AVTOVAZ 2005 English - Amazon S3s3.amazonaws.com/zanran_storage/data.cbonds.info/ContentPages/... · LADA NIVA series automobiles; • phasing out LADA 2105/2107 series automobiles;

Lead Manager: TRUST Investment BankUlansky Pereulok 26, Moscow, Russia 107045

Fixed Income Research Tel. +7 (095) 247 2591 Fax +7 (095) 208 2256 E-mail: [email protected] http://www.trust.ru

OJSC “AVTOVAZ” A NEW DIRECTION

NEW CLN ISSUE OCTOBER 2005

.

October 2005

page 2 of 38

CONTENTS

INVESTMENT SUMMARY .................................................................................... 3 CONCLUSION........................................................................................................ 4 OJSC “AVTOVAZ” TODAY AND TOMORROW .............................................. 5

AVTOVAZ is a Leading Russian Auto Producer....................................................................5 AVTOVAZ: Mission Statement ....................................................................................................5 Strategic Goals for the Next 5 Years.........................................................................................6

SHAREHOLDER STRUCTURE............................................................................... 7 RUSSIAN AUTOMOBILE MARKET ...................................................................... 8

Key Features of the Russian Automobile Market ................................................................8 Automobile Fleet and Production............................................................................................11 Government Policy on the Automobile Industry .............................................................13

AVTOVAZ – A LEADING GLOBAL CAR PRODUCER.....................................14 Company History.............................................................................................................................14 Model Range.......................................................................................................................................14 Cooperation with GM and the Chevrolet Niva .................................................................16 LADA KALINA Project.....................................................................................................................17 LADA PRIORA Project ....................................................................................................................19 Sales and Marketing........................................................................................................................21 Export.....................................................................................................................................................24 Development of Customer Credit Services .........................................................................25 Service and Distribution Network............................................................................................25

FOR THE INVESTOR ...........................................................................................26 Credit Strengths................................................................................................................................26 Credit Challenges .............................................................................................................................27

FINANCIAL STATEMENTS..................................................................................28 AVTOVAZ Group Companies: Sales Dynamics.................................................................28

CREDIT CONSIDERATIONS...............................................................................30 International Peers...........................................................................................................................32 Credit History.....................................................................................................................................33 Investment Program.......................................................................................................................35 Dividends..............................................................................................................................................35 Financial Forecast for 3-5 Years................................................................................................35 Program to Reduce Expenses .....................................................................................................36

APPENDIX: KEY FINANCIAL INDICATORS.........................................................37

October 2005

page 3 of 38

INVESTMENT SUMMARY

The Credit Linked Notes (CLNs) of OJSC “AVTOVAZ” provide investors with an opportunity to gain

exposure to the fast growing Russian consumer market and the rapidly developing passenger

automobile market, which was estimated at US$17.4 billion in 2004. AVTOVAZ has enjoyed positive

financial results thanks to its leading position in one of the world’s fastest growing car markets, with

average annual growth of 6% over the last five years. AVTOVAZ dominates the all-important

“medium-price” segment, supplying over 40% of all passenger cars to a market averaging 1.5 million

new purchases per year.

This new US$-denominated issue is the company’s latest step in enhancing its credit history and

raising its profile on international capital markets. Proceeds from this new CLN will be used to

modernize existing production facilities and finance the production of its latest LADA KALINA and

LADA PRIORA models. These new models are the most advanced passenger cars ever produced by

AVTOVAZ and meet all modern-day standards for performance and safety.

EXHIBIT 1. MARKET CAPACITY FOR LADA AUTOMOBILES BY REGION OF THE RUSSIAN FEDERATION

Source: company info, TRUST estimates

- over 100,000 automobiles

- 20,000-50,000 automobiles




- under 1,000 automobiles

October 2005

page 4 of 38

CONCLUSION

• OJSC “AVTOVAZ” is the largest Russian automobile manufacturer by the number of cars sold. The history of the company goes back almost 40 years. More than 23 million cars have been produced over this time. Today, LADA cars make up more than half of the Russian car fleet. The long-term outlook for AVTOVAZ is quite promising, supported by strong growth in the Russian economy and a prudent government policy for the car-making industry.

• AVTOVAZ regularly updates its strategy for the Russian car market and has changed its corporate structure to create a transparent, world-class company with full control over its production and distribution chains.

• In order to maintain its market share, AVTOVAZ plans to renew its entire model range by 2008 and develop cars in the US$6,000-10,000 price segment that offer the best price/quality ratio and meet world standards. Despite rising competition from cheap foreign cars, AVTOVAZ expects to raise sales in this price point.

• The mass production of LADA KALINA cars began in August 2005. The models meet the most rigid requirements and fit into the most popular segment on the domestic car market. Regional dealers have submitted large orders for LADA KALINAs.

• In 2004, AVTOVAZ sold over 630,000 cars in Russia, up 3% from 2003. 2004 output equaled 718,000 cars, or 64% of Russian passenger car production.

• The revenues of the AVTOVAZ Group rose 22.8% y-o-y to RUR160.5 billion (US$5.6 billion) in 2004; EBITDA rose 37% to RUR16.9 billion (US$586.6 million).

• The AVTOVAZ Group significantly improved its credit quality. Net Debt/EBITDA decreased to 1.3x in 2004 from 1.7x in 2003 and EBITDA/interest expense rose to 4.9х from 3.6х in 2003.

• In 2005 the AVTOVAZ Group expects to spend RUR11.0 billion (US$394 million) on capex. Preliminary investment programs for 2006 and 2007 stand at RUR5 billion a year.

• Stable income has allowed the AVTOVAZ Group to regularly pay dividends since 2001. Dividends for 2004 amounted to RUR739 million (US$30.6 million).

• OJSC “AVTOVAZ” has a history of good relations with

respected foreign and Russian banks (including

Vneshtorgbank, Sberbank and Deutsche Bank). In 2004

AVTOVAZ placed its debut US$150-million CLN and

repaid it in full in September 2005.

EXHIBIT 2. AVTOVAZ: KEY FINANCIAL INDICATORS

IFRS (RUR mln.) 2003 2004

Revenues 130,772 160,536 EBITDA 12,358 16,926 EBIT 6,065 10,547 EBITDA margin, % 9.5% 10.5% EBIT margin, % 4.5% 5.9% Total Debt* 27,865 33,693 Net Debt* 20,994 21,727 Net Debt*/EBITDA(х) 1.6 1.3 EBITDA/interest expense (x) 3.6 4.9 Total Debt*/Equity, % 35.0% 40.4% * including restructured tax liabilities


EXHIBIT 3. OJSC “AVTOVAZ” MARKET SHARE, 1H 2005

Ot her domest ic cars

10.8%

LADA (ot her plant s)

1.6%

AVTOVAZ38.5%

Used f oreign cars 14.1%

New foreign cars 35%

Source: company info

EXHIBIT 4. RUSSIAN CAR MARKET

5.7 6.5

9.011.1

13.4

17.4

21.0

0.0

5.0

10.0

15.0

20.0

25.0

1999 2000 2001 2002 2003 2004 2005 F

US$

bln

.

Source: company info, TRUST

October 2005

page 5 of 38

OJSC “AVTOVAZ” TODAY AND TOMORROW

AVTOVAZ is a Leading Russian Auto Producer OJSC “AVTOVAZ” is the largest producer of passenger cars in Russia and Eastern Europe, with annual production of over 700,000 automobiles. AVTOVAZ is one of the largest industrial enterprises in the country and a key company for the city of Togliatti in the Samara region. As of July 1, 2005, OJSC “AVTOVAZ” controlled about 40% of domestic car sales, dominating the middle price segment. The group supplies over 1000 enterprises with orders; subsequently, these enterprises employ 2 million people throughout the country, making it a key employer.

AVTOVAZ is a major taxpayer to the federal budget and the budget of the Samara region, contributing RUR14.0 billion to budgets of various levels in 2004. AVTOVAZ employs over 117,000 people.

AVTOVAZ: Mission Statement

We create quality automobiles at affordable prices for our clients, earn stable profits for our shareholders, improve the welfare of our employees and increase the value of our company for the good of the nation.

COMPANY VALUES

• Employee motivation

• Customer loyalty

• Strong brand

• High scientific-technological potential

• Solid business reputation

• Social responsibility

STRATEGIC GOALS

Leadership

• Maintaining leadership of the Russian automobile market

• Actively integrating into world automobile production

• Educating and perfecting the skills of personnel

Efficiency

• Effectively managing resources and expenses

• Improving quality

• Promoting a result-oriented corporate culture

Flexibility

• Introducing of state-of-the-art production technologies

• Rapidly responding to market demand

• Providing consumers with automobiles that match international safety and environmental standards

AVTOVAZ is the largest producer of passenger cars in Russia and Eastern Europe

Key strategic goals include maintaining leadership and improving quality

October 2005

page 6 of 38

Strategic Goals for the Next 5 Years Key strategic goals for OJSC “AVTOVAZ” include developing new automotive products and technologies and renewing the model range. AVTOVAZ strives to produce next-generation cars that are competitive, affordable for many segments of the Russian population and in accordance with international safety and environmental standards.

The company’s latest projects, the LADA KALINA and the LADA PRIORA, currently at different stages of development, pursue these objectives.

LADA KALINA automobiles are designed for individuals, families and businesses. The new construction focuses on relevant international safety and environmental standards. Many of the engineering decisions significantly boost the consumer qualities of the model, improving design, comfort and maneuverability. New facilities, with the capacity to produce 220,000 cars a year, were built for the KALINA series of cars.

Total investment into the KALINA project is US$630 million.

LADA PRIORA, a series of front-wheel drive automobiles, is based on the LADA 110 platform. LADA PRIORA cars will have a more effective breaking system, power steering and a highly comfortable interior, with optional air conditioning and sound systems.

Total investment into the PRIORA project equals US$132 million.

The strategic plan of OJSC “AVTOVAZ” for the next five years includes:

• producing LADA SAMARA series automobiles – up to 235,000 a year;

• modernizing (“face lifting,” improving separate components, etc.) and producing LADA NIVA series automobiles;

• phasing out LADA 2105/2107 series automobiles;

• producing LADA KALINA series automobiles, increasing output to planned capacity of 220,000 cars a year by 2008;

• introducing LADA PRIORA series automobiles, reaching planned capacity by 2009; the combined total volume of LADA 110 and LADA PRIORA series cars will be maintained at 235,000 a year.

AVTOVAZ is introducing a new generation of cars: the LADA KALINA and LADA PRIORA series

October 2005

page 7 of 38

SHAREHOLDER STRUCTURE As of December 31, 2004, OJSC “AVVA”, an 86% owned subsidiary of OJSC “AVTOVAZ”, owned 38% of the ordinary shares of OJSC “AVTOVAZ”. CJSC “Central Branch of the Automotive Financial Corporation” (CJSC “CB AFC”), in which OJSC “AVTOVAZ” controls 60% jointly with OJSC “AVVA”, owned another 24% of ordinary shares of OJSC “AVTOVAZ”. Furthermore, CJSC “IFC”, a 51% owned subsidiary of OJSC “AVTOVAZ”, owns 2% of the ordinary shares of OJSC “AVTOVAZ”. As a result, 64% of the ordinary voting share capital of OJSC “AVTOVAZ” is held by entities within the AVTOVAZ Group.

The equity capital, which amounts to RUR16.062 billion, is divided into 27,194,624 ordinary (84.65%) and 4,930,340 preferred (15.35%) shares.

The market capitalization of OJSC “AVTOVAZ” equaled US$675 million on September 1, 2005. The company’s shares are publicly traded on Russian equity markets (AVAZ/AVAZ RU) and are listed in Germany in the form of GDRs (AVVG GR).

64% of the ordinary voting share capital of OJSC “AVTOVAZ” is held by entities within the AVTOVAZ Group

October 2005

page 8 of 38

RUSSIAN AUTOMOBILE MARKET

Key Features of the Russian Automobile Market Between 1999 and 2004, the Russian passenger car market tripled in value to US$17.4 billion. Domestic cars accounted for 30% of the market (about US$5.3 billion) in 2004. If the growth rate remains as high in 2005, total market value could exceed US$21 billion.

EXHIBIT 5. RUSSIAN PASSENGER AUTOMOBILE MARKET (US$ bln.)

5.7 6.5

9.011.1

13.4

17.4

21.0

0.0

5.0

10.0

15.0

20.0

25.0

1999 2000 2001 2002 2003 2004 2005 F

US$

bln

.


Growth in demand for passenger cars is outpacing domestic supply and the difference is met by foreign cars. Before prohibitive tariffs on the import of foreign cars older than 7 years were approved in 2002, these were the cars that absorbed the excess demand. In recent years, they have been replaced with new foreign cars assembled in Russia or imported from abroad.

There are four main segments in car sales: cars produced by AVTOVAZ, used foreign cars, new foreign cars and other domestically produced cars. Domestic models accounted for 50.9% of sales in 1H 2005 (Exhibit 7). AVTOVAZ is the largest player in the Russian automobile market, with 38.5% of sales.

EXHIBIT 6. PRIMARY SALES OF AUTOMOBILES IN RUSSIA, 2004

EXHIBIT 7. PRIMARY SALES OF AUTOMOBILES IN RUSSIA 1H 2005

Used foreign cars

15.3%

New foreign cars

27.0%

AVTOVAZ41.7%

LADA (other plants)4.3%

Other domestic

cars11.7%

Used foreign cars 14.1%

AVTOVAZ38.5%

LADA (other plants)1.6%

Other domestic

cars10.8%

New foreign cars 35%

Source: company info Source: company info

“C” class cars, which include LADA110, Ford Focus, Daewoo Nexia and Toyota Corolla, were the most popular type of cars sold in 2004 (68%). There was also significant demand for off-road vehicles, which accounted for 12% of sales.

Demand for passenger cars outpaces domestic supply – the difference is met by foreign cars

AVTOVAZ is the largest player in the Russian automobile market, with 38.5% of sales

Between 1999 and 2004, the Russian passenger car market tripled in value to US$17.4 billion

October 2005

page 9 of 38

The Russian automobile market is commonly divided into 5 price segments:

• Under US$4,500

• US$4,500-6,000

• US$6,000-10,000

• US$10,000-15,000

• Over US$15,000

EXHIBIT 8. SALE OF NEW CARS IN RUSSIA BY PRICE SEGMENT, 2003

EXHIBIT 9. SALE OF NEW CARS IN RUSSIA BY PRICE SEGMENT, 2004

over US$150008%

US$10,000-15,000

6%

under US$4,500

30%

US$4,500-6,00030%

US$6,000-10,00026% over

US$15,00018%

US$6,000-10,00044%

US$4,500-6,0007%

under US$4,500

22%

US$10,000-15,000

9%

Source: company info, TRUST estimates Source: company info, TRUST estimates

The two lowest price segments (“under US$4,500” and “US$4,500-6,000”) accounted for 60% of all sales in 2003. In 2004 their total market share decreased to 29%. This reflects both, the rising real income of the Russian population and the rising prices on AVTOVAZ cars, some of which moved to the “US$6,000-10,000” segment.

EXHIBIT 10. SHARE OF LADA AUTOMOBILES PRODUCED BY OJSC “AVTOVAZ” IN TOTAL SALES OF NEW PASSENGER AUTOMOBILES IN RUSSIA, 2004

41%52%

26%

100% 100%

59%22%

26%

36%

35%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

менее US$4500 US$4500 -US$6000

US$6000 -US$10000

US$10000 -US$15000

более US$15000

Другие а/м LADA 2105/2107 LADA SAMARA LADA 110 LADA NIVA


The total market share of two lowest price segments decreased from 60% of all sales in 2003 to 29% in 2004

Other

under over

The Russian automobile market is commonly divided into 5 price segments

October 2005

page 10 of 38

In 2004 the US$6,000-10,000 price segment was most popular, accounting for 44% of cars sold. LADA 110, LADA SAMARA and LADA NIVA series automobiles represent 74% of this segment. The segment also includes basic versions of new foreign cars, such as Daewoo Nexia, Volkswagen Pointer and Daewoo Matiz. LADA SAMARA series automobiles fit into the “US$6,000-8,000” segment, where competition from new foreign cars is not as rigorous.

Basic models of AVTOVAZ's LADA 2105/2107 series are within the “under US$4,500” price segment, where foreign producers are no longer present.

Thanks to the rising prosperity of the Russian population, sales in the “US$10,000-15,000” and “over US$15,000” segments doubled in 2004. New foreign cars, including those produced in Russia, make up the majority of the highest price segment. We expect demand to shift to higher-priced segments as real incomes in Russia increase.

Nevertheless, the “US$6,000-10,000” segment – the target niche for AVTOVAZ – remains the most popular segment. Even though the market share of LADA cars will decrease, AVTOVAZ should be able to maintain the number of cars sold at least at current levels, in part thanks to the development of car loan programs.

According to the Concept for the Development of the Russian Automobile Industry, annual sales will reach 2.2-2.5 million cars by 2010, which corresponds to annual growth of 5-6.5%. We estimate that the value of the car market in 2010 will be close to US$30 billion.

Changes will also affect market structure: the share of foreign cars assembled in Russia will rise to almost 39%, while the share of Russian brands will decrease to 40% (see Exhibit 11).

The production and investment programs of OJSC “AVTOVAZ” account for changes in consumer demand. Thus, by 2008, the enterprise plans to fully renew its model range to include automobiles in the most popular middle price segment that match the latest world standards.

EXHIBIT 11. FORECAST FOR THE RUSSIAN AUTOMOBILE MARKET THROUGH 2010

989 1,000

128

975

553 525

0

250

500

750

1,000

1,250

1,500

2004 2010 F

Russian producersAssembly plantsImport

thsd

. car

s

Source: Ministry of Industry and Energy, TRUST estimates

We expect demand to shift to higher-priced segments as real incomes in Russia increase

AVTOVAZ's production and investment programs account for changes in consumer demand

October 2005

page 11 of 38

Automobile Fleet and Production

Russia has one of the fastest growing car fleets in the world. Over the past decade it enjoyed average annual growth of 7% a year and we expect the pace of growth to equal at least 5% for the next five years.

EXHIBIT 12. SALES OF PASSENGER AUTOMOBILES IN RUSSIA

46 79 111216

406

638729 690 680 690

1361 1417 14331502

1134

0

200

400

600

800

1000

1200

1400

1600

2000 2001 2002 2003 2004

thsd

. car

s

New foreign cars LADA* Total

* Including LADA automobiles assembled at IzhAvto and RosLada


Despite the high growth of the Russian car market, consumer prosperity remains low: car density currently equals only about 135 cars per 1000 population, compared to 200-300 per 1000 in Eastern Europe and as many as 500 cars in Western Europe. This indicator is expected to rise to 163 cars per 1000 population by 2010.

Russia’s fleet of passenger automobiles has approached 25 million. Growth was most considerable in the second half of the 1990s: the car fleet more than doubled between 1994 and 2004.

EXHIBIT 13. RUSSIAN FLEET OF PASSENGER AUTOMOBILES, 1994-2004

11.9%11.4%

7.5%

11.4%

6.8%4.8%

3.3%4.3%

5.8%4.1% 3.5%

0

2500

5000

7500

10000

12500

15000

17500

20000

22500

25000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Fleet (thsd. cars) Fleet grow th (%)


LADA automobiles manufactured at OJSC “AVTOVAZ”, CJSC “IzhAvto” and OJSC “RosLada” account for half of the Russian car fleet. Foreign cars increased their presence on the Russian market almost three times as fast as Russian cars over the past decade and now make up 19.4% of the car fleet.

Russia has one of the fastest growing car fleets in the world, with average annual growth of 7% a year

Car density is expected to increase from the current 135 cars per 1000 population to 163 cars per 1000 population by 2010

October 2005

page 12 of 38

EXHIBIT 14. RUSSIAN FLEET OF PASSENGER AUTOMOBILES, 2004

Other9.9% OKA

1.5%UAZ2.9%

Moskvich9.1%

Foreign brands19.4%

LADA50.6%

GAZ6.6%


About 50% of the Russian car fleet is aged over 10 years and 29% – 5-10 years. Thus, the ageing of the car fleet will contribute to the growth of the Russian automobile market over the next few years.

Over 1,116,000 cars were produced in Russia in 2004, up 8.4% from 2003.

EXHIBIT 15. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA

706767

703 700 718 715

9821,033 993 1,030

1,1161,063

0100200300400500600700800900

1,0001,1001,2001,300

2000 2001 2002 2003 2004 2005 FAVTOVAZ Other

thsd

. car

s


The considerable growth in production in 2004 primarily reflects the 120.7% increase in the assembly of foreign brands in Russia.

EXHIBIT 16. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA, 2004

EXHIBIT 17. PRODUCTION OF PASSENGER AUTOMOBILES IN RUSSIA, 1H 2005

Assembly plants11.5%

Other Russian producers

24.2%

AVTOVAZ64.3%

Assembly plants14%

ZMA3%

RosLada3%

SEAZ1%

UAZ2%

AVTOVAZ68%

IzhAvto4%

GAZ5%

Source: company info, TRUST estimates Source: company info, TRUST estimates

Changes in the volume of production resulted in changes in the market shares of output by various car producers. There is a clear tendency of rising assembly of foreign automobiles in Russia. While foreign assembly plants produced only 9,500 cars in 2002, this number increased to 58,000 in 2003 and almost 130,000 in 2004. Foreign assembly plants produced 68,000 automobiles in 1H 2005.

LADA automobiles account for half of the Russian car fleet

Over 1,116,000 cars were produced in Russia in 2004, up 8.4% from 2003

There is a clear tendency of rising assembly of foreign automobiles in Russia

October 2005

page 13 of 38

OJSC “AVTOVAZ” remains the largest Russian car producer, accounting for the production of 68% of passenger automobiles assembled in Russia. The decrease in AVTOVAZ’s share of output that has taken place over the last five years is party compensated by growth of production at the GM-AVTOVAZ joint enterprise. In addition, some LADA models (2106 and 2104) are assembled at other Russian plants: IzhAvto and RosLada.

Government Policy on the Automobile Industry The state policy on automobile production is regulated by the Concept for the Development of the Russian Automobile Industry, approved by the Russian government in July 2002, which covers the period through 2010. The key goals of the Concept include:

• creating conditions that will promote the development of the Russian automobile industry;

• improving the effectiveness of the production of modern, competitive automotive technology that meets the demands of consumers, the government and companies;

• integration of the Russian automobile industry into the world automobile industry.

The Concept for the Development of the Russian Automobile Industry outlines three stages.

Stage 1. (2002-2004):

• Introducing customs tariffs on the import of used foreign cars;

• Replacing existing model range;

• Restructuring liabilities to the budget.

Stage 2. (2005-2008):

• Establishing a favorable investment climate in the industry to encourage sizeable capital influx;

• Building facilities for the mass production of promising models;

• Preparing to switch to Euro-2 and Euro-3 technological and environmental standards.

Stage 3. (2009-2010):

• Integrating into the world automobile industry;

• Adopting European technological and environmental safety standards.

In 2002, the government of the Russian Federation initiated Stage 1 of the Concept and approved a hike in tariffs on imported used cars, which became prohibitive for cars older than 7 years and very high for cars aged 3-7 years. As a result, foreign cars have been almost completely pushed out of the lowest price segment (under US$4,500) and the share of used foreign cars purchased in Russia decreased to 15%.

AVTOVAZ has been actively working on Government Resolution No. 166 “On the Introduction of Changes to the Customs Tariffs of the Russian Federation for Car Components Imported for Industrial Assembly.” AVTOVAZ is submitting business plans that substantiate the company’s proposals to apply tax breaks for the import of components. The plant is very important for the Russian economy. Going forward, we do not rule out the possibility that the government will make decisions that support Russia’s biggest car producer.

AVTOVAZ has also been working with the administration of the Samara Region on plans to establish a free economic zone. A relevant proposal has been submitted to the federal government. The establishment of a free economic zone would include the creation of a research and technology park on the basis of AVTOVAZ. A tax-free regime would allow for lower costs for producing automobiles, which would certainly have a positive effect on the development of the enterprise and the production of new cars.

The decrease in AVTOVAZ’s share of output is party compensated by growth of production at the GM-AVTOVAZ joint enterprise

In 2002, the government initiated Stage 1 of the Concept for the Development of the Russian Automobile Industry and approved a hike in tariffs on imported used cars

AVTOVAZ is submitting business plans that substantiate the company’s proposals to apply tax breaks for the import of components

October 2005

page 14 of 38

AVTOVAZ – A LEADING GLOBAL CAR PRODUCER

Company History In 1966, the government approved a resolution on the construction of a plant for the production of passenger cars in the City of Togliatti. The Volga Automobile Plant (VAZ) had close ties with Italy’s FIAT: the enterprises signed a general agreement on cooperation in the design of automobiles, as well as the design and construction of the automobile production plant. Hundreds of enterprises that would supply materials and components were built in tandem with the Volga Automobile Plant.

The first six cars came off the assembly line on April 19, 1970. A decision was made on July 8, 1971 to establish an official servicing network, AvtoVAZtekhobsluzhivanie.

On July 13, 1971, the Volga Automobile Plant Production Enterprise (PO “AvtoVAZ”) was founded on the basis of the head plant.

On January 5, 1993, PO “AvtoVAZ” was transformed into Open Joint Stock Company (OJSC) “AVTOVAZ.” A plan for the privatization of PO “AvtoVAZ”, a Charter of OJSC “AVTOVAZ” and the Board of Directors were approved.

In 2001, AVTOVAZ signed a general agreement with the General Motors Corporation and the European Bank for Reconstruction and Development on the establishment of a joint enterprise for the production of passenger automobiles.

The first LADA KALINA automobile came off the assembly line in 2004. Mass production of the series began in the summer of 2005.

Model Range

The model range of OJSC “AVTOVAZ” takes into account tendencies in the development of the global automobile industry, adjusted for the demands and specific characteristics of the Russian car market.

Today 12 models in five series (excluding modifications) are produced at the main assembly plant of OJSC “AVTOVAZ”:

• LADA 2105/2107 (LADA 2105, LADA 2107)

• LADA SAMARA (LADA SAMARA sedan, LADA SAMARA 5-door hatchback, LADA SAMARA 3-door hatchback)

• LADA 110 (LADA 110 sedan, LADA 110 hatchback, LADA 110 station wagon)

• LADA NIVA (LADA NIVA 3-door, LADA NIVA 5-door, LADA 2120)

• LADA KALINA (LADA KALINA sedan)

The subsidiaries of OJSC “AVTOVAZ” mass produce pick-up trucks, vans, sport cars, armored vehicles and other special-designation automobiles, such as the VAZ-21106 (2.0-liter Opel engine), the VAZ-21218 “Fora” (improved comfort with all-wheel drive), the VAZ-21218B (special purpose armored cash-in-transit vehicle), the VAZ-21109 “Consul” (limousine), the VAZ-21108 “Premier” (luxury automobile) and the VAZ-2131 (5-door LADA NIVA).

The first six Volga Automobile Plant cars came off the assembly line on April 19, 1970

Today 12 models in five series are produced at the main assembly plantof AVTOVAZ

October 2005

page 15 of 38

EXHIBIT 18. LADA MODELS BY PRICE SEGMENT (BASIC VERSION)

2120

21052107

2113 2114

2115 Niva 2121Niva 2131

Kalina2110 2112 2111

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

US

$ th

sd.

under US$4,500

US$4,500-6,000

US$6,000-8,000

US$8,000-10,000


By 2008, OJSC “AVTOVAZ” plans to renew its entire model range. In the end of 2004 LADA SAMARA series cars were replaced with a new generation of LADA SAMARAs. Mass production of LADA KALINA series cars began in 2005. LADA 2105/2107 series cars are expected to be phased out by 2007.

Important goals in the technological development of AVTOVAZ include introducing new products and updating the model range to include new competitive automobiles that are affordable for large segments of the Russian population. As part of its technological development program, OJSC “AVTOVAZ” is designing new models and car series. The enterprise is currently working on two radically new automobiles: one in the D class and one in the C class.

The basic versions of all models produced by AVTOVAZ cost under US$10,000

October 2005

page 16 of 38

Cooperation with GM and the Chevrolet Niva Joint Enterprise “GM-AVTOVAZ” was established in 2001 by OJSC “AVTOVAZ”, the General Motors Corporation and the European Bank of Reconstruction and Development (EBRD). OJSC “AVTOVAZ” received 41.6% of shares in GM-AVTOVAZ in return for patents, buildings and equipment. GM received another 41.6% of shares in exchange for a cash contribution of US$100 million and EBRD received 16.8% for a cash contribution of US$40 million and a loan of US$90 million.

GM-AVTOVAZ began producing the Chevrolet-Niva off-road vehicle in the fall of 2002. 25,000 cars came off the assembly line in 2003, 58,000 cars -- in 2004 and 75,000 are expected to be produced in 2005.

Participation in the joint company allows AVTOVAZ:

• to receive management and production experience from the world’s largest car producer;

• to use GM’s privileged conditions for importing components and materials;

• to integrate smoothly into world car-making in the long term by actively applying foreign components.

OJSC “AVTOVAZ”, General Motors and the EBRD established the “GM-AVTOVAZ” Joint Enterprise in 2001

October 2005

page 17 of 38

LADA KALINA Project The objective of the LADA KALINA project is to organize the production and distribution of a new series of B-class cars to improve the business potential of OJSC “AVTOVAZ.” The life cycle of the project provides for production of LADA KALINA series cars for at least 8-10 years.

The technical characteristics of LADA KALINA cars are comparable to those of foreign models such as the Renault Clio, Fiat Siena, Seat Cordoba, Chevrolet Corsa and VW Polo.

According to AVTOVAZ, as of August 2005, the estimated cost of the project was US$630 million (RUR17.9 billion). As of 1H 2005, about 64% of the planned amount has been invested.

The first LADA KALINA cars came off the assembly line on November 18, 2004. The LADA KALINA sedan went on sale in August 2005. Dealers will offer LADA KALINA hatchbacks starting in 2006. Production will reach planned levels of 220,000 automobiles a year by 2008. About 30,000 cars are expected to be exported.

The LADA KALINA series will include the following models:

LADA KALINA - 5-door station wagon

LADA KALINA - 4-door sedan

LADA KALINA - 5-door hatchback

The introduction of LADA KALINA series cars will allow AVTOVAZ to maintain its market share.

The new automobile meets Euro-4 environmental standards, which were introduced in Europe on January 1, 2005 and will be applied in Russia starting January 1, 2008. The design of LADA KALINA series cars focused on meeting existing international safety and environmental standards. In addition, the comfort, design and maneuverability of the vehicles were improved.

The use of modern technologies and materials made it possible to significantly increase warranty provisions. LADA KALINA cars have a warranty of two years, regardless of mileage. Special anti-corrosion treatment allows for an additional warranty for the car body: 3-year warranty against surface corrosion and 6-year warranty against deep corrosion.

The LADA KALINA meets Euro-4 environmental standards, introduced in Europe on January 1, 2005

The first LADA KALINA cars came off the assembly line on November 18, 2004

October 2005

page 18 of 38

EXHIBIT 19. CAPEX FOR THE LADA KALINA PROJECT

11,631

4,255

1,550491

17,92817,43615,886

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Invested as ofJan 01, 2005

2005 2006 2007

Capex

Capex (accrual)

RU

R m

ln.


The basic version of the LADA KALINA sedan is priced at about RUR225,000 (US$7,800). Available options include manual and automatic air conditioning, heated front seats, remote control locks, air bags and power steering.

The market has responded positively to the LADA KALINA series: dealers are already submitting orders. Strategic regions for the LADA KALINA series include Moscow, the Moscow Region, St. Petersburg, Leningrad Region, Stavropol Krai, Sverdlov Region, the Republic of Tatarstan and the Tyumen Region.

EXHIBIT 20. LADA KALINA: SALES FORECAST

50

120

190 190 190

1025 30 30 30

2.9%

6.5%

8.2%7.5%

7.0%

0

2550

75100

125150

175200225250

275

2006 2007 2008 2009 20100.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Domestic market (left axis)Export (left axis)Share of domestic market, % (right axis)

thsd

. car

s


The market has responded positively to the LADA KALINA series: dealers are already submitting orders

October 2005

page 19 of 38

LADA PRIORA Project LADA PRIORA is the new version of the C-class series with improved design and production quality.

LADA PRIORA automobiles will gradually replace the LADA 110 series on the assembly line.

The LADA PRIORA series includes the following models:

LADA PRIORA sedan

LADA PRIORA hatchback

LADA PRIORA station wagon

LADA PRIORA cars have a more effective braking system than LADA 110s, power steering, a modern and comfortable interior, and optional air conditioning and music systems.

The LADA PRIORA is the most modern Russian series. The automobile meets the latest European safety standards for side and frontal offset impact.

Assembly of LADA PRIORA cars is expected to begin in 2006, with 570 cars produced. By 2009 AVTOVAZ plans to bring production of LADA PRIORAs up to planned capacity of 235,000 models, including 35,000 for export. The assembly of the LADA PRIORA series will take place at existing facilities, which will be modernized. The transition from the LADA 110 to the LADA PRIORA series will be gradual, with the combined volumes of the two series remaining stable.

EXHIBIT 21. LADA PRIORA: SALES FORECAST

1

47

177200 200

15 25 35 35

9.0% 9.0%8.6%

2.7%

025

5075

100

125150

175200225

250275

2006 2007 2008 2009 20100.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Domestic market (left axis)Export (left axis)Share of domestic market, % (right axis)

thsd

. car

s


LADA PRIORA is the new version of the C-class series with improved design and production quality

The LADA PRIORA is the most modern Russian series and meets the latest European safety standards for side and frontal offset impact

October 2005

page 20 of 38

Total investment in the LADA PRIORA project will equal US$132 million, primarily spent on the technological re-equipment of production. So far about US$2.2 million has been invested. The bulk of the investment will be made in 2005, which means that capex for the LADA PRIORA project will not require significant cash outflow in the next few years.

EXHIBIT 22. CAPEX FOR THE LADA PRIORA PROJECT

360

1,210

103

2,242

2,602

3,811 3,915

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Invested as ofJan 01, 2005

2005 2006 2007

Capex

Capex (accrual)RU

R m

ln.


Total investment in the LADA PRIORA project will equal US$132 million

October 2005

page 21 of 38

Sales and Marketing AVTOVAZ sells and markets its products on both the domestic and the foreign markets. About 34% of cars are sold through official dealers and 64% through controlled dealers. The company pays special attention to improving marketing and distribution systems.

The following aspects of sales and marketing are most important for AVTOVAZ:

• introducing comprehensive customer loans and leasing services;

• improving the quality of after-sale servicing;

• enhancing market research technologies and introducing quantitative characteristics, such as consumer satisfaction and consumer loyalty indices, which are very popular abroad;

• introducing the “AVTOVAZ Corporate Style” at official and independent entities within the distribution network.

Over 2004 the weighted average retail price for LADA automobiles rose 9.2% to RUR184,000. Average factory price rose 12% to RUR171,600. The difference between the retail and factory prices rose sharply in 1H 2004, forcing AVTOVAZ to pay closer attention to the distribution network.

EXHIBIT 23. AVTOVAZ: RETAIL AND FACTORY PRICES, 2004-JULY 2005 (WEIGHTED AVERAGE PRICE)

188.1 188.1 188.9 189.2187.3

189.4191.0

172.9169.9 171.2 171.2 169.8 169.4

170.9

184.0184.1182.1182.6

185.4187.6

186.1184.4

179.2

173.7170.4

168.8171.6

170.1169.0165.3

163.7163.5162.7162.0161.7161.0159.7

154.4

150155160165170175180185190195200

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

RU

R th

sd.

Retail price Factory price

.


722,000 LADA cars produced by AVTOVAZ were sold in Russia and abroad in 2004, up 4,000 from 2003. The breakdown of sales did not change significantly y-o-y: there was an even distribution among three major series: in 2004 there were about 239,000 LADA 110 automobiles, 241,000 LADA SAMARA automobiles, 212,000 LADA 2105/2107 automobiles and 30,000 LADA NIVA automobiles sold.

The difference between the retail and factory prices rose sharply in 1H 2004, forcing AVTOVAZ to pay closer attention to the distribution network

AVTOVAZ pays special attention to improving marketing and distribution systems on the domestic and the foreign markets

October 2005

page 22 of 38

EXHIBIT 24. LADA SALES BREAKDOWN BY SERIES

29% 29% 29%

31% 32% 33%

11% 7% 4%

34%32%29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004

LADA SAMARA LADA 2104/2105/2106/2107 LADA 110 LADA Niva


In addition, the following were produced and sold:

• 147,000 kits for the assembly of LADA cars

• 101,000 kits for the assembly of other domestic cars.

EXHIBIT 25. AVTOVAZ: SALES OF ASSEMBLY KITS

183,679 178,127

248,348

2,9043,158

4,026

0

50,000

100,000

150,000

200,000

250,000

300,000

2002 2003 20042,000

2,500

3,000

3,500

4,000

4,500

5,000

Kits for assembly (left axis)Sales revenues

RUR mln.


Sales are distributed fairly evenly among three major series: LADA 110, LADA SAMARA and LADA 2105/2107

147,000 kits for the assembly of LADA cars and 101,000 kits for the assembly of other domestic cars were produced and sold

October 2005

page 23 of 38

EXHIBIT 26. LADA SALES IN RUSSIA

49.9 50.0

62.164.1

50.1

50.652.0

48.450.4

45.643.4

59.0

55.451.8

56.153.2

38.642.4

25

30

35

40

45

50

55

60

65

70

Janu

ary

Febr

uary

Mar

ch

April

May

June

July

Augu

st

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

thsd

. car

s

2004 2005 (6M)

.


The residents of Moscow and the Moscow Region were AVTOVAZ’s main domestic consumers in 1H 2005, accounting for more than 20% of the plant’s sales. The federal districts with the highest demand for AVTOVAZ cars were the Central Federal District, the Volga Federal District and the Ural Federal District.

EXHIBIT 27. LADA SALES BY FEDERAL DISTRICT, 1H 2005

Northwestern8%Siberian

8%Far Eastern1%

Urals10%Central

33%

Volga27%

Southern13%


Moscow and the Moscow Region were AVTOVAZ’s main regional markets in 1H 2005, accounting for more than 20% of sales

October 2005

page 24 of 38

Export AVTOVAZ exported 93,000 cars in 2004, up 1.5% from 91,700 in 2003. Including kits for assembly supplied to foreign enterprises, up to 150,000 LADAs are exported every year.

LADA automobiles are sold in more than 60 countries. Export to non-CIS countries accounts for about 44% of sales and export to the CIS -- about 56%. In 2004, sales increased noticeably in certain countries, including Sweden (+69%), Switzerland (+56%), Austria (+21%), Macedonia (+120%), Bulgaria (+65%) and Lithuania (+60%).

EXHIBIT 28. EXPORT OF AUTOMOBILES AND ASSEMBLY KITS

99

8697

92 93

410

1621

64

0

20

40

60

80

100

120

2000 2001 2002 2003 2004

thsd

. car

s

cars Kits for assembly


In 2004, AVTOVAZ signed an agreement for the delivery of 1,800 automobiles to Venezuela. The company is negotiating the export of cars to Chile, Mexico, Libya, Ghana and Angola. The number of importers has been rising. Markets in North Africa and South America are becoming stronger. There is growing interest in LADA cars from countries such as Turkey, Iraq, Azerbaijan, Armenia, Tajikistan, Uzbekistan and Afghanistan.

EXHIBIT 29. EXPORT BY REGION

Other15%

Europe41%

CIS44%


Requirements for the safety, environmental and consumer characteristics of automobiles remain highest in Western Europe. Despite these requirements, AVTOVAZ has been able to maintain sales levels. AVTOVAZ cars are modernized to meet the latest European environmental and safety standards. One of the latest important innovations is the use of a 1.6-liter engine designed by AVTOVAZ for the LADA110 series. With a new catalytic converter and an electronic control system, this engine enables cars to meet Euro-3 environmental standards.

The number of importers has been rising

AVTOVAZ exported 93,000 cars in 2004; LADA automobiles are sold in more than 60 countries

AVTOVAZ cars are modernized to meet the latest European environmental and safety standards

October 2005

page 25 of 38

Development of Customer Credit Services We estimate the Russian car-loan market at US$2.5-3 billion in 2004 and forecast that it will grow to US$5-6 billion in 2005. The value of LADA automobiles sold using customer credit services in 2004 equaled about US$750 million. AVTOVAZ estimates that one in four LADA automobiles sold in Russia in 2004 was sold using car loans offered by dealers and banks.

In 1H 2005 the number of LADAs sold under crediting systems continued to rise. The share of cars sold on credit directly through official AVTOVAZ dealers rose to 30% as a result of changes in the conditions of car loans that made them more attractive.

Today, various banks throughout the Russian regions offer car loans. AVTOVAZ dealers cooperate with major national banks as well as local banks. AVTOVAZ specifically works its subsidiary, Avtomobilnyi Bankirskii Dom (ABD).

ABD offers customer credit services in 27 regions of the Russian Federation. ABD car loans were used for 1,667 LADA automobiles in 2003 and 15,899 in 2004. The forecast for 2005 is 32,424 LADA automobiles.

Service and Distribution Network The development of the service and distribution network in 2002-2004 allows AVTOVAZ to control value added throughout the production cycle.

As of August 18, 2005, the dealer network of AVTOVAZ was a two-level system and included 507 service and distribution enterprises, including:

• 68 distributors;

• 155 official dealers;

• 284 regional dealers.

In 2004 AVTOVAZ continued working on a competitive service and distribution network in the domestic and foreign markets. By the end of 2005 the plant plans to switch to a single-level distribution network, selling automobiles (retail) directly through official dealers and maintaining the exclusive right to sell automobiles wholesale.

Dealers have certain quotas of automobiles and all dealers face the same price conditions: no discounts are applied. OJSC “AVTOVAZ” covers the entire cost of delivering cars to various regions so that all dealers, regardless of location, offer automobiles at the same price.

Today, all dealers must meet certain conditions that regulate the key characteristics of dealerships, service stations, premises for customers and primary equipment, as well as the types of services offered, informational support and the use of elements of corporate style.

The new dealer policy will allow the plant to increase the production and distribution of spare parts, which is expected to become the second most important source of revenues. Starting in 2006, AVTOVAZ plans to switch to a system of distribution of parts exclusively through official dealers.

We estimate the Russian car-loan market at US$2.5-3 billion in 2004 and forecast that it will grow to US$5-6 billion in 2005

AVTOVAZ is working on a competitive service and distribution network in the domestic and foreign markets

October 2005

page 26 of 38

FOR THE INVESTOR

Credit Strengths

• Recognition of the LADA brand in Russia and abroad. The history of AVTOVAZ goes back almost 40 years. Over this time, the company has produced more than 23 million cars. LADAs account for over half of Russia’s active car fleet. Brand recognition allows AVTOVAZ to promote new products in the Middle East, Latin America and Europe, as well as in Russia and the CIS.

• Strong financial position. Total revenues in 2004 were US$5.6 billion and EBITDA – US$588 million. With Net Debt/EBITDA ratio of 1.3x, the financial position of AVTOVAZ can be defined as stable and improving. In 2004, the company reached a positive free operating cash flow. Management has also made significant efforts to reduce costs.

• Competitive price-to-quality ratio of cars and spare parts. AVTOVAZ fully covers the middle price range, which includes most of consumer demand for passenger cars. AVTOVAZ controls more than 40% of a market that is estimated to add 1.5 million passenger cars each year. Going forward, the company plans to retain its existing share of the market and broaden the range of cars and optional features as the purchasing power of the Russian population grows.

• AVTOVAZ is the sole buyer of car components from many Russian manufactures. The company produces about 70% of Russian cars and many components producers work only for AVTOVAZ. The company can therefore affect the quality and prices of materials and components it purchases.

• Well-developed distribution network. AVTOVAZ sells up to 98% of its cars through a network of official and controlled dealers that covers all of Russia’s regions. This allows AVTOVAZ to offer a flexible price policy and trace changes in consumer demand.

• Government support. The Russian government has created advantageous conditions for Russian car producers. Competition from the import of old foreign cars has been drastically limited: there are prohibitive import duties for foreign cars more than 7 years old and considerable duties for cars that are 3-7 years old. We believe that AVTOVAZ is also able to lobby for other important decisions that affect its operations.

• High level of transparency. AVTOVAZ has published annual and half-year financial statements according to IFRS since 1993. The reports are audited by PricewaterhouseCoopers. All financial and operational information is available to investors and regularly updated on the company’s website and in press releases.

Brand recognition allows AVTOVAZ to promote new products in the Middle East, Latin America and Europe, as well as Russia and the CIS

AVTOVAZ is the sole buyer of car components from many Russian manufactures

AVTOVAZ is able to lobby for important decisions that affect its operations

October 2005

page 27 of 38

Credit Challenges

• Changes in consumer preferences. Consumers increasingly choose cars with better technical characteristics and more features. In this situation, the company plans to adapt the model range, improve quality and increase the package of services that accompany its cars.

• Increasing costs. Components and materials make up 78% of AVTOVAZ’s costs. Some of them are imported. There are also plans to buy large quantities of imported engines. The appreciation of the rouble, as well as the growth of prices on electricity, transportation and labor, could negatively impact the financial results of AVTOVAZ.

• Strengthening competition. The US$6,000-10,000 price segment is the main market niche for AVTOVAZ. Most new foreign cars fall into price segments that are above US$10,000. Nevertheless, certain producers (such as Renault, Hyundai and Volkswagen) are making attempts to launch new budget models, the basic versions of which are priced slightly below US$10,000. To maintain its competitive advantages, AVTOVAZ does not plan radically change its market niche over the next few years.

• Changes in customs and tax legislation. The Russian tax legislation is very contradictory and has the tendency to change. A decrease in customs duties on used imported cars could strengthen competition in the middle price segment and lead to a reduction in the market share of AVTOVAZ. However, customs duties are unlikely to be reduced over the next five years and AVTOVAZ has time to fully replace its existing range of cars and present more competitive models.

AVTOVAZ plans to adapt the model range, improve quality and increase the package of services that accompany its cars

Customs duties are unlikely to be reduced over the next 5 years and AVTOVAZ has time to present more competitive models

October 2005

page 28 of 38

FINANCIAL STATEMENTS The AVTOVAZ Group makes its consolidated financial statements (according to IFRS, published twice a year for the end of the accounting periods of June 30 and December 31) available to the investment community. Quarterly (stand-alone) results are published according to Russian Accounting Standards (RAS). Since 1993, AVTOVAZ’s financial statements have been audited by PricewaterhouseCoopers. The AVTOVAZ Group consolidated financial statements include the suppliers of components and materials, financial companies and service and distribution companies. The analysis provided below is based on the Group’s audited consolidated financial statements for 2000-2004.

The APPENDIX at the end of the memorandum includes key financial indicators (IFRS)

AVTOVAZ Group Companies: Sales Dynamics

The sales revenues of the AVTOVAZ Group reflect the volume of output, car prices and the structure of the model range. The Group’s consolidated revenues come from the sale of:

• complete automobiles and assembly kits (76.2% of revenues),

• car parts produced at AVTOVAZ plants (5.6%),

• cars produced at other plants (9.6%),

• other products (8.6%).

Revenues equaled RUR160.5 billion (US$5.6 billion) in 2004, up 22.8% from 2003. Due to the appreciation of the rouble, revenues increased 30.7% in US$ terms. Key factors driving revenues up included growing output, rising prices and improvements in the structure of the model range.

The AVTOVAZ Group increased its output 2.6% in 2004. Taking advantage of favorable market conditions, the plant raised wholesale pries 12.3% and retail prices -- 9.2%. AVTOVAZ also improved the structure of its model range to include more modern models in higher-priced segments: for example, the share of premium “ten” series cars produced rose from 32% in 2003 to 33% in 2004.

Over 84% of consolidated revenues come from sales in the Russian market.

EXHIBIT 30. KEY INCOME STATEMENT INDICATORS

IAS, mln. US$* 2002 2003 2004 2004 vs. 2003 Revenues 3,808 4,264 5,572 30.7% Cost of Goods Sold (3,167) (3,590) (4,640) 29.2% SG&A, other operating expenses (463) (480) (602) 25.6% Gross profit 641 673 932 38.4% EBITDA 478 403 588 45.8% EBIT 291 198 366 85.1% Net income 36 96 159 65.1% Gross margin, % 16.8% 15.8% 16.7% EBITDA, % 12.6% 9.5% 10.5% Operating income, % 7.6% 4.5% 5.9% Net income, % 0.9% 2.3% 2.8% * calculated using the weighted average US$/RUR exchange rate for the relevant period: 31.36 for 2002, 30.67 for 2003 and 28.81 for 2004.


Revenues rose 22.8% y-o-y to US$5.6 billion in 2004; output increased 2.6% y-o-y

The AVTOVAZ Group publishes semi-annual consolidated financial statements according to IFRS and quarterly stand-alone results according to RAS

October 2005

page 29 of 38

Materials and components

77.7%

Labor costs12.9%

Overhead expenses

5.4%

Other4.0%

The Group was able to restrain production costs in 2004. The growth of costs had outpaced the growth of revenues in previous years, but in 2004 AVTOVAZ was able to reverse this negative trend: the cost of goods sold increased 21.4%, while revenues rose 22.8%. The change positively affected the gross margin of the AVTOVAZ Group, which equaled 16.7% in 2004, vs. 15.8% in 2003.

EXHIBIT 31. COST OF GOODS SOLD, 2004


To better control costs and expenses, management switched to long-term contracts with employees and suppliers, which will help lock in current prices for a longer period of time.

EBITDA margin rose to 10.5% in 2004 from 9.5% in 2003 on the back of rising gross margins. Operating margins also rose, to 5.9% in 2004 from 4.5% in 2003.

Gross, EBITDA and operating margins rose in 2004

AVTOVAZ was able to restrain production costs in 2004

October 2005

page 30 of 38

CREDIT CONSIDERATIONS

The credit indicators of the company were evaluated on the basis of IFRS results for 2002-2004.

The overall credit quality of AVTOVAZ improved in 2004. The main changes affected the volume and profile of debt, as well as debt servicing costs. Furthermore, for the first time in three years the company demonstrated positive free cash flow (operating cash flow minus capex) at RUR1.8 billion (US$65 million).

EXHIBIT 32. KEY CREDIT INDICATORS

RUR mln. (IFRS) 2002 2003 2004 2004 vs. 2003, %

Revenues 119,432 130,772 160,536 22.8% EBITDA 15,002 12,358 16,926 37.0% EBIT 9,133 6,065 10,547 73.9% Interest expense (3,077) (3,416) (3,451) 1.0% Operating Cash Flow 2,561 7,417 10,759 45.1% Debt, including 18,757 27,865 33,693 20.9%

Restructured tax liabilities 5,456 5,426 5,146 -5.2% Short-term debt 10,261 12,873 17,096 32,8% Long-term debt 8,496 14,992 16,597 10.7%

Net Debt 16,006 20,994 21,727 3.5% EBITDA margin (%) 12.6% 9.5% 10.5% EBIT margin, % 7.6% 4.5% 5.9% EBITDA/interest expense (x) 4.9 3.6 4.9 Debt /EBITDA (x) 1.3 2.3 2.0 Net Debt/EBITDA (x) 1.1 1.7 1.3 Debt/Equity (%) 24.4% 35.0% 40.4% Long-term debt /Equity * (%) 10.0% 15.9% 16.6% Total Debt / Total Assets (%) 13.5% 18.3% 20.3% Current Assets/Current Liabilities (%) 84.2% 94.6% 98.6% * Long-term debt plus Equity

Source:Company info, TRUST estimates

The company’s total debt figures include long-term restructured tax liabilities as well as loans and borrowings. As of FYE 2004, the share of restructured tax liabilities in total debt equaled 15.3%. Total debt stood at RUR33.7 billion (US$1.2 billion) on December 31, 2004, up 20.9% y-o-y.

The debt increase primarily reflects higher bank loans and debt securities, which rose 27.2% to RUR28.2 billion (US$1.0 billion). At the same time, AVTOVAZ decreased its restructured tax liabilities 5.2% to RUR5.1 billion (US$185 million).

The need to increase investment in development and production of new models was the main reason for the rise in debt. Despite the 20.9% increase in total debt, the net debt of AVTOVAZ rose only 3.5% to RUR21.7 billion (US$785 million) at FYE 2004.

The increase in debt over 2002-2004 was the main factor affecting the balance sheet structure of the company. The Total Debt/Equity ratio rose from 24.4% in 2002 to 40.4% in 2004. The share of total debt in total assets rose from 13.5% in 2002 to 20.3% in 2004.

The debt profile also changed: the share of short-term debt rose from 46.2% in 2003 to 50.7% in 2004, reflecting primarily a RUR4-billion rouble bond with a put option in August 2005, which was included in short-term debt, as well as a US$150-million CLN, maturing in September 2005. The placement of a second CLN will allow the AVTOVAZ Group to significantly improve its debt profile. In 1H 2005, revenues from writing off part of the restructured tax liabilities (under government resolution No. 264) equaled about RUR2.3 billion (US$85 million), which also helped decrease the cost of borrowing and improve the credit quality of OJSC “AVTOVAZ”.

The company’s overall credit quality improved in 2004

Despite a 20.9% y-o-y increase in total debt, the net debt of AVTOVAZ rose only 3.5% to US$785 million at FYE 2004

The placement of a second CLN will allow the AVTOVAZ Group to significantly improve its debt profile

October 2005

page 31 of 38

17096

9208

10723431

4252461

0

5000

10000

15000

20000

less than 1y ear

1-2 y ears 2-3 y ears 3-4 y ears 4-5 y ears ov er 5 y ears

RUR

mln.

EXHIBIT 33. LOANS AND BORROWINGS BY CURRENCY, DECEMBER 31, 2004

EUR2.1%

US$38.2%

Roubles57.8%

CHF1.9%


The debt of OJSC “AVTOVAZ” is sensitive to currency risks: about 42% of debt is tied to US$/RUR, EUR/RUR and CHF/RUR exchange rates. The enterprise does not currently use financial instruments to minimize these risks. At the same time, the company’s debt is not affected by changing interest rates: the rates on loans and credits are fixed.

OJSC “AVTOVAZ” was able to significantly improve its credit ratios in 2004 thanks to rising operating cash flow: Net Debt/EBITDA decreased to 1.3x, from 1.7x in 2003.

EXHIBIT 34. DEBT REPAYMENT SCHEDULE AS OF DECEMBER 31, 2004


Despite growing debt, OJSC “AVTOVAZ” took advantage of favorable conditions on fixed income markets and noticeably decreased the cost of servicing debt: weighted average interest rate decreased from 13.6% in 2003 to 10.5% in 2004. As a result, EBITDA/interest expense improved to 4.9x in 2004 from 3.6x in 2003.

AVTOVAZ’s debt is sensitive to currency risks: about 42% of debt is tied to the US$/RUR, EUR/RUR and CHF/RUR exchange rates

AVTOVAZ took advantage of favorable conditions on fixed income markets and noticeably decreased the cost of servicing debt

October 2005

page 32 of 38

International Peers

While AVTOVAZ is a much smaller car producer than its international peers, its operating and credit ratios compare quite favorably.

The company’s EBITDA margin was two times higher than Fiat’s (5.2%) and 1.3x higher than that of Volkswagen, one of Europe’s top car producers. Unlike most North American car producers, AVTOVAZ has relatively low leverage, with Net Debt/EBITDA of 1.3х, vs. 6.1x and 8.9x for Ford and GM, respectively

EBITDA/interest expense coverage ratios are also robust with AVTOVAZ posting 6.1x coverage at FYE 2004, above the indicators of Ford (3.5x), GM (3.5x) and Fiat (1.3x).

EXHIBIT 35. LEADING AUTO PRODUCERS: KEY INDICATORS, 2004

US$ mln. AVTOVAZ BMW FORD GM FIAT Volkswagen Accounts IFRS IFRS US GAAP US GAAP IFRS IFRS Car sales, thsd. cars 718 1,209 6,798 over 9,000 1,766 5,079

Sales 5,572 35,659 171,652 193,517 39,271 71,553

EBITDA 588 7,971 24,547 29,848 2,051 5,957

Interest expense 97 638 7,071 11,980 1,560 531

Total debt 1,177 22,371 172,973 300,279 12,908 44,828

Net debt 759 20,809 149,462 264,286 10,586 37,327

Equity 2,917 12,856 16,045 27,726 4,225 17,582

Assets 6,314 49,475 292,654 482,029 42,010 93,184

Key Indicators EBITDA margin, % 10.6% 22.4% 14.3% 15.4% 5.2% 8.3%

Net Debt/EBITDA (х) 1.3 2.6 6.1 8.9 5.2 6.3

EBITDA/Interest expense (x) 6.1 12.5 3.5 2.5 1.3 11.2

Total Debt/Equity, % 40.3% 174.0% 1078.0% 1083.0% 305.5% 255.0% Source: company info, TRUST estimates

AVTOVAZ has relatively low debt leverage and high EBITDA/Interest expense coverage

October 2005

page 33 of 38

Credit History

OJSC “AVTOVAZ” placed its first rouble bond in 2003, worth RUR1 billion with a maturity of 1 year. A second rouble bond, worth RUR3 billion, was placed in February 2004 and a third rouble bond, worth RUR5 billion – in June 2005.

In September 2004 OJSC “AVTOVAZ” made its first appearance on international debt capital markets with a one-year US$150-million CLN. The bond was repaid in full in September 2005.

OJSC “AVTOVAZ” relies on different types of financial instruments, depending on its needs and the market environment.

EXHIBIT 36. BORROWING POLICY

Instrument Maximal volume of a single transaction Maturity Target

Rouble bonds RUR5 billion under 5 years Investment and current

operations

Foreign-currency bonds US$300 million 5-7 years Investment and current

operations

Rouble-denominated loans RUR1.5 billion under 3 years Investment and current

operations Foreign-currency-denominated loans

US$20 million

5-7 years

Financing foreign import contracts


Bank loans remain one of the main sources of financing for OJSC “AVTOVAZ”. The company works with leading banks to finance its operating activities and investment projects. The following banks provide loans to AVTOVAZ:

• Deutsche Bank.

• Vnesheconombank;

• Vneshtorgbank;

• Povolzhsky Bank of the Sberbank of the Russian Federation;

• Alfa Bank;

• Solidarnost;

• MDM Bank;

• Hypo- und Vereinsbank.

Bank loans are guaranteed by inventory, equipment and securities. As of June 30, 2005, secured liabilities to third parties equaled RUR6.6 billion.

OJSC “AVTOVAZ” placed its first rouble bond in 2003 and its first CLN in September 2004

Bank loans remain one of the main sources of financing for AVTOVAZ

October 2005

page 34 of 38

EXHIBIT 37. DEBT PROFILE, JUNE 30, 2005

Long term debt61%

Short term debt39%


EXHIBIT 38. REPAYMENT SCHEDULE OF RESTRUCTURED TAX LIABILITIES AS OF JANUARY 1, 2005

847

1479

316 247 209

2048

0

500

1000

1500

2000

2500

less than 1y ear

1-2 y ears 2-3 y ears 3-4 y ears 4-5 y ears ov er 5 y ears

RUR

mln.


Restructured tax liabilities. Long-term tax liabilities include obligations AVTOVAZ did not fulfill to the federal budget in the past, which were restructured to be paid over a period of 10 years. According to the agreement, in case of any delays or non-payment of current or restructured debt, the Tax Ministry can require AVTOVAZ to pay back the liabilities in full. AVTOVAZ has met all of its tax commitments since the liabilities were restructured in 2002-2003. At the end of 2004 restructured debt totaled RUR5.146 billion (US$185 million), including short-term debt of RUR847 million.

Obligations AVTOVAZ did not fulfill to the federal budget in the past were restructured to be paid over a period of 10 years

October 2005

page 35 of 38

Investment Program

In 2004 AVTOVAZ carried out its planned investment program in full (RUR12.6 billion). The ratio of financing from internal/borrowed funds equaled 60%/40%. RUR7.22 billion was invested into the LADA KALINA project and RUR258 million – into the LADA PRIORA project.

Investment into the LADA KALINA and LADA PRIORA projects will continue in 2005. Total investment will equal RUR11,031.5 million (US$393.98 million). As the LADA KALINA project enters the final stage, financing will decrease from 2004, while investment into the LADA PRIORA project will increase as it enters stages requiring significant purchases of equipment as well as construction and installation work (2004 expenses were mainly in research & development).

The ratio of financing from internal/borrowed funds is expected to remain at 2004 levels in 2005.

The strategic plans and investment programs for 2006-2007 provide for the investment of about RUR5 billion a year, including RUR1.4 billion for the maintenance of current production. The investment program is updated, reviewed and approved by the Board of Directors every year. As a result, the volume of investment can be adjusted.

Dividends

AVTOVAZ has regularly paid dividends for preferred shares since 2002 and regular shares since 2003. Total dividends of RUR739 million (US$27 million) were approved for 2004. Dividends of RUR219.8 million (US$7.8 million) and RUR631.55 million (US$22.5 million) were paid in 2002 and 2003, respectively.

Financial Forecast for 3-5 Years

According to the strategic plans of the enterprise and planned volume of sales, OJSC “AVTOVAZ” intends to change its structure of production over the next five years. The company plans to introduce more modern automobiles that meet the demands of consumers as well as environmental and safety standards.

On the basis of market research the company will continue to position its products in price segments under US$10,000, which it believes will help boost revenues.

Over the next 3-5 years AVTOVAZ plans to generate operating cash of over US$300 million every year, maintaining EBITDA margins at 12-14%.

Furthermore, AVTOVAZ plans to repay its liabilities, including tax payments to the budgets of all levels, restructured debts and investment debt, in full and according to schedule.

Over the next 3-5 years AVTOVAZ plans to generate operating cash of over US$300 million a year, maintaining profit margins at 12-14%

Total investment into the LADA KALINA and LADA PRIORA projects will equal US$393.98 million

October 2005

page 36 of 38

Program to Reduce Expenses

AVTOVAZ has developed and introduced a program to reduce expenses that covers all subdivisions of the plant and includes various methods of reducing costs. There is ongoing work on optimizing the management of the plant, including non-core assets.

The strategic and budget management systems of AVTOVAZ are developing measures to reduce costs, aiming to cut overall plant expenses by 20% in 2005 and a further 10% in 2006.

There are also efforts to speed up turnover and reduce inventories. OJSC “AVTOVAZ” continues to negotiate pricing with component suppliers. Thus, over 1H 2005, the company was able to restrain the inflation of procurement prices at 4.5%, while the official inflation rate published by the State Statistics Service was 7%. Going forward, the group plans to continue negotiating with suppliers, in order to restrain price inflation.

OJSC “AVTOVAZ” has also been working on expanding its distribution market and transitioning to a single-level system of relations with dealers.

The company is constantly and comprehensively working to improve the quality of its products as part of a program to improve quality control. Measures that have been carried out resulted in fewer defects covered by warranty and losses due to rejects as well as a significant reduction in spending on warranty servicing. The strategic program of the enterprise sets a goal of reducing expenses on warranty servicing by 10% every year.

Current plans for reducing personnel are focused on early retirement for select workers. If production of specific components is transferred to other enterprises, the company plans to also transfer its workers to these enterprises.

AVTOVAZ aims to cut overall plant expenses by 20% in 2005 and a further 10% in 2006

Current plans for reducing personnel are focused on early retirement for select workers

October 2005

page 37 of 38

APPENDIX: KEY FINANCIAL INDICATORS IFRS, RUR mln. 2002 2003 2004 INCOME STATEMENT Gross revenues 119,432 130,772 160,536 Cost of Goods Sold (99,331) (110,120) (133,687) Gross Profit 20,101 20,652 26,849 SG&A, other operating expenses (14,510) (14,711) (17,353) EBITDA** 15,002 12,358 16,926 Depreciation and amortization (5,869) (6,293) (6,379) EBIT** 9,133 6,065 10,547 Interest incurred (3,077) (3,416) (3,451) Other non-operating income (expense) 3,546 41 1,381 Income tax (4,932) 385 (2,851) Minority interest 4 (83) 330 Net income 1,128 2,951 4,575 CASH FLOW STATEMENT Operating cash flow 2,561 7,417 10,759 Capex (7,994) (9,210) (8,963) Investment activities other than capex 142 (520) (1,533) Net increase in debt 3,285 9,108 5,828 Dividends paid (164) (219) (538) Additional capital (400) - - Cash from financing activities 3,627 6,446 4,850 Net increase in cash and equivalents (1,818) 4,120 5,095 BALANCE SHEET Cash and cash equivalents 2,751 6,871 11,966 Trade receivables 8,247 6,970 7,548 Inventories 18,484 19,060 20,742 Other current assets 6,662 11,334 13,758 Current Assets 36,144 44,235 54,014 Property, plant & equipment 100,383 101,454 103,158 Other long-term assets 2,453 6,375 8,687 Long-term assets 102,836 107,829 111,845 Total Assets 138,980 152,064 165,859 Short-term debt (including current restructured tax liabilities) 10,261 12,873 17,096 Other current liabilities 15,203 16,378 19,173 Trade payables 17,444 17,495 18,494 Current Liabilities 42,908 46,746 54,763 Long-term debt (including current restructured tax liabilities) 8,496 14,992 16,597 Other long-term liabilities 10,762 10,824 11,009 Long-term liabilities 19,258 25,816 27,606 Total Equity 76,814 79,502 83,490 Total Liabilities and Equity 138,980 152,064 165,859 KEY FINANCIAL INDICATORS Total Debt* 18,757 27,865 33,693 Net Debt * 16,006 20,994 21,727 EBITDA margin (%) 12.6% 9.5% 10.5% EBITDA/interest expense (x) 4.9 3.6 4.9 (EBITDA - Capex)/Interest (x) 2.3 0.9 2.3 Total Debt*/EBITDA (x) 1.3 2.3 2.0 Net Debt*/EBITDA (x) 1.1 1.7 1.3 Long-term debt*/Total capital (%) 10.0% 15.9% 16.6% Total debt*/Total assets (%) 13.5% 18.3% 20.3% Total Debt*/Equity (%) 24.4% 35.0% 40.4% Current Assets/Current Liabilities (%) 84.2% 94.6% 98.6% Operating cash flow interest cover (x) 0.8 2.2 3.1 Operating cash flow/Capex (%) 32.0% 80.5% 120.0% Operating cash flow/Total debt* (%) 13.7% 26.6% 31.9% EBITDA growth (%) -45.3% -17.6% 37.0% Total Debt* growth (%) 21.2% 48.6% 20.9% Capex growth (%) 18.4% 15.2% -2.7% Source: company info, TRUST estimates * including restructured tax liabilities; ** - EBITDA = Net income (including minority interest)+ amortization + interest expense+ income tax; EBIT = Net income (including minority interest) + interest expense + income tax

FIXED INCOME PRODUCT GROUP

Directors Michael Workman

Piotr Piecha

FIXED INCOME RESEARCH Telephone +7 (095) 247-90-75 Fax +7 (095) 247-25-96 E-mail [email protected] Web http://www.trust.ru

Corporate Credit Research +7 (095) 208-20-38 Alexei Dyomkin Mikhail Galkin Leonid Ignatiev

Fixed Income Strategy +7 (095) 208-20-24 Nikolai Podguzov Alexander Schurikov Timur Semenov

Macroeconomics +7 (095) 208-20-12 Yevgeny Nadorshin

Production Editors Luba Schwartzman Tatyana Andrievskaya

TRADING Telephone +7 (095) 247-25-95 Fax +7 (095) 247-25-96 E-mail [email protected] Petr Ter-Avanesyan +7 (095) 247-25-97 Dmitry Igumnov +7 (095) 247-25-95 Andrey Lifchits +7 (095) 247-25-92 Yevgeny Garipov Andrei Shurinov Andrei Mironov

Promissory notes Igor Mikhailov

SALES Denis Zibarev +7 (095) 789-36-22 Valentina Sukhorukova +7 (095) 247-25-90 Natalya Sheiko +7 (095) 247-28-39 Giuseppe Cicatelli +7 (095) 789-35-93 Andrei Polyakov +7 (095) 247-25-95

DEBT CAPITAL MARKETS

Managing Directors Konstantin Mokhnachev Alexander Kurbatov

Origination and Structuring Anatoly Iofe Denis Nikitin Anna Tigeeva Alexander Buyanovsky

Structured Products Olga Dumanskaya

Contacts Telephone +7 (095) 247-25-91 Fax +7 (095) 208-22-56 E-mail [email protected]

Primary Placement and Syndication Denis Tulinov +7 (095) 789-32-60 Ivan Shiyanov +7 (095) 247-25-91

REUTERS: TRUST Sovereign Eurobonds OFZ and Municipal Bonds Corporate and Municipal External Debt Rouble bonds Closing Prices for the Most Liquid Emerging Markets Instruments

BLOOMBERG: TIBM Sovereign Debt and MinFins Corporate Eurobonds Rouble Municipal Bonds Rouble Corporate Bonds Deposit Rates

This report is not an offer or solicitation to buy or sell any securities or related financial instruments or to participate in any trading strategy. Although the information and opinions expressed in this report are believed to be accurate as of this date, no express or implied warranties or representation are being made as to accuracy or completeness. The information and opinions presented have not been tailored to any specific transaction of any third party and are not a detailed analysis of a specific situation of any third party. Our opinions may change without further notice. The information and opinions expressed in this report are not a substitute for an independent assessment of an individual’s investment needs and goals. Opinions expressed in this report may differ or be contrary to the opinions of other units of TRUST Investment Bank (hereinafter referred to as the Bank) as a result of using different assumptions or criteria or analysis of information for different purposes. This document is for information purposes only. Descriptions of any company or companies or their securities or the markets or developments mentioned herein are not intended to be complete. Any statements regarding past performance are not necessarily indicative of future performance. The Bank, its affiliates, officers, directors and/or employees and/or related parties may hold interests in or may have performed services for one or more of the companies mentioned in this report and/or may hold such interests and perform or seek to perform such services in the future subject to the Bank’s internal procedures aimed at avoidance of conflict of interest. The Bank or any of its affiliates may act or have acted as market-makers in securities or other financial instruments mentioned herein or securities underlying such financial instruments or related to those securities. Furthermore, the Bank may have or have had a relationship with or provide or have provided investment banking, capital markets and/or other financial services to the relevant companies. Employees of the Bank or its affiliates may serve or have served as officers or directors of the relevant companies subject to the Bank’s internal procedures aimed at avoidance of conflict of interest. The Bank has developed and introduced special procedures preventing unendorsed use of business information or conflict of interests arising from the provision by the Bank of advisory and other services in the financial market. Neither the Bank nor any of its affiliates accept any liability arising from the use of any of the information or opinions expressed in this report. This report may not be reproduced, distributed or published, in whole or in part, for any purpose without the express written permission of the Bank. This report may be used by investors within the Russian Federation subject to Russian laws. Foreign investors (including but not limited to those from Switzerland, the Netherlands, Germany, Italy, France, Sweden, Denmark, and Austria) may use this report provided they are deemed to be institutional investors under the laws of the country of registration. This report was prepared by the Bank, which is not registered as a broker-dealer by the SEC and is distributed to persons who by their acceptance thereof confirm that they are a major institutional investor in the US as defined in Regulation 15a–16 of the US Securities Act of 1934 and understand the risks involved in executing transactions in securities. This report was prepared by the Bank, which is not registered by the FSA and is not available to private customers in the United Kingdom. Each research analyst primarily responsible for the content, in whole or in part, of this research report, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report and (3) such research analyst does not perform transactions in securities issued by companies that he or she covers. The Bank accepts no responsibility for any use of information based on the views of any research analyst in relation to any relevant securities.

Documents

AVTOVAZ 2005 English - Amazon S3s3.amazonaws.com/zanran_storage/data.cbonds.info/ContentPages/... · LADA NIVA series automobiles; • phasing out LADA 2105/2107 series automobiles;