Research Notes

In the beginning of November MTS released its Q3 2007 US GAAP statement. Many of the results have exceeded our expectations, and given our more optimistic vision of the general situation in the Russian market, we decided to upgrade our financial model of the operator.

We note a continuously strong financial performance of the company. EBITDA and net margin are constant and at high levels and we do not expect their downgrade in the foreseeable future. The company's profits in USD terms are backed by well managed cost control and a strong ruble.

We increased our forecast of the number of mobile users in Russia. The pace of the mobile market is slowing down, but the number of subscribers shows stable growth. We anticipate that sales of SIM-cards are to stabilize in 2009 at a penetration level of 138%. Further growth would be driven by the removal of the "dead souls" from the subscriber data bases, rather than by new users. MTS market share would be stable with slight declining trend under pressure from competitors.

The short-term outlook in Ukraine is very promising for MTS: the company's market share is in decline with a moderate average return per user (ARPU) compared to very aggressive small operators. Nevertheless, we expect that from the start of 2008, MTS is to really fight for market share and increase its ARPU. This policy is to be a surefire success because the other operators are unlikely to be able to afford prolonged price wars in the saturated market.

Expansion in the Armenian market was very successful for MTS. MTS with its strategy to purchase local market leaders is to achieve strong financial results. The deals are structured so that the buyer is protected from possible risks from its subsidiaries. Possible expansion into the Kazakh market also indicates that the management of the company is to continue regional expansion.

MTS is one of the few companies that combine leadership and an excellent upside potential. We are extremely upbeat about the growth perspectives of the operator's stocks. Based upon our upgraded model, the upside till 2008 is 31%.

We assign a Buy recommendation for the company's common shares and estimate the fair price at USD 18.22 for the end of 2008.

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