On December 12 GAZ Group laid the foundation for a new engine manufacturing factory. The factory is to produce 80,000 engines a year. Production is slated to begin in early 2009, and by early 2012 the factory should reach full capacity. The factory aims to produce engines that are compliant with EURO 4 standards, and later the plan is to switch to EURO 5. The partners in this project are Austrian AVL List, Italian company Comau, and the Russian company Transengineering. The cost of the project is USD 400 mn, which includes USD 300 mn that is to be spent on production equipment. The tenders have already been completed.
News about the new factory is moderately positive. The engines presently produced by the Group are outdated. The design and development of engines would be very costly and time-consuming for the company, which means that the purchase of modern equipment from third-parties is reasonable.
GAZ intends to install the engines that are to be produced in this plant on a wide range of its products, including its bus models LiAZ, PAZ and KAvz, trucks URAL and GAZ, tractors and construction equipment. The new engines are to be installed in the most popular products of GAZ, which will further increase demand. In addition, the modern technology applied to the production of these new engines will improve reliability and enhance customer loyalty.
Based on our estimates and analysis of 2007 forecast results, the fair value of GAZ is USD 200.80 per common share, which implies 34.5% upside and corresponds to a Buy recommendation.
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