Daily analyst comments

On July 25 Leonid Dolgov, head of the GAZ group's car-making division, stated that the company was looking at the feasibility of forming a JV with a foreign automaker for production of B+ class cars, priced in the RUB 300,000 to RUB 500,000 range. The cars would complete in the same price niche as Renault Logan cars. Up to USD one billion could be invested in the JV. The projected output capacity is 300,000 vehicles a year. GAZ intends to finalize a foreign partner for the project before the year-end, while an automotive plant is to be completed towards the start of 2011.

We view the decision to build a car factory as somewhat belated. To begin with, domestic automobile sales could slow by 2011, as the market approaches its saturation point. To add to this, several foreign automakers will have already completed their Russian automotive plants, under construction since 2007-2008, by that time. These projects will bring the foreign automotive companies into the spotlight in Russia, enabling them to displace Russian car-makers on the local market. On top of that, the car market, especially the niche for an inexpensive car model in the B class, is one of the most competitive among automotive producers, which could impair the company's profit margins. All these factors call into question the viability of the project, under which GAZ aims to strengthen its foothold on the car market. Doubts remain despite the management's statement about the ongoing development of an up-to-date car model. On the other hand, the project could gain from a higher share of financing on the part of a foreign partner.

Our estimates put the fair value of GAZ at USD 283.7 per share as of year-end 2009, which implies an upside potential of 84.8% and corresponds to a BUY recommendation. The fair price of the company's prefs should be USD 156 per share, with an upside of 81.4%. Our recommendation is to BUY these shares too.