Ukraine 2015:Brains, Hands and Grains

A ground-floor investment opportunity at the EU’s frontier

July 2015

2 Source: Reuters, Hromadske 2015

“…Next door to Russia there is a complicated place, but also more attractive – it has a much better Finance Minister than anyone you can find in that part of the world…

Ukraine is an extremely attractive place to invest and I would look at that place as a place if you want to take some risk and you are investing in dollars, but there aren’t that many people investing in Ukraine, so you’re probably going to buy some things that are going to be relatively inexpensive”

- David Rubinstein, Carlyle Group

"I stand ready. There are concrete investment ideas, for example in agriculture and infrastructure projects. I would put in $1 billion”

- George Soros, Soros Fund Management  

"Personally, I think that Ukraine is a good place to invest. I'm hopeful that Virgin would start doing business in Ukraine”

- Richard Branson, Virgin Group

Invest in Ukraine?

Invest in Ukraine?

Why would respected, seasoned investors like Rubinstein, Soros or Branson be bullish about investing in Ukraine when the “bears” are much louder and more numerous?

3

ForewordThe “bear” perspective on Ukraine is clear. The challenges faced by the country are known and well-documented by analysts and media throughout the world.

What is missing though, is a contrarian perspective, which, while recognizing the challenges and risks, also gives a voice to the compelling reasons to consider Ukraine today as an investment destination.

To that end, this presentation makes a bullish case for Ukraine.

Each crisis opens up opportunities, and the latter is what we have chosen to focus our attention upon.

For above all, what we see in 2015 in Ukraine is a historical, ground-floor investment opportunity.

4

Outline

1.The lost decades

2.A ground-floor opportunity now

3.Brains: #1 IT engineering force in CEE

4.Hands: lowest-cost manufacturing platform in Europe

5.Grains: the food basket of the world

6.Entry ticket: a 70% discount to … Greek valuations

5

1. The lost decadesHow the lack of reforms over 20+ years failed to unleash much of Ukraine’s potential.

6

As USSR collapsed Ukraine had a reasonably good starting point…

7

6.0

0.0

4.0

2.0

7.0

5.0

3.0

1.0

Turkey

4.4

Romania

5.2

Poland

6.0

Brazil

6.7

Ukraine

6.8

Source: World Bank

GDP per capita (PPP) in 1990, thousand USD

..but populist, corrupt, incompetent governments resisted reforms

8

Ukraine’s ranking in Ease of Doing Business

Source: World Bank, 2010-2012

2011 rank

138 Madagascar

139 Micronesia

140 Bhutan

141 Sierra Leone

142 Syria

143 Ukraine

144 Gambia

145 Cambodia

146 Philippines

147 Bolivia

2012 rank

149 Iran, Islamic Rep.

150 Malawi

151 Mali

152 Tajikistan

153 Algeria

154 Gambia

155 Burkina Faso

156 Liberia

157 Ukraine

158 Bolivia

2010 rank

137 Iran

138 Ecuador

139 West Bank and Gaza

140 Gambia

141 Honduras

142 Ukraine

143 Syria

144 Philippines

145 Cambodia

146 Cape Verde

…which kept foreign investors away…

9

1,379

4,090

5,9667,109

8,828

11,63412,942

15,370

18,995

0

5,000

10,000

15,000

20,000

Estonia

Czech

Romania

Ukraine

Poland

Lithuania

Slovakia

Hungary

Latvia

Source: Economist Intelligence Unit

Net FDI stock in each country per capita, $

…failing to unleash Ukraine’s true potential

10

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

400

300

200

100

150

50

250

350

450

UkraineSlovakia

LatviaPoland

Estonia

GDP per capital growth (PPP), indexed scale, 1995=100

Source: World Bank

2. A ground-floor opportunityWhy this time is different and what makes us

optimistic about Ukrainian economy now.

11

A critical perspective: ground-floor starting point…

12

Economic Stagnation Authoritarian Legacy

Conflict Black Sheep of Europe

… all these countries faced major obstacles 10-15 years ago…

13

Philippines pre-Arroyo Georgia pre-Saakashvili

Colombia pre-Uribe Slovakia pre-Dzurinda

Lost decade, steep GDP decline

Vote-rigging president, ousted by popular revolt

FARC guerillas in a full-scale

war with government

Country missing EU accession boat

14

20

15

5

0

10

1990

+17%

 2010

 2000

 2014

 2005

1995

+8%

Dzurinda Reform

Administration

Starting point: end of 1990s

• Black sheep of Europe

• Missing EU accession boat

• Limited growth

Outcomes:

• Top investment destination

• Zero to highest automotive output per capita in a few years

• Exports drove growth, from $19bn in 2000 to $66bn in 2013

• Fastest growing economy in Europe through 2008

GDP per capita, in ‘000 USD

…yet managed to turn into spectacular successes: Slovakia

15

3

2

1

0

4

+14%

-6%

 2014

 2010

 2005

 2000

1995

1990

Saakashvili Reform

Administration

Starting point: 2004

• Endemic corruption

• Crippling energy blackouts

• Economy in shambles

Outcomes:

• Corruption Perception ranking: #132 to #51 by 2012 (i.e. higher than Czech)

• From #98th to #8th in Ease of Doing Business by 2014

• One of the fastest growing economies in the world

From laggard to leader: Georgia

GDP per capita, in ‘000 USD

16

3

2

0

1

 2014

 2010

-1%

+9%

1990

 2000

 2005

1995

Macapagal-Arroyo Reform Administration

GDP per capita, in ‘000 USD Starting point: 2001

• Ruinous Asian crisis

• President impeached

• Separatist war in the South

Outcomes:

• Sound national security

• GDP CAGR of 5.4% during 2002-2014

• BPO crucial catalyst, built on young, cost-competitive English-speaking generation

From laggard to leader: Philippines

17

10

8

6

4

2

0

+13%

+6%

 2014

 2010

 2005

 2000

1995

1990

Uribe ReformAdministratio

n

GDP per capita, in ‘000 USD

Starting point: 2004

• Failed state, recession

• Weak institutions

• War vs. FARC guerillas

Outcomes:

• National security key priority

• GDP CAGR 4-5% thru 2014

• FDI <$2bn to >$16bn in 2013

• Exports up 4.3x to $67bn

From laggard to leader: Colombia

Can this be also the story of Ukraine in 2015?

18

Kyiv Maidan, 15 December 2013

The Revolution of Dignity marks a paradigm shift in Ukrainian society, politics and inevitably, the economy

The active, pro-European civil society – the Maidan generation, intolerant of abuses and relentless in their controlling function, warrants a point of no return for the transformation of the country

A critical mass of active, tech-savvy civil society=relentless scrutiny

19

Percent of population using internet, %

Source: Euromonitor, Internetlivestats, BBC, USAID

6

7

1

2

3

4

55.7

Russia

4.5

Romania

3.6

Ukraine

3.3

Czech

2.6

Belarus

Civil Society Organization Index in 2014, 1-7 scale, lower=stronger civil society+0.

1+0.4

0-

0.2+0.142

3834

29

23

18

0

10

20

30

40

50

2010

2012

2008

2014

11

“Throughout this turbulent period, Ukrainian civil society stepped up to the plate, playing a key role in forming the new government’s policy priorities and providing critical services to the public”

– USAID, 2015

Improvement vs. 2008

“2014 saw the rise of self-organized public and a strong volunteer movement”

A president elected for the first time by both, East & West in Ukraine

20

Presidential elections 2004:

Yushchenko

Presidential elections 2010:

Yanukovich

Presidential elections 2014:

Poroshenko

For the first time, Ukrainian people did not split along geopolitical or language lines. President Poroshenko won in the outright

majority of constituencies

A young, technocrat, pro-business, English speaking government

21

4546

50

56

58

40

45

50

55

60

13 years

Mar-10

Dec-07

Dec-12

Dec-14

Feb-14

Source: kmu.gov.ua

Average age of ministers in Ukrainian Governments (2007-2014)

Tymoshenko Azarov Azarov Yatsenyuk Yatsenyuk

Soviet legacy dying off

22

0

322721

65

123

0

50

100

150

2007

2006

2012

2014

1998

2002

Source: Central Election Committee

Communist representation in Parliament, out of 450 seats

The Communist Party, on a declining trend since independence, failed to reach parliament in 2014 altogether – an expression of the generational change in peoples’ values and preferences

A clear pro-European majority, for the first time

23 Source: Razumkov Centre, Democratic Initiatives, Kyiv Post

2002 2004 2006 2008 2010 2012 2014

50%

55%

60%

65%

35%

40%

45%

40%

53%

64%

48%

53%

44%

49%

Population support for joining the EU, percent

91%

45%51%

0%

20%

40%

60%

80%

100%

2014

2012

2007

100%

Pro-EU parties support in parliament, %

A critical mass of reformers and start of structural reforms

24

Critical mass of reformers

Fiscal discipline

Deregulation

Privatization

Free trade

Transparency

• New pro-business, pro-reform, pro-Europe government• Average age 45, fluent English, Western experience and

education• Eliminating intermediaries, open competition for public

positions, electronic state tenders, civic society high engagement

• 19% budgetary surplus in 1Q15, despite near tripling defense spending; cut energy subsidies costing 10% of GDP, 4x hike in gas tariffs

• Licensing for 26 activities abolished, 16 regulations scrapped• Rose 56 positions in Ease of Doing business to #96, key reform KPI

• > 300 state owned enterprises to be privatized, years of mismanagement have led to 2.5% of GDP consumed in annual subsidies

• Historical free trade agreement (DCFTA) signed with EU, eliminating tariffs and quotas for trade, opening up the largest market in the world

Macro: stabilization package with IMF tempered C/A deficit, UAH rate

25

21.1

26.5

16.2

13.011.8

0

5

10

15

20

25

30

Feb

’15

Nov ’14

Aug ’14

May

’14

May

’15 Source: Dragon Capital, minfin.com.ua

Hryvnia exchange rate, UAH per USD

0.70.8

-1.3-0.9

-1.5-2.3

-8

-6

-4

-2

0

2

4Q13

2Q13

4Q15F

-1.0

-5.0

-6.0

-3.2

2Q15F

4Q14

2Q14

-0.5

-1.5

Current account balance, USD billion

Public finance: fiscally disciplined, despite spike in defense spend

26

Ukrainian state budget, 1Q 2015UAH mn 2014 2015 YoY, %

Revenues 152,050

198,409 30%

Tax on income of individuals

22,238

28,676 29%

Corporate income tax 18,948

19,447 3%

VAT 40,668

58,735 44%

Other 70,197

91,552 30%

Expenses (154,718)

(178,760) 16%

Debt service (12,411)

(25,721) 107%

Military expense (4,393)

(11,691) 166%

Other (137,914)

(141,348) 2%

Financing (190)

(1,156) 507%

Budget deficit/surplus (2,858)

18,493 747%

Source: Ministry of Finance of Ukraine

Finance Minister Jaresko runs a prudent budget. Ukraine achieved a 19% primary surplus despite a near tripling of defense expenses

Energy: doing away with a ruinous subsidy costing 10% of GDP

27

0.9

2.52.7

4.2

9.7

0

3

6

9

12

Ukraine

USACanada

Czech

EU-28

-91%

Natural gas prices, 2014, $ cents per kWh (pre reform)

3.0

5.87.07.4

11.2

0

3

6

9

12-73%

Ukraine

Czech

Canada

USAGermany

GDP $ produced from 1 kg of oil equivalent

Source: Eurostat, World Bank

Unprecedentedly, the new government had the courage to push through a near 4x hike in gas tariffs, to be followed by increases to full market parity, ending 20+ years of ruinous subsidies

Energy: gas reform, cut reliance on Russia, boost production

28

Imports vs. local production, BCM Sources of gas import, %

92%74%

37%

26%

63%

8%100%

80%

60%

40%

20%

0%5M

2015201

3201

4

1122 22 23

8

48 2820

9

33

0

10

20

30

40

50

60

2013

50

5M15

17

2014

43

2012

55

2011

59EU RussiaOwn production*Gas import

* includes gas usage from reserves (up to 6% of consumption) Source: Naftogaz of Ukraine, Ukrstat

Privatization: shaking-off the inefficient state-owned enterprises

29

State-owned companies contribution, % GDP

Source: Ministry of Economic Development and Trade of Ukraine

-3.0%

-2.0%

-1.0%

0.0%

1.0%

-2.5%

0.2%

SubsidiesDividends

The Ministry of Economy announced a bold privatization agenda to address the systemic inefficiencies of the state owned enterprises

Over 1,800 SOEs generated in 2014 a net loss of UAH 115 billion and consuming subsidies of 2.5% of GDP

Analysis shows a potential income of at least UAH 60 billion

Privatization program aims to divest over 300 state enterprises in the first phase

As a first step, data about the top-100 SOEs has been made public, including financial statements

Banking: cleaning up the sector, shutting down “pocket banks”

30

Number of banks where temporary administration or liquidation was initiated

13

22

76

5

0

6

12

18

24

2Q15

1Q15

4Q14

3Q14

2Q14

Source: National Bank of Ukraine, DGF

The government has to resolve insolvent banks through recapitalization and liquidation

Since early 2014, over 50 banks out of 180 have closed their doors, as the NBU has increased capital requirements and committed to ridding the system of “pocket banks”

Structural impediments in the system are being addressed, preventing a wide-spread practice of channeling excessive lending to insiders

The adoption of the law on strengthening bank owner responsibility, as demanded by the IMF, should improve corporate governance and bring more transparency to the sector, again lowering the burden on the state to save failing banks

Deregulation: ease of doing business a key KPI for government

31

50

100

150

200201

5

96

2014

112

2013

137

2012

152

Source: World Bank, Ministry of Economic Development and Trade of Ukraine

Ukraine’s ranking in Ease of Doing Business, inversed scale An ambitious deregulation program

has been launched, with over 70 initiatives, from scrapping a quarantine certificate for grain transportation, to liberalizing the land market, to simplifying the immigration rules for expats

Licensing for 26 business activities has been abolished and 16 regulations scrapped

The Ministry of Economy estimates the program to generate between $2.4 - $3.3 billion in savings for the business community and dramatically improve Ukraine’s standing in the World Bank’s Ease of Doing Business Rating

In summary: Ukraine offers a true ground-floor opportunity

• Largest country within Europe

• 45 million population, 99.7% literacy

• 70% live in urban areas

• #1 black-soil bank in the world

• 93% of country open for business

Too big to ignore

• 3x-10x consumption gap vs. peers in basic categories, from e-commerce to pharma

• 10x-100x+ consumption gap in select categories ie. life insurance, parcel delivery

• GDP growth expected to restore in 2016

Huge catch-up to peers

• $156 average manufacturing salary

• 2 truck days away from EU

• Free trade area with over 730m consumers

• Leading global positions in Agro & IT

Europe’s most cost-competitive platform

• Liquidity crunch as no lending

• Median EV/EBITDA only 4.3x, 50-60% discount to Poland, Bulgaria, Turkey

• Median P/E only 4.6x, ~70% discount to Greece

Bargain valuations

Sources:1) Ukrstat2) CIA

3) Euromonitor consumer statistics, Datamonitor

4) IMF, the Economist5) www.worldatlas.com

6) Capital IQ

32

Export champions – the growth engine and safest bet on UA economy

Lviv 400km from Warsaw, 900km from Berlin

Manufacturing wages $1.2 / hour, 2x lower than China

60% devaluation boosting cost competitiveness

6.5% exports CAGR between 2009-2014

Exports only 49% of GDP vs 61% for CEE peers

Per capita exports of $1,540 still 3x lower than

Poland

Share of EU exports from 20% to 35% in 5 years

0% duty on most EU exports

20x growth in IT exports in 10 years

Sources:1) Ukrstat, NBU2) EU DCFTA text

3) World Bank, the Economist

4) China Statistical Yearbook

5) www.worldatlas.com  

33

Brains, Hands and Grains: three lasting, competitive advantages

1. Brains 2. Hands 3. GrainsThe #1 IT

engineering force in CEE

Lowest-cost manufacturing platform

in Europe

Largest black-soil bank in the world

Sustainable competitive advantages in IT, Manufacturing, Agriculture to drive an exports-fueled rebound

34

3. Brains: #1 CEE IT engineering force

35

Top math and science education, starting with primary school

36

China 1

US 2

Ukraine 6

Romania 11

Netherlands 13

Germany 16

Czech Republic 32

India 39

France 45

Belgium 59

Source: International Mathematical Olympiad, Eurostat, Ukrstat 2014

Results at the International Math Olympiad, global rank

10%

4%

2%

8%

6%

0%

4.4%

Romania

4.9%

Ukraine

5.1%

Bulgaria

6.3%6.8%

Latvia

9.8%

Poland

Hungary

Lithuania

3.9%

Share of math, science and computing graduates, %

Strong technical education ensures high quality of students…

37

United Kingdom 1

Hungary 9

Ukraine 13

Belgium 15

United States 26

Poland 32

Italy 38

Romania 48

India 56

Philippines 115

Source: goodcountry.org, Universitas 21

Good Country Index: Science and Technology parameters reported to GDP, rank

US 1

UK 8

Germany 14

Hungary 30

Poland 32

Ukraine 41

Romania 42

Indonesia 48

Turkey 49

India 50

Universitas 21, university research quality, rank

…and feeds abundant technical talent into the market

38

Engineering graduates per annum in European countries, thousand students

3948

56

667175

93

105

130

20

40

60

80

100

120

140

Romania

Italy

Spain

Poland

UKTurkey

Germany

France

Ukraine

Source: World Economic Forum, Forbes, 2014, IVC, www.business-standard.com

Programmer salaries among the most competitive in the world

39

Average programmer salary, comparable skills, thousand USD per annum

Source: Stackoverflow, 2014

26

3843

6263686869

77

90

0

20

40

60

80

100 -71%

South

Africa

Ireland

New Zealan

d

Israel

Canada

UKAustralia

United

States

Ukraine

China

Largest IT outsourcing force in CEE & among top ones globally

40

Kharkiv 6.7%

Kyiv 6.6%

Lviv 3.4%

Zaporizhya 3.1%

Omsk 3.1%

Moscow 2.8%

Minsk 2.7%

Novosibirsk 2.6%

Bucharest 2.5%

Belgrade 2.3%

Source: dou.ua, Elance

3%Macedonia

3%

Croatia2%

Moldova7%

Other

7%Poland

4%Belarus4%

Bulgaria

Serbia8%

21%

33%Ukraine

Russia

9%

Romania

Top CEE countries by IT freelance outsourcing, %

Top CEE cities by IT freelance outsourcing, %

Ukraine is the #1 IT outsourcing country in CEE, by a wide margin;

#3 by freelance outsourcing in the world after US, India

As result, IT outsourcing grew at 30%+ annually for over 10 years

41

Total size of the IT outsourcing market, USD million

Source: Ukrainian Hi-Tech Initiative, Symphony-solutions

2,379

2,000

1,400

1,100

874697

530544390

250165110

0

500

1,000

1,500

2,000

2,500

+32%

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Beats growth in global IT outsourcing by a wide margin

42

437

368

257

202161

128

97

144141123121112107

111

0

100

200

300

400

500

2007 2008 2009 2010 2011 2012 2013 2014

Growth in Ukrainian IT outsourcing sales vs. the global market, indexed (2007=100)

Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner

Global IT outsourcingUkrainian IT outsourcing

43 Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner,

Ukrstat

Outsourcing emerged as the #2 export service, tripled share

18%27%

12%

12%

64% 44%

17%6%

0%

20%

40%

60%

80%

100%

Business services

100%

Other

IT outsourcing

Transportation

2007

2014

Breakdown of Ukrainian service exports, 2007-2014

Already the #1 exports category to

United States

Over 100 global companies located software R&D in Ukraine

44

North America Europe Asia

Samsung alone has over 1,000 engineers working on things like computer vision, information security, artificial intelligence,

natural language processing (NLP), human computer interaction (HCI), computational intelligence and more

Ukraine has among the lowest living expenses in the world

45

India 125

Pakistan 123

Ukraine 117

Philippines 112

Romania 105

Hungary 97

Poland 96

China 58

United States 21

Switzerland 1

Source: numbeo.com

Cost of living, including rent, global ranking (lower = cheaper)

One bedroom rent, month            250

Intercity train Kyiv-Lviv (500km)

              14

Two courses in fancy restaurant

              12

Dry-clean suit               10

Theater ticket                 5

Haircut                 4

Taxi trip                 3

A bowl of borscht                 2

Tomatoes, 1kg              1

Milk, 1L             0.5

Prices of selected items in Kyiv,USD

The beer and burgers are the cheapest in the world too :)

46 Source: Wall Street Journal, The Economist Big Mac Index – February

2015

7,0

6,0

5,0

4,0

3,0

2,0

1,0

0,0Kyiv

1.7

Dehli

1.8

Berlin

2.6

London

4.5

New York

5.2

Hong

Kong

6.2

Geneva

6.37,0

3,0

6,0

5,0

0,0

4,0

2,0

1,0

8,0

1.2

1.9

Ukraine

India

3.7

Philipp.

Germany

4.3

US

4.8

Switzer.

7.5

Average price of a 330ml beer, USD Price of a Big Mac, USD

Large, young, urban population

47 Source: Ukrstat

7297669931,017

1,451

2,868

0

500

1,000

1,500

2,000

2,500

3,000

Kharkiv

LvivZaporizhya

Kyiv Odessa

Dnipropetrovsk

• 70% urban population, concentrated mainly in and around large cities

• 2.6 million student population with 640,000 graduates each year

Select Ukrainian cities by population, thousand people

And all this in a progressive, cosmopolitan, European country

48

Tech talent + cheap living + global outlook = thriving tech ecosystem

49

IT outsourcing is one of the perennial growth hope stories for Ukraine, drawing its inspiration from the Soviet tradition of science teaching, and the country’s plethora of scientific institutes that used to churn out rocket scientists. Under market conditions, the schools have switched to producing programmers – an estimated 16,000 new IT specialists graduate each year

The huge IT outsourcing sector feeds increasing number of risk-taking tech talent, with a cosmopolitan outlook, willing to strike on their own and launch globally-focused tech startups. The low costs of living and progressive big-city culture, further add to a thriving tech ecosystem

Increasing number of tech UA companies dominate global niches

50

A common theme for all these companies: profitable, self-sustaining business models, compensating the shortage of venture capital available

Leading app maker for mobile enterprise

productivity

Leading one-stop-shop provider of online payment solutions

Top-5 global jobs aggregator

Cloud based grammar and spelling solutions

provider

Top-5 global stock photos and videos marketplace

Cloud based CRM solutions provider

A top-10 global, ‘Big’, developing internet market

51 Source: KPCB, Mary Meeker - 2015 Internet Trends

#9 developing BIG internet market in the world as per Internet Trends by KPCB, with penetration at 42% and 23% growth in 2014

52

1,837

2,000

1,600

1,043

680

443409331

0

500

1,000

1,500

2,000

2014

2013

2012

2011

2010

2009

2008

2007

E-commerce sales in Ukraine 2007-2014, USD million

Source: Euromonitor, Horizon Capital estimates

28%

Drop in 2014 driven by large Hrivnya devaluation. Growth in national currency continued to be very strong

E-commerce posted 5.5x growth for the last 7 years…

…growing at much faster pace than global market…

53

415451

361

235

153

100

246

206177

143

100

0

100

200

300

400

500

2009 2010 2011 2012 2013 2014

119

Ukrainian vs. Global e-commerce sales evolution, indexed growth (2009=100)

Source: eMarketer, Euromonitor, Horizon Capital estimates

Global e-commerceUkrainian e-commerce

…and with plenty of upside ahead to catch up with peers

54 Source: internetlivestats.com, Euromonitor

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Germany

UK

Ukraine

France

Netherlands

Sweden

Italy

Poland

Spain

% of internet users shopping online

% o

f in

tern

et

use

rs in t

ota

l popula

tion

Only ~20% of Ukrainian internet users shop online (share doubled over 2 years)

Percent of online shoppers = 3x lower vs Poland, Italy; 4x vs UK, Germany

Share of ecommerce in total retail is just above 2%, 3-6x lower vs Western Europe

E-commerce incidence and internet penetration, %

“Brains”: recap

• Good education, a strong math and science legacy

• Feeding abundant tech talent to the market – largest IT engineering force in CEE

• Which led to a thriving IT outsourcing business, up 20x during last decade

• Tech talent increasingly turning to startups, beyond outsourcing = increasing numbers of global software champions from Ukraine

55

4. Hands: lowest-cost manufacturing platform in Europe

56

Plenty of industries remain very dependent on labor cost

57 Source: icrier.org for Emerging Markets, India example

0.30.30.30.30.40.40.40.40.40.5

0.60.6

0.9

1.0

0.0

0.2

0.4

0.6

0.8

1.0

Footwear

Structural metal

prod.

Bicycles

Knit fabric

s

Pasta, noodle

s

Luggage

Animal feeds

Apparel Sporting goods

Jewelry Refractory ceramic

ToysGeneral purpose

machinery

Furniture

Workers per unit of gross fixed capital stock in manufacturing

Unbeatable cost advantage, further enhanced by UAH devaluation

58 Source: U.S. Bureau of Labor Statistics, International Labor Comparisons,

Statista, Ukrstat, 2014

1.22.1

8.311.311.9

19.4

26.8

35.7

0

5

10

15

20

25

30

35

40

US Poland

Slo vaki

a

Ukraine

China

Czech

Greece

Spain

7.9

10.010.510.5

12.6

19.2

0

5

10

15

20

Ukraine

USAPoland

Czech Republi

c

Slo vaki

a

Germany

Hourly wages in manufacturing industry in select countries, USD

Electricity prices for industrial enterprises, USD cent / kWh

Ideally positioned to be a manufacturing and trading platform

59 Source: www.worldatlas.com, www.travelmath.com

Kilometers distance to select cities from Lviv

Flight hours to select cities from Kyiv

LvivWarsaw390

Budapest

570

Berlin

930

Milan

1,560

London

1,990

KyivIstanbul

2

Berlin

2

London

3

NYC

10

Beijing

9

Dubai

5

In a world of tighter supply chains, faster product innovation cycles, Ukraine has a real chance to emerge as a manufacturing and trading hub at the frontier of EU, Middle East and Asia. A case in point, Western Ukraine emerged as home to a vibrant automotive

spare-parts manufacturing cluster

60 Source: Kyiv Post, HCA

Light manufacturing

Machinery & Equipment“The production of Ukrainian workers can compete with the European level in terms of quality. There's a new, highly-educated generation of creative people who want to see their country strong. I'm an optimist”

- Dietmar Kung, Hugo Boss

Proven by top global brands who localized production in Ukraine

61 Source: Ukrstat

Exports to EU rising strongly, marking fundamental shift in trade

38

35

38

34 34

27

27

2630

32

48

38

35

40

15

20

25

30

35

40

45

50

18

2008

2009

2010

2011

2012

2013

2014

1Q 201

5

2007

Other countriesEuropeRussia & CIS

Exports split by destination, %

Moving away from over-reliance on Russian market as exports to Europe grow. Signing of the DCFTA with the EU is expected to further accelerate the trend

“Hands”: recap

• Demand for labor remains high, as many industries are still very labor intensive

• Ukraine enjoys a very attractive location, at the intersection of the EU, Middle East, Asia

• Signing of historical EU DCFTA to further boost attractiveness

• The manufacturing labor costs are very competitive, even compared to China

• Cost, advantageous FTAs and proximity to large markets position Ukraine as ideal manufacturing and trading platform 62

5. Grains: the food basket for the world

63

Global demand for agricultural products to keep increasing

64

1,000

3,000

2,500

2,000

1,500

500

0

2024

2,740

516

1,440

784

2020

2,610

486

1,371

2,442

2015

753

451

1,280

711

2010

2,192

396

1,135

661

2005

1,953

327

1,005

621

2000

1,750

272

888

591

1995

1,500

211

840

448

OilseedsWheat Coarse grains

Source: OECD

Global demand, 1995-2024F, million tons

Ukraine: already an agro-powerhouse, share of global market rising

65 Source: OECD

1%

0%

2%

4%

6%

8%

10%

12%

14%

1995

0%

2%2%1%

2%

7%

3%2%

2005

3%

2015

3%

2000

13%

5%6%

2010

6%

OilseedsCoarse grainsWheat

Ukraine’s share of global exports by commodity, %

World’s leading positions in a number of markets

66 Source: Ministry of Agricultural Policy and Food

#1 in sunflower oil

#2 in grains

#3 in corn

#4 in barley

#6 in wheat

#7 in soybean

#8 in poultry

Signing the historical EU DCFTA set to accelerate growth

67 Source: Dragon Capital, Institute of Economic Research and Political

Consultations

Item Quota, tons

% of quota

used

Wheat 950,000 100%

Corn 400,000 100%

Tomatoes 10,000 100%

Juice 10,000 100%

Cereal groats, meal and pellets and cereal grains 6,300 100%

Honey 5,000 100%

Barley 250,000 5%

Poultry 36,000 41%

Sugar 20,070 3%

Bran, sharps and other residues 16,000 12%

EU quotas for export of Ukrainian agro products, 2014

Industry Old Tarrif

New Tarrif

Agriculture, forestry 12.7% 0.3%

Fisheries 12.1% 1.3%

Extraction of fuel energy resources 9.2% 0.0%

Extraction of other resources 22.0% 0.4%

Chemical production 9.2% 0.0%

Rubber and plastic goods 7.5% 0.0%

Leather and leather goods 4.9% 0.0%

Textile and furs 4.3% 0.0%

Production of non-mineral goods 4.1% 0.0%

Auto vehicles 4.1% 0.0%

EU import tariffs on Ukrainian produce

A lasting competitive advantage: the most fertile soils in the world

68 Source: Harmonized World Soil Database

Chornozem

Podzoluvisol

Greyzem

Phaeozem

Leptosol

Cambisol

Kastanozem

Arenosol

Water bodies

Gleysol

Fluvisol

Map of Ukraine’s soils

About 1/3 of world’s most fertile – chornozem soils – are in Ukraine

Yet the productivity upside potential remains very significant

69 Source: USDA

6

8

2

4

12

10

0

8

9 9

Switzerland

Canada

11

USA Ukraine

6

Argentina

-45%

Corn yields in select countries, tons per ha

Yields set to rise as farms keep investing in modern technology and methodologies – opening up significant investment opportunities and upside

Leading UA companies show the productivity jump is real

70 Source: USDA, Companies fillings

10

0

2

8

12

6

4

Average

Ukraine

6

Astarta,

Ukraine

7

Argentina

8

MHP, Ukrain

e

9

Switzerland

9

Canada

9

USA

11

6

Yields, tons per ha

In-country logistics benefit from closer port infrastructure

71

Average distance to port, selected countries, kilometers

300

900950

1,500

0

300

600

900

1,200

1,500

1,800

USAArgentina

Brazil

Ukraine

Source: HCA estimates

Favorable location provides additional cost advantage

72Source: Sea Rates

10

15

0

5

20

Brazil

Argentina

Ukraine

UAEIndiaChina Spain EgyptNetherlands

Average distance to key markets, thousand kilometers

Thriving agricultural exports to EU, Asia, CIS and Middle East

73Source: Ministry of Agricultural Policy and Food

EU:$5.0 bn.

CIS:$2.6 bn.

Asia:$6.6 bn.Africa:

$5.0 bn.

Local agro-champions operate larger farms than global peers

74 Source: Eurostat, Agricultural Council of America, FAO, Oxford Farming

Conference

150

300

450

0

250

5915

Germany

France

Czech Republi

c

18

Argentina

USABrazil (Central/Eas

t)

90

Ukraine

6

50

Brazil (South

)

Russia

450

Average farm size, ha

As result, fertile soils + better logistics + scale = cost advantage

75 Source: Ministry of Agricultural Policy and Food, USDA, GRDC

123

149

169

210

0

30

60

90

120

150

180

210

240

Australia

Ukraine

Canada

EU

Wheat

79

118

140153

0

30

60

90

120

150

180

210

240

Argentina

USABrazil

Ukraine

Corn

Cost of production, USD per ton

Sustainable cost advantage = higher profit pool

76 Source: Capital IQ

3%

13%15%

6%

13%

23%

2%

10%6%6%

1%

7%8%5%

9%

32%

6%

24%

36%

0%

10%

20%

30%

40%

Atria

6%

Cherkizovo

11%

20%

MHP, UA

25%

32%

9%

Ensuiko

Dhampur 

7%

Astarta,

UA

19%

Kernel, UA

China

Agri

Golden Agri

2014

20122013Vegetable oilSugarMeat

EBITDA margin by agro-sector, %

Prone to harvest fluctuations in the long run

77 Source: FAOSTAT

0

10,000

20,000

30,000

40,000

20

30

40

50

60

70

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Total Harvest, mn tonsTotal Grain Revenue, USD mn

Grain revenue, USD mn (left axis); Grain harvest, mn tons (right axis)

Industry moves up the value chain, further increasing margins

78 Source: HCA

Farming

Grain trading

Value-added agri

Agri infrastructure

Valu

e a

dd

Grains -> Poultry and Eggs -> Farm Equipment exampleCost advantage in grains enabled growth of eggs and poultry producers, which rely on grains for a large portion of costs. Companies like MHP, Ovostar, Avangard have achieved global leading positions in these market segments. Further up the value chain, a thriving poultry and eggs industry, enabled growth of farm-equipment manufacturers e.g. Texna, which subsequently turned into global export champions, leveraging their Ukraine base.

“Grains”: recap

• Global demand for food keeps rising

• Ukraine is home to 1/3 of the most fertile soils on earth

• Soils, location and scale warrant a lasting cost advantage for Ukrainian producers

• The room for upside is still large, as further technologization will keep pushing the yields up

• As the industry matures, it moves up the value chain, boosts profits, creating a thriving agricultural cluster

79

6. Entry ticket: a near 70% discount to … Greek valuations

80

Historically low valuations

81

4.3

5.5

6.57.2

8.2

9.7

10.7

0

3

6

9

12

Romania

Greece

Poland

Bulgaria

Turkey

Kazakhstan

-60%

Ukraine

Source: Capital IQ, 10 July-2015

Median EV/EBITDA multiple for selected countries

82 Source: Capital IQ, 10 July-2015

4.6

10.211.0

13.714.114.8

15.7

0

2

4

6

8

10

12

14

16

18

Turkey

Bulgaria

Greece

Poland

-67%

Ukraine

Romania

Kazakhstan

Historically low valuations: near 70% discount to Greek companies

Median P/E multiple for selected countries

Final recap

• The Revolution of Dignity led to a paradigm shift in Ukrainian society, politics and inevitably – the economy

• Young, technocratic government leading a bold, structural reforms agenda

• Uncompromising, active, tech-savvy civil society warrants the change is lasting = point of no return

• Sustainable competitive advantages in IT, Manufacturing, Agriculture open up attractive investment opportunities

• Valuations are at historical lows = an ideal time to seize on the potential upside

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About – Horizon Capital

Horizon Capital is a private equity fund manager that originates and manages investments in mid-cap companies with high growth and profit potential in Ukraine and the near region. Learn more at www.horizoncapital.com.ua

84

Contact – Horizon Capital

Lenna KoszarnyFounding Partner and CEOlkoszarny@horizoncapital.com.ua

Vasile TofanPartnervtofan@horizoncapital.com.ua

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Thank you!

Igor KotsyubaOlexander MatvienkoRoman CherepakhaVadym Trembovetsky

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DisclosureThe attached presentation of Horizon Capital does not constitute an offer to sell or a solicitation of an offer to purchase an interest in any Horizon Capital private equity fund or sponsored investment. 

Certain economic and market information contained herein has been obtained from published sources prepared by other parties.  While such sources are believed to be reliable, none of Horizon Capital or its affiliates assumes any responsibility for such information.  Recipient should make its own investigations and evaluations of the information contained herein.

Recipient is cautioned not to place undue reliance on any forward-looking statements, and Horizon Capital assumes no obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. Such statements speak only as of the date that they were originally made.

While presenting the opportunity for monetary gain, an investment in Ukraine will involve a high degree of risk and is suitable only for investors that have no immediate need for liquidity of the amount invested and can withstand a loss of their entire investment.

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www.horizoncapital.com.ua/groundfloor-opportunity

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