On December 20 GAZ Group released its 9M 2007 operating results. Generally, we consider these results as positive, but they were expected by the market. Despite some negative trends in several segments, the company's management has taken measures to change these trends in the future.
GAZEL sales growth in the minibuses segment in 9M 2007 was at only 4.2% y-o-y. We believe that the increased demand for higher quality and technical features of the minibuses were a reason for the slowdown of sales. Customers are ready to pay more for these vehicles, and as a result, sales of foreign minibuses have grown, though their considerable disadvantage is a high price. Therefore, manufacturers that sell under foreign labels and produced in Russia are likely to considerably capitalize on the further growth of minibuses sales. They can offer a minibus manufactured with foreign technology and sold at low price due to local assembly. GAZ bought LDV factory a year ago. It plans to bring the equipment to Russia to start production of the most popular models.
OAO GAZ: 9M 2007 operating results
| Segment | Product group | 9М 2007 | 9М 2006 | Growth |
| Minibuses |
GAZel |
121664 |
116793 |
4.2% |
| LDV |
7458 |
1471 |
|
| Vans |
21391 |
18286 |
17.0% |
| Cars |
31968 |
38630 |
-17,2% |
| Trucks |
11616 |
7734 |
50,2% |
| Buses |
small |
10653 |
10 582 |
0.7% |
| medium |
2822 |
2 449 |
15.2% |
| big |
2238 |
2147 |
4.2% |
| construction equipment |
excavators |
2146 |
1548 |
38.6% |
| motor graders |
705 |
546 |
29.1% |
| front-end loaders and bucket loaders |
528 |
496 |
6.5% |
| Diesel engines |
41 263 |
37594 |
9,8% |
Source: Company data, FINAM estimates
Car production dropped by 17.2%,which was pushed down by changes in consumer preferences and a changing market structure. Consumers are now ready to pay more for a modern and comfortable foreign car. GAZ Group has an innovative solution. The production of GAZ Siber, based on the Chrysler Sebring, with American equipment is slated for 2008.
The truck output has increased by 50.2%, due to the rapid growth of forest harvesting, construction and mining industries. We expect further stable growth in this segment.
Another traditional segment for GAZ group is suburban buses, which has seen considerably lower growth rates. It rose only by 0.7% in 9M 2007. However, we do not perceive this as a negative event, because the consumer demand has switched to bigger buses - medium and big range. That is why the sales in the medium class buses climbed by 15.2%.
The road construction division was another growth point for GAZ group. The sale of construction equipment has increased by more than 25%. The main reason is the 37.2% growth of investments, compared to 2006. We believe that GAZ is likely to keep further high growth rates in the construction segment, as investments in the infrastructure are expected to increase, due to a 65% road depreciation rate in Russia.
Based on our estimates and analysis of 2007 forecast, the fair value of GAZ common stock is USD 197 per share. It implies 23% upside and corresponds to BUY recommendation. The fair value of preferred shares is USD 143 with 23.2% upside. We assign BUY recommendation.
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