Research Notes

Tremendous growth in residential housing construction, commercial property projects, and rapid development of the Russian automotive industry have positive impact on the outlook of the entire glass industry and ensure a high level of demand for modern float glass.

The high financial results of glass manufacturers, strong positions in the market, and the modernization and expansion of production are to become the leading companies of the sector, which include AGC Bor Glassworks and Salavatsteklo

• A shortage of high quality float glass coupled with the growth of demand in the construction and automotive industries is one of the key upside drivers for the float glass market. Data from StekloSouz, the United National Council of Glass Industry Enterprises, reports that the volume of float glass production in 2008 is likely to increase by more than 14% compared to 2007.
• The market is highly consolidated and five companies control over 90%. We believe the beneficiaries of the favorable market conditions would be the leaders of the sector with diversified product portfolio and modern equipment: Bor Glassworks that controls around 26% of the market and Salavatsteklo that controls around 24% of the market.
• The increased demand for float glass in the Russian market is the major upside driver for companies' financial results. We expect that the year-end 2007 revenue of Bor Glassworks is to grow by over 23% compared to 2006, and would double the market performance. Based on our forecasts, Salavatsteklo's revenue at the year-end 2007 is to increase by 14,5% compared to 2006. In our opinion, the modernization and expansion of production are likely to improve the company’s financial results at the year-end 2008.

Our calculations showed that Bor Glassoworks and Salavatsteklo are considerably undervalued compared to their peers from developed and emerging markets. Our fair value of Bor Glassworks is USD 123.4 per common share. This implies 20% upside potential. We assign BUY recommendation for the company's shares.

Based on our estimates the fair value of Salavatsteklo is USD 140 per share. The upside potential is 124% and we assign BUY recommendation for the company’s shares.

Michael Frolov

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