Ukraine 2015: Brains, Hands and Grains

A ground-floor investment opportunity at the EU’s frontier

July 2015

Why would respected, seasoned investors like Rubinstein,

Soros or Branson be bullish about investing in Ukraine

when the “bears” are much louder and more numerous?

“…Next door to Russia there is a complicated place, but also more attractive – it

has a much better Finance Minister than anyone you can find in that part of the

world…

Ukraine is an extremely attractive place to invest and I would look at that place

as a place if you want to take some risk and you are investing in dollars, but

there aren’t that many people investing in Ukraine, so you’re probably going to

buy some things that are going to be relatively inexpensive”

- David Rubinstein, Carlyle Group

"I stand ready. There are concrete investment ideas, for example in agriculture

and infrastructure projects. I would put in $1 billion”

- George Soros, Soros Fund Management

"Personally, I think that Ukraine is a good place to invest. I'm hopeful that Virgin

would start doing business in Ukraine”

- Richard Branson, Virgin Group

Source: Reuters, Hromadske 2015

Invest in Ukraine?

The lost decades

1. A ground-floor opportunity now

2. Brains: #1 IT engineering force in CEE

3. Hands: lowest-cost manufacturing platform in Europe

4. Grains: the food basket of the world

5. Entry ticket: a 70% discount to … Greek valuations

The “bear” perspective on Ukraine is clear. The challenges faced by the country are known and well-documented by analysts and media throughout the world.

What is missing though, is a contrarian perspective, which, while recognizing the challenges and risks, also gives a voice to the compelling reasons to consider Ukraine today as an investment destination.

To that end, this presentation makes a bullish case for Ukraine.

Each crisis opens up opportunities, and the latter is what we have chosen to focus our attention upon.

For above all, what we see in 2015 in Ukraine is a historical, ground-floor investment opportunity.

As USSR collapsed Ukraine

had a reasonably good starting point…

GDP per capita (PPP) in 1990, thousand USD

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Ukraine Slovakia Latvia Estonia

GDP per capital growth (PPP), indexed scale, 1995=100

Poland

Source: World Bank

-0.2

A critical mass of active, tech-savvy civil

society=relentless scrutiny

Percent of population using internet, %

“Throughout this turbulent period, Ukrainian civil

society stepped up to the plate, playing a key role

in forming the new government’s policy priorities

and providing critical services to the public”

– USAID, 2015

“2014 saw the rise of self-

organized public and a strong

volunteer movement”

Civil Society Organization Index in 2014, 1-7 scale,

lower=stronger civil society

+0.1

Improvement vs. 2008

+0.4 0 +0.1

Source: Euromonitor, Internetlivestats, BBC, USAID

A ground-floor opportunity Why this time is different and what makes

us optimistic about Ukrainian economy now.

A critical perspective: ground-floor starting point…

A critical mass of reformers and start

of structural reforms

Macro: stabilization package with IMF tempered

C/A deficit, UAH rate

Current account balance, USD billion

-2.3

-3.2

-6.0

-5.0

-1.5

-0.9

-1.3 -1.5 -0.5

0.8 0.7

-1.0

Hryvnia exchange rate, UAH per USD

11,8 13,0

16,2

26,5

21,1

Source: Dragon Capital, minfin.com.ua

Ukraine’s ranking in Ease of Doing Business, inversed scale

An ambitious deregulation program has been launched, with

over 70 initiatives, from scrapping a quarantine certificate for

grain transportation, to liberalizing the land market, to

simplifying the immigration rules for expats. Licensing for 26

business activities has been abolished and 16 regulations

scrapped.

The Ministry of Economy estimates the program to gene-rate

between $2.4 - $3.3 billion in savings for the business

community and dramatically improve Ukraine’s standing in the

World Bank’s Ease of Doing Business Rating.

Source: World Bank, Ministry of Economic Development and Trade of Ukrain

A critical mass of reformers and start

of structural reforms

Export champions – the growth engine

and safest bet on UA economy

The №1 IT engineering

force in CEE

1. Brains 2. Hands Lowest-cost manufacturing

platform in Europe

3. Grains Largest black-soil bank

in the world

Sustainable competitive advantages in IT, Manufacturing,

Agriculture to drive an exports-fueled rebound

Brains, Hands and Grains: three lasting, competitive advantages

Lviv 400km from Warsaw, 900km from Berlin

Manufacturing wages $1.2/hour, 2x lower than

China

60% devaluation boosting cost competitiveness

20x growth in IT exports in 10 years

0% duty on most EU exports

Share of EU exports from 20% to 35% in 5 years

Per capita exports of $1,540 still 3x lower than Poland

6.5% exports CAGR between 2009-2014

Exports only 49% of GDP vs 61% for CEE peers

Sources: Ukrstat, NBU, EU DCFTA text, World Bank, the Economist, China Statistical Yearbook, www.worldatlas.com

1

9 Hungary

13 Ukraine

15 Belgium

26 United States

32 Poland

38 Italy

48 Romania

56 India

115 Philippines

1 US

8 UK

14 Germany

30 Hungary

32 Poland

41 Ukraine

42 Romania

48 Indonesia

49 Turkey

50 India

1 China

2 US

6 Ukraine

11 Romania

13 Netherlands

16 Germany

32 Czech Republic

39 India

45 France

59 Belgium

1.Brains: №1 CEE IT engineering force

Results at the

International

Math Olympiad,

global rank

United Kingdom

Good Country Index:

Science and

Technology parameters

reported to GDP, rank

Universitas 21,

university

research quality,

rank

Share of math, science and computing graduates, %

Source: goodcountry.org, Universitas 21

Source: International Mathematical Olympiad, Eurostat, Ukrstat 2014

Top math and science education, starting with primary school

…and feeds abundant technical

talent into the market

18%27%

12%

12%

64% 44%

17%6%

0%

20%

40%

60%

80%

100%

Business services

Other

100% IT outsourcing

Transportation

Breakdown of Ukrainian service exports, 2007-2014

Already the

№1 exports

category to

United States

Ukraine’s ranking in Ease of Doing Business, inversed scale

Source: Ukrainian Hi-Tech Initiative, Symphony-solutions, Gartner, Ukrstat

Engineering

Graduates

per annum in

European countries,

thousand students

Average

programmer

salary,

comparable

skills, thousand

USD per annum

Source: World Economic Forum, Forbes, 2014, IVC, www.business-standard.com

Samsung alone has over 1,000 engineers working on things like computer vision,

information security, artificial intelligence, natural language processing (NLP), human

computer interaction (HCI), computational intelligence and more

Over 100 global companies located

software R&D in Ukraine

125 India

123 Pakistan

117 Ukraine

112 Philippines

105 Romania

97 Hungary

96 Poland

58 China

21 United States

1 Switzerland

Cost of living, including rent,

global ranking (lower = cheaper)

Prices of selected items

in Kyiv, USD

250 One bedroom rent, month

14 Intercity train Kyiv-Lviv (500km)

12 Two courses in fancy restaurant

10 Dry-clean suit

5 Theater ticket

4 Haircut

3 Taxi trip

2 A bowl of borscht

1 Tomatoes, 1kg

0.5 Milk, 1L

Ukraine has among the lowest living expenses in the world

Source: numbeo.com

The beer and burgers are the

cheapest in the world too :)

6,3

5,2

2,6

1,8 1,7

7,5

4,8

3,7 1,9

21,1

Average price of a 330ml beer, USD

Price of a Big Mac, USD

6,2 4,5

4,3

1,2

Source: Wall Street Journal, The Economist Big Mac Index – February 2015

• 70% urban population, concentrated mainly in and around large cities

• 2.6 million student population with 640,000 graduates each year

Select Ukrainian cities by population, thousand people

Source: Ukrstat

Tech talent + cheap living + global outlook =

thriving tech ecosystem

IT outsourcing is one of the perennial growth hope stories for Ukraine, drawing its inspiration from the Soviet tradition of science teaching, and the country’s plethora of scientific institutes that used to churn out rocket scientists. Under market conditions, the schools have switched to have

The huge IT outsourcing sector feeds increasing number of risk-taking tech talent, with a

cosmopolitan outlook, willing to strike on their own and launch globally-focused tech

startups. The low costs of living and progressive big-city culture, further add to a thriving

tech ecosystem

switched to producing programmers – an estimated 16,000 new IT specialists graduate each year

28

%

Drop in 2014

driven by large

Hrivnya

devaluation.

Growth in

national currency

continued to be

very strong

E-commerce sales in

Ukraine 2007-2014,

USD million

E-commerce posted 5.5x growth for the last 7 years…

Source: Euromonitor,

Horizon Capital

…and with plenty of upside ahead

to catch up with peers

…and with plenty of upside ahead to catch up with peers

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Germany

UK

Ukraine

France

Netherlands

Sweden

Italy

Poland

Spain

% of internet users shopping online

% o

f in

tern

et u

se

rs in t

ota

l p

op

ula

tion

Only ~20% of Ukrainian

internet users shop

online (share doubled

over 2 years)

Percent of online

shoppers = 3x lower vs

Poland, Italy; 4x vs UK,

Germany

Share of ecommerce in

total retail is just above

2%, 3-6x lower vs

Western Europe

• Good education, a strong math and science legacy

• Feeding abundant tech talent to the market – largest IT engineering force in CEE

• Which led to a thriving IT outsourcing business, up 20x during last decade

• Tech talent increasingly turning to startups, beyond outsourcing = increasing numbers of global software champions from Ukraine

Source: internetlivestats.com, Euromonitor

2. Hands: lowest-cost manufacturing platform in Europe

Hourly wages

in manufa-

cturing industry

in

select

countries, USD

Electricity

prices for

industrial

enterprise,

USD cent/

kWh

Workers per unit of gross

fixed capital stock in

manufacturing

Plenty of industries

remain very dependent

on labor cost

Source: icrier.org for Emerging Markets, India example

Source: www.worldatlas.com, www.travelmath.com

Flight hours to select

cities from Kyiv

Lviv Warsaw

390

Budapest

570

Berlin

930

Milan

1,560

London

1,990

Kyiv Istanbul

2

Berlin

2

London 3

NYC

10

Beijing

9 Dubai

5

In a world of tighter supply chains, faster product innovation cycles, Ukraine has a real chance to

emerge as a manufacturing and trading hub at the frontier of EU, Middle East and Asia. A case in

point, Western Ukraine emerged as home to a vibrant automotive spare-parts manufacturing cluster

“The production of

Ukrainian workers can

compete with the

European level in terms

of quality. There's a

new, highly-educated

generation of creative

people who want to see

their country strong. I'm

an optimist”

- Dietmar Kung,

Hugo Boss

Proven by top global brands who localized production in Ukraine

Kilometers distance

to select cities from Lviv

Ideally positioned to be a manufacturing

and trading platform

Exports to EU rising strongly, marking

fundamental shift in trade

Source: Ukrstat

38

35

38

34 34

27

27

2630

32

48

38

35

40

15

20

25

30

35

40

45

50

18

2008 2009 2010 2011 2012 2013 2014 1Q

2015 2007

Other countries Europe Russia & CIS

Exports split by destination, %

Moving away from over-reliance on Russian market as exports to Europe grow.

Signing of the DCFTA with the EU is expected to further accelerate the trend

• Demand for labor remains high, as many industries are still very labor intensive

• Ukraine enjoys a very attractive location, at the intersection of the EU, Middle East, Asia

• Signing of historical EU DCFTA to further boost attractiveness

• The manufacturing labor costs are very competitive, even compared to China

• Cost, advantageous FTAs and proximity to large markets position Ukraine as ideal manufacturing and trading platform

Oilseeds Wheat Coarse grains

Global demand, 1995-2024F,

million tons

Source: OECD 1 2 3

Source: OECD

Ukraine: already an agro-powerhouse,

share of global market rising

Oilseeds Wheat Coarse grains 1 2 3

Ukraine’s share of

globalexports by

commodity, %

3. Grains: the food basket for the world

Ukraine: already an agro-powerhouse,

share of global market rising

№3 in corn

№8 in poultry

№1 in sunflower oil

№4 in barley №6 in wheat №7 in soybean

№2 in grains

World’s leading positions in a number of markets

Thriving agricultural exports to EU, Asia, CIS and Middle East

EU: $5.0 bn.

CIS: $2.6 bn.

Africa: $5.0 bn. Asia: $6.6 bn.

Source: Ministry of Agricultural Policy and Food

Source: HCA

Farming

Grain

trading

Value-added

agri

Agri

infrastructure

Va

lue

ad

d

Grains ->

Poultry and Eggs ->

Farm Equipment example Cost advantage in grains enabled growth of eggs and poultry

producers, which rely on grains for a large portion of costs.

Companies like MHP, Ovostar, Avangard have achieved global

leading positions in these market segments. Further up the

value chain, a thriving poultry and eggs industry, enabled growth

of farm-equipment manufacturers e.g. Texna, which

subsequently turned into global export champions, leveraging

their Ukraine base.

Industry moves up the value chain,

further increasing margins

• The Revolution of Dignity led to a paradigm shift in Ukrainian society, politics and inevitably – the economy

• Young, technocratic government leading a bold, structural reforms agenda

• Uncompromising, active, tech-savvy civil society warrants the change is lasting = point of no return

• Sustainable competitive advantages in IT, Manufacturing, Agriculture open up attractive investment opportunities

• Valuations are at historical lows = an ideal time to seize on the potential upside

• Global demand for food keeps rising

• Ukraine is home to 1/3 of the most fertile soils on earth

• Soils, location and scale warrant a lasting cost advantage for Ukrainian producers

• The room for upside is still large, as further technologization will keep pushing the yields up

• As the industry matures, it moves up the value chain, boosts profits, creating a thriving agricultural cluster