Polish Strategy - PBG SA

EQUITY MARKETSJuly 2010Polish StrategyOn the right course and with tailwindsPolish Strategy July 2010Andrzej KnigawkaWarsaw +48 22 820 5015andrzej.knigawka@pl.ing.comTomasz CzyzWarsaw +48 22 820 5046tomasz.czyz@pl.ing.comAdam MilewiczWarsaw +48 22 820 5031adam.milewicz@pl.ing.comMilena Olszewska, CFAWarsaw +48 22 820 5039milena.olszewska@pl.ing.comPiotr Palenik, CFAWarsaw +48 22 820 5020piotr.palenik@pl.ing.comTamas Pletser, CFABudapest +36 1 235 8757pletser.tamas@ing.huDalibor VavruskaLondon +44 20 7767 6972dalibor.vavruska@uk.ing.comJean-Baptiste BouillaguetLondon (44 20) 7767 5888jean-baptiste.bouillaguet@uk.ing.comAlexandra MelnikovaMoscow +7 495 755 5180alexandra.melnikova@ingbank.com We expect modest gains for the Polish equity market in 2H10 with a year-endtarget level for the WIG20 index of 2,530. Diminishing supply of new share offerings, re-allocation of global capitaltowards EM, a stronger PLN (and weaker US$) and an increased share inMSCI indices should drive the market higher. Sector selection will be key. We favour banks over insurers, basic resourcesover utilities, mid-caps over blue-chips, consumer sectors over construction. Our focus list Buys are GTC, Handlowy, LPP, KGHM and PGE.PKN Orlen, Polimex and PZU are our top Sells.research.ing.comSEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION

Polish Strategy July 2010ContentsEquity market outlook 3Fund flows 9Local mutual funds .............................................................................................................9Local pension funds ...........................................................................................................9Sector stance ...................................................................................................................10Macro and politics 14Banks 17BPH..................................................................................................................................22BRE..................................................................................................................................24BZ WBK ...........................................................................................................................26Getin ................................................................................................................................28Handlowy .........................................................................................................................30Millennium........................................................................................................................32Pekao...............................................................................................................................34PKO BP............................................................................................................................36Basic Resources 39Andrzej KnigawkaWarsaw +48 22 820 5015andrzej.knigawka@pl.ing.comTomasz CzyzWarsaw +48 22 820 5046tomasz.czyz@pl.ing.comAdam MilewiczWarsaw +48 22 820 5031adam.milewicz@pl.ing.comMilena Olszewska, CFAWarsaw +48 22 820 5039milena.olszewska@pl.ing.comPiotr Palenik, CFAWarsaw +48 22 820 5020piotr.palenik@pl.ing.comTamas Pletser, CFABudapest +36 1 235 8757pletser.tamas@ing.huDalibor VavruskaLondon +44 20 7767 6972dalibor.vavruska@uk.ing.comJean-Baptiste BouillaguetLondon +44 20 7767 5888jean-baptiste.bouillaguet@uk.ing.comAlexandra MelnikovaMoscow +7 495 755 5180alexadra.melnikova@ingbank.comArctic Paper......................................................................................................................40KGHM ..............................................................................................................................42Mondi ...............................................................................................................................44Stalprodukt .......................................................................................................................46Chemicals 49Ciech................................................................................................................................50Police ...............................................................................................................................52Pulawy .............................................................................................................................54Synthos ............................................................................................................................56Construction & Materials 59Budimex ...........................................................................................................................60Cersanit............................................................................................................................62Kety..................................................................................................................................64Mostostal Warszawa ........................................................................................................66PBG .................................................................................................................................68Polimex MS ......................................................................................................................70Food & Beverage 73Astarta..............................................................................................................................74CEDC...............................................................................................................................76Cover photograph courtesy of istockphotosPricing date 19/07/10 unless statedotherwisePublication date 26 July 20101

Polish Strategy July 2010Insurance 79PZU..................................................................................................................................80Media 83Agora ...............................................................................................................................84Cinema City (CCI) ............................................................................................................86Cyfrowy Polsat .................................................................................................................88TVN..................................................................................................................................90Oil & Gas 93Lotos Group .....................................................................................................................94PGNIG..............................................................................................................................96PKN Orlen........................................................................................................................98Real Estate 101Dom Development .........................................................................................................102GTC ...............................................................................................................................104Retail 107EM&F .............................................................................................................................108LPP ................................................................................................................................110NG2................................................................................................................................112Vistula Group .................................................................................................................114Technology 117Asbis ..............................................................................................................................118Asseco Business Solutions ............................................................................................120Asseco Central Europe ..................................................................................................122Asseco Poland ...............................................................................................................124Comarch.........................................................................................................................126Comp .............................................................................................................................128Sygnity ...........................................................................................................................130Telecommunications 133Netia...............................................................................................................................134TPSA..............................................................................................................................136Utilities 139CEZ................................................................................................................................140Enea...............................................................................................................................142PGE ...............................................................................................................................144Disclosures Appendix 1462

Polish Strategy July 2010Equity market outlookKey actionable changes inratingsIn this note we change several actionable recommendations. We cut PZU to a Sell onprice appreciation. We upgrade KGHM to a Buy on sector re-rating and record quarterlyearnings expected in 2Q10. We cut our ratings on three construction companies –PBG, Polimex and Mostostal Warszawa – from Hold to Sell on a negative change insector view. We believe now is the time to Buy GTC, which we upgrade from Hold onadditions of new projects and a much more robust outlook for rents. We upgrade NG2from Hold to Buy on expected strong 2Q10 earnings and gradually improvingconsumption patterns, which are likely to benefit mainstream brands first. We cut EM&Ffrom Hold to Sell on price appreciation, rich valuations and more remote recoveryprospects in up-scale retail segments. We rate Pulawy a Buy from Hold on price decline.We upgrade Agora to a Buy from Hold on attractive valuation.Fig 1 Key actionable stock ideasCompany Rating Old rating Price (PLN) Target price (PLN) Old target price(PLN)Upside/downside(%)PZU Sell Hold 373.7 337.8 318.0 -10KGHM Buy Hold 94.2 110.0 101.0 17GTC Buy Hold 22.8 29.7 25.0 30Polimex MS Sell Hold 4.5 4.0 4.5 -12PBG Sell Hold 220.0 200.0 248.0 -9Mostostal Warszawa Sell Hold 67.2 60.0 67.0 -11NG2 Buy Hold 54.6 62.6 57.5 15EM&F Sell Hold 18.0 16.5 15.5 -9Pulawy Buy Hold 68.5 78.9 78.3 15Agora Buy Hold 22.7 27.1 25.0 19Source: INGKey sector callsIn terms of our core calls for 2H10, we move from neutral to overweight on the banks.Within financials our pair trade is to go long banks versus underweight PZU. Wedowngrade utilities from neutral to underweight with a strong preference for PGE overCEZ. We continue to underweight oil and gas. We change our stance on constructionfrom overweight to underweight. Our new overweight sector stances are media(from neutral) and chemicals (from neutral). We maintain our overweight stance on thefood and beverage sector as well as general retailers. We also have strong preferencefor mid-cap over blue-chip stocks, as the former offer superior earnings growth. Our lastpair sector trade is consumer-related stocks with exposure to increasing consumerspending from relatively unleveraged Polish consumers over construction and capitalgoods producers which are likely to suffer from a squeeze in margins.Fig 2 ING sector and stock focus listSector1H10 return(%)ING stance Top picks Least favourite stocksBanks -1.4 Overweight from Neutral Millennium, Handlowy added, BZWBK Pekao SA, Getin added, BRE removedremoved, PKO BP removedInsurance N/A Underweight PZU addedOil & gas 1.9 Underweight PKNTelecoms 0.0 Neutral TPSA addedMedia 10.0 Overweight from Neutral CCI, Agora addedConstruction 7.4 Underweight from Overweight Budimex, PBG removed Mostostal Warszawa addedReal-estate -9.2 Neutral GTC added, Dom removedRetail N/A Overweight LPP, NG2 added EM&FFood and beverage 22.7 Overweight CEDC; Kernel removed Astarta addedBasic resources N/A Neutral KGHM, Arctic Paper added Mondi addedChemicals 4.0 Overweight from Neutral Synthos added CiechBuilding materials N/A Underweight Kety added Cersanit removedTechnology -9.4 Neutral ABS added, Comp added, Asbis removed ComArch added, Sygnity removedUtilities -6.0 Underweight from Neutral PGE added; CEZSource: ING3

Polish Strategy July 2010Fig 3 Changes in ratings and target pricesPrice Target price Old target price Upside/downside Rating Old rating Change Adj. EPS growth (%)(PLN) (PLN) (PLN) (%) 2010F 2011FBanks & insuranceBPH 56.5 61.6 60.9 9 Hold Hold Maintained n/a n/aBRE 245.0 249.9 251.0 2 Hold Sell Upgrade 194 81BZ WBK 196.5 212.5 229.7 8 Hold Hold Maintained 8 28Getin 9.8 10.1 11.4 3 Hold Hold Maintained 56 44Bank Handlowy 74.1 85.9 85.9 16 Buy Buy Maintained 36 32Millennium 4.6 5.8 5.5 26 Buy Buy Maintained 11,479 92Pekao 159.9 154.0 153.2 -4 Hold Sell Upgrade 8 25PKO BP 38.5 46.8 47.6 22 Buy Buy Maintained 33 33PZU 373.7 337.8 318.0 -10 Sell Hold Downgrade -35 7ChemicalsCiech 24.3 25.8 32.8 6 Hold Sell Upgrade n/a n/aPolice 5.0 5.1 6.2 2 Hold Hold Maintained n/a n/aPulawy 68.5 78.9 78.3 15 Buy Hold Upgrade n/a n/aSynthos 1.9 2.2 2.2 18 Buy Buy Maintained 19 -11ConstructionBudimex 89.0 90.0 93.3 1 Hold Buy Downgrade 23 -13Cersanit 13.2 15.0 14.1 14 Hold Sell Upgrade n/a 33Kety 103.9 124.0 117.2 19 Buy Hold Upgrade 16 17Mostostal Warszawa 67.2 60.0 67.0 -11 Sell Hold Downgrade -17 -27PBG 220.0 200.0 248.0 -9 Sell Hold Downgrade 7 1Polimex MS 4.5 4.0 4.5 -12 Sell Hold Downgrade -3 -10Food and beverageAstarta 59.0 49.1 44.2 -17 Sell Sell Maintained 91 -19CEDC (US$) 24.6 31.0 31.0 26 Buy Buy Maintained 51 6General retailersEM&F 18.0 16.5 15.5 -9 Sell Hold Downgrade 75 31LPP 1,710.0 2,025.0 2,175.3 18 Buy Buy Maintained 67 17NG2 54.6 62.6 57.5 15 Buy Hold Upgrade 53 29Vistula 2.6 2.7 3.0 3 Hold Buy Downgrade n/a 42ITAsbis 4.2 4.6 5.5 10 Hold Buy Downgrade n/a 42Asseco BS 9.2 10.5 10.5 15 Buy Buy Maintained 12 4Asseco CE 22.1 29.0 30.0 31 Buy Buy Maintained 1 12Asseco Poland 56.6 60.0 65.0 6 Hold Buy Downgrade -5 -7Comarch 83.0 78.5 98.0 -5 Sell Hold Downgrade 101 13Comp 68.2 78.5 78.7 15 Buy Buy Maintained 13 12Sygnity 12.9 14.7 15.5 14 Hold Hold Maintained n/a n/aMediaAgora 22.7 27.0 25.0 19 Buy Hold Upgrade 66 40CCI 39.5 47.0 38.0 19 Buy Buy Maintained 22 46Cyfrowy Polsat 14.3 16.2 17.7 14 Buy Buy Maintained 17 23TVN 16.5 18.0 16.0 10 Hold Hold Maintained -20 106Mining and metalsKGHM 94.2 110.0 101.0 17 Buy Hold Upgrade 57 23Stalprodukt 423.0 407.0 393.5 -4 Hold Sell Upgrade -39 25OilLotos 31.0 22.0 22.0 -29 Sell Sell Maintained -90 238PKN Orlen 38.4 31.0 31.0 -19 Sell Sell Maintained -18 19PaperArctic Paper 14.2 17.8 17.9 26 Buy Buy Maintained -80 178Mondi 74.0 52.6 52.9 -29 Sell Sell Maintained 69 88Real estateDom Development 48.0 47.4 53.4 -1 Hold Buy Downgrade -54 164GTC 22.8 29.7 25.0 30 Buy Hold Upgrade -151 176TelecomsNetia 4.8 5.0 5.0 3 Hold Hold Maintained -582 39TPSA 15.4 18.7 18.7 21 Buy Buy Maintained -28 23UtilitiesCEZ (Kc) 866.8 811.5 811.0 -6 Hold Sell Upgrade -2 6Enea 18.1 20.0 20.0 10 Hold Hold Maintained 54 5PGE 21.3 25.0 25.0 17 Buy Buy Maintained -32 22PGNiG 3.5 3.3 5.1 -4 Hold Buy Downgrade -4 39Source: ING estimates4

Polish Strategy July 2010Fig 4 Valuation summaryPrice Target price Diff to Mkt cap EV/EBITDA (X) PER (X) P/BV (x) ROE (%) Div yield (%)Rec (PLN) (PLN) TP (%) (US$m) 2010F 2011F 2010F 2011F 2010F 2010F 2010FBanks & insuranceBPH Hold 56.5 61.6 9 1,359 - - Neg 21.2 1.0 Neg 0.0BRE Hold 245.0 249.9 2 3,232 - - 19.2 10.6 1.5 9.9 0.0BZ WBK Hold 196.5 212.5 8 4,497 - - 15.0 11.7 2.2 15.3 2.0Getin Hold 9.8 10.1 3 2,148 - - 16.2 11.2 1.6 10.6 0.0Bank Handlowy Buy 74.1 85.9 16 3,035 - - 14.1 10.7 1.5 10.9 5.1Millennium Buy 4.6 5.8 26 1,758 - - 21.4 11.2 1.4 7.6 0.0Pekao Hold 159.9 154.0 (4) 13,164 - - 16.0 12.9 2.1 13.5 1.8PKO BP Buy 38.5 46.8 22 15,088 - - 15.7 11.8 2.2 14.6 4.1PZU Sell 373.7 337.8 (10) 10,122 - - 13.1 12.2 2.5 20.4 3.1ChemicalsCiech Hold 24.3 25.8 6 213 6.8 6.2 Neg 58.8 0.8 Neg 0.0Police Hold 5.0 5.1 2 118 5.6 5.6 Neg 25.5 0.8 Neg 0.0Pulawy Buy 68.5 78.9 15 411 51.6 6.1 Neg 13.2 0.8 Neg 0.9Synthos Buy 1.9 2.2 18 789 5.6 5.6 9.4 10.5 1.3 15.0 0.0ConstructionBudimex Hold 89.0 90.0 1 713 4.3 4.8 10.6 12.2 3.6 35.3 7.6Cersanit Hold 13.2 15.0 14 597 9.8 7.8 18.1 13.6 1.6 9.4 0.0Kety Buy 103.9 124.0 19 301 6.3 5.3 11.5 9.8 1.2 11.0 4.3Mostostal Warszawa Sell 67.2 60.0 (11) 422 6.7 8.0 13.7 18.8 2.4 18.9 1.5PBG Sell 220.0 200.0 (9) 927 9.4 8.8 13.5 13.4 1.9 15.3 2.2Polimex MS Sell 4.5 4.0 (12) 661 7.3 6.9 13.6 13.7 1.4 11.3 1.5Food and beverageAstarta Sell 59.0 49.1 (17) 463 5.0 5.5 6.0 7.4 1.9 37.6 0.0CEDC Buy 24.6 31.0 26 1722 10.0 9.5 11.2 10.5 0.9 8.3 0.0General retailersEM&F Sell 18.0 16.5 (9) 593 8.1 6.6 20.8 15.8 3.2 16.6 0.0LPP Buy 1,710.0 2,025.0 18 915 9.2 8.1 16.8 14.4 3.8 24.0 2.9NG2 Buy 54.6 62.6 15 658 12.1 9.4 16.4 12.7 4.7 36.1 1.8Vistula Hold 2.6 2.7 3 92 10.7 8.8 23.4 16.6 0.9 3.4 0.0ITAsbis Hold 4.2 4.6 10 73 5.8 4.6 12.4 8.8 0.8 6.2 0.0Asseco BS Buy 9.2 10.5 15 96 6.7 6.3 12.3 11.8 1.2 9.8 8.2Asseco CE Buy 22.1 29.0 31 148 5.2 4.1 10.6 9.5 1.2 10.5 4.1Asseco Poland Hold 56.6 60.0 6 1,212 7.3 6.9 11.1 11.9 1.0 9.5 2.6Comarch Sell 83.0 78.5 (5) 207 9.0 6.4 15.4 13.6 1.2 5.7 0.0Comp Buy 68.2 78.5 15 102 7.3 6.1 13.3 11.8 0.9 9.1 0.0Sygnity Hold 12.9 14.7 14 48 57.5 5.5 Neg 14.9 0.6 Neg 0.0MediaAgora Buy 22.7 27.0 19 363 6.3 5.0 17.1 13.4 0.9 5.0 2.2CCI Buy 39.5 47.0 19 631 9.1 6.1 18.3 11.3 2.2 14.8 0.0Cyfrowy Polsat Buy 14.3 16.2 14 1,199 10.1 8.2 14.1 11.5 9.0 72.1 4.7TVN Hold 16.5 18.0 10 1,756 10.7 8.2 33.9 16.5 3.3 8.1 1.3Mining and metalsKGHM Buy 94.2 110.0 17 5,910 2.9 2.3 4.7 3.8 1.4 32.9 12.7Stalprodukt Hold 423.0 407.0 (4) 892 10.7 8.4 16.3 13.1 2.0 12.7 1.9OilGrupa Lotos Sell 31.0 22.0 (29) 1,261 9.5 7.0 41.2 12.2 0.6 1.4 0.0PKN Orlen Sell 38.4 31.0 (19) 5,152 6.5 5.8 15.3 12.8 0.8 5.5 0.0PaperArctic Paper Buy 14.2 17.8 26 247 8.1 5.1 25.2 9.1 1.2 4.8 1.6Mondi Sell 74.0 52.6 (29) 1,161 12.9 9.6 30.6 16.3 2.8 9.7 3.3Real estateDom Development Hold 48.0 47.4 (1) 370 34.4 12.4 32.7 12.4 1.5 4.6 1.7GTC Buy 22.8 29.7 30 1,569 35.1 26.1 19.8 7.9 1.2 9.9 0.0TelecomsNetia Hold 4.8 5.0 3 589 4.2 3.6 20.9 15.0 0.9 4.6 0.0TPSA Buy 15.4 18.7 21 6,452 4.8 4.6 22.3 18.1 1.3 5.8 9.7UtilitiesCEZ (Kc) Hold 866.8 811.5 (6) 26,005 6.9 7.0 10.0 9.4 2.1 22.8 6.1Enea Hold 18.1 20.0 10 2,506 3.8 4.0 10.1 9.6 0.8 8.3 2.1PGE Buy 21.3 25.0 17 11,559 5.6 5.0 13.1 10.8 1.1 8.9 3.6PGNIG Hold 3.45 3.3 (4) 6,385 8.1 7.0 17.7 12.7 0.9 5.3 2.1ING universe 7.6 6.3 14.1 10.9 1.9 13.4 3.3Source: ING estimates5

Polish Strategy July 2010Very modest gains expectedin 2H10Fig 5 Poland vs EMEAWe expect modest gains for the Polish equity market in 2H10 in zloty terms. Our bottomupderived year-end target level for the WIG20 index is 2,530 points. The WIG20 indexadvanced 4% in 1Q10 on flows to EMEA funds and investors’ expectations of earningsrecovery. The index corrected by 9% in 2Q10 on significant supply of shares from theState Treasury, European fiscal worries and a declining euro. We believe equities will besupported by: (1) a narrowing supply of new share offerings; (2) a re-allocation of globalcapital towards emerging markets; (3) an undervalued currency; and (4) a strongerEurodollar. On the negative side, domestic equity-related funds faced very thin inflows atPLN0.2bn in 1H10 and flows are likely to remain muted in 2H10. We struggle also to finda compelling case for corporate earnings surprises for the index heavyweights. Mid-capsoffer better earnings prospects, which we believe are not priced in. For our coverageexcluding WIG20 companies, we forecast a very strong 53% YoY rebound in netearnings in 2010F.Fig 6 Poland 1H10 sector returns12010080604020FoodMediaConstructionChemicalsOil and gasTelecomBanksEnergy01/00 2/00 4/00 5/00 7/00 9/00 10/00 12/00 1/01 3/01 5/01Real-estateITMSCI PolandMSCI EMEA(10) 0 10 20 30Source: BloombergSource: ING estimatesSector selection is the key todelivering alpha in 2H10Fig 7 WIG20For at least two good reasons sector selection is the key to delivering alpha returns inwhat we expect to be an essentially flat market for the rest of the year. First, we expectvery significant divergence of returns in individual sectors, with mid-caps likely tooutperform blue-chips, and consumer-related stocks likely to beat construction andcapital goods. Second, large IPOs, sell-downs and expirations of lock-ups have changedthe composition of indexes significantly. Defensive stocks have a much higher weightingin the indexes, largely at the cost of banks. Banks are no longer such an easy proxy forthe market. With a significant share of the indices geared to defensive sectors, we believegrowth mid-cap stories are likely to attract more attention from investors.Fig 8 MSCI indices returns in 1H10 (%, US$)3,0002,5002,0001,500HungaryPolandCzech RepublicRussiaSouth Africa1,0007/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10 -25 -20 -15 -10 -5 0TurkeySource: BloombergSource: Bloomberg6

Polish Strategy July 2010A sluggish total 8% YoYgrowth in earnings distortsthe underlying differential inearnings momentum ofindividual sectorsZloty weakness is negativefor earnings growth asexporters are underrepresentedon the WSEWe forecast sluggish earnings growth of 8% YoY in 2010F for our expanded Polishuniverse. Revised earnings momentum appears significantly weaker than the 39% thatwe expected in January. However, comparability is flawed by the incorporation of actual2009 results and a broadening of coverage, including the addition of earnings-heavy bluechip companies PZU and PGE, which we expect to report declines in net earnings for theyear. Our earnings growth projection for the like-for-like universe would have been 23%YoY now, 16ppt lower growth than expected in January. We cut our earnings estimatesby 8% for the like-for-like universe, which explains 11ppt of the difference. Companiesreported 5% higher 2009 earnings, which explains the remaining 5ppt difference.Comparable earnings growth is lower than expected in January despite an upwardrevision in GDP growth. Manufacturers restocking and exports have driven the upwardrevisions in GDP so far this year in Poland. Polish exporters are under-represented bothon the WSE and in our universe versus their share of GDP. A weaker-than-expected zlotyhas an indirect negative impact on Polish banks’ earnings which make up 32% of our netearnings universe in 2010 and direct negative effect on net earnings for PGNIG, CEDC,media companies and general retailers.Fig 9 Contributions to GDP growthFig 10 Recovery driven by supply side of economy20151050-51Q043Q041Q053Q051Q063Q061Q073Q071Q083Q081Q093Q091Q10F3Q10FPrivate consumption Public consumption Fixed InvestmentsInventories Net exports GDPSource: GUS, ING forecastsPLN offers the bestfundamental value in theEMEA region302520151050-5-10-15-201/03 2/04 3/05 4/06 5/07 6/08 7/09 8/10Source: ING estimatesIP (%YoY)Export (%YoY, rhs)In our view, PLN offers the best fundamental value in the EMEA region. The zloty shouldrally through 4.0 versus the € in the short-term and we see long-term fair value for thezloty at 3.5-3.6 to the € based on PPP comparisons. We expect the zloty to close at 3.9to the € at the end of 2010F and 3.6 at the end of 2011F.403020100-10-20-30-40Fig 11 € trading back up...Fig 12 ...and PLN/€ regaining ground1.61.51.41.31.21.17/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/105.04.54.03.53.07/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10 7/10Source: BloombergSource: BloombergPoland is now 1.5% of MSCIEM and the share is growingForeign flows are likely to be stronger on the back of an increase in MSCI weightings, anundervalued currency and an economy that is relatively isolated from double-dip risk.7

Polish Strategy July 2010Although the MSCI Poland index was down 19% in 1H10, the country weighting in theMSCI EM index increased to 1.48%, from 1.27% at the start of the year. There are stillsell-downs planned for the next six months, but the value is likely to be significantlysmaller compared with the PLN20.8bn sold by the State Treasury ytd. The only possibleIPO of a state-owned company later this year is a listing of the Warsaw Stock Exchange,but it is going to be fairly small at c.PLN0.8bn. The sell-down of a large block of PGEshares is likely to be postponed until 2011. As far as we are aware, there are no largelistings of private companies coming to the market for the reminder of the year.Valuation premium to otherEMEA markets widened in1H10 due to a reduction inearnings estimatesBased on revised estimates for our universe, the Polish equity market trades at 14.1x2010F PER and a more attractive 10.9x 2011F PER. The MSCI Poland index trades at11.9x 2010F PER versus a historical average of 12.5x. EMEA markets trade at anaverage 8.9x 2010F PER. Polish valuations are at a 37% premium to EMEA markets, awider than historical average premium of 23%. The premium has widened slightly sinceJanuary despite MSCI Poland underperforming MSCI EMEA by 7ppt, because the markethas scaled back earnings expectations for Poland.Fig 13 MSCI PL vs MSCI EMEA 12m FWD PER multiple(x)Fig 14 ... and premium (%)3025201510501/00 2/00 3/00 4/00 5/00 6/00Poland EMEA Poland hist avg EMEA hist avg100806040200-20-402/97 2/99 2/01 2/03 2/05 2/07 2/0912m FWD PER premium over MSCI EMEA Avg hist premiumSource: BloombergSource: Bloomberg8

Polish Strategy July 2010Fund flowsLocal mutual fundsAccording to our calculations, domestic mutual funds recorded PLN5.6bn of cashinjections in 1H10, over two times more than the PLN2.1bn attracted throughout thewhole of 2009. However, 1H10 money inflows were mainly attributable to non-equityfunds (money market and bonds), which collected PLN5.4bn. Equity-related funds(balanced, stable growth and pure equity) faced modest inflows of PLN0.2bn.AUM grew by 8% YTD as of end June 2010 and reached PLN99.5bn (US$30bn).However local mutual funds would need a further PLN46bn increase in AUM to approachthe record high levels recorded in October 2007 (PLN145bn AUM). Equity holdingsincreased only slightly, by 1% YTD to PLN33bn (US$9.9bn).Fig 15 Mutual funds AUM (PLNbn)Fig 16 Net purchases of equities (PLNbn)15010050006/03 06/04 06/05 06/06 06/07 06/08 06/09 06/106.04.02.00.0-2.0-4.0-6.0-8.0-10.0Jan 07 Jan 08 Jan 09 Jan 1070,00060,00050,00040,00030,00020,00010,0000(Index value)Equity-related funds*Other fundsNet purchases of equity (lhs)WIG index (rhs)*pure equity, balanced and stable growthSource: ING estimatesSource: ING estimatesFig 17 Flows to mutual funds (PLNbn)6420-2-4-6-8-10-12-14-161/055/059/051/065/069/061/075/079/071/085/089/081/095/099/091/105/10Non-equity fundsEquity-related funds**pure equity, balanced and stable growthSource: ING estimatesLocal pension fundsIn 1H10 domestic pension funds purchased equities worth PLN10.7bn, more than theyhad bought in the whole of 2009 (PLN10bn). 1H10 equity purchases were mainlydedicated to two large IPOs (PZU and Tauron) and plenty of State Treasury placements(KGHM, Lotos, Enea, Bogdanka and Mennica). AUM increased by 8% YTD toPLN193.2bn (US$58.2bn) as of end June 2010.9

Polish Strategy July 2010Fig 18 Pension fund AUM (PLNbn)Fig 19 Net purchases of equities (PLNbn)25020015010050001/00 06/01 11/02 04/04 09/05 02/07 07/08 12/09(PLNbn)4.03.02.01.00.0-1.0-2.0-3.0Dec-05 Dec-06 Dec-07 Dec-08 Dec-0970,00060,00050,00040,00030,00020,00010,000(Index value)EquitiesDebt instr, bank deposits, cashNet purchases of equity (lhs)WIG Index (rhs)Source: KNFSource: KNF, ING estimatesEquity allocation in Polish pension funds reached 32.5% as of end-June 2010, stillsignificantly higher than the historical monthly average of 30%. Given high equity purchasesYTD, demanding levels of equity allocation and poor macro sentiment, we believe thatdomestic pension funds may be passive on the secondary market in the short term.Fig 20 Equity allocation of pension funds (%)4238343026221802/00 09/02 04/05 11/07 06/10Equities as % of AUMHistorical average of equity allocationSource: KNFSector stanceBanksWe upgrade our stance on banks from neutral to overweight. There are few signs thatloans may significantly accelerate but we think that the market is too focused on volumegrowth this year. The recent series of major rate cuts on retail deposits and increases ofaccount prices is evidence of softening competition. As the result even in case of possibledisappointments is balance sheet growth there is a meaningful chance for positivesurprises in earnings (we are above consensus in most of the banks). Moreover, in 2-3months the market will start discounting the 2011 outlook which still looks good thanks toimproving macro (falling unemployment and appreciating currency should help retaillending quality, growing interest rate should support margins). Millennium and Handlowyare our top picks (Millennium because of low PBV and recovering earnings; Handlowybecause of low PER). We are still positive on PKO BP, although we perceive the potentialacquisition of BZ WBK as more of a risk than an opportunity.UtilitiesWe downgrade our weighting for the utilities sector from neutral to underweight, as weexpect the sector to underperform in a growing market. Even though we upgrade CEZ toHold on valuation grounds (we no longer have downside), we continue to dislike the stock10

Polish Strategy July 2010and believe the sentiment towards CEZ will remain mediocre in the coming months; dueto: (1) its hedging strategy (currently its hedged prices are below the EEX curve); (2)guidance for falling earnings in 2010 with the risk of additional costs; and (3) an outlookfor flat 2011 earnings, less attractive than at Polish peers. As a result, we would switchCEZ for PGE, which is our top-pick in the segment. We like PGE as: (1) it is a leader inthe generation segment in Poland, which we consider the best place to be; (2) due to itsyounger-than-average generation fleet it should be the key beneficiary of expectedgrowth in electricity prices; and (3) we see 20% earnings growth in 2011 after the launchof the new Belchatow block. We remain neutral on Enea. On one hand we see growth inearnings due to the impact of RAB revaluation. On the other, we believe that there maybe disappointment in the market if a strategic investor is not found for the company atprices expected by the Polish State Treasury. The electricity utilities trade at 5.8x 2010FEV/EBITDA and 5.4x 2011F. We cut our recommendation on PGNIG to Hold based onrevised earnings estimates, as adverse tariff decisions show that the regulator remainsopenly hostile to company efforts to receive fair returns in the wholesale trade segment.PGNIG is also increasing its E&P capex on shale gas exploration, but production isunlikely to increase in the short-term.Oil and gasWe expect Lotos Group and PKN Orlen to underperform in the coming months on aweaker outlook for refining margins in the second half of the year and softening retailmargins. Refining economics could take a hit in the second half of the year after marginperformed well in 1H10. However, as both US and European distillation units are runningat full capacity after the recent large-scale maintenance shutdowns, the risk of productoverhang is increasing again. Meanwhile, the demand side, especially in Europe, doesnot look promising. Key middle distillate crack spreads look poor given high US andMiddle East imports to Europe and the lukewarm recovery of transportation. Moreover,we expect the lucrative retail margins to soften in 2010 for both companies, due to moreintensified competition after Lotos ramped up refining production and slower demandgrowth from households and industry in Poland.MediaWe upgrade media from neutral to overweight on improved prospects for earningsgrowth. In the past GDP growth of over 3% in Poland drove high-single-digit or evendouble-digit growth in ad spend. We forecast 3% total ad spend growth in 2010F and anacceleration to 8%/12% in 2011F and 2012F. Internet, television and cinema advertisingwill lead the growth. Our top pick remains CCI. CCI offers a unique combination of highfree cash flows with decent underlying growth driven by cinema openings. Managementdeleveraged the balance sheet and has a number of options to reinvest excess cash inthe core business, including both organic development as well as M&A. We upgradeAgora to Buy as we believe the acquisition of Helios is a transforming milestone for thegroup, which should allow it to reduce its share of free-falling newspaper advertising tojust 24% of group revenue in 2011F. The company’s internet segment is seeing robusttop-line growth, has captured increased market share from competitors and is expectedto break even at the EBITDA level this year. We also like Cyfrowy for its ability to addressthe challenges of a decelerating satellite TV market in Poland. Management has anumber of options to grow ARPU and revenue. We expect the share price to be driven bythe market shifting attention from subscriber growth to positive trends in ARPU, solidearnings recovery and investors playing down concerns about the competition, which iseither financially constrained (N) or suffering from managerial shake-up (Cyfra+).TechnologyWe maintain our neutral weighting for the Technology sector. We believe that after adifficult 2009, 2010 is not going to be much better, as IT budgets are still under pressure.In our opinion, corporates will be willing to conduct only necessarily investments, which11

Polish Strategy July 2010may mean some growth in demand for hardware (already visible) and crucial IT systems,such as ERP software or security. However, contrary to earlier months, we believe it willnot be the business model but company specific issues driving the earnings and shareperformance. Thus, even though we see a pick-up in hardware spending (especially inthe CIS region) we downgrade Asbis to Hold, due to high FX risk. We believe thatsoftware houses will continue to prove more immune to the slowdown than integrators,but our ratings are based on the speed of expected earnings improvement. We are mostpositive on ABS and Asseco CE (both Buys), subsidiaries of Asseco Poland, rather thanthe parent company itself, which we downgrade to Hold. In ABS we like the strongearnings pattern, a consequence of cost reductions, and the possibility of acquisitions. InAsseco CE we like the attractive multiples and the gradual recovery from past problems.At Asseco Poland, however, we see a rather unattractive earnings pattern and a sizeablerisk of US acquisition, financed from yet another equity issuance. Our third top-pick in theIT segment would be Comp, where we expect a scale change in 2Q10 earnings (makingup for the poor 1Q10), due to the strong backlog, and we see potential for new contracts.At the same time we are disappointed with the pace of restructuring at Comarch andSygnity. At Comarch (downgraded to Sell) we see further problems in two areas: GermanSoftM and new ventures, which continue from 2009. At SoftM costs have been reducedbut revenues fell to a greater extent, which will mean another year of losses, in ouropinion. The new ventures are disappointing, with losses expanding rather thancontracting. At Sygnity we similarly believe that despite further restructuring, high lossesare likely in 2010. On 12.6x 2010F PER and 12.3x 2011F PER, the sector multiples donot look demanding and selected IT companies could follow the examples of Teta orWola Info and be taken over by international players.RetailWe maintain our overweight for the late-cyclical retail sector, as we believe that the worsttrends in consumption materialised in 1H10. We expect economic indicators to graduallyimprove, with 2010F GDP growth reaching 3.2% (versus 1.8% in 2009), privateconsumption growing 2.5% in 2010F and 3.7% in 2011F (versus 2.2% in 2009) and theunemployment rate stabilising at 11.9%. We believe that the strong floods have alreadyhad their negative impact on consumption. In our opinion, a gradual recovery inconsumption should be visible first at the level of average Poles, thus at the level ofmainstream brands. We expect like-for-likes to start building up in the coming months,coming out of negative territory around 4Q10. We believe that this picture is only likely tobe spoilt temporarily by FX. We have seen the zloty in a depreciating trend versus US$and euro, which means increased COGS and rental expenses for retailers. We believethat with gradually improving consumption patterns, retailers may be more eager totransfer the increased cost of inventory onto consumers in 2H10. Our macroeconomistsexpect the zloty to return to an appreciating trend in 4Q10, which could provide anothershare price stimulus. As a result, we would play mainstream retailers (LPP, NG2) versusup-market ones (EM&F and Vistula Group), with the mainstream players being moreexposed to FX due to a lack of hedging and sizeable sourcing from China. Our top picksin the sector are LPP (Buy maintained) and NG2 (upgraded to Buy). We see strongearnings dynamics as well as attractive multiples. In the short-term, we see a better 2Q10earnings outlook at NG2 than at LPP. However, we point out that NG2’s CEO maycontinue to reduce his stake in the company. In addition, both players pay dividends. Wedislike EM&F (downgrade to Sell) and Vistula Group (downgrade to Hold) as these areboth up-market players, operating in lifestyle and luxury, respectively, and we expectimproved trends in these areas only in 2011. We see rich valuations at both companies.We believe that in the case of EM&F, the market is paying too much for security in theform of currency hedging, which we find unwarranted given our currency forecasts. Weunderstand the more elevated multiples of Vistula Group, coming out of solvencyproblems. Nevertheless, we still see the company struggling with NWC, so as to finance12

Polish Strategy July 2010the increased December inventory purchases. We point out that valuations in the retailsegment are starting to look rich, at 19.4x 2010F PER and 14.9x 2011F PER.ConstructionWe downgrade Polish contractors from overweight to underweight on an expectedsqueeze in 2011 margins, an overly optimistic market consensus on 2011F earnings anda likely delay in signing large power construction contracts. The WIG Construction indexhas gained 13.3% YTD compared to a 6% increase in the WIG. Despite expectations ofstrong results in 2010, as a late-cyclical play the sector will be affected by margindeterioration beginning in 2011. The secured backlog of contracts should guaranteerevenue growth in 2010 and 2011 in case of all major contractors, but the economicrebound will translate into increased construction materials prices and pressure fromsubcontractors. As a result, the impact on profitability will be negative. We also believethat expectations of supportive newsflow in 2H10 related to large power blockconstruction contracts (including tenders for Kozienice (€1.6bn), Opole (€3.0bn) andSiekierki (€0.7bn) will be pushed back until 2011 following delays in tender processes.We downgrade Mostostal Warszawa (MSW PW; Sell; TP PLN60), Polimex (PXM PW;Sell; TP PLN4.0) and PBG (PBG PW; Sell; TP PLN200) to Sell. Mostostal Warszawa isour least preferred construction company, primarily related to intensified competition inthe company’s core segment of infrastructure, a lack of large signings over the past fewmonths and also a lack of diversification into cyclical construction segments. Wedowngrade Polimex to Sell on expectations of weak 1H10 results which will not be caughtup in 2H10, resulting in flat YoY net profit in 2010F. Although the company is perceived tobe the frontrunner in the award of power block tenders, delays in tender processes willalso delay supportive newsflow. We downgrade PBG to Sell on worries that entry intoroad construction, which already constitutes 26% of the backlog, will deteriorate profitmargins beginning from 2011.ChemicalsWe upgrade the sector rating for chemical producers from Neutral to Overweight. Amongsector indices WIG Chemicals was the worst performing index in 2Q10. WIG Chemicalsdropped 12.5% QoQ in 2Q10, underperforming the market by 5ppt. For fertilizerproducers we expect a recovery in fertilizer prices in 2H10, driven by a rebound in grainprices caused by concerns about low harvests in FSU-12, Canada, EU-27 and India. Atthe same time, we agree that 2010/11 global grain ending stocks are forecast atdemanding levels of 464m tonnes and thus may curb significant growth in grain prices inthe medium term. All in all, we forecast 10-15% YoY growth in fertilizer prices in 2010Fversus a 30-50% YoY drop in 2009. We upgrade Pulawy from Hold to Buy, as we expecta rebound in FY11F earnings driven by a recovery in nitrogenous fertilizer prices, arevival in the performance of the chemical sector and a gradual improvement in thecompany’s export competitiveness. Our top pick is still synthetic rubber producer Synthos(Buy, TP: PLN2.24) given cheap valuations (9.4x 2010F PER, or a 25% discount toglobal peers) and conservative consensus for 2010F earnings (our forecasts of EBITDAand net profit are 12% higher than market expectations for both).Paper producersWe have a neutral view on Polish paper manufacturers. However, we advise investors toswitch from Mondi to Arctic Paper. We would be Buyers of Arctic Paper (Buy, TP:PLN17.8) given an expected decline in pulp prices (34% of operating costs) in 2H10driven by restoration of global supply. We forecast 178% YoY growth in EPS, implying anattractive 2011F PER of 9.1x, or a 10% discount to global peers. We do not like Mondi(Sell; TP: PLN52.6) given rich valuations (30.6x 2010F PER, or a 132% premium topeers) and overly optimistic consensus for 2010F earnings (our forecasts of EBITDA andnet income are 22%/37% lower than consensus, respectively).13

Polish Strategy July 2010Macro and politicsThe Polish economy stacks up well against other EMEA markets, with low householddebt, a higher share of domestic consumption, prudent fiscal policies and relativeresilience to external uncertainties. GDP growth estimates in Poland are being revisedupwards as the economy wakes from a winter-related investment slump, helped by morerobust German demand and post-flooding reconstruction. ING expects 3.2% GDP growthin 2010F, with the key drivers being private consumption – responsible for 1.5% of the3.2% growth – and manufacturing restocking, responsible for 1.3%.Fig 21 Key macro indicators2004 2005 2006 2007 2008 2009 2010F 2011F 2012FActivityReal GDP (%ch YoY) 5.3 3.6 6.1 6.7 4.9 1.8 3.2 3.9 4.9Private consumption (%ch YoY) 4.4 2.0 5.0 5.0 5.3 2.2 2.5 3.7 4.0Private investment (%ch YoY) 6.4 6.5 16.5 18.0 6.4 (0.4) (2.3) 4.0 9.0Government expenditure (%ch YoY) 3.1 5.2 3.9 3.6 0.0 1.8 3.2 6.0 3.0Industrial production (%ch YoY) 13.1 4.1 12.0 9.2 3.8 (3.6) 9.8 7.3 8.8Unemployment rate (%, end period) 19.0 17.6 14.8 11.2 9.2 11.9 11.9 11.3 10.3Nominal GDP (US$bn) 237.2 270.0 342.4 425.7 526.5 430.3 435.7 485.3 570.1Gross domestic saving (% of GDP) 19.0 19.8 20.6 21.5 23.6 20.2 20.4 20.6 21.8PricesCPI (%ch YoY, annual average) 3.5 2.1 1.0 2.5 4.2 3.4 2.4 2.7 3.0PPI (%ch YoY, annual average) 7.0 0.7 2.3 2.3 2.5 3.3 2.1 2.5 2.6Enterprise sector wage rates (%ch YoY) 4.3 3.2 5.0 9.1 11.0 4.2 3.5 4.6 5.2Enterprise sector unit wage costs (%ch YoY) (13.0) 0.5 (6.4) (0.1) 6.9 3.7 2.7 5.6 4.8Fiscal balanceBudget balance (% of GDP), ESA 95 (5.7) (4.3) (3.8) (2.1) (2.5) (7.1) (7.0) (6.7) (5.2)Public debt (% of GDP), ESA 95 45.7 47.1 47.6 45.2 44.8 51.0 53.8 55.4 54.9External balanceExports (US$bn) 81.9 96.4 117.5 142.0 179.3 140.0 150.4 165.4 198.5Imports (US$bn) 87.5 99.2 124.5 158.6 203.8 144.4 156.4 183.0 228.8Trade balance (US$bn) (5.6) (2.8) (7.0) (16.6) (24.6) (4.5) (6.0) (17.6) (30.2)Current account balance (US$bn) (10.7) (4.8) (11.1) (19.6) (28.2) (7.2) (7.2) (12.1) (30.0)Current account balance (% of GDP) (4.5) (1.8) (3.2) (4.6) (5.4) (1.7) (2.1) (2.5) (5.3)Export volume (%ch YoY) 28.0 18.0 20.5 16.7 21.3 (19.0) 14.7 10.0 20.0Import volume (%ch YoY) 24.9 13.6 24.1 23.2 23.6 (26.8) 15.6 17.0 25.0FX reserves (ex gold, US$bn), year end 35.3 40.9 46.4 63.0 59.9 75.9 83.7 97.0 100.4Debt indicatorsGross external debt (US$bn) 130.0 132.9 169.6 233.1 244.7 279.5 300.5 330.5 380.1Gross govt. external debt 57.8 58.8 67.8 79.2 82.0 - - - -Gross external debt (% of GDP) 54.8 49.2 49.5 54.8 46.5 65.0 69.0 68.1 66.7Gross external debt (% of exports) 158.8 137.9 144.4 164.1 136.5 199.7 199.8 199.8 191.5Government foreign debt service (US$bn) 4.1 4.2 5.3 6.7 7.3 49.0 51.1 56.2 64.6Government foreign debt service (% of GDP) 1.7 1.6 1.5 1.6 1.4 11.4 11.7 11.6 11.3Interest & exchange ratesBroad money supply (%ch YoY) year end 9.4 10.3 16.0 13.4 15.0 8.1 7.2 12.0 14.03-month interest rate (%) annual average 5.7 6.1 4.2 4.8 6.3 4.3 4.0 4.5 5.1Long bond yield (5yr, since 1999 10yr, %) end 6.2 5.0 5.0 6.1 6.1 6.2 6.1 5.9 6.0Long bond yield (5yr, since 1999 10yr, %)av 7.0 5.2 5.1 5.5 6.1 6.1 5.9 6.0 6.0Exchange rate (US$/PLN) year end 2.99 3.26 2.91 2.76 3.34 2.85 3.39 3.00 2.77Exchange rate (US$/PLN) annual average 3.90 3.64 3.09 2.76 2.46 3.11 3.23 3.12 2.88Euro/US$ year end 1.33 1.18 1.32 1.30 1.20 1.44 1.15 1.20 1.30Euro/US$ annual average 1.24 1.24 1.26 1.34 1.43 1.40 1.25 1.18 1.25Exchange rate (Euro/PLN) year end 4.08 3.86 3.83 3.58 4.01 4.11 3.90 3.60 3.60Exchange rate (Euro/PLN) annual average 4.45 4.52 3.90 3.78 3.52 4.34 4.05 3.66 3.6052-week t-bill year-end 6.3 4.4 4.1 5.8 5.6 4.2 4.2 4.9 5.1Source: ING estimatesInterest rates to stay flat in2H10We expect interest rates will only move higher in 2011F, with no change forecast until1Q11F. The current monetary policy council is more dovish than the previous one. MrMarek Belka, the newly appointed Central Bank Governor, has an IMF background andwill be placing stronger emphasis on global economic matters when discussing interestrate changes. With a deflationary external environment and only moderately higher14

Polish Strategy July 2010growth in private consumption, the outlook for interest rates is stable. The FRAs market ispricing two 25bp interest rate increases over the next 12 months.Low expectations forprogress on reforms as thenext elections are loomingFiscal reforms at a dead endThe time for cheap excuses is over for the government. Civic Platform's (PO) candidateMr Komorowski won the presidential elections in July. We struggle to see a crediblereform agenda anywhere further down the legislative channel, other than near the point ofconceptual discussion or drafting. We also have low expectations for reforms progress,as municipal elections are scheduled in 2010 and general elections are planned for 2011.With no unpopular reforms planned (and not too many popular reforms either) POappears to be moving towards being able to form a one-party cabinet post the 2011general elections. Current opinion polls indicate a reasonable chance of a one-partymajority in the future parliament.The key to fiscal reform is held by the junior coalition partner, the Polish Peasants Party(PSL). The farmers’ pension system is a potential source of the largest single saving forthe central budget in the future. But reform of the farmers’ pension system has facedmajor resistance from the PSL in the past. PO appears unable to break the deadlock.Fiscal reforms seem to be concentrated on the enhancement of tax collection as well asincentivising recipients of social benefits to actively seek jobs. In our view, theaccelerating economy would have enabled the government to trim the planned centralbudget deficit of PLN52.2bn by PLN10-15bn, were it not for flooding-relatedreconstruction and spending.15

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Polish Strategy July 2010Banks17

Polish Strategy July 2010BanksFundamental highlights for Polish banking sector:• In 1Q10 margins were fairly good (only BRE recorded a QoQ contraction in NIM) ie,the expected rebound continued. However, we had been concerned that the 2Q10outlook would be spoilt by declines in interbank rates, which would reduce depositmargins. Surprisingly, the guidance from managements was rather positive. Most ofthe banks highlighted the positive impact from the reduction of rates on deposits,which they offer. It clearly indicates that the deposit war is ending fairly quickly,particularly in the retail segment. It was also confirmed by several press reportscomplaining of poor rates offered by banks to customers. Therefore, we believe that in2Q10 NIM will improve at most of the banks, which will be an important driver for NIIimprovement this quarter. The jump in cost of swaps in mid-2Q10 will affect 3Q10rather than 2Q10, and it should be smaller than last year (after 2008-09’s badexperience with swaps, banks extended the maturity of their hedging).• The end of the deposit war is likely to be connected to the fact that there is no needfor liquidity as lending volumes are still fairly weak, for the same reasons as in thepast three or four quarters (weak demand for corporate loans, weak supply of cashloans). Please note that reported volumes will probably show much greater growththan in 1Q10 (when deposits fell by 0.2ppt and loans by 0.3ppt) because of thedepreciating PLN that will inflate the existing stock of FX loans.Fig 22 Spreads on retail deposits (ppt)Fig 23 Spreads on corporate deposits (ppt)3.02.01.00.0-1.0-2.0-3.01/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10New On stock1.51.00.50.0-0.5-1.01/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10New On stockSource: NBP, Bloomberg, ING estimatesSource: NBP, Bloomberg, ING estimates• Fees are likely to record small growth due to good capital markets (brokerage ratherthan mutual funds) and loan fees (sales of corporate loans are still weak butmortgages should improve). Also, transactional fees should improve slightly due tostronger activity after a weak 1Q10.• Provisions are likely to grow QoQ (by 5%). The general pressure from corporate andcash loans should decline, but there is likely to be a seasonal review of portfolios after1H. Additionally, there is likely to be growth of provisions in mortgage lending(especially affecting Getin, BPH) and for banks there will be base effects due topositive surprises in 1Q10 (Handlowy, BZ WBK). In 2H10 the situation should start toimprove and poor May data (major growth of NPLs in the banking sector) seems to bethe exception rather than the acceleration of negative trends. Depreciating PLNshould not affect the quality of corporate loans (companies are not “over-hedged” asthey were in late 2008) and the impact on the quality of mortgage loans will be limitedas long as CHF interest rates stay low. All in all, we believe that the peak of totalNPLs will be in 2Q10 or 3Q10.18

Polish Strategy July 2010• After four consecutive quarters of YoY reduction, costs are likely to pick up in 2Q10and this trend should continue after that. However, the YoY growth rates are not likelyto be high (we forecast 2% in 2Q10) and will be connected mainly with unfreezing ofsalaries and a small revival in marketing expenses. QoQ growth will be slightly higher(+4%) but it will be partly a seasonal effect.All in all, we think that 2Q10 will be moderately good. There will be very small growthof earnings in comparison with 1Q10 (+1% QoQ) but we should remember that 1Q10 wassurprisingly good for the sector. We see a chance for positive surprises in the case ofPKO BP, Pekao and Millennium. There is a risk of disappointments in the case of BZWBK and Getin (BPH is likely to show very high losses but it was flagged bymanagement in May so should be in the price already).Fig 24 Change in ING forecasts for profits of Polish banksPrevious forecast (PLNm) New forecast (PLNm) % change2010F 2011F 2010F 2011F 2010F 2011FBPH (117) 227 (190) 205 63 -10BRE 534 970 537 971 1 0BZ WBK 1,001 1,266 958 1,225 -4 -3Getin 473 632 430 621 -9 -2Handlowy 670 887 685 902 2 2Millennium 241 488 261 502 8 3Pekao 2,688 3,392 2,615 3,267 -3 -4PKO BP 3,007 3,985 3,056 4,067 2 2Total 8,497 11,847 8,353 11,760 -2 -1Source: ING estimatesWe do not make major changes to our forecasts (2010F earnings are revised down by2%). In fact, if we exclude Getin and BPH – which face problems with mortgage lending –the profit forecasts for the sector would be unchanged. We slightly increase fee forecastsand slightly reduce NII.We believe that the outlook for earnings is good in the medium term, as the depositwar is softening and in 2H10 we should at last see a meaningful decline in provisions andfirm signs of an upcoming turnaround in loan quality. Volumes will be weak but it is hardto believe that they will deteriorate more (we do not believe that the so called“Recommendation T” of banking supervision will affect lending to a major extent). Themain internal risk is connected with pressure on lending margins. The external risk seemsto be more important, ie, the turmoil in the financial systems of EU countries. Polishbanks have negligible exposure in terms of assets/financing, but they may be hit indirectlyin two ways. Firstly, if we see falling valuations in Europe it will inflate the relativevaluation of Polish banks more (and they are not very cheap; although the 30/40%premium on 2010F/11F PER versus EMEA banks is the same as six months ago).Secondly, the growth of risk may increase the cost of FX swaps more, which would affectNIM (Getin, Millennium).Because internal risks are relatively small, the 2H10 earnings outlook seems to be good(we are above consensus for most of the banks) and comparatively good 1Q10 resultswere not factored in by the market, we upgrade our relative stance on the banksversus the Polish market from Neutral to Overweight. After the upgrade of Handlowyfrom Hold to BUY earlier this month, in this report we upgrade Pekao and BRE (bothfrom Sell to HOLD).Our current order of preference for the Polish banking sector would be: Handlowy,Millennium, PKO BP, BRE, BPH, BZ WBK, Pekao, Getin.19

Polish Strategy July 2010Fig 25 Growth of loans in Poland (% YoY)50403020100-101/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10Corporate loans Retail loans Total loansFig 26 Growth of deposits in Poland (% YoY)50403020100-101/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10Corporate deposits Retail deposits Total depositsSource: NBPFig 27 Loans and deposits structure (May)Source: NBPFig 28 Loan growth by segments(% YoY)100%80%60%40%20%0%66 42216238387 433DepositsLoans706050403020100-10CorporateMicrocompaniesMortgage Cards ConsumerfinanceRetail Corporate PublicJun-08 Dec-08 Jun-09 Dec-09 May-09Source: NBPFig 29 Structure of loan portfolios in 1Q10 (%)*mainly consumer loansSource: NBPFig 30 Loans and deposits change in 1Q10 (% YoY)100%90%80%70%60%50%40%30%20%10%0%GTN MIL BPH KRB PKO BRE PEO ING BZW BHWMortgage Retail CorporateDepositsPEOKRBBREBZWMILBHW302520151050-5-10-15INGGTNPKO-15 -10 -5 0 5 10 15 20 25 30LoansNote: retail – all non-mortgage retailSource: Company data, ING estimatesSource: Company dataFig 31 Loans / deposits ratio in the sector (%) Fig 32 Loans / deposits ratio by banks (%)120110100908070605012/04 6/05 12/05 6/06 12/06 6/07 12/07 6/08 12/08 6/09 12/0916014012010080604020023015913089 91 9811297 103 103 1139061 61 636578 81 87 96BHW ING BZW PEO GTN PKO KRB MIL BRE BPH1Q09 1Q10Source: NBPSource: Company data, ING estimates Note: BPH affected by merger with GEMB20

Polish Strategy July 2010Fig 33 Solvency ratios of listed banks (%)Fig 34 CAR in listed banks in 1Q10 (% YoY)16.015.014.013.012.011.010.09.08.01Q05 1Q06 1Q07 1Q08 1Q09 1Q1020.018.016.014.012.010.08.06.04.02.00.018.4 18.414.9 15.212.2 12.4 12.9 13.0 13.611.0GTN BRE KRB BPH ING BZW MIL PKO BHW PEOAverage CARAverage Tier-1CARMinimum required levelNote: minimum level of CAR is 8%Source: Company data, ING estimatesSource: Company data, NBPFig 35 Impairment ratios in 1Q10 (%) Fig 36 Provision coverage in 1Q10 (%)18.016.014.012.010.08.06.015.59.2 9.1 8.98.37.26.0 6.0 5.84.79080706050403043555966 67 677276 77814.0202.0100.0BHW BPH KRB GTN PKO PEO MIL BRE BZW ING0PKO MIL BZW BHW BRE KRB ING GTN PEO BPHSource: Company data, ING estimatesSource: Company data, ING estimatesFig 37 Median NIM (%) Fig 38 Average cost of risk* (%)4.03.53.02.52.01Q05 1Q06 1Q07 1Q08 1Q09 1Q1022520017515012510075502504Q06 4Q07 4Q08 4Q09Median NIM (%)Average cost of risk (bps)Note: counted on total assets; includes BPH, BRE, BZW, GTN, MIL, KRB,BSK, PEO, PKOSource: Company data, ING estimates*provisions/loans annualised Note: includes BPH, BRE, BZW, GTN, MIL, KRB,BSK, PEO, PKOSource: Company data, ING estimates21

Polish Strategy BPH July 2010BPHA few more hurdles aheadMaintainedHoldPoland Market cap PLN4,331.7mBanks Bloomberg BPH PWBPH faces more problems than it flagged last year. 2010 willbe in the red and significant staff reductions are in progress.However, extremely bearish guidance from managementleaves little space for negative surprises.Investment caseLast year BPH finally completed the merger with GE MoneyBank (GEMB), which more than doubled size of the bank interms of assets and loans (but not in terms of deposits as GEMBwas entirely financed by loans from the parent, GE). It seemedthat the completion of the legal process cleared the way to startthe implementation a new ambitious strategy (published in mid-2009) and be more active in the market.However, in May BPH cancelled the strategy and the targets thataccompanied it (eg, 17%+ ROE in 2012). The company alsodecided to close two important divisions ie, car loans and salesfinancing, which triggered planned c.1,500 staff reductions (19%of the total number). The news was very negative. Firstly, ithighlighted problems with the predictability. Secondly, it meantthat the restructuring will not end this year, so BPH will not focuson expansion and client acquisition soon, but it will ratherengage resources in internal processes.Nevertheless, some elements of last year’s strategy remainlargely unchanged, eg, the major shift of strategic focus: from thegrowth of balance sheet volumes to growth in efficiency. In caseof particular products, the most remarkable change was inmortgage lending: GEMB used to be a leading bank in thisproduct, but BPH expected the combined market share of thetwo banks to fall. In our view, this is linked to lower expectedfinancing from the parent GE and a much greater dependenceon deposits. While the behaviour of the bank implies thatfinancing from the parent will be a constraint in the medium term,we believe that, with improvements in global liquidity, it willbecome more available, which is a potential long-termopportunity.May was very bad in terms of negative newsflow, but it wasquickly factored into the price. Moreover, BPH already said that2Q10 will be weaker than (the already very weak) 1Q10 and thelater recovery will be slow. We have the impression thatmanagement realises that its credibility is under pressure due tothe latest disappointments and wants to play down expectations.As a result, the risk of the further negative surprises in the futureseems to be fairly low.The P/BV ratio of BPH (at 1.0x on 2010F) is the lowest in thesector, but because the “book value” will not generate majorprofits its 2011F PER is the highest (in 2010F the bank reporteda loss). Additionally, the low P/BV factors in problems with thecredibility of the bank after so many disappointments over thepast two years. Therefore, we maintain our HOLDrecommendation.Price (19/07/10)Target price (12-mth)PLN56.50Previously PLN60.91PLN61.58Forecast total return 9.0%Quarterly previewAfter 1Q data management warned that provisions will grow andrevenues will fall QoQ in 2Q10, so it is clear that this quarter willbe extremely weak. We can only add that we believe that theweakness of revenues will be connected with falling NII and thecosts will be additionally inflated with the reserves for the layoffs(we assume c.PLN50m). In case of provisions there is a risk offinal balance sheet cleaning, which could inflate this line wellabove PLN300m in the worst case scenario.2Q10F results preview(PLNm) 1Q10 2Q10FNII 344 334Revenues 546 535Costs (359) (408)Provisions (249) (286)Net profit (54) (130)Source: Company data, ING estimatesEarnings drivers and outlookWe expect both fees and NII to shrink. In both cases it will bedue to weak sales of loans as the banks exits two segments ofthe market (car loans, sales financing). Additionally, NIM willsuffer from fierce competition for deposits as the merged bankwants to reduce its L/D ratio. We should see mild improvementnext year, although growth will not be large as the bank will stillbe restructuring. The positive cost effects of restructuring shouldbe visible in 2H10, although at the level of reported costs theymay be offset by the last expenses of the merger (eg,rebranding) and lay-offs. If we exclude these one-offs we shouldsee a high single-digit decline in costs.In 4Q09 and 1Q10 it appeared that the real quality of lendingwas worse than expected. While at that time the biggest issuewas connected with unsecured retail lending we believe thattoday the biggest risk is connected with mortgage loans. GEMBused to target the lower segment of the market and it grantedmainly FX loans. Getin (with a very similar high risk profile ofmortgages) recorded very high provisions in mortgage in 1Q10,so we would not be surprised if we see impairments in thissegment also in BPH. On the other hand, there are the first signsof a turnaround in cash loans, so the total cost of risk should staybelow 300bps in 2010F and start falling quickly in 2011F.Our DDM-based target price rises only slightly, as lower net profitforecasts (2010F loss widened by 63%, 2011F profit cut by 10%)reflect mainly short-term rather than long-term prospects.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com22

Polish Strategy BPH July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2008 2009 2010F 2011F 2012F27 May 2010 End of negotiations with trade unions (agreed1,472 lay-offs)1 Jun 2010 AGM (no dividend, changes in the supervisoryboard)25 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)General Electric 89BZ WBK mutual funds 6Source: Company data, INGShare dataAvg daily volume (3-mth) 17,489Free float (%) 10.8Market cap (PLNm) 4,331.7Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance9080706050407/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)After the merger with GE Money Bank in 4Q09, BPHbecame the No.7 lender in Poland but it remainedretail-biased (84% of loans). It has a relatively strongposition in mortgage lending (although it plans toreduce its market share), credit cards and cash loans(targeting the lower segment of the market). BPH hasa relatively weak position in deposits (outside the top-10), which is the legacy of GE Money Bank (used tobe 99% financed by the parent). GE Money is astrategic investor (89% stake).RisksUpside: faster than expected improvement in loanquality; positive effects of costs restructuring.Dowside: too aggressive an approach to depositpricing would impact NIM; departure of key employeesas turmoil continuesIncome statementNet interest income 1,106 1,415 1,316 1,388 1,614Net fee & commission income 627 766 735 832 1,013Net trading income 64 89 64 77 99Insurance income 0 0 0 0 0Other operating income 26 (16) (17) (20) (25)Revenues 1,823 2,253 2,098 2,276 2,701Operating costs (1,254) (1,427) (1,347) (1,327) (1,423)Pre-provision profit 569 826 751 949 1,279Total impairments (271) (690) (873) (699) (628)Other non-operating income 0 (135) (110) 0 0Pre-tax profit 298 0.4 (232) 250 651Tax 29 61 44 (47) (124)Minorities (6) (8) (2) 2 7Other adjustments 0 0 0 0 0Net profit 321 53 (190) 205 534Normalised net profit 321 162 (101) 205 534Balance sheetTotal assets 36,678 35,215 35,186 37,151 44,061Customer loans 29,742 29,096 27,007 28,711 35,331Customer loans/assets (%) 81.1 82.6 76.8 77.3 80.2Customer deposits 10,317 10,125 12,027 14,482 17,710Loan to deposit ratio (%) 288.3 287.4 224.6 198.2 199.5Total equity 4,450 4,490 4,310 4,525 5,071Risk-weighted assets 29,495 30,314 29,585 31,904 38,143Profitability & efficiencyNet interest margin (%) 6.7 4.3 4.0 4.1 4.2Norm'ld return on t'gble eq (%) 20.1 5.0 -3.2 6.5 15.1Reported ROE (%) 0.15 0.01 -0.04 0.05 0.11RORWA (%) 1.1 0.54 -0.34 0.67 1.5Cost income ratio (%) 68.8 63.4 64.2 58.3 52.7Asset quality & capitalNPL/gross customer loans (%) 5.0 8.3 10.5 10.0 8.5Provision coverage ratio (%) 94.6 82.1 86.2 97.1 103.7Core Tier 1 ratio (%) 9.7 10.6 11.0 9.6 8.6Tier 1 ratio (%) 9.7 10.6 11.0 9.6 8.6T'gble equity/t'gble assets (%) 9.0 9.5 9.0 9.1 8.9Leverage (x) 8.2 7.8 8.2 8.2 8.7GrowthAsset growth (%) n/a -4.0 -0.08 5.6 18.6RWA growth (%) n/a 2.8 -2.4 7.8 19.6Loan growth (%) n/a -2.2 -7.2 6.3 23.1Deposit growth (%) n/a -1.9 18.8 20.4 22.3Net interest income grth (%) n/a 27.9 -6.9 5.4 16.3Revenue growth (%) n/a 23.6 -6.9 8.5 18.7Rep'td pre-tax profit grth (%) n/a -99.9 n/a n/a 160.6ValuationPER (x) 13.5 82.0 n/a 21.2 8.1Normalised PER (x) 13.5 26.7 n/a 21.2 8.1Price/book (x) 0.99 0.99 1.0 0.98 0.88Price/tangible book (x) 1.4 1.3 1.4 1.3 1.1Dividend yield (%) 0.0 0.0 0.0 0.0 0.0Per share dataReported EPS (PLN) 4.19 0.689 (2.48) 2.67 6.96Normalised EPS (PLN) 4.19 2.11 (1.32) 2.67 6.96Normalised EPS growth (%) n/a -49.5 n/a n/a 160.6Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00Dividend growth (%) n/a n/a n/a n/a n/aPayout ratio (%) 0.0 0.0 0.0 0.0 0.0BV/share (PLN) 56.86 57.26 54.78 57.45 64.41Tangible BV/share (PLN) 41.66 42.44 39.96 42.63 49.59Source: Company data, ING estimates23

Polish Strategy BZ WBK July 2010BZ WBKFundamentals versus ownership changeMaintainedHoldPoland Market cap PLN14,336.6mBanks Bloomberg BZW PWBZ WBK has survived the crisis well and has strongfundamentals. But its fate (and price) depends on who willacquire the controlling stake from AIB, and how.Investment caseBZ WBK had a very good 2009 and 1Q10, as the biggest risk forthe bank – defaults in the construction and real estate sectors(45% of corporate loans; 31% of total loans) – did notmaterialise. Just the opposite in fact – the bank benefited fromthese loans as there was room for upward repricing of theseproducts. While, the short-term performance was good, we areworried by the evolution of the strategy. During the crisis,management assured that it would reduce this overexposure toreal estate loans, but now it is giving up on the idea, lured by thegood margins in these segments.We like the fact that in the retail segment BZWBK has a goodstarting position to participate in the recovery and grow faster than itscompetitors. The staff reductions were moderate (-8% from thepeak) and branch expansion was not cancelled (the bank plansfurther growth of the network, although based mainly on franchiseoutlets), so the bank has capacities. Despite not pricing aggressivelyBZ WBK managed to stop the outflow of retail deposits and itsliquidity is still good (LDR, at 78%, is the third best among listedbanks in Poland). This was achieved thanks to very visiblemarketing campaigns (often supported by foreign celebrities), whichalso helped to increase the number of current accounts, one of thekey products now (the other being mortgage lending). The bankhas been always biased to capital markets, which is positive nowas we see return of inflows to mutual funds and a new wave ofprivatisation. The risk is that the competition is growing and ithas lost a few key employees in this area (June was the tenthconsecutive month of declining market share in mutual funds).We like the fundamentals and the management team, but these arenot the crucial catalysts for the price in the short-term. AIB is sellingits 70% stake in BZ WBK, so the price performance will depend onthe following factors: (1) who will buy it (the more independent thebank remains the better; a merger would be a worst case scenarioas we do not believe in a favourable swap ratio)? (2) What willbe the price? (3) Will the public bid be announced for all the shares(according to the law it should be, but there are ways to avoid it)?Because the answers to these questions are largely guesswork wemaintain our neutral view (HOLD) on the stock.We reduced our DDM-based target price due lower profit forecasts(higher provisions; lower NII due to weak corporate volumes).BZ WBK trades at over a 30% premium to peers on P/BV, whichseems to be justified by higher profitability (as a result, on2010F/11F PER it trades at par). Because the main driver for theprice is the outcome of the ongoing tender and the outcome will notbe just the function of fundamentals but also of political pressure,we maniatin our HOLD recommendation.Price (19/07/10)Target price (12-mth)PLN196.50Previously PLN229.68PLN212.53Forecast total return 11.2%Quarterly previewAs usually with BZ WBK, 2Q is likely to be the strongest quarterof the year thanks to the dividend from Aviva (PLN48m). Webelieve that NII will rebound slightly thanks to better margins incorporate loans and falling cost of deposits. Provisions are likelyto be visibly higher than 1Q10, which was deflated by thePLN35m release of IBNR provisions.2Q10F results preview (28 July)(PLNm) 1Q10 2Q10FNII 424 433Revenues 833 881Costs (414) (422)Provisions (70) (113)Net profit 233 261Source: Company data, ING estimatesEarnings drivers and outlookWe expect double-digit growth of core revenues (NII+fees) thisyear. NII is likely to be driven by continued repricing of corporateloans (although the management’s guidance for this factor isvery volatile). Fees should driven by capital markets andinsurance but also by general growth of volumes in retail bankingproducts that will still benefit from branch expansion in 2008. Thestrong growth of a number of current accounts in 1H10 should betranslated into better card, loan and transactional fees in 2H10.Costs are likely to grow due to better sales volumes because thebank usually pays relatively high bonuses (especially as a largepart of the business is investment banking). The bank intends tostart hiring, but the average staff number should fall 1% YoY andit will become a burden from 2011 onwards.Because a large part of real-estate loan portfolio is late-cyclicalcommercial developers, we cannot exclude that despite balancesheet-cleaning in 4Q08 there may be some negative surprises inthis line in 2010. Apart from this we are concerned by the suddengrowth of NPLs in unsecured retail loans in 1Q10.There is also some risk of write-offs connected with the 10%stake in the Aviva pension fund. If there are further unfavourablechanges in the law the bank may be forced to write-off part of thestake (the downside does not exceed PLN100m, in our view).Moreover, we expect the dividends from the Aviva group todecline 20% this year.Thanks to good growth in revenues BZ WBK may be the onlyPolish bank that will have 2010F profit at all-time high levels.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com26

Polish Strategy BZ WBK July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F30 Apr 2010 1Q10 results5 May 2010 Traded ex-dividend (PLN4.0 per share)12 May 2010 Fitch upgrades rating outlook from negative tostable ; BBB+ rating confirmed12 Jul 2010 Press reports: only PKO BP and BNP Paribasare short-listed by AIB; the bid prices are saidto be “low”28 Jul 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Allied Irish Bank 70Source: Company data, INGShare dataAvg daily volume (3-mth) 71,503Free float (%) 29.6Market cap (PLNm) 14,336.6Dividend yield (1F, %) 3.0Source: Company data, ING estimatesShare price performance240220200180160140120100806/09 8/09 10/09 12/09 2/10 4/10Income statementNet interest income 1,287 1,635 1,563 1,736 1,959 2,188Net fee & commission income 1,334 1,139 1,089 1,228 1,460 1,707Net trading income 321 354 587 471 521 567Insurance income 0 0 0 0 0 0Other operating income 14 40 27 19 21 23Revenues 2,955 3,169 3,266 3,454 3,961 4,485Operating costs (1,560) (1,654) (1,622) (1,735) (1,942) (2,183)Pre-provision profit 1,395 1,514 1,644 1,719 2,019 2,302Total impairments (4) (365) (481) (379) (269) (241)ProvisionsOther non-operating income 0 62 0 0 0 0Pre-tax profit 1,391 1,211 1,163 1,341 1,750 2,060Tax (281) (256) (223) (308) (368) (433)Minorities (156) (99) (54) (74) (158) (185)Other adjustments 0.2 (0.8) (0.3) (0.4) (0.5) (0.6)Net profit 955 855 886 958 1,225 1,442Normalised net profit 955 805 886 958 1,225 1,442Balance sheetTotal assets 41,319 57,838 54,058 57,426 63,339 71,548Customer loans 23,950 35,137 34,571 35,117 39,056 45,979Customer loans/assets (%) 58.0 60.8 64.0 61.2 61.7 64.3Customer deposits 29,766 42,811 41,223 43,296 47,669 52,982Loan to deposit ratio (%) 80.5 82.1 83.9 81.1 81.9 86.8Total equity 4,577 5,192 6,056 6,722 7,516 8,223Risk-weighted assets 24,659 36,523 41,653 43,625 48,773 56,279Profitability & efficiencyNet interest margin (%) 3.7 3.5 3.0 3.2 3.4 3.4Norm'ld return on t'gble eq (%) 23.7 17.9 16.8 15.7 18.0 19.1Normalised ROA (%) 2.6 1.6 1.6 1.7 2.0 2.1RORWA (%) 4.3 2.6 2.3 2.2 2.7 2.7Cost income ratio (%) 52.8 52.2 49.7 50.2 49.0 48.7Asset quality & capitalSource: INGPriceCompany profileWIG20 (rebased)NPL/gross customer loans (%) 2.8 2.9 5.5 5.8 5.2 4.6Provision coverage ratio (%) 84.6 85.7 58.2 62.4 66.0 65.5Core Tier 1 ratio (%) 13.3 10.7 13.0 13.6 13.5 12.8Tier 1 ratio (%) 13.3 10.7 13.0 13.6 13.5 12.8T'gble equity/t'gble assets (%) 10.3 8.3 10.7 11.2 11.4 11.1Leverage (x) 9.0 11.1 8.9 8.5 8.4 8.7BZW BK is the fifth largest bank in Poland in assets(5% share). The bank has corporate roots (still 38% ofdeposits and 70% of loans at the end of 2009), but itis also strong in selected retail products, eg, mutualfunds (No.2 in Poland, with a 12% market share) andcash loans. The loan portfolio is heavily biased to realestateand construction sectors (one-third of totalloans portfolio, the highest share among Polish listedbanks). Ireland’s AIB is a strategic shareholder in thebank (70% stake) but plans to dispose of the stake byend-2010.RisksRisks to our HOLD rating include: high costs ofmarketing and expansion, further loss of market sharein mutual funds (downside); the acquisition price beinghigher than expected and there is a public bid forminorities; fast growth in the number of accounts andfees, growth of market share in mortgages (upside).GrowthAsset growth (%) 25.1 40.0 -6.5 6.2 10.3 13.0RWA growth (%) 24.4 48.1 14.0 4.7 11.8 15.4Loan growth (%) 35.9 46.7 -1.6 1.6 11.2 17.7Deposit growth (%) 23.2 43.8 -3.7 5.0 10.1 11.1Net interest income grth (%) 24.7 27.1 -4.4 11.1 12.8 11.7Revenue growth (%) 24.5 7.2 3.1 5.8 14.7 13.2Rep'td pre-tax profit grth (%) 31.8 -12.9 -4.0 15.3 30.5 17.7ValuationPER (x) 15.0 16.8 16.2 15.0 11.7 9.9Normalised PER (x) 15.0 17.8 16.2 15.0 11.7 9.9Price/book (x) 3.3 2.9 2.4 2.2 1.9 1.8Price/tangible book (x) 3.4 3.0 2.5 2.2 2.0 1.8Dividend yield (%) 1.5 0.0 2.0 3.0 5.1 6.0Per share dataReported EPS (PLN) 13.09 11.72 12.15 13.14 16.79 19.76Normalised EPS (PLN) 13.09 11.04 12.15 13.14 16.79 19.76Normalised EPS growth (%) 25.9 -15.7 10.1 8.1 27.8 17.7Dividend per share (PLN) 3.00 0.00 4.00 5.91 10.07 11.86Dividend growth (%) -50.0 -100.0 n/a 47.9 70.4 17.7Payout ratio (%) 22.9 0.0 32.9 45.0 60.0 60.0BV/share (PLN) 59.51 67.87 81.51 90.65 101.53 111.22Tangible BV/share (PLN) 57.94 65.49 79.02 88.06 98.84 108.42Source: Company data, ING estimates27

Polish Strategy Getin July 2010GetinMortgage blessing; mortgage curseMaintainedHoldPoland Market cap PLN6,960.0mBanks Bloomberg GTN PWGetin is one of the few banks to be aggressive in volumesacquisition. However, as a result of its aggressive policy,the high cost of risk extends the cyclical weakness in itsprofits. The potential defaults in its high-risk FX mortgageportfolio are the main concern. HOLD maintained.Investment caseOther than PKO BP, Getin is probably the only Polish bank thatis really active in lending. At the start of 2010, Getin Noble Bank(a key banking subsidiary of Getin) announced its 2010-12strategy and key targets. The growth-oriented strategy is alsovisible in its operational objectives. Getin Noble wants toincrease branch numbers by 130 (+24%) within the next threeyears, which is probably the largest network expansion projectstill in progress. It will need new hires, and the bank assumesthat total staff will grow by c.50% to 2012. Growth in resources isthe way to achieve a top five position in all key categories in thePolish banking sector. While we believe this is achievable in thelonger term, we doubt it will be possible by 2012, despite the factthat in selected products the bank has already reached leadingpositions (eg, in car loans; second/third in new mortgage loans).On the assets side, the key products will be mortgages (the planis to grow 30% in 2010F and, with 10% achieved in 1Q10, theyare on track), leasing and car loans. Cash loans are too risky atpresent. On the liabilities side, the key objective is to increasesales of products with long maturities (deposits and structuredproducts). Although the cost of funding such products is high, wethink that this is a good move as it locks in the cost ahead ofinterest rate hikes. Moreover, sales of these products are sogood (deposits grew 10% YTD in 1Q10) that liquidity is no longera big problem (an LDR ratio of 87% is comparable with Pekao).It must be underlined that faster-than-average growth isconnected – as usual – to an above-average risk profile. Getintargets the lower segment of the market and it pays for this:mortgage defaults were very high in 1Q10 (especially comparedwith mainstream banks). High unemployment and a depreciatingPLN may worsen the situation, which concerns investors,because mortgages account for 70% of all loans.There is a concern regarding its capital position. Following themerger, Getin Noble has an 11% CAR, which may be insufficientfor swift growing assets. A share issue could be a solution, butGetin denies such plans. The risk of such a scenario grewrecently after the planned IPO of the Europa subsidiary failed.After a downward revision of forecasts, the stock trades ataverage ratios for the sector (the exception: p/pre-provision profitof 5.0x for 2010F is the lowest). This may seem slightlystretched, considering earlier discounts and the risks connectedwith the mortgage book, but this is one of the very few realgrowth stories. We maintain our HOLD rating.Price (19/07/10)Target price (12-mth)PLN9.79Previously PLN11.41PLN10.09Forecast total return 3.1%Quarterly previewThe period of weak results is likely to continue. Two lines matter,in our view: provisions and NIM. NIM should improve thanks togood volumes in mortgages and margins benefiting from asoftening deposit war. The key will be the NPL ratio in mortgagesand losses in this sub-segment (we expect further deterioration).Net profit may be supported by minor one-offs (negative goodwillfrom GMAC, tax write-backs) and a revaluation of CIRS (whichmay have a meaningful impact but is not fully recurring).2Q10F results preview(PLNm) 1Q10 2Q10FNII 288 308Revenues 547 593Costs (203) (213)Provisions (279) (293)Net profit 110 68Source: Company data, ING estimatesEarnings drivers and outlookWe expect Getin’s profit to rebound over 50% this year (vsc.30%+ for the sector), after halving in 2009 (-32% for thesector). The problem is that the quality of earnings both in 2009and 2010F is low. In 2009, they included over PLN100m in therevaluation of hedging, fees from the renegotiation of FX loancontracts and tax returns. This year, Getin also expects taxreturns (c.PLN80m) and extra fees from CHF loan agreements.Not fully recurring loan fees from 1H09 are the main reason weexpect flat fees this year. At the same time, NII is likely toaccelerate, owing to margin expansion, although 1Q10 resultswere a bit disappointing because of the aggressive pricing ofdeposits. In the medium term, fees are likely to grow faster thanNII (cross-selling of cards, accounts, bancassurance).We should also remember that aggressive ROE targets forGetin Noble Bank (94% subsidiary of Getin), ie, 20% in 2010F and25% in 2012F, cannot be merely translated into ROE of GetinGroup, owing to goodwill and minorities at the consolidated level.Costs are unlikely to surprise positively, as the bank continueshiring and aggressive marketing campaigns. Losses on old cashloans are almost exhausted (new cash loans appear safe), butdefaults in mortgage loans have started growing and if they getout of control we could see another dip in earnings.We cut our DDM-based TP due to the downward revision of ourprofitability forecasts, especially in the provisions line.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com28

Polish Strategy Getin July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F21 May 2010 Financial regulator approves issueprospectus of Europa, insurance subsidiary8 June 2010 Europa suspends IPO due to weak demand31 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Mr Leszek Czarnecki 56Aviva pension fund (PL) 7Pioneer Pekao mutual funds (PL) 5ING pension fund (PL) 5Source: Company data, INGShare dataAvg daily volume (3-mth) 905,305Free float (%) 44.3Market cap (PLNm) 6,960.0Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance12111098767/09 9/09 11/09 1/10 3/10 5/10Income statementNet interest income 561 1,018 978 1,302 1,597 1,922Net fee & commission income 257 242 443 426 507 606Net trading income 260 298 224 118 129 149Insurance income 258 472 450 566 668 754Other operating income (74) (163) (33) (59) (89) (107)Revenues 1,262 1,866 2,061 2,352 2,812 3,325Operating costs (586) (787) (861) (952) (1,121) (1,352)Pre-provision profit 676 1,080 1,200 1,401 1,692 1,973Total impairments (104) (379) (842) (861) (803) (807)Other non-operating income 227 (0.2) 64 85 0 0Pre-tax profit 798 700 422 625 889 1,166Tax (134) (140) (85) (119) (169) (222)Minorities (42) (52) (60) (75) (98) (117)Other adjustments 4 0.2 (0.5) (0.8) (1) (1)Net profit 626 509 276 430 621 826Normalised net profit 425 536 212 345 621 826Balance sheetTotal assets 19,005 31,293 35,560 43,590 51,878 63,093Customer loans 11,444 21,876 26,381 33,193 41,382 52,464Customer loans/assets (%) 60.2 69.9 74.2 76.1 79.8 83.2Customer deposits 10,406 20,052 28,241 35,527 42,633 51,159Loan to deposit ratio (%) 110.0 109.1 93.4 93.4 97.1 102.6Total equity 3,270 3,812 4,054 4,529 5,204 6,095Risk-weighted assets 13,794 17,580 21,371 25,538 30,149 35,682Profitability & efficiencyNet interest margin (%) 3.9 4.4 3.1 3.5 3.5 3.5Norm'ld return on t'gble eq (%) 22.8 22.7 7.9 11.5 17.7 19.6Normalised ROA (%) 2.7 2.1 0.63 0.87 1.3 1.4RORWA (%) 3.3 3.4 1.1 1.5 2.2 2.5Cost income ratio (%) 46.5 42.1 41.8 40.5 39.8 40.7Asset quality & capitalSource: INGPriceCompany profileWIG20 (rebased)NPL/gross customer loans (%) 5.7 4.5 7.7 8.0 7.2 6.4Provision coverage ratio (%) 90.2 90.0 79.1 87.2 99.4 107.1Core Tier 1 ratio (%) 10.9 11.8 11.8 10.9 10.6 10.6Tier 1 ratio (%) 10.9 11.8 11.8 10.9 10.6 10.6T'gble equity/t'gble assets (%) 11.8 8.6 8.1 7.5 7.5 7.5Leverage (x) 5.8 8.2 8.8 9.6 10.0 10.4Getin has a 3% share of assets in Poland, and isstrong in the retail segments of mortgages (No.5 inPoland) and car loans (No.1). Getin has anaggressive risk approach to lending products (forbetter margins and volumes) and in the pricing ofdeposit products, but a weak position in corporateloans and deposits. As well as its key bankingsubsidiary, Getin Noble Bank, Getin controls aninsurer (Europa), a Russian leasing company(Carcade) and a financial intermediaries company(Open Finance). Getin is the only listed Polish bank tobe controlled by a private individual, Mr LeszekCzarnecki.RisksThe main risks to our HOLD rating: problems withmortgage loans extended to 2011; growing cost ofswaps hits NIM; potential share issue (downsides);interest rate hikes (large part of deposits was fixed forlonger-term); weakening deposit war; growth ofmortgage market supporting volumes and insurancerevenues (upsides).GrowthAsset growth (%) 57.8 64.7 13.6 22.6 19.0 21.6RWA growth (%) 16.8 27.4 21.6 19.5 18.1 18.4Loan growth (%) 83.6 91.2 20.6 25.8 24.7 26.8Deposit growth (%) 58.5 92.7 40.8 25.8 20.0 20.0Net interest income grth (%) 54.1 81.4 -4.0 33.2 22.6 20.3Revenue growth (%) 83.9 47.9 10.5 14.1 19.6 18.2Rep'td pre-tax profit grth (%) 289.1 -12.3 -39.7 48.0 42.3 31.1ValuationPER (x) 10.6 13.7 25.2 16.2 11.2 8.4Normalised PER (x) 15.6 13.0 32.8 20.2 11.2 8.4Price/book (x) 2.2 1.9 1.8 1.6 1.4 1.2Price/tangible book (x) 3.3 2.7 2.5 2.2 1.8 1.5Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0Per share dataReported EPS (PLN) 0.93 0.72 0.39 0.61 0.87 1.16Normalised EPS (PLN) 0.63 0.75 0.30 0.49 0.87 1.16Normalised EPS growth (%) 131.2 20.0 -60.4 62.7 80.0 33.0Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Dividend growth (%) n/a n/a n/a n/a n/a n/aPayout ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0BV/share (PLN) 4.37 5.06 5.39 5.99 6.87 8.03Tangible BV/share (PLN) 3.00 3.64 3.93 4.51 5.37 6.51Source: Company data, ING estimates29

Polish Strategy Handlowy July 2010HandlowyEarly in the cycleMaintainedBuyPoland Market cap PLN9,675.3mBanks Bloomberg BHW PWWeak volumes growth but a high chance of positivesurprises in fees, costs and provisions (earlier-than-averagerecovery of loans quality). The safest dividend play in thePolish banking sector, in our view.Investment caseIn 1Q10, Handlowy showed good profitability (thanks to costsand provisions) but disappointed with weak volumes (the banklost market share in loans and deposits). The bank is stillunwilling to grab market share if it puts its margins at risk.However, in the short term, it assures fairly good growth inearnings so there is a chance of positive surprises later this year.We have not seen any positive impact from the new strategy asyet, however, its announcement was made only in January.According to the strategy document, Handlowy wants to focusmore on the quality of its relationships rather than quantity. Themain objective will be to increase its cross-selling ratio amongexisting clients, not to acquire new ones. It will especially targetthe customers with just one product (66% of total number inretail; 51% in corporate). While we agree that this is a cheap wayto achieve revenue growth, we think that there are limits to thisform of development.Loan growth will result from strong relationships with clients. Thebank is eager to strengthen its position in mortgages but CEO,Slawomir Sikora, has pointed out that this will not happenquickly. Therefore, we think that it will be difficult to fully utilisethe bank’s current good liquidity and strong capital position withthis strategy (in 1Q10, Handlowy had a 61% loan/deposit ratio –the best among the listed banks – and a CAR of 18.4% –second best). When the corporate lending market (still the keybusiness for the banks) is weak due to low demand fromdeleveraging corporations, we see relatively poor prospects forasset/loan growth. Prospects for revenues are better than forassets as the bank should benefit from a revival in capitalmarkets as it has a meaningful exposure to brokerage andmutual funds (as the agent).The bank paid out dividends of almost 100% of its 2009 profitsand it is likely to continue this policy. As the result, Handlowy isthe most attractive dividend story (yields of 5%+) in the Polishbanking sector.Handlowy trades at a small discount to its peers on PBV andPER (the biggest discount, 11%, is for 2010F PER). In the caseof PBV, the difference shrinks over the time due to high dividendpayouts (we assume almost 100%). We maintain our BUY rating.The main catalyst for share appreciation should be good 2H10results thanks to quickly falling provisions.Price (19/07/10)Target price (12-mth)PLN74.05MaintainedPLN85.93Forecast total return 23.1%Quarterly previewWe expect further profitability improvement at Handlowy. Thistime it will be the result of good fees (capital markets) and thetrading result (high volatility in FX and bonds) rather than NII(margins may increase slightly but volumes are falling). Thereshould be no negative one-offs (almost PLN11m in 1Q10 for therepurchase of Lehman Brothers’ bonds from clients).2Q10F results preview (31 August)(PLNm) 1Q10 2Q10FNII 373 373Revenues 610 633Costs -325 -334Provisions -77 -85Net profit 151 167Source: Company data, ING estimatesEarnings drivers and outlookIn 1Q10, Handlowy increased its NIM to a record high of 4.0%and was the leader among the listed banks. We do not think thisis sustainable as competitive pressure in deposits is shifting fromretail to corporate. Together with weak volumes, it means that NIIwill be flat. Fees are likely to be the main driver for revenues,benefiting from a turnaround in capital markets, the partial effectsof price increases in mid-2009 and an increased number ofaccounts due to cross-selling.As in previous years, costs should be under strict control.According to the bank, we will see a small growth in staffnumbers (after severe cuts in 2008-09) but this will be due toinsourcing so should not boost total costs. Provisions for NPLsare likely to fall as the bank started restructuring its retail portfolioearlier than competitors and the corporate segment will not beaffected by ‘FX-options’ (PLN126m provisions in 1H09). Thecorporate bias of the loan portfolio and lack of mortgage loansmean that the nature of the loan book quality is early cyclical: itstarted deteriorating early and should recover before peers.We do not think the 2012 targets set by management (20%+ROE, leverage), which is crucial to exceed 20%ROE (a special dividend is unlikely given the view of the bankingregulators). However, low consensus estimates (4% and 8%below our 2010F and 2011F forecasts) indicate that the marketis also sceptical so the risk of negative surprise is low.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com30

Polish Strategy Handlowy July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F6 May 2010 1Q10 results28 June 2010 AGM approves DPS of PLN3.771 July 2010 Traded ex-dividend6 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Citibank 75Source: Company data, INGShare dataAvg daily volume (3-mth) 35,149Free float (%) 25.0Market cap (PLNm) 9,675.3Dividend yield (1F, %) 7.0Source: Company data, ING estimatesShare price performance9085807570656055507/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Handlowy is a mid-sized Polish bank with a 3% sharein total assets. It is corporate-biased (58% of loans,71% of profits in 2009) with a strong position in largecorporates. It has an excellent position in credit cards(the fourth in terms of number of cards, the leader ingenerated turnover) and cash loans. However, it isalmost non-existent in the mortgage lending segment(mortgages are below 5% of its loan portfolio, thelowest ratio among listed banks). Citibank holds a75% stake in Handlowy.RisksThe main risks for our Buy rating are: increasedcompetition in the corporate sector; continuedproblems with the sale of mortgage loans; pressure onbonuses/salaries growth in investment banking; weakmarket for FX products as customers have been putoff following problems with ‘FX options’.Income statementNet interest income 1,204 1,366 1,505 1,513 1,533 1,593Net fee & commission income 737 619 556 641 753 867Net trading income 462 328 356 383 432 488Insurance income 0 0 0 0 0 0Other operating income 65 93 49 42 55 60Revenues 2,469 2,405 2,467 2,580 2,772 3,008Operating costs (1,523) (1,496) (1,382) (1,376) (1,427) (1,520)Pre-provision profit 946 909 1,085 1,204 1,345 1,488Total impairments 53 (153) (546) (315) (176) (89)ProvisionsOther non-operating income 44 0 115 0 0 0Pre-tax profit 1,043 756 654 889 1,169 1,399Tax (210) (159) (151) (205) (270) (323)Minorities 0 0 0 0 0 0Other adjustments (9) 3 0.4 2 3 4Net profit 824 600 504 685 902 1,080Normalised net profit 789 600 411 685 902 1,080Balance sheetTotal assets 38,908 42,550 37,633 37,321 38,903 41,228Customer loans 12,935 14,563 13,299 13,646 15,085 17,353Customer loans/assets (%) 33.2 34.2 35.3 36.6 38.8 42.1Customer deposits 23,000 24,522 23,675 23,441 24,779 26,029Loan to deposit ratio (%) 56.2 59.4 56.2 58.2 60.9 66.7Total equity 5,603 5,626 6,199 6,392 6,616 6,803Risk-weighted assets 26,709 30,453 25,907 26,576 28,114 30,176Profitability & efficiencyNet interest margin (%) 3.9 4.2 4.6 4.8 4.8 4.7Norm'ld return on t'gble eq (%) 18.7 13.9 8.9 13.7 17.3 19.9Normalised ROA (%) 2.1 1.5 1.0 1.8 2.4 2.7RORWA (%) 3.1 2.1 1.5 2.6 3.3 3.7Cost income ratio (%) 61.7 62.2 56.0 53.3 51.5 50.5Asset quality & capitalNPL/gross customer loans (%) 11.8 12.0 14.4 14.4 13.4 11.4Provision coverage ratio (%) 84.9 75.8 68.9 74.1 73.9 73.9Core Tier 1 ratio (%) 12.9 12.1 16.7 16.6 15.8 14.7Tier 1 ratio (%) 12.9 12.1 16.7 16.6 15.8 14.7T'gble equity/t'gble assets (%) 11.5 10.5 13.5 14.2 14.2 13.8Leverage (x) 6.9 7.6 6.1 5.8 5.9 6.1GrowthAsset growth (%) 8.1 9.4 -11.6 -0.83 4.2 6.0RWA growth (%) 8.4 14.0 -14.9 2.6 5.8 7.3Loan growth (%) 20.9 12.6 -8.7 2.6 10.5 15.0Deposit growth (%) 7.6 6.6 -3.5 -0.99 5.7 5.0Net interest income grth (%) 17.4 13.4 10.2 0.53 1.3 3.9Revenue growth (%) 17.3 -2.6 2.6 4.6 7.5 8.5Rep'td pre-tax profit grth (%) 26.5 -27.5 -13.5 35.9 31.6 19.6ValuationPER (x) 11.7 16.1 19.2 14.1 10.7 9.0Normalised PER (x) 12.3 16.1 23.6 14.1 10.7 9.0Price/book (x) 1.7 1.7 1.6 1.5 1.5 1.4Price/tangible book (x) 2.2 2.2 2.0 1.9 1.8 1.8Dividend yield (%) 6.4 0.0 5.1 7.0 9.2 10.0Per share dataReported EPS (PLN) 6.31 4.59 3.85 5.25 6.91 8.27Normalised EPS (PLN) 6.04 4.59 3.14 5.25 6.91 8.27Normalised EPS growth (%) 59.0 -23.9 -31.6 67.0 31.6 19.7Dividend per share (PLN) 4.75 0.00 3.77 5.19 6.84 7.44Dividend growth (%) 15.9 -100.0 n/a 37.8 31.6 8.8Payout ratio (%) 78.7 0.0 120.0 99.0 99.0 90.0BV/share (PLN) 42.88 43.06 47.45 48.92 50.64 52.07Tangible BV/share (PLN) 33.06 33.24 37.63 39.11 40.82 42.26Source: Company data, ING estimates31

Polish Strategy Millennium July 2010MillenniumAfter the stormMaintainedBuyPoland Market cap PLN5,604.6mBanks Bloomberg MIL PWAfter zero profits in 2009, Millennium seems to berecovering. There are still a few issues ahead (quality ofmortgage, corporate volumes), but the bottom line shouldshow improvement and PBV is fairly low. BUY maintained.Investment caseMillennium had a very difficult 2009. It was the only bank underour coverage that made no profits, as it was heavily exposed toevery negative factor to appear last year (cost of SFr hedges,deposit war, FX options, liquidity problems). In addition, it madea large (38%) capital increase (completed in 1Q10).The main risk was that in such a difficult environment the existingassets of the bank may appear unprofitable. And because mostof the loan book (64%) was long-term low-margin mortgageloans, there was no chance of them being replaced or rolledover. However, most of the negative factors quickly startedreversing (much faster than the markets expected): liquidity inthe sector improved, FX option problems exhausted, the cost ofFX hedges declined (although we saw a moderate pick-up in2Q10 again) and the deposit war is ending. As a result, thebank’s ‘old’ portfolio has a chance of showing reasonableprofitability again. Short term, the risk is connected with thequality of mortgage lending, but we think that it is better than forthose banks that were aggressive in this segment in the past (eg,Getin and BPH). Rather than lose clients, Millennium competedon low price (the impairment ratio of its mortgages was 0.9% in1Q10 versus 2.8% at Getin and 2.0% at PKO BP).At the same time, new capital should allow the bank to acquirenew assets that should show better margins. This time, the mainarea of growth is expected to be the corporate (SME) segment. Itis a meaningful change because until end-2008 Millennium wasone of the most retail-biased banks in Poland (74% of loans/68%of deposits). Initially, we had a relatively negative view on thischange, remembering the heavy losses on corporate FX options,but further analysis showed that the profitability of this segment,although lower than in retail, is still satisfactory (12% ROE in2005-1H09 versus 17% in retail). With some efficiencies of scale,it is possible that it will be better in future. The problem is that thedemand is fairly weak in corporate lending and Millennium has tofight fiercely for market share. However, in the past, Millenniumhas proved that it is able to acquire share if necessary.Millennium has the second-lowest PBV among the Polish banks.It trades at the highest 2010F PER due to the dilutive effect ofthe latest share issue, but when the new capital starts to beutilised the ratio should improve (for 2011F, it is at the averagefor the sector). Because of Millennium’s low PBV, lowexpectations about its profitability and its willingness andcapacity to capture growth in an economic recovery, we maintainour BUY. Our DDM-based TP rises to PLN5.80.Price (19/07/10)Target price (12-mth)PLN4.62Previously PLN5.54PLN5.80Forecast total return 26.6%Quarterly previewWe expect a slight decline in profits in 2Q10 due to growth inprovisions (mainly in mortgage lending; the corporate provisionsshould fall) and costs (ending cost cuts; marketing campaigns).Also fees are likely to decline, because in 1Q10 they wereslightly inflated by insurance bonuses (seasonal item) andsmaller inflows to mutual funds. On the positive side, we expecthigh growth in mortgage loan sales and minimal NIM expansiondue to lower competition in deposits.2Q10F results preview (27 July)(PLNm) 1Q10 2Q10FNII 217 226Revenues 424 425Costs (255) (260)Provisions (83) (87)Net profit 68 62Source: Company data, ING estimatesEarnings drivers and outlookThe single most important driver for Millennium’s recovery will benet interest income, although its ‘structure of growth’ will changein the future. In 2010, this line will be supported mainly by marginexpansion, which benefits from lower competition in deposits,falling costs of swaps (we assume the latest hike is temporary)and repricing of corporate loans in 2009. In 2011 and beyond,the importance of volumes will increase.At the same time, provisions should decline. The bank usuallyhas a lower cost of risk than its competitors and this is unlikely tochange. We see risks connected with defaults in mortgage loans,but they should be more than offset by the level of corporateprovisions (especially that part of 2009 provisions in the areaconnected with FX options and 3Q09 balance sheet cleaning,which are not fully recurring).After several quarters of squeezing personnel costs (bothsalaries and headcount), we believe Millennium will be forced toimprove pay this year; first, because another year of low salarieswould lead to the voluntary departure of high-quality employees;and second, because the current strategy is slightly moreexpansionary than the 2009 approach, so some bonus costs arelikely to reappear.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com32

Polish Strategy Millennium July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F26 Apr 2010 1Q10 results27 Jul 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Banco Comercial Portugues 66Aviva pension fund (PL) 8Source: Company data, INGShare dataAvg daily volume (3-mth) 501,523Free float (%) 34.5Market cap (PLNm) 5,604.6Dividend yield (1F, %) 0.93Source: Company data, ING estimatesShare price performance5.55.04.54.03.53.02.57/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Millennium is a mid-sized bank with a 4% share intotal assets (Poland’s sixth largest). It is biasedtowards the retail segment and is especially strong inmortgage lending (second largest, 11% share instock, 66% of total loans). The latest strategyassumes a shift towards the corporate segment (SMErather than large corporations). It has a large retailnetwork (474 branches, sixth largest). Portugal’s BCPis the strategic shareholder (a 67% stake).RisksMajor risks to our Buy rating: major defaults inmortgage lending (64% of total portfolio); growingcompetition and weak growth in corporate lending,where the bank wants to expand; pressure on marginsin corporate loans; pressure on liquidity in Millenniumand in the sector if the PLN depreciates more (FXmortgage loan portfolios will expand); the latestgrowth of swap costs being continued into 2H.Income statementNet interest income 772 935 598 885 1,072 1,312Net fee & commission income 543 472 494 557 655 783Net trading income 333 421 342 198 211 224Insurance income 0 0 0 0 0 0Other operating income 60 19 19 21 23 25Revenues 1,708 1,846 1,453 1,660 1,961 2,345Operating costs (1,057) (1,190) (1,022) (1,046) (1,131) (1,253)Pre-provision profit 651 657 431 615 830 1,092Total impairments (67) (135) (436) (293) (212) (202)ProvisionsOther non-operating income 0 0 0 0 0 0Pre-tax profit 585 522 (5) 322 618 890Tax (123) (108) (0.4) (61) (117) (169)Minorities 0 0 0 0 0 0Other adjustments 0 0 7 0.6 1 2Net profit 462 413 2 261 502 723Normalised net profit 462 413 2 261 502 723Balance sheetTotal assets 30,530 47,115 44,914 49,583 57,009 65,322Customer loans 22,027 33,809 33,694 37,751 44,871 53,636Customer loans/assets (%) 72.1 71.8 75.0 76.1 78.7 82.1Customer deposits 22,341 32,044 32,313 36,148 40,860 45,972Loan to deposit ratio (%) 98.6 105.5 104.3 104.4 109.8 116.7Total equity 2,520 2,815 2,787 4,075 4,495 5,089Risk-weighted assets 21,090 34,553 31,053 34,372 40,049 46,819Profitability & efficiencyNet interest margin (%) 2.9 2.6 1.4 1.9 2.1 2.2Norm'ld return on t'gble eq (%) 19.7 15.6 0.06 7.7 11.8 15.2Normalised ROA (%) 1.7 1.1 0.00 0.55 0.94 1.2RORWA (%) 2.5 1.5 0.00 0.80 1.3 1.7Cost income ratio (%) 61.9 64.4 70.3 63.0 57.7 53.4Asset quality & capitalNPL/gross customer loans (%) 3.4 3.4 5.8 6.1 5.6 5.1Provision coverage ratio (%) 79.5 64.4 54.4 57.8 61.2 63.4Core Tier 1 ratio (%) 10.1 7.9 8.9 11.4 10.5 10.0Tier 1 ratio (%) 10.1 7.9 8.9 11.4 10.5 10.0T'gble equity/t'gble assets (%) 8.2 5.9 6.2 8.2 7.8 7.8Leverage (x) 12.1 16.7 16.1 12.2 12.7 12.8GrowthAsset growth (%) 23.6 54.3 -4.7 10.4 15.0 14.6RWA growth (%) 29.1 63.8 -10.1 10.7 16.5 16.9Loan growth (%) 47.5 53.5 -0.34 12.0 18.9 19.5Deposit growth (%) 39.0 43.4 0.84 11.9 13.0 12.5Net interest income grth (%) 18.6 21.1 -36.0 47.9 21.2 22.4Revenue growth (%) 34.9 8.1 -21.3 14.2 18.1 19.6Rep'td pre-tax profit grth (%) 57.7 -10.8 n/a n/a 91.9 44.1ValuationPER (x) 8.5 9.5 2,483 18.2 11.2 7.8Normalised PER (x) 8.5 9.5 2,483 18.2 11.2 7.8Price/book (x) 1.6 1.4 1.4 1.4 1.2 1.1Price/tangible book (x) 1.6 1.4 1.4 1.4 1.3 1.1Dividend yield (%) 4.1 0.0 0.0 0.93 1.8 1.9Per share dataReported EPS (PLN) 0.544 0.487 0.002 0.253 0.414 0.596Normalised EPS (PLN) 0.544 0.487 0.002 0.253 0.414 0.596Normalised EPS growth (%) 53.5 -10.4 -99.6 13,523 63.2 44.1Dividend per share (PLN) 0.190 0.00 0.00 0.043 0.083 0.089Dividend growth (%) 11.7 -100.0 n/a n/a 91.9 8.1Payout ratio (%) 35.0 0.0 0.0 20.0 20.0 15.0BV/share (PLN) 2.97 3.31 3.28 3.36 3.71 4.20Tangible BV/share (PLN) 2.95 3.29 3.26 3.34 3.69 4.17Source: Company data, ING estimates33

Polish Strategy Pekao July 2010PekaoCautious as usualPreviously SellHoldPoland Market cap PLN41,966.1mBanks Bloomberg PEO PWPekao is stuck in the middle. Margins and cost of risk aregood, but volumes struggle. The BZ WBK story is positive.Valuation is rich considering the past low growth and theprospects. We upgrade to HOLD.Investment casePekao survived last year in fairly good shape and proved to havea below-average risk profile. We had been wary of provisionsconnected with the corporate loan book and Ukraine, but in bothcases there were positive surprises, because in the case of retailloans the bank was even more cautious than in corporate ones.We do not expect a major deterioration in loan quality this year.On the top of this there was relatively good NIM. While lowprovisions were the result of past conservative lending policy, thegood NIM was the effect of the current conservative strategy.The bank remained focused on margins, even at the expense ofvolumes. As a result its market shares in loans and deposits keptfalling over 2009, although it was probably the best moment toacquire new clients by more aggressive policy (as manycompetitors just stopped lending and cared about costs, liquidityand capital position). The policy is continuing – in 1Q10 Pekaoloans shrank by 12% YoY (the worst result among listed banks)and deposits shrank by 2% (the second worst). During the 1Q10presentation the bank revealed monthly data showing stronggrowth of selected loans (SME, mortgage, cash), but we aresceptical about the figures due to short data series (Pekao isfairly inconsistent in providing sales data).Looking to the future, we believe the market environment willimprove in 2011 and the chance to grab market share willdiminish, as history shows that during boom times Pekao is notwilling to compete with aggressive midcap banks. Therefore,despite quite good capacity to grow (reasonable liquidity; thebest capital position) we do not believe Pekao is exposed to therecovery as the strategy remains defensive.Unicredit/Pekao expressed an interest in an acquisition of BZWBK. It has a better capital position and more experience inM&A than PKO BP, so we can see positives to the transaction,eg, strengthening of market position at reasonable cost (asmentioned above, the organic growth is poor). On the otherhand, we would not count on huge synergies after the BPHacquisition disappointed. If BZ WBK is not bought (which is morelikely as press reports say that the Unicredit was not shortlisted),the bank is likely to return to high dividend payouts.Pekao used to be the most expensive Polish bank on 2010FP/BV, but after weak performance YTD (the second weakestamong Polish banks) its valuations became less stretched. Onthe back of this, we upgrade stock from Sell to HOLD.Price (19/07/10)Target price (12-mth)PLN159.90Previously PLN153.2PLN154.0Forecast total return 2.2%Quarterly previewWe expect 2Q10 to be fairly similar to 1Q10. Further NIMimprovement and further decline of assets is likely. There couldbe a positive surprise in the trading line if part of the 1Q10 profitson the AFS portfolio (previously booked through equity) nowappears in the P&L.2Q10F results preview (4 August)(PLNm) 1Q10 2Q10FNII 1,005 1,015Revenues 1,765 1,824Costs (904) (913)Provisions (141) (141)Net profit 603 635Source: ING estimatesEarnings drivers and outlookWe forecast further NIM improvement this year, although at aslower pace. It will benefit from the softening deposit war in themarket. According to the bank’s representatives on the asset side,the space for further growth is exhausted. Because volumes willbe weak Pekao is not likely to return NII to 2008 levels this year.Pekao is well positioned for a rebound in capital markets. Whilethe merger with BPH in 2007 diluted its exposure to this sourceof fees (to 18% of fees/6% of total revenues in 1Q10), the fact isthat it controls the largest mutual funds manager in Poland.However, 1Q10 revealed pressure on other fees. It is difficult tosay how much of problem this is, as management was veryunclear about the background for this weakness.The bank reduced costs by 3% YoY in 2009, but we would notjump to positive conclusions too soon as it was partly the baseeffect (in 2008 the bank booked over PLN100m of the mergercosts). Because this year the bank will book the costs of plannedrebranding, it will be difficult to reduce expenses in absoluteterms. But on the other hand, in comparison with its peers Pekaois likely to show lower cost growth in both 2010 and 2011.Pekao is one of few banks for which we forecast growing cost ofrisk. This is largely connected with extremely low provisions in1Q09 and a small chance that it could go far below currentquarterly provision charge (PLN130-150m). Again, as in the caseof opex, 70bp cost of risk should be better than the sector average.Our DDM-based target price is largely unchanged as lower profitforecasts (-3% for 2010F) and trading ex-dividend (PLN2.9 pershare) were offset by higher payout assumptions.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com34

Polish Strategy Pekao July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F28 Apr 2010 AGM (approval of PLN2.90 DPS)12 May 2010 1Q10 results13 May 2010 Traded ex-dividend (PLN2.90 DPS)12 Jul 2010 Press report: Unicredit (the parent for Pekao)has not been shortlisted for BZ WBK4 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Unicredit 59Source: Company data, INGShare dataAvg daily volume (3-mth) 502,713Free float (%) 40.6Market cap (PLNm) 41,966.1Dividend yield (1F, %) 5.9Source: Company data, ING estimatesShare price performance190180170160150140130120Source: ING7/09 9/09 11/09 1/10 3/10 5/10PriceCompany profileWIG20 (rebased)Pekao is the second largest bank in Poland in termsof assets (12% share), the second largest in terms ofbranches (1,000) and in terms of client numbers, farbehind PKO BP (4m vs 6m). Pekao is strong in mutualfunds (No.1) but relatively weak in mortgage lending(as it offers only PLN-denominated loans) and creditcards. Pekao has a very conservative risk approach. Itis controlled by Italy’s Unicredit (59% stake).Income statementNet interest income 4,323 4,509 3,802 4,121 4,553 4,677Net fee & commission income 2,932 2,342 2,289 2,433 2,648 2,893Net trading income 755 729 907 800 825 885Insurance income 0 0 0 0 0 0Other operating income 126 271 117 129 148 163Revenues 8,136 7,851 7,115 7,483 8,175 8,618Operating costs (3,805) (3,802) (3,686) (3,741) (3,778) (3,885)Pre-provision profit 4,332 4,050 3,429 3,742 4,397 4,733Total impairments (320) (263) (535) (587) (478) (375)Other non-operating income 201 436 45 0 0 0Pre-tax profit 4,213 4,223 2,939 3,155 3,919 4,358Tax (805) (805) (576) (618) (768) (854)Minorities (13) (13) (10) (16) (14) (15)Other adjustments 153 123 58 95 129 161Net profit 3,547 3,528 2,412 2,615 3,267 3,650Normalised net profit 3,385 3,175 2,375 2,615 3,267 3,650Balance sheetTotal assets 124,096 131,941 130,616 134,517 139,449 146,002Customer loans 69,702 82,516 79,484 79,685 85,047 92,692Customer loans/assets (%) 56.2 62.5 60.9 59.2 61.0 63.5Customer deposits 89,944 90,889 97,250 99,385 105,110 110,162Loan to deposit ratio (%) 77.5 90.8 81.7 80.2 80.9 84.1Total equity 14,748 16,036 18,371 20,427 21,109 21,555Risk-weighted assets 90,883 107,151 92,622 94,983 100,577 107,800Profitability & efficiencyNet interest margin (%) 4.8 3.8 3.1 3.3 3.5 3.4Norm'ld return on t'gble eq (%) 30.4 21.8 14.5 14.0 16.3 17.7Normalised ROA (%) 3.5 2.5 1.8 2.0 2.4 2.6RORWA (%) 5.2 3.2 2.4 2.8 3.3 3.5Cost income ratio (%) 46.8 48.4 51.8 50.0 46.2 45.1Asset quality & capitalNPL/gross customer loans (%) 7.7 5.6 6.8 8.0 7.6 7.2Provision coverage ratio (%) 84.3 85.3 77.0 67.5 72.0 73.8Core Tier 1 ratio (%) 12.1 12.2 16.2 18.0 17.0 16.0Tier 1 ratio (%) 12.1 12.2 16.2 18.0 17.0 16.0T'gble equity/t'gble assets (%) 11.3 11.6 13.5 14.7 14.7 14.4Leverage (x) 8.4 8.2 7.1 6.6 6.6 6.8GrowthAsset growth (%) 83.3 6.3 -1.0 3.0 3.7 4.7RWA growth (%) 131.4 17.9 -13.6 2.5 5.9 7.2Loan growth (%) 112.9 18.4 -3.7 0.25 6.7 9.0Deposit growth (%) 73.7 1.1 7.0 2.2 5.8 4.8Net interest income grth (%) 81.9 4.3 -15.7 8.4 10.5 2.7Revenue growth (%) 73.1 -3.5 -9.4 5.2 9.3 5.4Rep'td pre-tax profit grth (%) 99.4 0.24 -30.4 7.3 24.2 11.2ValuationRisksUpside: acceleration of loan sales; further fall inprovisions.Downside: possible rebranding; further loss of marketshares in deposits.PER (x) 9.7 11.9 17.4 16.0 12.8 11.5Normalised PER (x) 10.1 13.2 17.7 16.0 12.8 11.5Price/book (x) 2.9 2.6 2.3 2.1 2.0 2.0Price/tangible book (x) 3.0 2.8 2.4 2.1 2.1 2.0Dividend yield (%) 6.0 0.0 1.8 5.9 7.4 8.3Per share dataReported EPS (PLN) 16.54 13.46 9.20 9.97 12.44 13.90Normalised EPS (PLN) 15.78 12.12 9.06 9.97 12.44 13.90Normalised EPS growth (%) 47.3 -23.2 -25.3 10.1 24.8 11.7Dividend per share (PLN) 9.60 0.00 2.90 9.47 11.82 13.20Dividend growth (%) 6.7 -100.0 n/a 226.9 24.8 11.7Payout ratio (%) 74.3 0.0 32.0 95.0 95.0 95.0BV/share (PLN) 56.01 60.82 69.71 77.51 80.08 81.74Tangible BV/share (PLN) 53.38 57.97 67.01 74.95 77.64 79.43Source: Company data, ING estimates35

Polish Strategy PKO BP July 2010PKO BPPotential acquisition, potential problemsMaintainedBuyPoland Market cap PLN48,100.0mBanks Bloomberg PKO PWPKO continues to gain market share and its profitabilityshould benefit from falling provisions. But the potentialacquisition of BZ WBK is more of a risk than an opportunity.Investment caseDuring the previous boom, 2005-08, PKO BP used to losemarket share in the retail segment, due to strong competitionfrom aggressive small and midcap players. From this point ofview 2009 appeared to be a blessing for the bank. When thepressure from small banks eased it was able to increase itsshares in retail (by 0.3% in loans/1.1% in deposits) thanks tomore competitive pricing in deposits and less tight credit policy inloans. We especially like the fact that the bank managed toincrease its share in mortgage lending. It sells PLN3bn ofmortgages per quarter, which is close to pre-crisis highs. It has ac.30% share in new sales (PKO has just 14% share in totalassets of the sector) and we believe it will be the fastest growingsegment of the market in the short and medium term. Althoughwe do not think these trends are sustainable in the long term, inthe short term PKO BP should be able to outperform minorplayers, which still have problems with capital/liquidity/strategy.In the case of the corporate segment, the bank has alsoimproved its market shares, but here the key thing is to improvethe profitability of the division, which was weak in the past andweakened even further during the crisis, as provisions soared.In February the bank’s management published its 2010-12strategy, which generally confirms the expansionary policy of thebank. However, we are slightly disappointed by the fact therewere few new elements (eg, the focus on cross-selling, strongbrand etc, are “old”) and most of the financial targets wereovercautious.While the operating performance is fairly good, there is still theproblem with political pressure (as always). Last year the StateTreasury forced the bank to carry out a capital increase andchanged the CEO without providing any sensible reason for thismove. A situation when the ministry directly influencesoperations is definitely negative. This year it seems that that thegovernment backs the idea to bid for BZ WBK. We do not like it.PKO BP has insufficient capacity and experience to managesuch a large merger. Moreover, although it has started internalrestructuring there is still plenty to do in this area and we believethe bank should finish this process before seeking new challenges.PKO BP is the second most expensive Polish bank on 2010FP/BV, but it is traded at par on PER. On a stand-alone basis itgives good exposure to the Polish recovery thanks to strongpositions in mortgage lending. Due to the company’s size andliquidity this is also the easiest play on Polish macro. Therefore,despite potential risks connected with BZ WBK, we maintain ourBUY recommendation.Price (19/07/10)Target price (12-mth)PLN38.48Previously PLN47.6PLN46.8Forecast total return 26.7%Quarterly previewIn late May the CEO gave fairly positive guidance on provisions(“lower than in 1Q”) and ROE (should be higher than in 1Q10).Earlier management had indicated that margins should notdeteriorate QoQ, which should support NII growth as volumesare growing (although slightly slower than in 1Q10). All in all, weexpect good earnings thanks to small improvements at all lines.2Q10F results preview (26 July)(PLNm) 1Q10 2Q10FNII 1,475 1,519Revenues 2,346 2,415Costs (1,014) (1,050)Provisions (425) (383)Net profit 720 783Source: Company data, ING estimatesEarnings drivers and outlookNIM was under heavy pressure in 1H09 but it started reboundingin 3Q09 and then continued to do so. We do not believe that itwill reach record high levels (over 5% in 9M08) any time soon (ifever), but we should see further gradual improvement. NII shouldgrow much faster as the bank is likely to show good volumes inboth the retail and corporate segments. Stronger growth of NIMis possible when we see rate hikes in Poland (we forecast it willhappen in 1H11), as PKO BP is one of the most exposed banksto this factor (due to its high share of deposit margins).According to the company’s 2010-12 strategy, PKO BP expects16%+ ROE in 2012. This is very low – much lower than duringthe precious cycle, when it was well above 20%. However, itseems that it was just an extremely cautious figure as the latestguidance from the CEO (“PLN3bn net profit in 2010 is realistic”)is definitely above the level suggested by the strategy.Provisions are likely to fall only slightly this year. The quality ofthe retail portfolio is likely to be above-average, but the fact isthat the peak of retail NPLs is still ahead of us. Quality ofcorporate loans should start to improve soon. Total provisioncoverage of impaired loans is just 42% and is the lowest inPoland, although the coverage of 90+ day delayed loans(c.100%) is in line with the sector average.We reduce our DDM-based target price, largely due to theuncertain situation with BZ WBK. A pure DDM-based target pricewould be higher (PLN49.3) but we include a 5% discount toreflect the risks connected with potential BZW BK acquisition.Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com36

Polish Strategy PKO BP July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F25 June 2010 AGM suspended till 23 July7 July 2010 PKO plans maximum PLN5bn subordinatedbond issue10 July 2010 Press reports: PKO short-listed for BZWBK23 July 2010 AGM approves conditional dividend ofPLN1.90 DPS (record day 23 Oct); paid if noacquisition completed by 10 Dec26 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Poland State Treasury 41BGK Bank (State-owned) 10Source: Company data, INGShare dataAvg daily volume (3-mth) 2,579,562Free float (%) 49.0Market cap (PLNm) 48,100.0Dividend yield (1F, %) 5.1Source: Company data, ING estimatesShare price performance48433833287/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)PKO BP is the No.1 bank in Poland in terms of assets(14% share) and No.1 in terms of retail clients (6mcurrent accounts). It has also the largest branchnetwork (c.1,200 branches) and additionally 2,500agents. PKO BP is the largest mortgage lender and isbiased toward retail banking (65% of loans, 72% ofdeposits). PKO BP is controlled by the Poland StateTreasury (51% stake directly and indirectly).RisksThe main risks to our BUY recommendation are: apotential acquisition of BZ WBK (especially if it isexpensive); mortgage loans start deteriorating late inthe cycle (although no signs so far in PKO BP);influence of the State Treasury on the strategy.Income statementNet interest income 4,647 6,127 5,051 6,157 7,098 7,801Net fee & commission income 2,332 2,412 2,583 2,885 3,238 3,670Net trading income 466 558 973 575 603 633Insurance income 0 0 0 0 0 0Other operating income 258 292 261 235 293 367Revenues 7,702 9,389 8,868 9,851 11,233 12,471Operating costs (4,041) (4,296) (4,244) (4,394) (4,686) (5,040)Pre-provision profit 3,662 5,092 4,624 5,457 6,546 7,432Total impairments (57) (1,130) (1,681) (1,546) (1,329) (737)Other non-operating income 0 0 0 0 0 0Pre-tax profit 3,605 3,962 2,943 3,910 5,217 6,694Tax (668) (838) (632) (839) (1,120) (1,437)Minorities (38) (19) (6) (16) (31) (40)Other adjustments 4 16 0.3 0.4 0.5 0.7Net profit 2,904 3,121 2,306 3,056 4,067 5,218Normalised net profit 2,904 3,121 2,306 3,056 4,067 5,218Balance sheetTotal assets 108,538 134,636 156,479 172,532 186,520 209,324Customer loans 76,417 101,108 116,573 127,640 147,448 175,212Customer loans/assets (%) 70.4 75.1 74.5 74.0 79.1 83.7Customer deposits 86,580 102,940 125,073 135,632 146,776 160,433Loan to deposit ratio (%) 88.3 98.2 93.2 94.1 100.5 109.2Total equity 11,979 13,998 20,436 21,532 23,154 26,949Risk-weighted assets 83,730 114,130 121,873 135,675 154,736 181,056Profitability & efficiencyNet interest margin (%) 4.7 5.4 3.7 3.9 4.1 4.1Norm'ld return on t'gble eq (%) 29.2 26.7 14.7 15.7 19.6 22.2Normalised ROA (%) 2.8 2.6 1.6 1.9 2.3 2.6RORWA (%) 4.1 3.2 2.0 2.4 2.8 3.1Cost income ratio (%) 52.5 45.8 47.9 44.6 41.7 40.4Asset quality & capitalNPL/gross customer loans (%) 3.2 3.6 7.6 8.1 7.7 6.8Provision coverage ratio (%) 96.2 77.1 43.2 48.2 52.5 53.8Core Tier 1 ratio (%) 10.1 9.9 13.3 13.6 12.6 12.6Tier 1 ratio (%) 10.1 9.9 13.3 13.6 12.6 12.6T'gble equity/t'gble assets (%) 10.0 9.5 12.2 11.7 11.7 12.2Leverage (x) 9.1 9.6 7.7 8.0 8.1 7.8GrowthAsset growth (%) 7.2 24.0 16.2 10.3 8.1 12.2RWA growth (%) 41.6 36.3 6.8 11.3 14.0 17.0Loan growth (%) 29.7 32.3 15.3 9.5 15.5 18.8Deposit growth (%) 4.4 18.9 21.5 8.4 8.2 9.3Net interest income grth (%) 21.3 31.9 -17.6 21.9 15.3 9.9Revenue growth (%) 18.2 21.9 -5.5 11.1 14.0 11.0Rep'td pre-tax profit grth (%) 33.3 9.9 -25.7 32.9 33.4 28.3ValuationPER (x) 13.3 12.3 18.8 15.7 11.8 9.2Normalised PER (x) 13.3 12.3 18.8 15.7 11.8 9.2Price/book (x) 3.2 2.8 2.4 2.2 2.1 1.8Price/tangible book (x) 3.6 3.1 2.6 2.4 2.2 1.9Dividend yield (%) 2.8 2.6 4.1 5.1 3.0 3.8Per share dataReported EPS (PLN) 2.90 3.12 2.05 2.44 3.25 4.17Normalised EPS (PLN) 2.90 3.12 2.05 2.44 3.25 4.17Normalised EPS growth (%) 35.1 7.5 -34.3 19.3 33.1 28.3Dividend per share (PLN) 1.09 1.00 1.57 1.96 1.14 1.46Dividend growth (%) 11.2 -8.3 56.8 24.8 -41.8 28.3Payout ratio (%) 37.5 32.0 85.0 80.0 35.0 35.0BV/share (PLN) 11.92 13.95 16.34 17.22 18.52 21.55Tangible BV/share (PLN) 10.74 12.60 15.08 15.96 17.26 20.30Source: Company data, ING estimates37

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Polish Strategy July 2010Basic Resources39

Polish Strategy Arctic Paper July 2010Arctic PaperWeak 2010 already in the share priceMaintainedBuyPoland Market cap PLN787mBasic Resources Bloomberg ATC PWWe forecast 178% YoY growth in 2011F EPS, driven by anexpected easing in pulp prices. Arctic Paper trades at anattractive 2011F PER of 9.1x, implying a discount of 10% toglobal peers. Given that in our view the strong YoYdeterioration in 2010F earnings has already been largelypriced in, we maintain our BUY recommendation with a newtarget price of PLN17.8.Investment caseWe expect a YoY drop in EBIT margin to 3% in 2010F, from 10%in 2009. It is likely to be attributable mostly to soaring pulp prices(34% of the company’s operating costs). Given that Arctic Paperis a non-integrated paper producer, the company is forced to buypulp from external suppliers. In 1H10, pulp prices hit all-time highlevels. Global pulp supply was squeezed owing to an earthquakein Chile, which produces 7% of global pulp capacity. Moreover,the pulp market supply has been reduced because of strikeaction in Sweden and Finland, resulting in the closure of somepulp mills. As a result, about 12% of the global supply of pulpwas blocked, pushing raw material prices up to record levels. Weforecast 45% YoY growth in average pulp prices this year, whichis unlikely to be counterbalanced by increases in graphic paperprices (10% YoY growth). Given that the stock has depreciatedby 15% over the past three months, underperforming the marketby 11ppt, we think the market has already discounted a poor2010 outlook and is now looking at 2011.We forecast that pulp prices will start to roll over in 2H10F astemporary disruptions are coming to an end (80% of Chileandeliveries have already been restored). Moreover, global pulpinventories grew to 27 days of supply in May after fourconsecutive months of decreases. Despite pulp stocks remaininglow (the monthly historical average is 32 days), we believe pulpinventories should normalise in coming months, puttingdownside pressure on commodity prices. We forecast a 20%YoY drop in the average pulp price next year. Thus, we expect arebound in EBIT profitability to 5% next year.Arctic Paper trades at 9.1x 2011F PER, which translates into a10% discount to global peers. Despite some risks connected withthe stock (lack of integration with the pulp mill), we perceive thisdiscount to be largely unwarranted, given 178% YoY EPS growthforecast for next year.Our target price is calculated as the sum of 50% of our DCFvaluation and 50% of our peer group valuation. In ourcomparable valuation, we use 2011F PER and EV/EBITDAmultiples, to which equal weightings are applied. In our view,2011F figures reflect normalised earnings for the company.Thus, we eliminate cyclical 2010F earnings distortions. Inaddition, 2011F Arctic Paper multiples are approximate to cycleaverage valuation ratios.Price (19/07/10)Target price (12-mth)PLN14.2Previously PLN17.9PLN17.8Forecast total return 27.0%Quarterly previewWe expect 28%QoQ growth in revenues in 2Q10F, mainly on theconsolidation of Grycksbo figures and growth in graphic paperprices. The company managed to raise paper prices by 10-12%in June. We anticipate it may not be profitable on the EBIT line in2Q10F, given demanding levels of pulp prices (BHK pulp price ofUS$870/tonne in 2Q10F vs US$750/tonne in 1Q10 average). Weforecast a PLN7m loss on operating activity. In our view, netprofitability should be strengthened by PLN15m in positive FXdifferences, which should be offset by PLN10m in interest costs.2Q10F results preview (due 31 August)(PLNm) 1Q10 2Q10FRevenues 479 615EBITDA 32 13EBIT 13 (7)Net profit 1 (2)EPS (PLN) 0.01 N/ASource: Company data, ING estimatesEarnings drivers and outlookWe estimate a 10% YoY increase in average graphic paper pricesin 2010F driven by a rebound in European graphic papershipments after a weak 2009. However, a rally in pulp prices (weforecast 45% YoY growth in 2010F) should offset product pricehikes. We believe 2010F margins are also likely to suffer from PLNappreciation against the EUR (our house view of PLN4.05/EUR in2010F versus PLN4.34/EUR in 2009). The 2010F margin shouldalso be worsened by hikes in local gas tariffs (Kostrzyn mill) and arise in Swedish power prices (Munkendals and Grycksbo mills).We estimate large PLN310m capex this year (versus PLN113mlast year), consisting mainly of expenditures on the acquisition ofthe Grycksbo mill (PLN262m). We assume flat PLN100m capexin 2011-19F.In our view, the main downside risks are: a continuation of therally in pulp prices, PLN appreciation against the EUR (thetransaction currency for paper sales contracts), and USD (thetransaction currency for pulp purchases contracts) appreciationagainst PLN. In the long term, we remain concerned about risingconsumption of non-paper-based media, which may replacegraphic paper. We think that the downside potential may comefrom an expansion of 4.5m tonnes of fine paper capacities inChina in 2010-12F. If this comes into effect, demand for pulpshould rise, which may drive raw material prices.Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com40

Polish Strategy Arctic Paper July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F1 Mar 2010 Purchase of 100% stake in Grycksbo21 Jun 2010 Ex-dividend date (PLN0.89 per shre)31 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Arctic Paper AB 75Source: Company data, INGShare dataAvg daily volume (3-mth) 15,402Free float (%) 25.0Market cap (PLNm) 787Net debt (1F, PLNm) 403Enterprise value (1F, PLNm) 1,190Dividend yield (1F, %) 1.6Source: Company data, ING estimatesShare price performance22201816141210/09 12/09 2/10 4/10 6/10Source: INGCompany profilePriceWIG (rebased)Arctic Paper is a mid-sized European manufacturer ofgraphic paper (3% market share in Europe) used inthe production of books, leaflets, booklets andcatalogues. The company owns four paper mills, inKostrzyn (Poland), Mochenwangen (Germany),Munkendals and Grycksbo (both in Sweden). ArcticPaper is notably exposed to the EUR:PLN rate as63% of group revenues is denominated in EUR. Giventhat the company is a non-integrated paper producer,Arctic Paper’s profitability is sensitive to the price ofpulp (main raw material at 34% of operating costs)that is bought from external suppliers.RisksContinuation of the rally in pulp prices, PLNappreciation against the euro; PLN depreciationagainst the US dollar; rising consumption of nonpaper-basedmedia, expansion of 4.5m tonnes of finepaper capacities in China, increase in Swedish powerpricesIncome statementRevenues 1,240 1,270 1,809 2,428 2,263 2,248EBITDA 108 122 247 147 223 299EBIT 54 66 179 62 124 200Net interest (5) (11) (19) (19) (24) (21)Associates 0 0 0 0 0 0Other pre-tax items 0.6 0.1 (7) (8) 0 0Pre-tax profit 50 55 153 36 100 179Tax 8 (5) (21) (5) (14) (24)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 57 50 132 31 87 155Normalised net profit 57 33 132 31 87 155Balance sheetTangible fixed assets 427 509 553 777 778 779Intangible fixed assets 9 49 43 212 212 212Other non-current assets 15 17 15 12 12 12Cash & equivalents 36 64 140 91 24 135Other current assets 385 481 430 555 611 589Total assets 872 1,121 1,180 1,647 1,637 1,726Short-term debt 92 53 23 135 74 74Other current liabilities 195 250 168 232 257 247Long-term debt 68 325 215 359 311 289Other long-term liabilities 64 117 156 262 262 262Total equity 453 375 618 660 734 854Total liabilities & equity 872 1,121 1,180 1,647 1,637 1,726Net working capital 189 224 236 290 321 309Net debt (cash) 124 314 98 403 360 228Cash flowCash flow EBITDA 108 122 247 147 223 299Tax, interest & other 2 (0.6) 100 135 40 47Change in working capital (75) (3) (7) (55) (31) 12Net cash from op activities 38 85 251 169 155 266Capex (82) (111) (113) (310) (100) (100)Net acquisitions 0 0 0 0 0 0Net financing cash flow 68 189 (43) 313 (109) (22)Dividends & minority distrib'n (20) (26) 0 (49) (12) (35)Net ch in cash & equivalents 2 28 76 117 (67) 110FCF (41) 3 102 (169) 75 185Performance & returnsRevenue growth (%) 1.2 2.4 42.5 34.2 -6.8 -0.65Normalised EPS growth (%) n/a -41.8 280.1 -80.3 177.8 78.6Normalised EBITDA mgn (%) 8.7 8.0 13.6 6.1 9.9 13.3Normalised EBIT margin (%) 4.4 3.6 9.9 2.6 5.5 8.9ROACE (%) 9.5 6.6 22.3 6.2 10.9 17.1Reported ROE (%) 13.0 12.2 26.7 4.8 12.4 19.5Working capital as % of sales 15.2 17.7 13.0 12.0 14.2 13.7Net debt (cash)/EBITDA (x) 1.1 2.6 0.40 2.7 1.6 0.76EBITDA net interest cvg (x) 19.9 10.7 13.1 7.9 9.4 14.1ValuationEV/revenue (x) 0.73 0.87 0.49 0.49 0.51 0.45EV/normalised EBITDA (x) 8.4 10.9 3.6 8.1 5.1 3.4EV/normalised EBIT (x) 16.7 24.3 4.9 19.2 9.3 5.1Normalised PER (x) 11.0 18.9 5.0 25.2 9.1 5.1Price/book (x) 1.4 1.7 1.2 1.2 1.1 0.92Dividend yield (%) 3.2 4.1 0.0 6.3 1.6 4.4FCF yield (%) n/a 0.5 15.6 n/a 9.6 23.5Per share dataReported EPS (PLN) 1.29 1.14 2.86 0.563 1.56 2.79Normalised EPS (PLN) 1.29 0.752 2.86 0.563 1.56 2.79Dividend per share (PLN) 0.449 0.581 0.00 0.890 0.222 0.625Equity FCFPS (PLN) (0.998) (0.577) 2.98 (2.57) 0.989 3.00BV/share (PLN) 10.22 8.46 11.79 11.90 13.24 15.41Source: Company data, ING estimates41

Polish Strategy KGHM July 2010KGHMUpgrade to buy on relative valuation and record 2Q10 earningsPreviously HoldBuyPoland Market cap PLN18,840.0mBasic Resources Bloomberg KGH PWWe upgrade KGHM to a BUY following a sector rally as wellas on expectations of record high company earnings in2Q10. The copper price is holding up well, copperinventories continue to be depleted in LME warehouses andwe believe demand for copper is not at risk in the short termgiven the level of manufacturing recovery in somedeveloped markets. While investors are likely to place aneven higher than historical holding discount on thecompany valuation, at least until it divests its telecomassets, still the current level of discount appears excessive.Investment caseOur concerns about potentially weaker copper markets in 2H10have not materialised so far. The recovery in manufacturing seenin some developed markets, such as Germany, is supportive tothe copper price which is back above US$7,000/tonne. The highcopper price combined with the weak zloty vs the US dollar hasled to one of the best operating environments for KGHM in itshistory as a public company. We expect KGHM to revise its tooconservative 2010F earnings guidance in 3Q10.In August, we expect the signing of an investment agreementwith Abacus regarding the joint venture to develop the Afton-Ajaxcopper-gold mining project in Canada. Shareholders of Abacushave approved the proposed transactions and the ball is now inKGHM's park. In our view, KGHM has selected an interestingacquisition project with low production costs, limited political riskand manageable execution challenges. The project assumescopper production of 50k tonnes pa and gold production of 100koz pa from 2013 over 23 years. Unit production costs of copperare estimated at US$2,000/tonne, using a gold price ofUS$700/oz for the calculation of gold credits. Gold would makeup 25% of the project’s revenues.Although KGHM blocked the IPO of Polkomtel earlier this yearwe believe the chances are increasing that KGHM will be able todivest its 24% stake in Polkomtel some time in 2011 in apotential private transaction. All the Polish shareholders seem tobe willing to sell their stakes to a strategic partner and Vodafoneis not against such a transaction either. Management is likely toreinvest potential proceeds from a Polkomtel sale into the corebusiness in our view.The stock trades at a 59% discount to the sector based on2011F adjusted EV/EBITDA of 2.3x and at a 66% discount on2011F adjusted PER of 3.8x. The discount is likely to be deeperthan historically due to KGHM’s over 5% equity investment inTauron but the current level of discount is excessive in our view.The investment in Tauron represented a departure from thecompany’s strategy of diversification into power through greenfieldinvestments. Our revised target price of PLN110 is basedon a 2010F PER of 6.9x and a 2010F EV/EBITDA of 3.4x inaddition to the standard DCF valuation.Price (19/07/10)Target price (12-mth)PLN94.20Previously PLN101.00PLN110Forecast total return 29.9%Quarterly previewWe forecast record high earnings for KGHM in 2Q10 driven by aweak zloty, higher production, sales of inventory and positiverevaluation of hedging positions. We forecast copper output of134k tonnes in 2Q10, including 38k tonnes from importedconcentrate and copper scrap. We forecast copper salesvolumes of 139k tonnes as KGHM was likely to have sold anadditional 5k tonnes of stocked copper in 2Q10.We forecast unit production costs of PLN13,500/tonne, up 19%YoY from PLN11,380/tonne in 2Q09 and 7% QoQ fromPLN12,606/tonne in 1Q10. The increased cost of importedconcentrate and copper scrap as well as costs of inventory arethe two major drivers of higher unit costs. The company will notrecognise any actuarial provisions in 2Q10; in 1Q10 actuarialprovisions lowered operating profits by PLN68m. KGHM willrecognise an estimated PLN180m of positive revaluation ofhedging positions as the copper price moved down fromUS$7,800/tonne at the end of 1Q10 to US$6,500/tonne at theend of 2Q10. We also expect PLN42m of dividend income fromPolkomtel to be recognised in 2Q10.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 2,772 3,846EBITDA 1,105 1,784EBIT 970 1,624Net profit 845 1,366Source: Company data, ING estimatesEarnings drivers and outlookWe keep unchanged our copper price assumption for 2010F atUS$7,165/tonne. We also maintain our 2011F and long-termaverage copper price assumptions of US$7,937/tonne andUS$5,512/tonne respectively. We also keep our FX assumptionsunchanged and continue to use an average PLN/US$ exchangerate of 3.22 in 2010 and 3.12 in 2011.Excluding implications of copper and US dollar hedging, zlotyappreciation of PLN0.1 over our 2010F central case assumptionlowers our 2010F net profit estimate for KGHM by PLN294m, or7%. An average copper price US$200/tonne below our centralassumption of US$7,165/tonne in 2010F reduces our 2010F netprofit estimate for KGHM by PLN219m, or 5%.Our dividend estimates are based on a 60% pay-out ratio whichwe believe is a fair assumption given the increased M&A activityand considerable maintenance capex of KGHM.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com42

Polish Strategy KGHM July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F13 August 2010 3Q10 resultsAugust 2010Likely Abacus deal closure3Q10Likely guidance revision10 November 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 31.8Source: Company data, INGShare dataAvg daily volume (3-mth) 961,157Free float (%) 3,280Market cap (PLNm) 18,840.0Net debt (1F, PLNm) (3,182)Enterprise value (1F, PLNm) 15,658Dividend yield (1F, %) 12.7Source: Company data, ING estimatesShare price performance12011511010510095908580Source: ING7/09 9/09 11/09 1/10 3/10 5/10PriceCompany profileWIG20 (rebased)KGHM was the ninth-largest producer of copper andthird-largest producer of silver in the world in 2009,producing 503,000 tonnes of copper and 1,203 tonnesof silver. KGHM owns its own copper ore deposit andintegrated production structure, comprising threemines, two copper smelters and a wire rod plant.KGHM owns a 100% stake in Dialog, the third-largestfixed telephony company in Poland, and a 24% stakein Polkomtel, the country’s second-largest mobileoperator.RisksWe note an increased risk of KGHM distributing lowerdividends in the future. We currently forecast a 60%dividend pay-out ratio starting from 2010F earnings tobe distributed in 2011F, which could be adverselyimpacted if KGHM were to increase further its M&Aactivity in either the core business of copper mining orthe non-core power generation segment.Income statementRevenues 12,183 11,303 11,061 14,291 14,938 14,382EBITDA 5,175 3,787 3,759 5,434 6,313 5,679EBIT 4,756 3,305 3,212 4,854 5,644 4,911Net interest 377 322 506 304 399 467Associates 0 0 0 0 0 0Other pre-tax items (478) (74) (650) (245) 0 0Pre-tax profit 4,655 3,554 3,067 4,912 6,044 5,378Tax (857) (633) (526) (933) (1,148) (1,022)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 3,799 2,920 2,541 3,979 4,895 4,356Normalised net profit 3,799 2,920 2,541 3,979 4,895 4,356Balance sheetTangible fixed assets 4,833 5,538 5,938 6,943 8,270 9,538Intangible fixed assets 75 81 76 93 90 91Other non-current assets 2,480 3,108 3,496 3,496 3,496 3,496Cash & equivalents 2,616 2,505 1,238 3,199 4,301 4,517Other current assets 2,375 2,669 3,205 4,016 4,040 3,988Total assets 12,380 13,900 13,953 17,747 20,197 21,630Short-term debt 9 7 6 6 0 0Other current liabilities 1,966 1,661 1,839 2,254 2,203 2,216Long-term debt 20 17 12 12 12 12Other long-term liabilities 1,419 1,623 1,693 1,693 1,693 1,693Total equity 8,966 10,591 10,404 13,782 16,290 17,709Total liabilities & equity 12,380 13,900 13,953 17,747 20,197 21,630Net working capital 908 1,193 1,829 2,329 2,391 2,329Net debt (cash) (2,588) (2,480) (1,221) (3,182) (4,290) (4,505)Cash flowCash flow EBITDA 3,799 2,920 2,541 3,979 4,895 4,356Tax, interest & other 0 0 0 0 0 0Change in working capital 177 (934) (113) (396) (75) 66Net cash from op activities 3,976 1,986 2,428 3,583 4,820 4,422Capex (873) (1,192) (942) (1,602) (1,993) (2,037)Net acquisitions 0 0 0 0 0 0Net financing cash flow 227 664 (544) 23 279 308Dividends & minority distrib'n (3,394) (1,800) (2,336) (601) (2,387) (2,937)Net ch in cash & equivalents 442 (741) (818) 1,961 1,103 217FCF 3,103 794 1,486 1,981 2,827 2,384Performance & returnsRevenue growth (%) 4.4 -7.2 -2.1 29.2 4.5 -3.7Normalised EPS growth (%) 5.4 -23.1 -13.0 56.6 23.0 -11.0Normalised EBITDA mgn (%) 42.5 33.5 34.0 38.0 42.3 39.5Normalised EBIT margin (%) 39.0 29.2 29.0 34.0 37.8 34.1ROACE (%) 55.5 33.7 30.5 40.1 37.5 28.9Reported ROE (%) 44.5 29.9 24.2 32.9 32.6 25.6Working capital as % of sales 7.5 10.6 16.5 16.3 16.0 16.2Net debt (cash)/EBITDA (x) (0.50) (0.66) (0.32) (0.59) (0.68) (0.79)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.3 1.4 1.6 1.1 0.97 1.00EV/normalised EBITDA (x) 3.1 4.3 4.7 2.9 2.3 2.5EV/normalised EBIT (x) 3.4 4.9 5.5 3.2 2.6 2.9Normalised PER (x) 5.0 6.5 7.4 4.7 3.8 4.3Price/book (x) 2.1 1.8 1.8 1.4 1.2 1.1Dividend yield (%) 9.6 12.4 3.2 12.7 15.6 13.9FCF yield (%) 19.1 4.9 8.4 12.7 19.4 16.6Per share dataReported EPS (PLN) 18.99 14.60 12.70 19.90 24.48 21.78Normalised EPS (PLN) 18.99 14.60 12.70 19.90 24.48 21.78Dividend per share (PLN) 9.00 11.68 3.00 11.94 14.69 13.07Equity FCFPS (PLN) 15.51 3.97 7.43 9.91 14.14 11.92BV/share (PLN) 44.83 52.96 52.02 68.91 81.45 88.55Source: Company data, ING estimates43

Polish Strategy Mondi July 2010MondiToo expensive to be attractiveMaintainedSellPoland Market cap PLN3,700.0mBasic Resources Bloomberg MSC PWWe are bearish on Mondi as we believe that marketconsensus for 2010F earnings is too optimistic and thevaluation is demanding. Our 2010F EBITDA and net incomeforecasts are 22% and 37% lower than market expectations,respectively. Mondi trades at a 2010F and 2011F PER of30.6x and 16.3x, an excessive 132% and 61% premium toglobal peers. We maintain our SELL recommendation with atarget price of PLN52.6.Investment caseMondi is currently experiencing high wood prices (17% ofoperating costs), the main raw material used to producepackaging paper. Wood price hikes have been caused by thisyear’s change in sales policy by the main local wood supplier,State Forests (a state-owned holding that manages publiclyownedlocal forests). In the past, State Forests sold 80% of itswood production to long-standing customers (such as Mondi),usually offering price discounts for the placement of large orders.As a result, Mondi benefitted from low wood prices and modestlogistics costs. Mondi thus had significant cost advantages overits European competitors. Currently, just 50% of State Forests’wood is sold in closed tenders to long-standing clients. Theremaining 50% is sold in open tenders to the highest bidder. Ashorter supply of local wood has been accompanied by strongdemand for raw materials from the power sector as a result ofrising consumption for biofuels. Thus local wood prices havegrown by 30-40% YTD, approaching European price levels.The main upside potential for the company is the introduction ofan alteration of forest law proposed by the Polish government.According to the preliminary project of alteration, State Forestsmay be forced to sell wood ‘taking into consideration theinterests of the State Treasury and the needs of the local woodindustry’. In practice it would lead to an increase in wood salesby State Forests to large local industry players at the expense ofthe foreign wood industry and small local players. Thus it wouldput downside pressure on the price of wood purchased byMondi. The project of alteration is currently in consultation withinterested parties: State Forests and representatives of thedomestic wood industry. Given that it is still at an initial stage, wedo not include its implementation and a potential decrease inwood prices in our model in 2011F. Based on our sensitivityanalysis, a PLN10/m 3 decline in wood prices would increaseMondi’s EBIT by c.PLN22m.In our view, the market is underestimating the negative impact ofraw material pricing pressure on the company’s earnings in2010. We estimate 31% YoY and 89% YoY hikes in averagewood and recovered paper prices in 2010F, respectively. Weforecast a 2010F EBITDA margin of 16% versus marketexpectations of 22%.Price (19/07/10)Target price (12-mth)PLN74.0Previously PLN52.9PLN52.6Forecast total return -25.6%Quarterly previewWe expect an 11% QoQ increase in revenues, mainly driven byhikes in packaging paper prices (11% QoQ and 13% QoQgrowths in Kraftliner and Testliner prices, respectively). Weforecast improvement in gross margin from 23% in 1Q10 to 24%in 2Q10F mainly on widening spread between CCM paper andrecovered paper prices. 2Q10F average spread betweenTestliner and OCC recovered paper price reached €276/tonne vs€258/tonne in 1Q10. Net profitability should be burdened byPLN12m interest costs.2Q10F results preview (due 11 August)(PLNm) 1Q10 2Q10FRevenues 474 526EBITDA 69 84EBIT 31 46Net profit 18 34EPS (PLN) 0.36 0.68Source: Company data, ING estimatesEarnings drivers and outlookFor 2010F, we forecast 20-30% YoY growth in averagepackaging paper prices, driven by a cyclical recovery in demandfor product. Given strong YoY growth rates for average CCMpaper prices in 2010F, we forecast an improvement in Mondi’sEBIT margin to 9%, from 7% in 2009 and the historical annualaverage of 17%. For 2011F, we assume a YoY rebound in EBITprofitability to 14%, driven mainly by a drop in recovered paperprices (we forecast a 30% YoY decline).Mondi trades at a 2010F PER of 30.6x and EV/EBITDA of 12.9x,which implies excessive 132% and 104% premiums to peers,respectively. Despite Mondi’s cost advantages (low payroll costs)we believe this premium is, to a large extent unwarranted, givenits large exposure to high wood prices. In 2011F, Mondi trades ata lower PER of 16.3x due to a YoY improvement in earningsdriven by an expected decline in recovered paper prices (30%YoY drop). However, we believe that the stock is still expensive,as it trades at a 61% premium to peers.Given Mondi’s rich valuations we maintain our SELLrecommendation with a target price of PLN52.6, the outcome ofDCF and peer comparison valuations, to which we apply equalweighting.Upside potential includes a stronger-than-expected easing inrecovered paper prices in 2H10 and PLN depreciation againstthe euro.Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com44

Polish Strategy Mondi July 2010NewsflowFinancialsDateDescriptionYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F1 Jul 2010 Appointment of new CFO12 Jul 2010 First working group session on change in forest law11 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Framondi 66.0ING OFE 10.4Aviva OFE 7.3Source: Company data, INGShare dataAvg daily volume (3-mth) 8,805Free float (%) 34.0Market cap (PLNm) 3,700Net debt (1F, PLNm) 511Enterprise value (1F, PLNm) 4,211Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance8580757065605550457/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Mondi is a leading European manufacturer of CCM(corrugated case material) paper used mainly in thepackaging industry. The company holds a 5% share inthe European CCM paper market. Mondi’s marginsare subject to EUR:PLN fluctuations as nearly 70% ofthe company’s revenues is denominated in euro.Mondi’s profitability is dependent on the price oftimber (17% of costs) and recovered paper (17% ofcosts); the main raw materials used in the productionof paper.RisksIntroduction of new wood sales policy by StateTreasury, PLN depreciation against the euro,stronger-than-expected easing of recovered papercosts in 2H10.Income statementRevenues 1,519 1,406 1,361 2,014 1,948 1,958EBITDA 400 306 218 327 428 454EBIT 296 195 100 176 277 304Net interest (4) (2) (15) (49) (41) (35)Associates 0 0 0 0 0 0Other pre-tax items 12 (18) (10) (1) 0 0Pre-tax profit 304 175 75 126 237 269Tax (58) (34) (3) (5) (10) (12)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 246 141 71 121 226 257Normalised net profit 246 141 71 121 226 257Balance sheetTangible fixed assets 869 1,445 1,821 1,804 1,804 1,803Intangible fixed assets 8 6 5 4 4 4Other non-current assets 15 25 13 18 18 18Cash & equivalents 48 15 30 203 218 171Other current assets 427 390 410 464 545 537Total assets 1,367 1,881 2,280 2,494 2,589 2,534Short-term debt 101 110 33 40 40 40Other current liabilities 182 345 309 393 461 455Long-term debt 4 196 674 674 595 516Other long-term liabilities 98 165 79 81 81 81Total equity 982 1,066 1,184 1,305 1,411 1,442Total liabilities & equity 1,367 1,881 2,280 2,494 2,589 2,534Net working capital 232 32 100 69 81 80Net debt (cash) 57 291 677 511 417 385Cash flowCash flow EBITDA 400 306 218 327 428 454Tax, interest & other 77 30 38 62 57 53Change in working capital (36) 54 (6) 31 (12) 1Net cash from op activities 327 301 203 310 365 409Capex (75) (524) (554) (134) (150) (150)Net acquisitions 0 0 0 0 0 0Net financing cash flow 37 195 366 7 (79) (79)Dividends & minority distrib'n (270) 0 0 0 (121) (226)Net ch in cash & equivalents 28 (33) 15 182 15 (47)FCF 233 (202) (346) 162 254 292Performance & returnsRevenue growth (%) 5.2 -7.4 -3.2 48.0 -3.3 0.55Normalised EPS growth (%) -8.8 -42.6 -49.5 69.2 87.5 13.7Normalised EBITDA mgn (%) 26.3 21.7 16.0 16.2 22.0 23.2Normalised EBIT margin (%) 19.5 13.8 7.3 8.7 14.2 15.5ROACE (%) 27.6 15.8 6.1 9.0 13.6 15.0Reported ROE (%) 24.8 13.8 6.3 9.7 16.7 18.0Working capital as % of sales 15.3 2.3 7.4 3.4 4.2 4.1Net debt (cash)/EBITDA (x) 0.14 0.95 3.1 1.6 0.98 0.85EBITDA net interest cvg (x) 105.4 189.1 14.5 6.7 10.5 13.1ValuationEV/revenue (x) 2.5 2.8 3.2 2.1 2.1 2.1EV/normalised EBITDA (x) 9.4 13.1 20.1 12.9 9.6 9.0EV/normalised EBIT (x) 12.7 20.5 44.0 23.9 14.8 13.5Normalised PER (x) 15.0 26.2 51.8 30.6 16.3 14.4Price/book (x) 3.8 3.5 3.1 2.8 2.6 2.6Dividend yield (%) 7.3 0.0 0.0 0.0 3.3 6.1FCF yield (%) 6.3 n/a n/a 4.4 6.9 7.9Per share dataReported EPS (PLN) 4.92 2.82 1.43 2.41 4.53 5.15Normalised EPS (PLN) 4.92 2.82 1.43 2.41 4.53 5.15Dividend per share (PLN) 5.40 0.00 0.00 0.00 2.41 4.53Equity FCFPS (PLN) 5.04 (4.47) (7.03) 3.51 4.29 5.18BV/share (PLN) 19.64 21.33 23.69 26.10 28.22 28.84Source: Company data, ING estimates45

Polish Strategy Stalprodukt July 2010StalproduktDelayed reboundPreviously: SellHoldPoland Market cap PLN2,844.7mBasic Resources Bloomberg STP PWAlthough prices of Stalprodukt’s main product transformersteel have stabilised in 3Q10, we believe the company is notin a position to pass on higher raw material prices to endcustomers. Unless prices rebound beginning from 4Q10,resulting in improving profitability, we believe Stalproduktwill not be a convincing growth story in 2011. HOLD.Investment caseStalprodukt is facing a challenging 2010 with an expected 39%YoY decline in EPS, primarily related to declining transformersteel prices, which as of end-1H10 dropped 44% from its peak in2008 but has finally stabilised at the beginning of 3Q10. A pickupin prices is likely beginning from 4Q10 and the extent ofincreases will determine EPS growth in 2011. We currently see2011F EPS growing 25% YoY.Transformer steel segment: The core segment of activity with a41% share of 2009 revenues and 84% share of last year's grossprofit. After a 20% decline in 2H09 prices decreased by another20% in 1H10. The CEO expects a stabilisation at levels slightlyabove EUR1,700 per tonne in 3Q10. Still, pressure on profitmargins continues to be immense as transformer manufacturersare not willing to accept price hikes. In our view, the company isjust not in a position to pass higher raw material costs to itscustomers, which should result in declining profitability QoQ in3Q10. We forecast a 32% gross margin in 3Q10 compared with36% in 1Q10 and 52% reported in 2Q09. A positive developmentsupporting the stabilisation theory is improving sales volumes,which increased by 37% YoY in 2Q10F. In all of 2010Stalprodukt expects 80,000 tons of volume sales (compared with62,000 reported in 2009) and hopes for at least 10,000 tons YoYhigher volume sales in 2011. Our forecasts are broadly in linewith management assumptions and we see 81,000 tons and90,000 tons of sales volumes in 2010F and 2011F, respectively.Steel profiles: Following difficult market conditions in 2009 (4%YoY decline in volume sales in 2009) demand improvedbeginning from 2010. As a result, we expect sales volumegrowth to approach 30% YoY in 1H10, impressive despite thelow base in 1H09. According to Stalprodukt, it is difficult toprovide an outlook for 2H10 given macroeconomic uncertaintiesbut the company hopes for at least double-digit growth rates YoYin 2010 vs the 210,000 sales volumes in 2009.Following the inability to pass on higher raw material prices tocustomers in 3Q10, we lower our 2010 and 2011 EPS estimatesby 6% and 10% to PLN175m and PLN218m, respectively.Based on our current forecasts Stalprodukt trades at 2011F and2012F EV/EBITDA of 8.4x and 6.8x, respectively, a 46% and 24%premium to peers. Our 12-month TP is based on DCF and peers’valuation with an 80% and 20% share applied to the methods.Price (19/07/10)Target price (12-mth)PLN423.00Previously PLN393.00PLN406.99Forecast total return -1.9%2Q10 previewRevenues are likely to be solely driven by steel profiles(PLN231m in 2Q10 compared with PLN173m in 2Q09) while thetransformer steel segment shold see a contraction in the top lineYoY following an over 30% YoY decline in price levels, which willnot be offset by the strong 5,000 ton increase in volume sales.We forecast a deterioration of profit margins (EBIT margin at14.6% vs 22.8% reported in 2Q09) primarily due to a sharp dropof transformer steel price levels but also an unfavourableEUR/PLN exchange rate (4.00 vs 4.44 in 2Q09).2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenues 411.0 431.8EBITDA 103.1 73.5EBIT 93.7 63.0Net profit 75.0 52.0EPS 11.2 7.7Source: Company data, ING estimatesEarnings drivers and outlookPrice pressure on transformer steel products will negatively affectStalprodukt’s profit margins in 2010F. We currently forecast a15.6% EBIT margin in 2010F versus 22.9% reported in 2009,primarily due to a transformer steel gross margin decrease, whichshould drive margins down to 31% versus 53% reported in 2009.In 2011F revenues should increase by 16% YoY to PLN1.9bn,driven by a recovery of transformer steel prices. We believe thecompany will be in a position to raise transformer steel prices by12.2% YoY. Also, volumes should improve to 90,000 tons sold in2011F vs 80,000 in 2010F. In steel profiles we raise our volumesales forecasts by 20,000 tons to 260,000 tons.Following price increases we believe profitability will improvemoderately in 2011F with EBIT/net profit margin growing to16.5% and 11.2%, respectively. Both transformer steel and steelprofiles segments should see stronger gross margins in 2011F at33% and 8%, respectively.The main earnings and share price driver will be price levels oftransformer steels. If Stalprodukt is in a position to increaseprices beginning from 4Q10 the impact on results would beimpressive as the company has a high operating leverage. Anincrease by EUR200 per tonne increases net profit by PLN56m.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com46

Polish Strategy Stalprodukt July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 August 2Q10 results10 November 3Q10 resultsSource: Company data, INGMajor shareholders (%)Arcelor Mittal Poland 38.96STP Investment 33.49Source: Company data, INGShare dataAvg daily volume (3-mth) 1,311Free float (%) 38.0Market cap (PLNm) 2,844.7Net debt (1F, PLNm) (94)Enterprise value (1F, PLNm) 2,777Dividend yield (1F, %) 1.9Source: Company data, ING estimatesShare price performance750700650600550500450400350Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePriceWIG (rebased)Stalprodukt is Europe’s third-largest manufacturer ofgrain-oriented electrical steel, the main material usedin the construction of distribution and powertransformers. The company is also among the top tenPolish steel distributors and controls close to 50% ofthe Polish road guard rails market.RisksThe company generates approximately 50% ofrevenues from export activities but applies onlynatural hedging. We estimate that Stalprodukt’s nonhedgedexposure to EUR movements exceedsPLN100m. A movement in the EUR/PLN exchangerate would have a positive (in case of further PLNweakness vs EUR) or negative (appreciation of PLNcurrency) impact on company’s bottom line.Income statementRevenues 1,630 1,781 1,658 1,669 1,943 1,892EBITDA 451 448 380 260 321 377EBIT 427 425 348 210 261 318Net interest 7 5 5 4 3 8AssociatesOther pre-tax items 0 0 0 0 0 0Pre-tax profit 434 430 353 214 264 326Tax (83) (82) (68) (39) (47) (59)Minorities (0.1) 0.2 (2) 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 350 349 283 175 217 267Normalised net profit 350 349 283 175 217 267Balance sheetTangible fixed assets 541 819 977 1,035 1,035 1,035Intangible fixed assets 1 3 2 2 2 2Other non-current assets 11 11 9 9 9 9Cash & equivalents 192 72 114 125 195 353Other current assets 372 446 466 521 605 577Total assets 1,116 1,351 1,568 1,692 1,846 1,977Short-term debt 14 25 27 27 27 27Other current liabilities 163 163 181 183 208 180Long-term debt 14 12 5 5 5 5Other long-term liabilities 96 32 11 11 11 11Total equity 830 1,118 1,344 1,466 1,597 1,755Total liabilities & equity 1,116 1,351 1,568 1,692 1,847 1,978Net working capital 224 309 315 367 427 427Net debt (cash) (164) (35) (83) (94) (163) (322)Cash flowCash flow EBITDA 451 448 380 260 321 377Tax, interest & other 77 76 63 35 44 51Change in working capital (20) (137) (24) (52) (60) 0.1Net cash from op activities 355 234 293 173 217 326Capex (232) (301) (190) (109) (60) (59)Net acquisitions 0 0 0 0 0 0Net financing cash flow (0.7) (23) (10) 0 0 0.0Dividends & minority distrib'n (67) (81) (53) (53) (87) (109)Net ch in cash & equivalents 53 (172) 42 11 70 159FCF 116 (72) 98 60 154 259Performance & returnsRevenue growth (%) 24.3 9.2 -6.9 0.67 16.4 -2.6Normalised EPS growth (%) 27.9 -0.32 -18.9 -38.1 24.0 23.2Normalised EBITDA mgn (%) 27.7 25.2 22.9 15.6 16.5 19.9Normalised EBIT margin (%) 26.2 23.9 21.0 12.6 13.4 16.8ROACE (%) 58.6 42.2 27.5 14.6 16.7 18.6Reported ROE (%) 50.0 36.4 23.5 12.7 14.4 16.2Working capital as % of sales 13.8 17.4 19.0 22.0 22.0 22.6Net debt (cash)/EBITDA (x) (0.36) (0.08) (0.22) (0.36) (0.51) (0.85)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.6 1.6 1.7 1.7 1.4 1.3EV/normalised EBITDA (x) 5.9 6.3 7.3 10.7 8.4 6.8EV/normalised EBIT (x) 6.3 6.7 8.0 13.2 10.4 8.0Normalised PER (x) 8.1 8.2 10.1 16.3 13.1 10.6Price/book (x) 3.4 2.6 2.2 2.0 1.8 1.6Dividend yield (%) 2.4 2.8 1.9 1.9 3.1 3.9FCF yield (%) 4.3 n/a 3.5 2.2 5.7 10.2Per share dataReported EPS (PLN) 52.06 51.89 42.06 26.02 32.26 39.75Normalised EPS (PLN) 52.06 51.89 42.06 26.02 32.26 39.75Dividend per share (PLN) 10.00 12.00 8.00 8.00 13.14 16.37Equity FCFPS (PLN) 18.26 (9.95) 15.35 9.54 23.34 39.77BV/share (PLN) 123.11 162.13 196.11 214.20 233.60 257.15Source: Company data, ING estimates47

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Polish Strategy July 2010Chemicals49

Polish Strategy Ciech July 2010CiechOvercapacity is keyPreviously SellHoldPoland Market cap PLN680mChemicals Bloomberg CIE PWWe lower our target price from PLN32.8 to PLN25.8 mainlyon higher than expected depreciation of soda ash prices hitby significant overcapacity. However, we upgrade Ciech toHOLD given the recent strong underperformance of thestock.Investment caseAn oversupply of soda ash led to a drop in product prices in1Q10. Soda ash contract prices declined from €205/t as of end2009 to €175/t in 1Q10. Thus the soda division gross margindropped from 20% in 4Q09 to 13% in 1Q10. This division’sprofitability was also impacted by poor margins generated byRomanian soda subsidiary Govora. Govora’s profitability was hitby strong downside pricing pressure from two soda factoriesowned by the main competitors: Solvay (in Bulgaria) andSisecam (in Turkey).In the organic products division we see a rebound in TDI pricesdriven by fairly balanced market fundamentals. TDI pricesreached nearly €2,300/t in 1Q10 vs the 2009 monthly average of€1,950/t. However, in our view, TDI prices peaked in 1H10 andwe do not rule out a downside correction in prices in comingmonths. Long term, the main risk is connected with additionalTDI capacities from the third-largest European TDI producer,Hungarian Borsodchem. Chinese company Wanhua purchaseda 38% stake in Borsodchem in order to enter the Europeanmarket. Wanhua intends to invest in the construction of a TDIproduction line of 200,000t annually. We think this may causelarge excess supply on the market, which may put downsidepressure on TDI prices.In April, Ciech signed an agreement with its banks on aPLN1.3bn debt restructuring. The main term of the agreementassumes a PLN400m decrease of Ciech’s debt by the end of thisyear. In our view this target will be very challenging. We thinkthat PLN200-250m issuance of shares or convertible bonds maybe necessary to meet this target. The company intends to reducedebt via divestments. The company wants to sell its 45% stake ininsurer PTU, fertilizer unit Fosfory, glass and silicates unitVitrosilicon and some smaller subsidiaries (Polfa, Boruta,Cheman, Transsoda and Transclean). In our view Ciech maycomplete the divestment of its stake in PTU in coming days. Weestimate PLN80m cash proceeds from this disposal.We expect a significant deterioration in the soda segment grossmargin from 22% in 2009 to 14% in 2010F. Moreover 2010F netprofitability should be burdened by high interest costs (ourforecast of PLN138m). Therefore we expect Ciech may suffer anet loss (PLN7m) this year. However, given that Ciech’s shareprice declined by 26% in the last three months we upgrade fromSell to Hold with a new TP of PLN25.8, the outcome of our DCFvaluation. Considering the risks connected with the stock we usea beta of 1.3 in our DCF valuation.Price (19/07/10)Target price (12-mth)PLN24.3Previously PLN32.8PLN25.8Forecast total return 6.0%Quarterly previewWe forecast a 1% QoQ decline in revenues, mainly attributableto lower TDI sales caused by temporary production line outage.We forecast 15,500t TDI sold in 2Q10F vs 17,300t in 1Q10. Weexpect a 20% QoQ decline in plant protection agents’ salescaused by the end of seasonal demand. We expect a PLN20mpositive impact on EBIT profitability from the sale of cavernassets in 2Q10F. We expect a similar QoQ gross margin of 14%in 2Q10F, as improvement in organic segment margin (driven bya strong performance from the resins division) should be offsetby a deterioration of agrochemical segment profitability (hit bypoor plant protection agents’ margins). Net profitability should beburdened by PLN30m interest costs, PLN12m negative FXdifferences and a PLN8m loss on sale of the stake in Tarnow.We do not rule out an impairment of Govora assets in 2Q10F(but do not include this in our forecasts).2Q10F results preview (due 31 August)(PLNm) 1Q10 2Q10FRevenues 962 950EBITDA 101 95EBIT 42 36Net profit (3) (14)EPS (PLN) n/a n/aSource: Company data, ING estimatesEarnings drivers and outlookGiven the recent significant deterioration of soda ash prices welower our forecast of 2010F soda division gross margin from 21%to 14%. Given the recent rally in TDI prices we upgrade ourforecasts of 2010F average TDI price from €2,150/t to €2,213/t.Thus we raise our 2010 organic division gross margin forecastfrom 10% to 12%.In 2010 and 2011 we forecast a respective PLN51m andPLN10m positive impact on EBIT margin from the sale of cavernassets. Given the expected squeeze in soda division profitabilitywe downgrade our forecast of 2010F normalised group EBITDAby 14% to PLN355m. Considering higher credit margins we raiseour expectations of interest costs by 17% to PLN138m.Therefore we anticipate a normalised net loss of PLN41m in2010F vs an earlier expected PLN17m net profit.The main upside potential is connected with the successfulcompletion of divestments. We estimate PLN162m cashproceeds from sale of Ciech assets (excluding Fosfory andVitrosilicon), which boosts our DCF valuation.Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com50

Polish Strategy Ciech July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F21 June 2010 Appointment of new CFO14 May 2010 Signed a letter of intent with Tarnow on saleof Fosfory29 April 2010 Conversion of FX options into credits26 April 2010 Signed an agreement on debt restructuring31 August 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 36.7Pioneer Pekao IM 19.6PZU OFE 6.1Source: Company data, INGShare dataAvg daily volume (3-mth) 10,051Free float (%) 63.3Market cap (PLNm) 680Net debt (1F, PLNm) 1,652Enterprise value (1F, PLNm) 2,369Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance4540353025207/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Ciech is one of the largest chemical manufacturers inPoland. It has a diversified product portfolio, but themost important products are soda ash (32% ofrevenues, used in glass production) and TDI (12% ofrevenues, used mainly in the furniture and automotiveindustries). Nearly 50% of sales are dedicated toforeign markets, therefore the company is exposed toEUR:PLN and USD:PLN fluctuations. The StateTreasury holds a 37% stake in the company.RisksUpside risks: successful completion of divestments(PTU, Fosfory, Vitrosilicon), quicker than expectedrebound in soda ash prices.Downside risks: share issuance, expansion of TDIcapacities by Borsodchem, correction in TDI prices.Income statementRevenues 3,415 3,787 3,684 3,931 3,903 3,886EBITDA 226 450 365 397 392 399EBIT 46 247 135 161 155 160Net interest (31) (99) (122) (132) (131) (132)Associates 0 0 0 0 0 0Other pre-tax items 6 (151) (98) (36) 0 0Pre-tax profit 22 (4) (84) (7) 24 28Tax (48) (24) (4) 0 (5) (5)Minorities (2) (10) 7 0 0 0Other post-tax items 0 0 0 0 0 0Net profit (28) (39) (82) (7) 19 23Normalised net profit 181 28 (97) (41) 12 20Balance sheetTangible fixed assets 1,964 2,383 2,409 2,424 2,437 2,448Intangible fixed assets 531 193 165 156 156 156Other non-current assets 156 190 184 158 158 158Cash & equivalents 124 112 132 141 12 24Other current assets 1,458 1,468 1,134 1,129 1,162 1,155Total assets 4,234 4,347 4,024 4,007 3,924 3,941Short-term debt 453 1,331 1,000 1,131 1,000 1,000Other current liabilities 877 881 919 960 987 982Long-term debt 766 339 666 662 662 662Other long-term liabilities 1,025 897 579 402 402 402Total equity 1,112 899 860 853 873 895Total liabilities & equity 4,234 4,347 4,024 4,007 3,924 3,941Net working capital 377 515 212 167 172 171Net debt (cash) 1,095 1,558 1,534 1,652 1,650 1,638Cash flowCash flow EBITDA 226 450 365 397 392 399Tax, interest & other 285 61 223 112 143 138Change in working capital (122) (148) 165 45 (5) 1Net cash from op activities 243 (30) 397 248 252 262Capex (220) (403) (244) (250) (250) (250)Net acquisitions 0 0 0 0 0 0Net financing cash flow 357 439 (68) (48) (131) 0Dividends & minority distrib'n (60) (58) 0 0 0 0Net ch in cash & equivalents (37) (75) 11 9 (129) 12FCF (116) (101) 72 144 108 119Performance & returnsRevenue growth (%) 57.1 10.9 -2.7 6.7 -0.73 -0.44Normalised EPS growth (%) 7.1 -84.7 n/a n/a n/a 71.2Normalised EBITDA mgn (%) 14.2 10.5 8.1 8.8 9.8 10.2Normalised EBIT margin (%) 8.9 5.1 1.9 2.8 3.7 4.0ROACE (%) 14.7 7.9 2.7 4.3 5.6 6.2Reported ROE (%) -2.6 -4.0 -9.8 -0.80 2.3 2.7Working capital as % of sales 11.0 13.6 5.8 4.2 4.4 4.4Net debt (cash)/EBITDA (x) 4.9 3.5 4.2 4.2 4.2 4.1EBITDA net interest cvg (x) 7.4 4.5 3.0 3.0 3.0 3.0ValuationEV/revenue (x) 0.53 0.60 0.61 0.60 0.61 0.61EV/normalised EBITDA (x) 3.8 5.7 7.5 6.8 6.2 6.0EV/normalised EBIT (x) 6.0 11.7 32.6 21.4 16.3 15.0Normalised PER (x) 3.8 24.5 n/a n/a 58.8 34.4Price/book (x) 0.64 0.80 0.83 0.83 0.81 0.79Dividend yield (%) 8.6 8.5 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a 10.5 21.2 15.8 17.5Per share dataReported EPS (PLN) (1.01) (1.38) (2.92) (0.234) 0.689 0.811Normalised EPS (PLN) 6.46 0.990 (3.48) (1.46) 0.413 0.707Dividend per share (PLN) 2.10 2.07 0.00 0.00 0.00 0.00Equity FCFPS (PLN) 0.812 (15.46) 5.48 (0.058) 0.054 0.427BV/share (PLN) 38.13 30.34 29.39 29.16 29.85 30.66Source: Company data, ING estimates51

Polish Strategy Police July 2010PoliceStill not profitable at EBIT lineMaintainedHoldPoland Market cap PLN373mChemicals Bloomberg PCE PWWe remain cautious on Police’s ability to achieve breakevenat the EBIT line this year given a slow recovery in NPKfertilizer demand and demanding raw material prices.Considering the strong underperformance of the stock overthe past three months, we maintain our HOLD rating,however, with a lower target price of PLN5.1.Investment caseIn 1Q10, Police did not manage to record positive EBITprofitability in spite of a seasonal rebound in fertilizer demand.Growth in fertilizer prices (10-20% QoQ) was not enough tocover high raw material costs (mainly gas, potash salt andphosphate rock). It is also worth noting that 1Q10 EBITprofitability was strengthened by some one-offs, including aPLN11m inventories writeback.2010F profitability might come under pressure due to demandingraw material prices that may not be counterbalanced by a reboundin fertilizer prices. From 1 June, the company has seen a 3% gastariff hike (17% of operating costs). The price of phosphate rock(16% of operating costs) is on the rise and hit US$125/tonne versusthe 2009 average of US$96/tonne. Therefore, we raise our forecast2010 phosphate rock price from US$75/tonne to US$110/tonne. Asignificant drop in the 1Q10 price of potash salt (17% of operatingcosts) came to a halt at US$345/tonne, still significantly higherthan the historical average of US$240/tonne. Moreover, we do notrule out a rebound in potash salt prices in the short term. One ofthe most important potash export associations, BPC, signed apotash supply contract with Vietnam at US$417/tonne. This couldsignal an upward trend in raw material prices.The company signed an agreement with the IndustrialDevelopment Agency to obtaining PLN150m funding. Police isobliged to pay off the loan by 25 November 2010. According tomanagement, the company will have an opportunity to prolongthe loan repayment deadline if the European Commissionapproves a restructuring plan prepared by the company. Therestructuring plan is based on the sale of non-core assets andemployment lay-offs, however, the company has not yetreleased details. In our model, we assume an optimistic scenarioand the company should manage to prolong the repaymentdeadline. We implement steady repayment of the loan over thenext five years. However, it is worth noting that Police cannotspend public aid on the repayment of a PLN119m gas debt(deadline of 31 August). In our view, the company may be forcedto pay off debt in non-cash form with the disposal of non-coreassets (power plant land or stakes in company’s subsidiaries).Given a worsening outlook for raw material prices, we lower ourtarget price from PLN6.2 to PLN5.1. However, considering thecompany’s strong underperformance of the past three months (a24% drop), we maintain our HOLD recommendation based onour DCF valuation.Price (19/07/10)Target price (12-mth)PLN5.0Previously PLN6.2PLN5.1Forecast total return 3.4%Quarterly previewWe forecast a 7% QoQ decrease in fertilizer revenues burdenedby a 10% QoQ average drop in fertilizer prices given a slowdownin demand. We assume 310,000 tonnes of fertilizer sold in2Q10F versus 314,000 tonnes in 1Q10. We estimate a 22%QoQ increase in titanium dioxide sales driven by 18% QoQhigher sales volumes and 3% QoQ growth in product prices. Weforecast PLN34m negative EBIT (versus a PLN8m loss onoperating activity in 1Q10) mainly on depreciation of fertilizerprices, higher phosphate rock and sulphur consumption costsand a lack of inventories writeback effect. We anticipate an FXderivatives impact on net profitability at close to zero. Thecompany has already closed its majority exposure of FX optionsgenerating negative cash flow of PLN21m in 1Q10.2Q10F results preview (due 20 August)(PLNm) 1Q10 2Q10FRevenues 420 406EBITDA (14) (12)EBIT (8) (34)Net profit (3) (36)EPS (PLN) n/a n/aSource: Company data, ING estimatesEarnings drivers and outlookGiven the recent rally in global wheat prices caused by concernsregarding adverse weather in Canada, Russia and Kazakhstan,we expect fertilizer prices to recover in 2H10. We expect 10%YoY growth in the average price of both urea and DAP in 2010F.However, in our view, 2010F fertilizer hikes will be largely offsetby demanding levels of raw materials (gas, phosphate rock andsulphur). We anticipate 2%, 15% and 176% YoY growth in2010F average price of gas, phosphate rock and sulphur,respectively. In our opinion, NPK fertilizer prices may continue tobe under pressure in the short term given slowly progressingapplication of potash by local farmers. We anticipate a 10% YoYdecline in the average 2010F NPK fertilizer price. Thus we donot expect a return to positive EBIT profitability this year. Weforecast PLN75m negative EBIT in 2010F.We anticipate a negative EBIT contribution from the titaniumdioxide segment this year, weakened by YoY 2010F PLNappreciation against the euro (4.05 in 2010F versus 4.34 in2009) and high fixed costs. We do not rule out that thecompany’s restructuring plan may assume the sale of titaniumdioxide assets.Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com52

Polish Strategy Police July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F8 June 2010 PLN150m loan agreement signed with ARP30 June 2010 Gas debt repayment agreement with PGNiG30 June 2010 PLN162m credit lines prolonged9 July 2010 Management approval of restructuring plan20 August 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 59.4Industrial Development Agency 8.8PZU OFE 5.6ING TFI 5.1Source: Company data, INGShare dataAvg daily volume (3-mth) 84,535Free float (%) 31.8Market cap (PLNm) 373Net debt (1F, PLNm) 239Enterprise value (1F, PLNm) 617Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance109876547/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Police is a major producer of multi-componentfertilizers (63% of revenues) and urea (16% ofrevenues). In addition, Police manufactures titaniumdioxide (9% of revenues, used in the constructionindustry) and ammonia (8% of revenues). Police’sprofitability is largely dependent on the price of potashsalt (19% of costs), gas (18% of costs) and phosphaterock (14% of costs). A large part of the company’ssales is dedicated to export (50% of revenues),therefore, Police is sensitive to EUR:PLN andUSD:PLN fluctuations.RisksUpside risks: PLN depreciation against the euro andUS dollar, long-term recovery in grain prices and the,successful disposal of non-core assets.Income statementRevenues 1,822 2,404 1,487 1,741 1,970 1,905EBITDA 235 230 (328) 3 109 106EBIT 187 164 (409) (75) 31 28Net interest (2) (3) (7) (9) (13) (13)Associates 0 0 0 0 0 0Other pre-tax items 19 (121) 9 6 0 0Pre-tax profit 204 40 (407) (78) 17 15Tax (4) (13) (17) 0 (3) (3)Minorities (0.5) 0.1 0.8 0.6 0.6 0.6Other post-tax items 0 0 0 0 0 0Net profit 200 28 (423) (78) 15 13Normalised net profit 200 28 (423) (78) 15 13Balance sheetTangible fixed assets 727 810 736 738 741 743Intangible fixed assets 3 5 4 4 4 4Other non-current assets 71 111 101 103 103 103Cash & equivalents 156 139 38 60 42 22Other current assets 403 801 379 385 442 462Total assets 1,359 1,867 1,258 1,291 1,332 1,334Short-term debt 0.3 149 6 292 262 232Other current liabilities 273 527 477 376 432 451Long-term debt 4 0.0 74 7 7 7Other long-term liabilities 149 228 161 155 155 155Total equity 933 963 539 461 476 489Total liabilities & equity 1,359 1,867 1,258 1,291 1,332 1,334Net working capital 121 272 (99) 9 10 11Net debt (cash) (151) 10 42 239 228 217Cash flowCash flow EBITDA 235 230 (328) 3 109 106Tax, interest & other (81) 44 (3) 5 20 18Change in working capital 12 (151) 414 (108) (1) (0.5)Net cash from op activities 174 (29) 45 (115) 90 90Capex (152) (164) (74) (80) (80) (80)Net acquisitions 0 0 0 0 0 0Net financing cash flow (57) 171 (79) 218 (29) (30)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents (31) (16) (104) 21 (19) (20)FCF 92 (135) 3 (139) 21 20Performance & returnsRevenue growth (%) 9.0 31.9 -38.2 17.1 13.2 -3.3Normalised EPS growth (%) n/a -86.0 n/a n/a n/a -12.9Normalised EBITDA mgn (%) 12.9 9.6 -22.1 0.15 5.5 5.6Normalised EBIT margin (%) 10.3 6.8 -27.5 -4.3 1.6 1.5ROACE (%) 21.9 16.0 -47.3 -10.9 4.1 3.8Reported ROE (%) 24.4 3.0 -56.8 -15.7 3.2 2.7Working capital as % of sales 6.6 11.3 -6.6 0.51 0.52 0.56Net debt (cash)/EBITDA (x) (0.64) 0.04 n/a 93.2 2.1 2.1EBITDA net interest cvg (x) 104.4 81.7 n/a 0.28 8.1 8.3ValuationEV/revenue (x) 0.12 0.16 0.28 0.35 0.31 0.31EV/normalised EBITDA (x) 0.97 1.7 (1.3) 240.6 5.6 5.6EV/normalised EBIT (x) 1.2 2.4 (1.0) (8.2) 19.7 21.5Normalised PER (x) 1.9 13.3 n/a n/a 25.5 29.3Price/book (x) 0.40 0.39 0.70 0.82 0.79 0.77Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) 24.7 n/a 0.8 n/a 5.7 5.4Per share dataReported EPS (PLN) 2.67 0.373 (5.64) (1.03) 0.195 0.170Normalised EPS (PLN) 2.67 0.373 (5.64) (1.03) 0.195 0.170Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) 0.295 (2.56) (0.394) (2.60) 0.137 0.130BV/share (PLN) 12.36 12.75 7.11 6.07 6.27 6.44Source: Company data, ING estimates53

Polish Strategy Pulawy July 2010PulawyLooking for earnings reboundPreviously HoldBuyPoland Market cap PLN1,309mChemicals Bloomberg ZAP PWWe expect a YoY recovery in FY11F earnings driven by:(1) a rebound in nitrogenous fertilizer prices; (2) a revival inthe performance of the chemical segment; and (3) a gradualimprovement in Pulawy’s competitiveness caused byexpected short-term growth in European spot gas prices.Given these drivers and the strong YTD underperformanceof the stock, we upgrade our Pulawy rating from Hold to BUYwith a new target price of PLN78.9, offering 16% upside.Investment caseWe anticipate a YoY increase in nitrogenous fertilizer prices inFY11F caused by a short-term rebound in grain prices due toconcerns about low harvests in some regions. The USDA (USDepartment of Agriculture) revised down its 2010/11 global grainending stock forecast from 482m tonnes to 464m tonnes (versus471m tonnes in 2009/10) due to lower estimated yields followingless favourable weather in FSU-12, Canada, EU-27 and India. Inour view, growth in grain prices should boost the purchasingpower of farmers in the autumn fertilizer season and thus fuelnitrogenous fertilizer prices in the short term. Following a 20-40%YoY plummet in the average nitrogenous fertilizer price in FY10Fwe assume a 10-15% YoY growth in FY11F. In addition,following strong declines in 1H10, we anticipate a recovery inEuropean gas spot prices, which should led to a narrowing of thegap between local gas prices and gas spot valuations. Thiswould improve Pulawy’s export competitiveness. In FY11F, weassume a 20% YoY increase in sales volumes of Pulawy’s mainexport product, UAN (following a 48% YoY decline in FY10F).We forecast a return to positive EBIT profitability in Pulawy’schemical segment in FY11F. Currently, we notice an increase inmelamine prices driven by healthy demand. The melaminecontract price has increased by 16% to €1,130/tonne at end-4QFY10. We forecast 20% YoY growth in the FY11F averagemelamine price. European platted caprolactam prices reached apeak in 2HFY10 and rose by 16% to US$2,410/tonne supportedby a tight product market. In our view, caprolactam prices mayease in coming months, burdened by retreating benzene prices.However, product prices should stay high, keeping marginsrelatively high. We assume a 5% YoY decline in the averagecaprolactam price to US$2,189/tonne in FY11F versus anhistorical monthly average of US$2,023/tonne.Based on our estimates, Pulawy trades at FY11F normalisedPER (excluding proceeds from the sale of ERU certificates) of13.2x, implying a 12% premium to global peers. However, onFY11F EV/EBITDA, the company trades at 6.1x, or a 10%discount to global peers. In our view, this discount is to largeextent unjustified given expected significant rebound in earningsin FY11F. We forecast PLN207m normalised EBITDA in FY11F(versus PLN23m in FY10F). In our view, a FY10F P/BV of 0.8xlooks attractive considering the lack of financial leverage and thecompany’s large exposure to resilient nitrogenous fertilizer sales.Price (19/07/10)Target price (12-mth)PLN68.5Previously PLN78.3PLN78.9Forecast total return 16.2%Quarterly previewWe forecast a 9% YoY decrease in nitrogenous fertilizer salesburdened by lower sales volumes and a decrease in productprices. The company implemented an 18-19% decline in fertilizerprices in June after a seasonal hike in product prices. In ourview, Pulawy may return to positive EBIT profitability in itschemical segment in 4QFY10F fuelled by demanding melamineand caprolactam prices and strong sales volumes. 4QFY10FCOGS may be lowered by around PLN50m value of ERUcertificates generated by the company between May 2009 andMay 2010.4QFY10F results preview (due 2 September)Yr to Jun (PLNm) 3QFY10 4QFY10FRevenues 599 545EBITDA 63 81EBIT 44 62Net profit 39 54EPS (PLN) 2.05 2.82Source: Company data, ING estimatesEarnings drivers and outlookWe forecast a YoY increase in FY11F normalised EBITDA toPLN207m (versus PLN23m in FY10F). We estimate FY11Fnormalised net profit at PLN99m versus PLN23m normalised netloss in FY10F. In our view, FY11F earnings should be driven bya recovery in fertilizer prices and sales volumes caused by anarrowing gap between local gas prices and European spotvaluations. We forecast 6% YoY growth in nitrogenous fertilizersales volumes in FY11F.We assume large capex of PLN366m and PLN260m in FY10Fand FY11F, respectively, to be spent on the construction of anoxygen ammonia urea plant and new fertilizer complex. Theoxygen ammonia urea plant (PLN236m capex) should startoperation in January 2011. Thanks to the investment, ammoniaand urea capacities will be increased by 170,000 and 270,000tonnes, respectively. It will be the base for the production of350,000 tonnes of sulphur nitrogen based fertilizers (PLN170mcapex) from FY13F. According to the company it should bringPLN210-290m revenues annually.Given that the stock declined by 12%YTD (underperforming themarket by 15ppt) and our expectations of an earnings rebound inFY11F, we rate Pulawy at BUY with a target price of PLN78.9(the outcome of DCF and peer comparison valuations, to whichwe apply equal weighting).Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com54

Polish Strategy Pulawy July 2010NewsflowDateDescriptionFinancialsYr to Jun (PLNm) 2007 2008 2009 2010F 2011F 2012F2 Jun 2010 Rejection of Pulawy bid for Anwil by PKN Orlen9 Jul 2010 PLN320m contract for the sale of melaminesigned23 Jul 2010 Deadline for placing bids for ST stake in Pulawy2 Sep 2010 4QFY10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 50.7Kompania Weglowa 9.9ING OFE 5.2Mennica Polska 5.2Source: Company data, INGShare dataAvg daily volume (3-mth) 6,333Free float (%) 39.4Market cap (PLNm) 1,309Net debt (1F, PLNm) (132)Enterprise value (1F, PLNm) 1,178Dividend yield (1F, %) 0.9Source: Company data, ING estimatesShare price performance12011010090807060Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePriceWIG (rebased)Pulawy is a manufacturer of nitrogenous fertilizers(over 50% of revenues) and chemical products (40%of revenues: caprolactam, used mainly in the textileindustry, and melamine, used in the constructionindustry). Around 50% of revenues are exposed toexports, therefore, the company is sensitive toPLN:EUR moves. Pulawy is dependent on gas prices,which constitute 40% of the company’s operatingcosts.RisksA decrease in global gas spot prices; a lower-thanexpectedrebound in nitrogenous fertilizer prices; adrop in grain prices; joint privatisation with Police;additional global capacities of nitrogen; and a delay inposting profits from the sale of ERU certificates.Increase in gas tariff in 4Q10.Income statementRevenues 2,205 2,504 2,397 2,052 2,370 2,482EBITDA 251 433 407 110 252 264EBIT 151 359 338 37 160 163Net interest 13 23 41 25 8 3Associates 0 0 0 0 0 0Other pre-tax items (6) 19 (139) (2) 0 0Pre-tax profit 159 401 241 61 168 166Tax (28) (71) (47) (14) (32) (32)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 130 331 195 47 136 135Normalised net profit 130 331 195 (23) 99 100Balance sheetTangible fixed assets 620 662 898 1,192 1,360 1,459Intangible fixed assets 8 11 14 14 23 23Other non-current assets 30 112 22 21 48 48Cash & equivalents 450 580 575 133 55 17Other current assets 556 602 683 634 630 691Total assets 1,666 1,968 2,193 1,993 2,115 2,238Short-term debt 48 60 0.2 0.4 0 0Other current liabilities 202 231 246 228 227 249Long-term debt 61 0.0 0.3 0.5 0 0Other long-term liabilities 99 137 181 108 108 108Total equity 1,255 1,540 1,765 1,657 1,781 1,882Total liabilities & equity 1,666 1,968 2,193 1,993 2,115 2,238Net working capital 314 323 437 406 403 443Net debt (cash) (341) (521) (575) (132) (55) (17)Cash flowCash flow EBITDA 251 433 407 110 252 264Tax, interest & other 15 86 70 (31) 7 32Change in working capital (61) (79) 35 31 2 (39)Net cash from op activities 148 336 320 106 205 197Capex (87) (107) (147) (366) (260) (200)Net acquisitions 0 0 0 0 0 0Net financing cash flow (65) (59) (83) (28) (10) 0.0Dividends & minority distrib'n (38) (32) (82) (156) (12) (34)Net ch in cash & equivalents 149 241 (293) (149) (78) (37)FCF 76 184 230 (175) (36) (6)Performance & returnsRevenue growth (%) 8.6 13.5 -4.3 -14.4 15.5 4.7Normalised EPS growth (%) -11.8 154.3 -41.2 n/a n/a 0.94Normalised EBITDA mgn (%) 11.4 17.3 17.0 1.1 8.7 8.9Normalised EBIT margin (%) 6.9 14.3 14.1 -2.4 4.8 4.9ROACE (%) 11.2 24.2 20.1 -2.9 6.7 6.6Reported ROE (%) 10.7 23.7 11.8 2.8 7.9 7.4Working capital as % of sales 14.2 12.9 18.2 19.8 17.0 17.8Net debt (cash)/EBITDA (x) (1.4) (1.2) (1.4) (1.2) (0.22) (0.07)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 0.44 0.32 0.31 0.57 0.53 0.52EV/normalised EBITDA (x) 3.9 1.8 1.8 51.6 6.1 5.8EV/normalised EBIT (x) 6.4 2.2 2.2 (23.7) 10.9 10.7Normalised PER (x) 10.1 4.0 6.7 n/a 13.2 13.0Price/book (x) 1.0 0.85 0.74 0.79 0.74 0.70Dividend yield (%) 2.9 2.5 6.3 11.9 0.90 2.6FCF yield (%) 5.8 14.0 17.5 n/s n/a n/aPer share dataReported EPS (PLN) 6.80 17.30 10.18 2.47 7.12 7.05Normalised EPS (PLN) 6.80 17.30 10.18 (1.22) 5.20 5.25Dividend per share (PLN) 2.00 1.70 4.30 8.14 0.617 1.78Equity FCFPS (PLN) 3.22 11.93 9.05 (13.60) (2.87) (0.166)BV/share (PLN) 65.68 80.58 92.35 86.67 93.18 98.45Source: Company data, ING estimates55

Polish Strategy Synthos July 2010SynthosWhere the rubber meets the roadMaintainedBuyPoland Market cap PLN2,514mChemicals Bloomberg SNS PWWe expect strong 2Q10F results fuelled by a rally in SBRprices, which should offset the high prices of raw materials.However, in our view, SBR prices have already reached theirpeaks and we do not rule out a downward correction in thecoming months. Despite this we still think that the marketunderestimates 2010F Synthos earnings. Our 2010F EBITDAand net income forecasts are both 12% higher than marketexpectations. We maintain our BUY recommendation andraise our target price slightly to PLN2.24.Investment caseIn 2Q10 European SBR contract prices increased by €400/tonneto €1,700-1,800/tonne due to tight supply and strong demand fromthe tyre replacement market. As of end May 2010, Europeanpassenger car tyre replacement grew by 9.8% YTD, driven bystock rebuilding by tyre dealers and significant consumption ofwinter tyres. The European SBR market was also strengthened bysolid export demand from the US and Asia. A strong USD versusEUR and high petrochemicals costs at these regions madeEuropean synthetic rubber more attractive to non-Europeanbuyers. In our view, the SBR price rally is running out of steam.We do not rule out product declines in the coming months, mainlyon retreating butadiene prices and falling Chinese demand. Asiantyre producers have ceased 3Q10 SBR contract negotiations andmet their raw material needs mainly on the cheap spot market. Inour view, it may put downside pressure on SBR contract prices inthe coming months. However, despite the expected declines, SBRprices should stay at relatively high levels compared withhistorical averages, supported by high feedstock costs andrelatively solid consumption of replacement tyres. We forecast anaverage SBR price of €1,500/t and €1,556/t in 2010/11F,respectively, versus a historical average of €1,180/t.The company took €57.5m of credit to be spent on theconstruction of a high quality rubber PBR production line. Thenew installation should start operations in mid-2011. Weestimate that the sale of PBR could add PLN40-50m EBIT in2012F. Thus we forecast 9/13/17% YoY growth in 2012FEBITDA, EBIT and net profit, respectively.In June the old butadiene installation was replaced by a new onethat allows Synthos’ Czech unit to produce 120,000 tonnes ofcommodity annually (vs 90,000 tonnes previously). Given thecurrent high price of butadiene, strengthened vertical integrationshould decrease SBR raw material costs in the coming quarters.Based on our forecasts, Synthos trades at 9.4x 2010F PER, asignificant 25% discount to global peers. We believe this discount isunjustified given 19% YoY growth in 2010F adjusted EPS. Given thehigher-than-expected rally in SBR prices in 2Q10, we raise ourforecast for the 2010F rubber segment EBIT margin from 15% to 16%.Given this, we increase our TP to PLN2.24 and maintain our BUY.Price (19/07/10)Target price (12-mth)PLN1.90Previously PLN2.22PLN2.24Forecast total return 17.8%Quarterly previewWe expect strong 2Q10F results, on the back of the strongperformance of the rubber segment. We forecast 2% QoQ growthin revenues to PLN840m, mainly on higher SBR, PS and EPSprices, which should be offset to an extent by lower sales volumesof rubber and weaker power sales. We forecast a 19% rubbersegment EBIT margin in 2Q10F vs 17% in 1Q10, mainly on thewidening spread between SBR and raw material (butadiene andstyrene) prices. We expect a 4% styrene plastics EBIT margin in2Q10F versus 2% in 1Q10, on the back of a revival in demandfor EPS and thus growth in product prices. Net profitabilityshould be burdened by PLN10-15m negative FX differences.2Q10F results preview (due 31 August)(PLNm) 1Q10 2Q10FRevenues 827 840EBITDA 153 164EBIT 101 111Net profit 95 77EPS (PLN) 0.07 0.06Source: Company data, ING estimatesEarnings drivers and outlookGiven the higher-than-expected rally in SBR prices in 2Q10, weincrease our forecast for the 2010F rubber segment EBIT marginfrom 15% to 16%. Thus we raise our forecast for 2010Fnormalised EBITDA by 2% to PLN502m. However, our forecastof 2010F normalised net income (PLN267m) remains flat giventhe addition of interest costs from new credit.For 2011F we forecast an 11% YoY decline in normalised EPS.This should be attributable to a slowdown in tyre demandfollowing the end of scrappage schemes (governmentprogrammes promoting the replacement of old cars). In our view,the negative impact on consumption of replacement tyres shouldmaterialise in 2011, putting pressure on rubber margins giventhat the RT market lags behinds the OE (original equipment)market by 9-15 months. We forecast a 14% rubber EBITsegment margin in 2011F (versus 16% in 2010F).Our forecasts for styrene plastics, dispersions and powersegment EBIT margins remain flat at 3/13/25%, respectively, inboth 2010F and 2011F.We value Synthos using a discounted cash flow model andmultiple comparison methodologies (2010F and 2011F PER andEV/EBITDA). Our target price is calculated using an equalweighting of our DCF and peer group valuations.Adam Milewicz Warsaw +48 22 820 5031 adam.milewicz@pl.ing.com56

Polish Strategy Synthos July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F11 Jun 2010 End of collective dispute with company’s tradeunions1 Jun 2010 Agreement signed to obtain €57.5m credit31 Aug 2Q10 resultsSource: Company data, INGMajor shareholders (%)Michal Solowow 56.9ING OFE 5.0Source: Company data, INGShare dataAvg daily volume (3-mth) 1,206,614Free float (%) 43.1Market cap (PLNm) 2,514Net debt (1F, PLNm) 297Enterprise value (1F, PLNm) 2,825Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance2.22.01.81.61.41.21.07/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Synthos is the largest supplier of E-SBR (emulsionstyrene butadiene rubber) in Europe with 32% marketshare. The company is a significant Europeanproducer of styrene plastics: EPS and PS with 11%and 5% market shares, respectively. Synthos rubbersupplies (46% of revenues, 58% of EBIT) are largelydedicated to the tyre industry. The main outlets forstyrene plastics (43% of revenues, 5% of EBIT) arethe construction and packaging industry. Synthospossesses two production plants in Poland and CzechRepublic. 30%, 20% and 50% of revenues are settledin PLN, CZK and EUR, respectively.RisksContinuation of intra-Solowow company transactions,a higher-than-expected decline in SBR prices in 2H10,PLN and CZK appreciation against the euro.Income statementRevenues 1,861 2,846 2,601 3,283 3,200 3,444EBITDA 136 265 323 502 472 513EBIT 41 141 178 350 311 352Net interest (3) (8) (5) (19) (16) (7)Other pre-tax items 375 (29) 36 20 0 0Pre-tax profit 413 104 209 351 295 345Tax 80 (13) (44) (67) (56) (66)Minorities (0.5) (0.5) (0.5) (0.5) (0.5) (0.5)Other post-tax items 0 0 0 0 0 0Net profit 493 91 164 284 238 279Normalised net profit 224 159 225 267 238 279Balance sheetTangible fixed assets 1,092 1,222 1,174 1,322 1,321 1,320Intangible fixed assets 64 9 12 23 23 23Other non-current assets 196 110 412 421 416 416Cash & equivalents 476 355 559 541 562 663Other current assets 685 994 790 967 1,066 1,092Total assets 2,514 2,690 2,947 3,274 3,387 3,514Short-term debt 706 2 190 0 0 0Other current liabilities 366 278 333 360 396 406Long-term debt 0.1 822 644 838 676 514Other long-term liabilities 135 90 126 140 140 140Total equity 1,307 1,498 1,653 1,937 2,175 2,454Total liabilities & equity 2,514 2,690 2,947 3,274 3,387 3,514Net working capital 272 496 451 608 670 686Net debt (cash) 230 469 275 297 114 (149)Cash flowCash flow EBITDA 136 265 323 502 472 513Tax, interest & other (517) 82 130 122 89 95Change in working capital 137 (174) 44 (156) (62) (17)Net cash from op activities 271 74 413 293 333 424Capex (665) (145) (161) (300) (160) (160)Net acquisitions 0 0 0 0 0 0Net financing cash flow 979 48 47 (8) (152) (162)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents 456 (75) 254 (18) 21 102FCF (384) (71) 173 (16) 191 270Performance & returnsRevenue growth (%) 58.8 52.9 -8.6 26.2 -2.5 7.6Normalised EPS growth (%) 105.7 -29.0 41.3 18.8 -10.8 17.0Normalised EBITDA mgn (%) 9.4 10.9 16.2 15.3 14.8 14.9Normalised EBIT margin (%) 4.3 6.5 10.6 10.7 9.7 10.2ROACE (%) 5.7 8.5 11.5 13.3 11.1 12.1Reported ROE (%) 47.5 6.6 10.5 15.9 11.7 12.1Working capital as % of sales 14.6 17.4 17.3 18.5 20.9 19.9Net debt (cash)/EBITDA (x) 1.7 1.8 0.85 0.59 0.24 (0.29)EBITDA net interest cvg (x) 46.0 34.8 61.4 26.1 29.2 70.6ValuationEV/revenue (x) 1.5 1.1 1.1 0.86 0.83 0.69EV/normalised EBITDA (x) 15.8 9.7 6.7 5.6 5.6 4.6EV/normalised EBIT (x) 34.6 16.2 10.2 8.1 8.5 6.8Normalised PER (x) 11.2 15.8 11.2 9.4 10.5 9.0Price/book (x) 1.9 1.7 1.5 1.3 1.2 1.0Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a 6.9 n/a 7.6 10.7Per share dataReported EPS (PLN) 0.372 0.069 0.124 0.214 0.180 0.211Normalised EPS (PLN) 0.170 0.120 0.170 0.202 0.180 0.211Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) (0.298) (0.054) 0.191 (0.005) 0.131 0.199BV/share (PLN) 0.976 1.12 1.24 1.45 1.63 1.84Source: Company data, ING estimates57

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Polish Strategy July 2010Construction &Materials59

Polish Strategy Budimex July 2010BudimexSafe and soundPreviously: BuyHoldPoland Market cap PLN2,272.0mConstruction & Materials Bloomberg BDX PWBudimex’s shares gained 28% YTD (incl. dividend), stronglyoutperforming its Polish peers. We believe the company willbe in a position to prevent margin deterioration in 2010 withan increase in the sales of residential units. Despite ourrating downgrade from Buy to HOLD, Budimex remains ourtop pick in the construction sector following attractivevaluations, sound financials and expectations of 2010-11Fearnings delivery ahead of consensus.Investment caseCEO Dariusz Blocher expects 2010 top-line growth at 10-20%YoY, which would imply up to PLN4.0bn revenues this year. Withexpectations of 18% YoY revenue growth in 2010 the market isin line with management’s assumptions.The CEO also believes Budimex will be in a position to improveits net profit margin YoY vs the 5.3% reported in 2009. Based onmarket consensus, net profit margin will drop to 4.8% and 2010net profit should reach PLN187m. In 2011 market consensussees EPS declining by 7% YoY. Our 2010F and 2011Fexpectations are 14% and 7%, respectively, ahead of net profitconsensus.With a portfolio of contracts amounting to PLN7.5bn, Budimexhas the highest backlog among Polish construction companies.As of beginning 2010 backlog amounted to PLN5.2bn andPLN3.2bn as of end 1H09. The strong increase is related to theaward of contracts worth PLN3.5bn over the last six monthscompared to PLN3.9bn new signings in 2009 and PLN2.9bn in2008. Current backlog is split into infrastructure (70% orPLN5.3bn), residential development (5% of backlog) and othergeneral construction contracts (25%). As of end May 2010, closeto 40% or PLN3.0bn of the company’s backlog consisted ofcontracts with an execution date in 2010.Despite a very harsh winter, Budimex posted solid 1Q10 resultsfollowing the sale of c.400 housing units vs 471 in 2009.Management believes that the residential development divisionwill be the major growth driver in 2010. Out of 930 housing unitsinventory (as of end-1Q10), Budimex plans to dispose of at least600 until year-end and approach 1,000 units sold this year. Withjust 300 units remaining for sale in 2011 residential developmentwill hardly provide a safety cushion for Budimex in times ofdeteriorating profitability of the infrastructure division. In 2012Budimex aims to reach 1,000 sold units again and has thus recentlyinitiated two new projects for 315 housing units and will launch up toanother four residential development projects in the coming months.Budimex expects 25% gross margin on new projects.Budimex seems attractively valued with 2010F PER of 10.6x or a28% discount to its peers. In 2011F following declining EPS thestock trades at a PER of 12.2x, still a 6% discount to its peers.Our DCF and peer valuation derived target price is PLN90.Price (19/07/10)Target price (12-mth)PLN89.00Previously PLN93.3PLN90.0Forecast total return 8.8%2Q10F results previewWe expect a strong set of results. There should be a growth inrevenues due to increasing backlog and more than double salesof residential units. We forecast higher EBIT and net profit YoYdespite a negative fx impact (PLN16m negative revaluation of fxinstruments compared to a PLN27m positive impact in 2Q09),driven by a higher contribution of the residential segment.2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenue 829.8 1,059.8EBITDA 56.6 60.0EBIT 51.2 54.8Net profit 37.1 47.8EPS 1.5 1.9Source: Company data, ING estimatesEarnings drivers and outlookThe market’s outlook of 4.8% net profit margin in 2010 andexpectations of strong margin deterioration in 2011 seems toopessimistic. Although we admit that following increased pressurefrom construction materials prices, and declining volume sales ofresidential units (300 expected in 2011F compared to 1,000envisaged in 2010F), the company is unlikely to beat 2010results next year, profitability deterioration should be smootherthan consensus expectations.We expect 22% YoY revenue growth in 2010F to PLN4.0bn andanother 7% to PLN4.3bn in 2011F. After a strong 1Q10,Budimex should post solid 2Q10 and 3Q10 numbers, resulting inPLN214m net profit in the entire 2010F (5.3% net profit margin).Following a declining contribution of the residential unit to EBITnext year (15% in 2011F vs 27% in 2010F), we estimate a 13%YoY decrease in 2011F EPS but remain 7% above consensusexpectations.In our view, Budimex remains a dividend story; in 2009 it paidPLN6.8 per share dividend (dividend yield of 7.6%). Given itsstrong net cash position we believe 2011 dividend will be similar.CEO Blocher confirmed recently that the company is looking foracquisition targets in the railway segment. Even if Budimex doesnot acquire a railway unit on too-high price expectations, webelieve it will get a foothold in the sector. Although negative inthe short term due to entry costs (we doubt that first contracts willbe profitable), Budimex should manage to run the railwayoperations at reasonable margins approaching 8% gross in thelong run.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com60

Polish Strategy Budimex July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 2Q10 results27 Oct 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)Ferrovial Agroman 59.1PZU pension fund 5.7Source: Company data, INGShare dataAvg daily volume (3-mth) 14,157Free float (%) 41.0Market cap (PLNm) 2,272.0Net debt (1F, PLNm) (1,089)Enterprise value (1F, PLNm) 1,183Dividend yield (1F, %) -7.6Source: Company data, ING estimatesShare price performance11510595857565Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePriceWIG (rebased)Budimex is the third-largest Polish constructioncompany in terms of revenues and the second-largestcontractor in road construction after Skanska. Thecompany is majority owned by the Spanish company,Ferrovial (with a 59% stake in the company).RisksSharp increase in construction materials prices ismain risk factor to company's profitability.Income statementRevenues 3,076 3,274 3,290 4,017 4,293 4,232EBITDA 52 54 222 276 229 196EBIT 28 32 201 253 205 172Net interest (16) 15 22 14 24 33AssociatesOther pre-tax items 2 3 2 0 0 0Pre-tax profit 14 49 224 268 230 205Tax 0.5 (32) (51) (54) (44) (39)MinoritiesOther post-tax items 0.9 0 0 0 0 0Net profit 15 17 174 214 186 166Normalised net profit 15 17 174 214 186 166Balance sheetTangible fixed assets 201 192 173 213 235 247Intangible fixed assets 5 4 4 4 4 4Other non-current assets 300 267 341 341 341 341Cash & equivalents 539 826 1,150 1,252 1,288 1,296Other current assets 1,299 1,998 1,672 1,790 1,918 1,893Total assets 2,344 3,286 3,340 3,600 3,786 3,780Short-term debt 106 136 63 63 63 63Other current liabilities 1,386 2,154 2,272 2,623 2,846 2,805Long-term debt 171 255 230 100 50 50Other long-term liabilities 144 179 188 188 188 188Total equity 536 562 586 627 639 675Total liabilities & equity 2,344 3,286 3,340 3,600 3,786 3,780Net working capital 505 1,008 717 832 883 872Net debt (cash) (262) (434) (857) (1,089) (1,176) (1,183)Cash flowCash flow EBITDA 53 57 223 276 229 196Tax, interest & other 16 17 29 39 19 6Change in working capital (131) (621) 289 (93) (50) 11Net cash from op activities (78) (564) 512 182 179 206Capex (18) (44) (3) (62) (45) (36)Net acquisitions 0 0 0 0 0 0Net financing cash flow 41 46 (98) (130) (50) 0Dividends & minority distrib'n 0 0 (149) (174) (174) (130)Net ch in cash & equivalents 37 161 435 141 56 13FCF (95) (608) 510 120 134 170Performance & returnsRevenue growth (%) 1.1 6.4 0.48 22.1 6.9 -1.4Normalised EPS growth (%) 286.9 14.8 904.3 23.3 -13.2 -10.7Normalised EBITDA mgn (%) 1.7 1.6 6.7 6.9 5.3 4.6Normalised EBIT margin (%) 0.91 0.96 6.1 6.3 4.8 4.1ROACE (%) 3.6 3.6 21.9 30.4 26.6 22.4Reported ROE (%) 2.8 3.2 30.3 35.3 29.4 25.3Working capital as % of sales 16.4 30.8 21.8 20.7 20.6 20.6Net debt (cash)/EBITDA (x) (5.1) (8.1) (3.9) (4.0) (5.1) (6.0)EBITDA net interest cvg (x) 3.2 n/a n/a n/a n/a n/aValuationEV/revenue (x) 0.65 0.56 0.43 0.29 0.26 0.26EV/normalised EBITDA (x) 38.9 34.2 6.4 4.3 4.8 5.6EV/normalised EBIT (x) 71.7 58.3 7.1 4.7 5.3 6.3Normalised PER (x) 150.8 131.4 13.1 10.6 12.2 13.7Price/book (x) 4.2 4.0 3.9 3.6 3.6 3.4Dividend yield (%) 0.0 0.0 -6.6 -7.6 -7.6 -5.7FCF yield (%) n/a n/a 36.0 10.2 12.2 15.6Per share dataReported EPS (PLN) 0.590 0.677 6.80 8.39 7.28 6.50Normalised EPS (PLN) 0.590 0.677 6.80 8.39 7.28 6.50Dividend per share (PLN) 0.00 0.00 (5.84) (6.80) (6.80) (5.10)Equity FCFPS (PLN) (3.74) (23.82) 19.97 4.71 5.24 6.67BV/share (PLN) 21.00 22.00 22.96 24.55 25.03 26.43Source: Company data, ING estimates61

Polish Strategy Cersanit July 2010CersanitTimid signs of recoverypreviously SellHoldPoland Market cap PLN1,904.2mConstruction & Materials Bloomberg CST PWAs the company plans to raise up to PLN250m, Cersanit’sESM will vote on up to a 72m rights issue on 3 August. Witha decline of 18% YTD following weaker-than-expected 1Q10results and negative sentiment related to the rights issue,Cersanit was one of the worst performing stocks in ouruniverse. 2Q10 should not yet surprise positively, but thefirst signs of a rebound in demand in Russia and Ukraineshould translate into a rebound in profits in 2011 and 2012.Investment caseCersanit plans to conduct a rights issue, raising equity by up to50% or 72m shares. The company wants to collect betweenPLN150m and PLN250m, primarily in order to repay debt and tostrengthen its equity. We have not yet included the rights issue inour model as it has not yet been approved by the ESM. Theswap ratio was set at two shares for one right. The implied priceof one right would be PLN2.8, assuming a PLN0.2bn issue.A slowdown in demand on almost all markets of operationsresulted in a 7% YoY decline in revenues in 2009. Demand hasrecovered slowly since the beginning of 2010. Although thecompany’s capacity utilisation remains at 80%, double-digitgrowth rates of sales volumes in Russia, Ukraine and Romaniasignal a positive development in the coming quarters, translatinginto improving operating margins in 2010F (we forecast a 12.2%EBIT margin in 2010F versus 11.5% in 2009) improving further in2011F to 14.7%.In June, Cersanit signed an agreement with Meissen KeramikVertriebs GmbH on the distribution of the company’s products inGermany, Austria and the Benelux. Cersanit will now be presentin DIY stores, which should enable a gradual increase in volumesales in these markets. The company targets annual salesvolumes in ceramic tiles to increase over the next five years fromless than 2m m² in 2009 to 10m m² in 2014. Cumulated revenuesfollowing the agreement are expected to reach €350m, close to15% of the company’s 2010-14F revenues.In the tiles segment (64% of 2009 revenues), the company plansto sell 53m m² of ceramic tiles this year, compared with 48m m² ofvolumes in 2009. Poland will still be Cersanit’s core market with a50% contribution to 2010 sales. The second largest market forCersanit is Russia, with expected volume sales of c.11m m² in2010 compared with 8m m² sales in 2009. Also Ukraine, where thecompany has a market share of close to 40%, is expected topost double-digit growth rates this year, with planned salesvolumes approaching 10m m². Among smaller markets, Romaniaand Germany should each contribute 2m m² of sales.We upgrade Cersanit to HOLD following expectations of strongearnings recovery in 2011 and 2012, with a DCF-derived 12-month target price of PLN15.0. The company trades at a 2010/11FEV/EBITDA of 9.8x/7.8x, a 54%/39% premium to global peers.Price (19/07/10)Target price (12-mth)PLN13.20previously PLN14.10PLN15.00Forecast total return 13.6%2Q10 previewWe forecast a moderate 3% YoY increase in revenues followingthe pick up in sales in Russia and Ukraine, with Polishoperations 10% lower YoY. EBIT should be 8.5% higher onmoderately higher gross margin (40.5% versus 39.2% in 2Q09)and cost control (SG&A expenses at 25.6% of revenues versus26.8% in 2Q09). Net profit could be distorted by an estimatedPLN45m negative impact from the revaluation of FX debt.2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenue 369 380EBITDA 77 82EBIT 48 52Net income (1.4) (6.4)EPS (PLN) (0.01) (0.04)Source: Company data, ING estimatesEarnings drivers and outlookThe planned rights issue should have a negative impact on theshare price in the short term, especially as PLN0.2bn cashproceeds will primarily be dedicated for working capital purposesand debt repayments, leaving investments in new capacitiesaside.In 2010F we expect revenue growth to reach a moderate 3.8%following higher capacity utilisation rates both in ceramic tilesand sanitary ware (78% and 70% in 2010F, compared with 72%and 65% in 2009, respectively). As the competitive environmentremains demanding, primarily in Poland, we assume slightsingle-digit decreases in ceramic tile and sanitary ware pricesYoY in 2010F. We forecast a 12.2% EBIT margin in 2010Fcompared with 11.9% reported in 2009. Market consensus is13% above our estimates, with an expected EBIT margin of13.4% this year. We believe it will be difficult for Cersanit to deliveron expectations in 2010 given the strong competitive environmentand only a moderate rebound in demand. Management has a2010 EBIT margin of 12-13% as an internal target.In 2011F we forecast 13% YoY revenue growth, driven both byhigher price levels and capacity utilisation at 82% and 77%,respectively. Cersanit’s EBIT margin should improve to 14.7% in2011F. Market consensus is for a 2011 EBIT margin of 15.4% andPLN183m net profit. These are demanding targets, especially asthe company would be happy to see a 15% EBIT margin nextyear. However, given the high operating leverage, 2011consensus is achievable, if market conditions turn favourable.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com62

Polish Strategy Cersanit July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F3 Aug 2010 ESM on rights issue17 Aug 2010 Rights date31 Aug 2010 2Q10 results15 Nov 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)Michal Solowow 48.6ING pension fund 12.6Aviva pension fund 11.3Source: Company data, INGShare dataAvg daily volume (3-mth) 56,132Free float (%) 51.4Market cap (PLNm) 1,904.2Net debt (1F, PLNm) 1,032Enterprise value (1F, PLNm) 2,936Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance19181716151413127/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Cersanit is the second-largest manufacturer ofceramic products in CEE and the CIS and is executinga strategy that should place it among the largestglobal producers (currently seventh-largest global tilesmanufacturer). Current capacities amount to 65m m2of ceramic tiles and 6.5m units of sanitary ware.RisksGiven Cersanit’s high debt burden at 1.0x netdebt/EBITDA and close to 4.0x net debt/12-monthEBITDA, it is unlikely that the company will financeany further investments in new production capacitiesthrough bank debt. A potential share issue mighttherefore take place at the end of 2010 if the companydecides to invest in production capacities in Romaniaor Russia. The value of issue is estimated atPLN0.2bn. There are upside and downside risksdepending on the success or otherwise of thepotential rights issue.Income statementRevenues 1,455 1,517 1,415 1,468 1,654 1,795EBITDA 322 340 285 300 363 487EBIT 232 234 168 179 243 371Net interest (28) (48) (59) (70) (67) (70)AssociatesOther pre-tax items (39) (156) (117) 21 0 0Pre-tax profit 165 30 (8) 130 175 301Tax (26) (24) (0.4) (25) (35) (60)Minorities (18) 2 0.4 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 121 8 (8) 105 140 240Normalised net profit 121 8 (8) 105 140 240Balance sheetTangible fixed assets 1,061 1,199 1,165 1,090 1,054 1,155Intangible fixed assets 284 405 383 383 383 383Other non-current assets 18 27 22 23 26 28Cash & equivalents 389 717 106 218 365 437Other current assets 725 1,016 948 965 1,031 1,026Total assets 2,477 3,364 2,625 2,679 2,859 3,029Short-term debt 607 788 270 250 282 306Other current liabilities 344 399 341 256 264 292Long-term debt 506 1,074 947 1,000 1,000 950Other long-term liabilities 17 52 1 1 2 2Total equity 1,003 1,052 1,066 1,171 1,312 1,480Total liabilities & equity 2,477 3,364 2,625 2,679 2,859 3,029Net working capital 423 555 509 622 668 625Net debt (cash) 724 1,145 1,110 1,032 916 819Cash flowCash flow EBITDA 175 38 49 131 158 226Tax, interest & other (93) (229) (177) (74) (102) (202)Change in working capital (162) (211) (35) (103) (60) 30Net cash from op activities (26) (328) (104) 49 97 185Capex (567) (244) (83) (45) (84) (218)Net acquisitions 0 0 0 0 0 0Net financing cash flow 484 793 (623) 34 32 (26)Dividends & minority distrib'n 0 0 0 0 0 (72)Net ch in cash & equivalents (118) 99 (787) 38 45 (131)FCF (593) (572) (187) 4 13 (33)Performance & returnsRevenue growth (%) 91.4 4.3 -6.7 3.8 12.6 8.6Normalised EPS growth (%) -17.3 -93.9 n/a n/a 33.0 71.6Normalised EBITDA mgn (%) 22.1 22.4 20.1 20.4 21.9 27.1Normalised EBIT margin (%) 15.9 15.4 11.9 12.2 14.7 20.6ROACE (%) 12.9 9.3 6.5 7.6 9.7 13.9Reported ROE (%) 15.3 0.82 -0.77 9.4 11.3 17.2Working capital as % of sales 29.1 36.6 36.0 42.3 40.4 34.8Net debt (cash)/EBITDA (x) 2.2 3.4 3.9 3.4 2.5 1.7EBITDA net interest cvg (x) 11.5 7.0 4.8 4.3 5.4 6.9ValuationEV/revenue (x) 1.9 2.0 2.1 2.0 1.7 1.5EV/normalised EBITDA (x) 8.7 9.0 10.6 9.8 7.8 5.6EV/normalised EBIT (x) 12.0 13.1 17.9 16.4 11.6 7.3Normalised PER (x) 14.5 238.3 n/a 18.1 13.6 7.9Price/book (x) 2.1 1.8 1.8 1.6 1.5 1.3Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 3.8FCF yield (%) n/a n/a n/a 0.15 0.47 n/aPer share dataReported EPS (PLN) 0.911 0.055 (0.056) 0.730 0.971 1.67Normalised EPS (PLN) 0.911 0.055 (0.056) 0.730 0.971 1.67Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.500Equity FCFPS (PLN) (4.46) (4.12) (1.29) 0.030 0.093 (0.231)BV/share (PLN) 6.34 7.25 7.39 8.12 9.09 10.26Source: Company data, ING estimates63

Polish Strategy Kety July 2010KetyAn attractive alternative to Polish contractorsPreviously HoldBuyPoland Market cap PLN958.55mBasic Resources Bloomberg KTY PWKety’s 2010-15 strategy implies an aggressive 16% CAGR inEPS. Our forecasts of 13% CAGR in EPS are belowmanagement’s expectations, nevertheless we perceive Ketyas an attractive investment alternative to Polish contractors.Low valuations, double-digit EPS growth, strong positioningin segments of operations and a stable dividend policyjustify our upgrade to BUY.Investment caseKey figures of the 2010-15 strategy are 10% CAGR in revenuesand 16.2% CAGR in EPS. The 2015F EPS target amounting toPLN19.0 is ambitious and 22% above our estimates. Shouldmanagement deliver on its promises, Kety’s perception of avalue story would turn into a growth story again. Even based onour more bearish assumptions, we perceive Kety as an attractiveinvestment alternative to Polish construction companies tradingat 2010F and 2011F PER of 11.5x and 9.8x, respectively. Whilewe believe the construction sector might face a deterioration ofprofit margins beginning from 2011F, Kety seems well positionedin its business segments and has scale to improve profitabilityand deliver double-digit EPS growth YoY in 2010F and 2011F.Kety’s 2010 guidance amounts to PLN1.2bn revenues,PLN118m EBIT and PLN81.5m net profit, which implies a 6%YoY increase in the top line and 15% YoY growth at the bottomline, but a 5% YoY decrease of EBIT. Growth will be drivenprimarily by the extruded profiles segment, which should delivera 20% YoY increase in revenues to PLN431m, following therecovery of aluminium prices to an average of US$2,000 peraluminium tonne compared with US$1,675 in 2009. Volumesales in extruded profiles should grow by low single-digit per centYoY. In 2009, Kety processed 30,500 tons extruded profiles and37,000 tonnes in 2008. Overall we expect extruded profiles willamount to 37% of revenues in 2010, compared with 32% in 2009(excluding internal sales). Still, Kety’s raw material hedgingpolicy results in the recognition of hedging on the financial level,which distorts actual single-digit growth YoY of the operatingprofit. The 2010 net profit market consensus is less optimisticthan management, with expectations of PLN78m net profit,which still implies a 10%YoY increase in net profit.After two years of declining capex, Kety finally plans an increasein investment outlays to PLN115m this year compared withPLN34m in 2009 and PLN80m in 2008.We raise our recommendation from Hold to BUY. Strongpositioning in all major segments of operations, qualitymanagement as well as attractive valuations justify our BUYrecommendation. Our DCF-based 12-month TP is now PLN124.We expect PLN4.5 dividend per share out of 2010F net profit, animplied dividend yield of 4.3%.Price (19/07/10)Target price (12-mth)PLN103.90Previously PLN117.20PLN124.00Forecast total return 19.3%2Q10F results previewWe expect a moderate 3% YoY revenue increase, followinghigher aluminium prices (US$2,125 in 2Q10 vs US$1,524 in2Q09).EBIT adjusted by commodity hedging transactions would comein flat YoY at PLN28m. Lower net profit following PLN7mnegative impact from the revaluation of FX debt.After 1H10, net profit should reach PLN30m, or only 37% of2010 net profit guidance.2Q10F results preview (12 August)(PLNm) 2Q09 2Q10FRevenues 278 285EBITDA 51.5 44.0EBIT 35.5 26.0Net profit 20.6 15.0EPS 2.2 1.6Source: Company data, ING estimatesEarnings drivers and outlookA pick-up in extruded profile volume sales and favourable FXexchange rates will likely be the main drivers of the share price.Our 2010 forecasts see extruded profiles volume sales flat YoYat 30,500 tonnes followed by a recovery of demand to 33,000tonnes in 2011F. However, Kety noted that as of beginning 3Q10monthly volume sales improved to c.3,500 tons. This is positive ifvolume sales in excess of 3,000 tonnes are to be maintained.Kety has managed to increase prices for extruded profiles andflexible packaging products beginning from 3Q10, which shouldtranslate into significantly stronger 3Q10 results QoQ.The currency environment for Kety is unfavourable, with a strongUSD (over 40% of costs, mainly aluminium, are USDdenominated)and a weak EUR (c.60% of Kety’s sales are EURdenominated),the most important macro drivers for Kety’sprofitability. In 2Q10, the average EUR/USD exchange rateamounted to 1.27 and 1.38 in 1Q10. If the USD remain strong vsthe EUR, Kety’s margins might deteriorate in 2H10, resulting inmissing 2010 guidance.Between 7,000-8,000 tonnes or 15-20% of Kety’s aluminiumprofiles capacities are located in Ukraine. In 2009, productionamounted to only 1,000 tonnes, with profitability of the Ukrainianplants around break-even at the EBITDA level. Easternoperations might provide upside to Kety’s results should theUkrainian market rebound beginning from 2011.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com64

Polish Strategy Kety July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F12 Aug 2010 2Q10 results27 Oct 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)ING pension fund 17.8Aviva pension fund 10.2Pioneer mutual funds 6.9Raiffeisen Zentrabank 5.7PZU pension fund 5.1Source: Company data, INGShare dataAvg daily volume (3-mth) 13,300Free float (%) 100.0Market cap (PLNm) 958.55Net debt (1F, PLNm) 207Enterprise value (1F, PLNm) 1,165Dividend yield (1F, %) -3.8Source: Company data, ING estimatesShare price performance1301201101009080Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePriceWIG (rebased)Kety is the leading Polish producer by market share ofextruded profiles (23% of revenues in 2009),aluminium systems and shutters (35% of revenues)and flexible packaging (26% of revenues). The mostimportant clients are from the construction, food andautomotive industries. Around one-third of sales comefrom exports.RisksAmong the risks to our recommendation, we seeanother decrease in demand for steel profiles,favourable FX exchange rates (strong US$, weakeuro) and significant cuts in interest rates.Income statementRevenues 1,253 1,171 1,107 1,184 1,298 1,384EBITDA 193 188 188 184 214 226EBIT 141 127 124 114 138 147Net interest (19) (56) (32) (12) (17) (18)AssociatesOther pre-tax items 0 0 0 0 0 0Pre-tax profit 122 71 92 103 121 129Tax (24) (10) (20) (20) (23) (25)Minorities (0.2) (0.3) 0.0 (0.2) (0.2) (0.2)Other post-tax items 0 0 0 0 0 0Net profit 98 61 71 83 98 105Normalised net profit 98 61 71 83 98 105Balance sheetTangible fixed assets 706 722 694 739 764 785Intangible fixed assets 92 91 84 80 76 71Other non-current assets 50 46 42 44 46 48Cash & equivalents 17 46 108 123 130 232Other current assets 450 410 361 393 414 423Total assets 1,314 1,315 1,290 1,380 1,429 1,559Short-term debt 224 258 222 250 250 250Other current liabilities 230 194 185 203 225 246Long-term debt 146 148 82 80 50 100Other long-term liabilities 0 0 0 0 0 0Total equity 714 715 801 847 904 962Total liabilities & equity 1,314 1,315 1,290 1,380 1,429 1,559Net working capital 306 293 249 266 267 258Net debt (cash) 353 360 196 207 170 118Cash flowCash flow EBITDA 193 188 188 184 214 226Tax, interest & other 43 65 53 31 40 42Change in working capital (15) (8) 43 (16) 0.4 10Net cash from op activities 135 115 179 137 174 194Capex (149) (80) (34) (115) (100) (100)Net acquisitions 0 0 0 0 0 0Net financing cash flow 37 21 (84) 30 (26) 54Dividends & minority distrib'n (37) (37) 0 (37) (42) (46)Net ch in cash & equivalents (19) 29 62 15 6 102FCF 5 91 177 33 91 112Performance & returnsRevenue growth (%) 18.7 -6.6 -5.4 6.9 9.6 6.6Normalised EPS growth (%) 12.4 -37.9 17.0 16.6 18.0 6.7Normalised EBITDA mgn (%) 15.4 16.1 17.0 15.6 16.5 16.4Normalised EBIT margin (%) 11.3 10.8 11.2 9.7 10.7 10.6ROACE (%) 13.8 11.5 11.1 10.0 11.6 11.7Reported ROE (%) 14.3 8.6 9.4 10.1 11.2 11.2Working capital as % of sales 24.4 25.0 22.5 22.5 20.6 18.7Net debt (cash)/EBITDA (x) 1.8 1.9 1.0 1.1 0.80 0.52EBITDA net interest cvg (x) 10.0 3.4 5.8 16.0 12.4 12.7ValuationEV/revenue (x) 1.1 1.1 1.0 0.98 0.87 0.78EV/normalised EBITDA (x) 6.8 7.0 6.1 6.3 5.3 4.8EV/normalised EBIT (x) 9.3 10.4 9.3 10.2 8.2 7.3Normalised PER (x) 9.8 15.7 13.5 11.5 9.8 9.2Price/book (x) 1.4 1.3 1.2 1.1 1.1 1.00Dividend yield (%) -3.8 -3.8 0.0 -3.8 -4.3 -4.8FCF yield (%) 0.40 6.9 15.3 2.9 8.1 10.4Per share dataReported EPS (PLN) 10.63 6.60 7.72 9.00 10.62 11.34Normalised EPS (PLN) 10.63 6.60 7.72 9.00 10.62 11.34Dividend per share (PLN) (4.00) (4.00) 0.00 (4.00) (4.50) (5.00)Equity FCFPS (PLN) (1.51) 3.80 15.65 2.38 8.00 10.20BV/share (PLN) 76.76 77.46 86.84 91.85 97.97 104.31Source: Company data, ING estimates65

Polish Strategy Mostostal Warszawa July 2010Mostostal WarszawaThe good times, the bad timesPreviously: HoldSellPoland Market cap PLN1,344.0mConstruction & Materials Bloomberg MSW PWWe downgrade Mostostal Warszawa to SELL onexpectations of margin deterioration in 2010 and 2011,primarily related to intensified competition in the company’score segment, infrastructure, but also a lack of largesignings over recent months. Mostostal Warszawa is ourleast preferred play among contractors. We set our DCFandpeer valuation-based 12-month target price at PLN60.Investment caseIn 2008 Mostostal Warszawa signed new contracts amounting toPLN3.5bn. In the following year its portfolio of contractsincreased by only PLN1.6bn, primarily related to intensifiedcompetition and MSW’s cautious budgeting approach. In 2010the company has focused on small- and mid-size tenders, at lasttranslating into a growing number of contract awards, withPLN1.3bn new signings YTD and another PLN0.6bn to follow inthe coming weeks. According to CEO Jaroslaw Popiolek, thisshould lead to c.10% YoY revenue growth in 2010 to close toPLN3.0bn, but also secure at least flat revenues in 2011. Marketconsensus is broadly in line with the company’s expectationsand expects PLN2.9bn revenues in 2010 and PLN3.0bn in 2011.On the secured sales figures, profitability is a concern. CEOPopiolek recently stated it will be difficult in 2010 to top 2009 netprofit of PLN120m. The major reasons behind the expectedmargin pressure are: (1) intensified competition in the company’score segments; (2) lack of cyclical subsidiaries with aboveaverageprofitability, which would help the company offset thedeclining margins of the infrastructure and civil engineeringsegments; and (3) an overly conservative budgeting approachthroughout 2009. Profitability deterioration is a fact, the scaleremains a question. Market consensus sees the company’s netprofit dropping 11% YoY in 2010 to PLN106.5m and another 11%YoY to PLN95m in 2011. We are significantly below the marketwith expectations of PLN98m/PLN71m net profit, respectively.MSW’s current backlog amounts to PLN3.4bn (of which PLN2.8bnis contracts at Mostostal Warszawa on a standalone basis andPLN0.6bn is collected by subsidiaries) vs c.PLN3.5bn as of end1H09. The backlog is almost equally split between infrastructureconstruction and civil engineering. The company hopes to signanother PLN0.6bn of new road construction contracts in thecoming weeks. The average contract value in 2010 is PLN83mcompared with PLN146m of contracts signed in 2008.We downgrade Mostostal Warszawa from Hold to SELL with arevised target price of PLN60, the outcome of a DCF valuationand peers valuation with a 60% and 40% share applied to themethods. Mostostal Warszawa trades at 13.7x/18.8x 2010/11FPER, and is our least preferred infrastructure play as a result ofmargin deterioration and demanding valuations.Price (19/07/10)Target price (12-mth)PLN67.20Previously PLN67.0PLN60.0Forecast total return -9.8%2Q10 previewWe forecast a 12% YoY increase in revenues related to 14%YoY backlog growth. EBIT should be 32% YoY lower followingprofitability deterioration of the general construction business(net profit margin at 5.0% compared with 10.1% reported in2Q09), but also a lower bottom line contribution from listedsubsidiaries Remak and Mostosal Plock due to a morecompetitive business environment. Consequently, we forecastnet profit down 22% YoY, following PLN2m financial income in2Q10 versus a PLN3m financial expense in 2Q09.2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenue 626.1 701.3EBIT 51.2 34.9Net profit 34.4 26.9EPS 1.7 1.3Source: Company data, ING estimatesEarnings drivers and outlookWe expect Mostostal’s profit margin to deteriorate from 3Q10and intensify in 2011. In 2010 we forecast a 3.3% net profitmargin, split into 3.7% in 1H10 and 3.0% in 2H10. In 2009, itsrecord year, the company’s net profit margin amounted to 4.5%.Contracts awarded in recent tenders are characterised by belowaverageprofitability, but the impact on results will be delayed. Asa result, we believe the worst is still to come in 2011, with aforecast net profit margin decrease to 2.2%.Share price triggers in the coming months will be not so muchthe quarterly results, but the intensification of power blockconstruction contracts. Following the intensification ofcompetition in road construction, MSW has put more emphasison smaller and mid-sized projects, but also wants to be an activeplayer on the power block construction market. As the companyparticipates in large power tenders, the announcement of thewinning parties of the €1.6bn Siekierki and €3.0bn Opole powerblock contracts might result in positive newsflow given the largecontract size. MSW’s share in the bidding consortiums amountsto 40% and 33%, respectively. Tender completion is scheduledfor the end of 2010 and beginning of 2011. Even if MostostalWarszawa is awarded one of these contracts, the impact on2011 figures will be negligible. Positive newsflow as well asexpectations of above-average profit margins on power industrycontracts beginning from 2012 would likely result inoutperformance of MSW’s shares.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com66

Polish Strategy Mostostal Warszawa July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 2Q10 results15 Nov 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)Acciona SA 50.1PZU pension fund 17.8Source: Company data, INGShare dataAvg daily volume (3-mth) 12,637Free float (%) 49.9Market cap (PLNm) 1,344.0Net debt (1F, PLNm) (354)Enterprise value (1F, PLNm) 1,077Dividend yield (1F, %) -2.1Source: Company data, ING estimatesShare price performance858075706560557/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)Mostostal Warszawa is the fifth-largest Polishconstruction company by revenues, active in generaland infrastructure construction. Company also owns apower industry construction arm, Remak (11.5% of1H09 revenues). Spanish strategic investor, Acciona,controls a 50% stake in the company.RisksThe award of large power industry tenders (MSW’sshare amounting to a total of PLN4.5bn) would securethe company’s backlog for 2012-15 with highmargined contracts and result in positive newsflow.Income statementRevenues 1,928 2,211 2,712 2,944 2,876 2,857EBITDA 78 145 209 162 129 105EBIT 59 122 181 126 95 71Net interest 1 1.0 (5) 11 8 8Other pre-tax items 2 (3) (7) 0 0 0Pre-tax profit 62 119 169 137 103 79Tax (4) (27) (43) (26) (20) (15)Minorities (6) (11) (9) (13) (12) (12)Other post-tax items 0 0 0 0 0 0Net profit 53 81 117 98 71 52Normalised net profit 53 81 117 98 71 52Balance sheetTangible fixed assets 151 188 285 344 401 416Intangible fixed assets 1 2 2 2 2 2Other non-current assets 32 56 75 78 82 85Cash & equivalents 288 309 429 484 536 514Other current assets 537 720 715 795 767 753Total assets 1,009 1,276 1,506 1,703 1,787 1,770Short-term debt 29 21 30 30 30 30Other current liabilities 601 806 844 917 938 921Long-term debt 16 29 60 100 100 50Other long-term liabilities 18 17 14 14 14 14Total equity 344 403 556 639 703 752Total liabilities & equity 1,009 1,276 1,505 1,701 1,786 1,769Net working capital 59 219 156 179 170 210Net debt (cash) (242) (259) (339) (354) (405) (434)Cash flowCash flow EBITDA 76 89 105 131 106 91Tax, interest & other (2) (26) (49) (43) (31) (21)Change in working capital 148 34 85 17 51 4Net cash from op activities 224 122 190 120 137 80Capex (31) (60) (125) (94) (92) (49)Net acquisitions 0 0 0 0 0 0Net financing cash flow 14 (33) 61 40 0 (50)Dividends & minority distrib'n 0 0 0 (28) (20) (14)Net ch in cash & equivalents 200 5 108 34 22 (36)FCF 193 62 66 26 45 32Performance & returnsRevenue growth (%) 62.3 14.7 22.7 8.6 -2.3 -0.67Normalised EPS growth (%) 166.2 53.2 44.6 -16.5 -27.1 -27.4Normalised EBITDA mgn (%) 4.1 6.5 7.7 5.5 4.5 3.7Normalised EBIT margin (%) 3.1 5.5 6.7 4.3 3.3 2.5ROACE (%) 16.6 28.9 33.0 17.8 11.8 8.5Reported ROE (%) 20.8 26.1 28.6 18.9 12.3 8.3Working capital as % of sales 3.1 9.9 5.8 6.1 5.9 7.3Net debt (cash)/EBITDA (x) (3.1) (1.8) (1.6) (2.2) (3.1) (4.1)EBITDA net interest cvg (x) n/a n/a 41.1 n/a n/a n/aValuationEV/revenue (x) 0.60 0.52 0.40 0.37 0.36 0.36EV/normalised EBITDA (x) 14.8 8.0 5.2 6.7 8.0 9.7EV/normalised EBIT (x) 19.7 9.4 6.0 8.5 10.9 14.4Normalised PER (x) 25.4 16.6 11.5 13.7 18.8 25.9Price/book (x) 4.7 4.0 2.8 2.4 2.2 2.1Dividend yield (%) 0.0 0.0 0.0 -2.1 -1.5 -1.1FCF yield (%) 16.7 5.4 6.1 2.4 4.4 3.1Per share dataReported EPS (PLN) 2.65 4.06 5.87 4.90 3.57 2.59Normalised EPS (PLN) 2.65 4.06 5.87 4.90 3.57 2.59Dividend per share (PLN) 0.00 0.00 0.00 (1.40) (0.979) (0.714)Equity FCFPS (PLN) 9.67 3.12 3.28 1.28 2.27 1.58BV/share (PLN) 14.24 16.88 24.12 27.62 30.21 32.09Source: Company data, ING estimates67

Polish Strategy PBG July 2010PBGIt’s all about the roadsPreviously HoldSellPoland Market cap PLN3,144.9mConstruction & Materials Bloomberg PBG PWOver the last two months, PBG has signed new contractsworth PLN2.4bn, increasing its backlog by around 40%.Coupled with bullish statements by management suggestingan upward revision of 2010 guidance and double-digit EPSgrowth expected in 2011, the company seems to be one ofthe few growth stories among Polish contractors. However,we worry about profitability deterioration related to lowmarginroad contracts and see 2011F EPS growing only 1%YoY vs 15% YoY EPS growth based on consensus. Wedowngrade to SELL, with a revised 12-month TP of PLN200.Investment caseCEO Jerzy Wisniewski announced recently that PBG willconsider an upward revision of its 2010 revenue and net profitguidance, amounting to PLN3.0bn and PLN220m respectively, atthe beginning of 4Q10. This might be possible as a result of alarge number of new contract signings throughout 2010 whichhave not been included in PBG’s guidance. Based on currentguidance, PBG trades at a 2010 PER of 14.3x, a 4% premium toits peers. Upside related to a potential guidance revision is limited,as the current market consensus already partly anticipates higherearnings and sees 2010 net profit at PLN227m.PBG is also bullish for 2011. Based on management statements,it will continue to target a double-digit increase in revenue andnet profit YoY next year. Growth rates will range between 10%and 20% YoY on all levels of operations. This would imply 2011revenues in excess of PLN3.3bn and net profit ranging fromPLN240m to PLN260m.Over the last two months, PBG has signed contracts worthPLN2.4bn, including PLN0.9bn for an LNG terminal andPLN1.4bn in new road contracts, increasing its backlog toPLN5.7bn compared with PLN4.0bn at beginning 2010. Of thebacklog, c.PLN2.0bn will be executed in 2010, which givenPLN0.5bn revenues reported in 1Q10 and another PLN0.7bnexpected in 2Q10F secures the PLN3.0bn revenue guidance.The backlog is dominated by oil & gas contracts with a 40%share of portfolio. Following recent signings, road contructionhas also become a crucial segment, with a 26% share ofbacklog.According to PBG, growth drivers in the coming years will still beroad construction, but also the power industry, where PBG hasallied with Alstom for tenders in the construction of power blocks.We downgrade PBG to SELL, with a revised DCF and peervaluation-based 12-month TP of PLN200. Based on our revisedforecasts, PBG trades at a 2010/11F PER of 13.5-13.4x, in linewith Polish peers in both years. Unless PBG manages to attractat least one large power block construction contract, a premiumis not justified in our view, given the risks related to the entranceinto lower margin road segment.Price (19/07/10)Target price (12-mth)PLN220.00Previously PLN248.00PLN200.00Forecast total return -6.8%2Q10 previewRevenue growth at 20% stemming primarily from industrialcontracts (three Euro 2012 football stadia) executed by itssubsidiary, Hydrobudowa Polska. EBIT margin down to 8.2%from 12.0% in 2Q09 following PLN13m OOI in 2Q09 (adjustedEBIT margin at 9.8%), but also the entry into lower marginindustrial and road contracts. EPS flat YoY following 6% dilutionrelated to shares issue in 2009.2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenue 599.4 718.0EBITDA 80.9 68.8EBIT 71.7 58.6Net profit 46.9 49.3EPS 3.5 3.5Source: Company data, ING estimatesEarnings drivers and outlookFollowing a 7% YoY increase in EPS in 2010F, we expect achallenging 2011. In order to fill its declining backlog and secure2011 turnover, PBG has entered lower-margin road contractswhich will have a contribution to revenues in excess of 20%beginning from 2011. As a result, we believe PBG will not be inposition to keep net profit margins in excess of 7.0%. Weforecast only 1% YoY EPS growth in 2011, which implies 6.8%net profit margin vs 7.0% in 2010F and 8.2% reported in 2009.Market consensus is significantly above our forecasts, withexpectations of 15%YoY EPS growth in 2011.Drivers of PBG’s earnings and simultaneously the share price inthe coming months will be any announcement on large contractswith above-average profitability, power industry and hydroengineering, and to a smaller extent the revision of 2010 netprofit guidance.PBG is one of the bidding parties at the €3.0bn Opole powerplant contract. We estimate PBG’s share in the consortium at35% or €1.0bn. Annoucement of the winning party is expected atthe turn of 2010 and 2011. In order to win the €1.6bn Kozienicepower block construction tender, PBG has allied itself withAlstom of France. Investors will select the contracting party in1H11. In hydro engineering, PBG will bid for two large contracts,the retention tank in Raciborz and the water tam in Nieszawa.The two contracts amount to PLN2.7bn, with tender completionscheduled for early 2011.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com68

Polish Strategy PBG July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 2Q10 results15 Nov 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)Jerzy Wisniewski 29.6Pioneer mutual funds 11.3Aviva pension fund 9.4ING pension fund 8.8Source: Company data, INGShare dataAvg daily volume (3-mth) 19,468Free float (%) 70.4Market cap (PLNm) 3,144.9Net debt (1F, PLNm) 233Enterprise value (1F, PLNm) 3,606Dividend yield (1F, %) 0.64Source: Company data, ING estimatesShare price performance320300280260240220200180Source: ING7/09 9/09 11/09 1/10 3/10 5/10PriceCompany profileWIG20 (rebased)PBG is the largest Polish construction company activein hydro engineering and oil & gas construction.Traditionally active in oil & gas in the years 2005-07PBG entered the environmental protection sector(acquisition of three companies). It is also active inhighway construction (beginning from this year). In thecoming years, roads but also power industryconstruction will be drivers of growth.RisksRisk factors remain the execution of stadiumcontracts, given the technical difficulty and timelimitations, which might pose unexpectedexpenditures next year. Upside risk to ourrecommendation is the award of a power blockconstruction contract, which would almost doublePBG’s backlog with above-average profit margins.Income statementRevenues 1,407 2,091 2,578 3,304 3,457 3,410EBITDA 164 267 328 385 386 331EBIT 139 226 286 339 337 283Net interest 7 (10) (24) (27) (23) 14AssociatesOther pre-tax items 0 0 0 0 0 0Pre-tax profit 146 216 263 312 314 297Tax (27) (26) (41) (59) (60) (56)Minorities (15) (32) (11) (20) (19) (19)Other post-tax items 0 0 0 0 0 0Net profit 104 158 211 233 235 221Normalised net profit 104 158 211 233 235 221Balance sheetTangible fixed assets 365 437 391 344 330 317Intangible fixed assets 13 15 33 33 33 33Other non-current assets 340 466 607 613 613 613Cash & equivalents 410 290 660 808 753 518Other current assets 1,131 1,651 2,318 2,632 2,598 2,571Total assets 2,259 2,859 4,008 4,430 4,327 4,051Short-term debt 467 671 642 500 500 200Other current liabilities 675 663 1,181 1,454 1,457 1,382Long-term debt 259 370 493 541 250 250Other long-term liabilities 73 40 69 69 69 69Total equity 785 1,114 1,623 1,866 2,051 2,151Total liabilities & equity 2,259 2,859 4,008 4,430 4,327 4,051Net working capital 540 1,031 1,182 1,238 1,202 1,229Net debt (cash) 315 752 475 233 (3) (68)Cash flowCash flow EBITDA 96 194 195 213 220 245Tax, interest & other (200) (527) (216) (142) (46) (70)Change in working capital (16) (147) (210) (38) (7) (37)Net cash from op activities (73) (441) (162) 119 250 182Capex (123) (114) 15 0 (35) (34)Net acquisitions 0 0 0 0 0 0Net financing cash flow 620 335 381 (83) (291) (300)Dividends & minority distrib'n 0 0 0 (20) (70) (141)Net ch in cash & equivalents 323 (303) 96 24 (145) (315)FCF (195) (556) (147) 119 215 148Performance & returnsRevenue growth (%) 108.5 48.6 23.3 28.2 4.6 -1.4Normalised EPS growth (%) 64.4 50.4 29.6 6.5 1.2 -6.0Normalised EBITDA mgn (%) 11.6 12.8 12.7 11.7 11.2 9.7Normalised EBIT margin (%) 9.9 10.8 11.1 10.3 9.8 8.3ROACE (%) 12.3 12.3 11.7 12.0 11.8 10.5Reported ROE (%) 18.6 18.9 18.1 15.3 13.7 12.0Working capital as % of sales 38.4 49.3 45.9 37.5 34.8 36.0Net debt (cash)/EBITDA (x) 1.9 2.8 1.4 0.60 (0.01) (0.21)EBITDA net interest cvg (x) n/a 27.6 13.8 14.3 16.7 n/aValuationEV/revenue (x) 2.5 2.0 1.5 1.1 0.98 0.98EV/normalised EBITDA (x) 21.4 15.3 11.7 9.4 8.8 10.1EV/normalised EBIT (x) 25.1 18.1 13.4 10.6 10.0 11.8Normalised PER (x) 28.1 18.7 14.4 13.5 13.4 14.2Price/book (x) 3.9 3.2 2.3 1.9 1.7 1.7Dividend yield (%) 0.0 0.0 0.0 0.64 2.2 4.5FCF yield (%) n/a n/a n/a 3.3 6.3 4.4Per share dataReported EPS (PLN) 7.83 11.78 15.27 16.27 16.47 15.49Normalised EPS (PLN) 7.83 11.78 15.27 16.27 16.47 15.49Dividend per share (PLN) 0.00 0.00 0.00 1.40 4.88 9.88Equity FCFPS (PLN) (14.67) (41.37) (10.63) 8.33 15.05 10.33BV/share (PLN) 55.90 69.11 97.61 114.60 126.20 131.81Source: Company data, ING estimates69

Polish Strategy Polimex MS July 2010Polimex MSWinter, flood, SELLPreviously: HoldSellPoland Market cap PLN2,320.1mConstruction & Materials Bloomberg PXM PWAt the beginning of 2010 CEO Konrad Jaskola announcedthe company will target 4.0% net profit margin for this year.Following the long winter in 1Q10 and floods in 2Q10 weexpect disappointing results in 1H10, translating into only a3.3% net margin in 2010F. We downgrade Polimex from Holdto SELL with a revised 12-month TP of PLN4.0.Investment caseCEO Konrad Jaskola recently cited that 2010 top-line growth willbe in a range of 5% to 10%, which implies PLN4.6-4.8bnrevenues this year. Net profit margin is unlikely to approach the4% level envisaged at the beginning of 2010, primarily due to thelong winter and floods on several of Polimex’s construction sitesin 2Q10. The CEO, however, did not withdraw from plans toincrease net profit YoY vs the PLN156m reported in 1H10,although investors should expect weaker 1H10 results YoY withstronger execution in 2H10. Based on that we expect 1H10 netprofit to decrease by 42% YoY to PLN42m which, despite astronger 2H10, will result in flat net profit in all of 2010. Thecurrent 2010 market consensus is a bit more optimistic and seesrevenues growing 8% YoY to PLN4.7bn and net profit 3% YoY toPLN161m, which implies a net profit margin of 3.4%.Polimex’s current backlog amounts to PLN7.4bn vs PLN6.8bn asof end-1H09. Out of the current backlog approximately PLN3.1bnis attributable to 2010F while the majority of the remainingPLN4.7bn should be executed primarily in 2011F and to a smallextent in 2012F. The backlog is dominated by road&railway(PLN2.5bn) and general construction (close to PLN2.0bn), andthe impressive backlog for 2010 and 2011 fully covers our 2010revenues forecasts and 89% of our 2011 revenues forecasts.In 4Q09 Polimex announced plans to acquire minority stakes ofseven subsidiaries, thereof listed Energomontaz Polnoc (EPNPW; NR, PLN16.15) and Naftobudowa (NFT PW; NR, PLN27.4).In mid July Polimex shareholders and shareholders of theacquired entities finally agreed on share swap parities andapproved the merger. The company will issue 56.6m shares(12% of equity) in exchange for the acquired stakes. We believethe transaction will be value accretive to PXM's shareholdersbased on attractive valuations of the acquired companies. Theshare issue is expected to be completed by end-3Q10 and wehave implemented it in our model. After the acquisition Polimex's2010F net profit should increase by PLN5m and PLN20m in2011F on minorities.Based on our 2010F Polimex trades at a PER of 13.6x, in linewith Polish peers. In 2011F we forecast a 13% YoY decrease inEPS, which results in PER valuations at 15.0x, a double-digitpremium to peers. Based on our DCF model (60%) and peercomparison (40%) we downgrade Polimex to SELL with arevised 12-month TP of PLN4.0 (previously PLN4.5).Price (19/07/10)Target price (12-mth)PLN4.54Previously PLN4.50PLN4.0Forecast total return -10.6%2Q10 previewProfitability will suffer from weak performance of the steelproduction division (low demand and high zinc prices resulting ingross margin decrease to 12.0% in 2Q10F compared with 21.2%reported in 2Q09) and higher costs related to flooding of severalconstruction sites.2Q10F results preview (31 August)(PLNm) 2Q09 2Q10FRevenues 1,176 1,078EBITDA 86.8 70.1EBIT 65.8 44.2Net profit 37.9 25.2Source: Company data, ING estimatesEarnings drivers and outlookWe expect Polimex’s EPS to decline by 3% YoY in 2010primarily following deteriorating profit margins in the productionsegment (14.6% in 2010F compared with 20.8% in 2009) butalso intensified competition in tenders, translating into margindecline in the divisions construction and road&railway.In 2011 the trend of declining margins in traditional constructionsegments should intensify (especially roads, where we forecast6.8% gross margin in 2011F vs 8.8% in 2010F) but will be partlyoffset by a rebound of the production division (17.4% grossmargin in 2011F vs 14.6% in 2010F) as well as higher marginedpower industry tenders. As a result, we expect net profit to comein flat YoY in 2011F at PLN154m but EPS to drop 10% YoYfollowing dilution related to the share issue.Positive newsflow can be expected from large tenders for theconstruction of power blocks, and the first announcement on thewinning parties should take place at the end of 4Q10. Polimex,traditionally active in the power construction segment (PLN1.0bnrevenues generated annually), is perceived to be one of themajor beneficiaries as the company is bidding on all major powerplant projects, including Siekierki (EUR0.7bn), Opole (EUR3.0bn)and Kozienice (EUR1.6bn). Power industry contracts areexpected to be of above-average profitability, which today is hardto question given the lack of a track record of power blockcontracts in the past in Poland. Announcements on theacceleration of power block construction contracts shouldtherefore be a share price driver, despite the recognition of firstrevenues in Polimex’s P&L, but not earlier than in 2H11.Tomasz Czyz Warsaw +48 22 820 5046 tomasz.czyz@pl.ing.com70

Polish Strategy Polimex MS July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 2Q10 results9 Nov 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)Pioneer mutual funds 8.9ING pension fund 8.7PZU pension fund 8.7Aviva pension fund 5.9Source: Company data, INGShare dataAvg daily volume (3-mth) 681,973Free float (%) 94.0Market cap (PLNm) 2,320.1Net debt (1F, PLNm) 138Enterprise value (1F, PLNm) 2,458Dividend yield (1F, %) -0.88Source: Company data, ING estimatesShare price performance5.55.04.54.03.57/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Polimex MS is the largest Polish constructioncompany, with operations in four areas: chemicals;power industry; general construction; and production(steel structures and galvanising services). Thecompany controls a number of companies specialisingin its chosen industries, including listed powercompany, Energomontaz Polnoc, and the oil & gasconstruction company, Naftobudowa.RisksA strong pick-up in profitability already in 3Q10 as wellas award of the Opole and Siekierki power blockcontracts by Polimex would definitely improvesentiment and move the company to the top pick inthe Polish construction sector.Income statementRevenues 3,720 4,062 4,397 4,677 4,726 4,865EBITDA 205 298 344 336 318 306EBIT 160 228 265 237 219 214Net interest (15) (72) (56) (33) (28) (16)AssociatesOther pre-tax items 4 3 6 0 0 0Pre-tax profit 149 159 216 205 191 198Tax (33) (18) (40) (39) (36) (38)Minorities (17) (20) (19) (10) 0 0Other post-tax items 0 0 0 0 0 0Net profit 100 120 156 156 154 161Normalised net profit 100 120 156 156 154 161Balance sheetTangible fixed assets 426 711 948 976 957 947Intangible fixed assets 458 530 544 544 544 544Other non-current assets 99 141 194 194 194 194Cash & equivalents 143 295 437 620 747 923Other current assets 1,675 1,762 1,705 1,763 1,641 1,690Total assets 2,801 3,439 3,828 4,097 4,082 4,297Short-term debt 229 318 155 155 155 400Other current liabilities 1,028 1,318 1,472 1,591 1,613 1,664Long-term debt 330 436 603 603 450 300Other long-term liabilities 128 199 214 214 214 214Total equity 1,086 1,169 1,383 1,531 1,649 1,717Total liabilities & equity 2,801 3,439 3,828 4,095 4,081 4,296Net working capital 798 575 351 317 175 177Net debt (cash) 416 458 321 138 (142) (223)Cash flowCash flow EBITDA 128 98 159 195 188 194Tax, interest & other (30) (22) (91) (53) (66) (59)Change in working capital (492) 224 234 34 142 (2)Net cash from op activities (360) 413 397 245 330 192Capex (217) (355) (316) (126) (80) (83)Net acquisitions 0 0 0 0 0 0Net financing cash flow 316 149 55 2 (153) 95Dividends & minority distrib'n (5) (5) (5) (19) (37) (93)Net ch in cash & equivalents (22) 42 54 114 61 117FCF (577) 58 82 119 249 110Performance & returnsRevenue growth (%) 50.9 9.2 8.2 6.4 1.1 2.9Normalised EPS growth (%) 32.7 10.5 30.3 -3.2 -9.9 3.5Normalised EBITDA mgn (%) 5.5 7.3 7.8 7.2 6.7 6.3Normalised EBIT margin (%) 4.3 5.6 6.0 5.1 4.6 4.4ROACE (%) 13.7 12.8 13.0 10.7 9.6 9.2Reported ROE (%) 15.0 11.8 13.6 11.3 9.7 9.5Working capital as % of sales 21.4 14.2 8.0 6.8 3.7 3.6Net debt (cash)/EBITDA (x) 2.0 1.5 0.93 0.41 (0.45) (0.73)EBITDA net interest cvg (x) 13.4 4.1 6.2 10.3 11.3 19.7ValuationEV/revenue (x) 0.76 0.71 0.63 0.53 0.46 0.43EV/normalised EBITDA (x) 13.8 9.7 8.1 7.3 6.9 6.9EV/normalised EBIT (x) 17.7 12.7 10.5 10.4 10.0 9.8Normalised PER (x) 18.9 17.1 13.1 13.6 15.0 14.5Price/book (x) 2.1 2.0 1.7 1.5 1.4 1.4Dividend yield (%) -0.25 -0.23 -0.23 -0.88 -1.6 -4.0FCF yield (%) n/a 2.0 2.9 4.8 11.4 5.2Per share dataReported EPS (PLN) 0.240 0.266 0.346 0.335 0.302 0.313Normalised EPS (PLN) 0.240 0.266 0.346 0.335 0.302 0.313Dividend per share (PLN) (0.011) (0.010) (0.010) (0.040) (0.072) (0.180)Equity FCFPS (PLN) (1.38) 0.128 0.181 0.255 0.488 0.214BV/share (PLN) 2.12 2.27 2.68 2.94 3.15 3.28Source: Company data, ING estimates71

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Polish Strategy July 2010Food & Beverage73

Polish Strategy Astarta July 2010AstartaAt the top of the cycleMaintainedSellUkraine Market cap PLN1,473.8mFood & Beverage Bloomberg AST PWWe cannot ignore changes in Ukraine’s sugar supplydemandbalance from a sugar deficit over the past two yearsto oversupply. We believe sugar prices in Ukraine willdecline following additional supply from the new harvestand the decline in international sugar prices. Given thatsugar-related business represents 76% of Astarta’s revenue,we believe a correction in the stock price is inevitable. Werate Astarta a SELL with a PLN49.1 target price.Investment caseWe believe that Astarta’s share price has over-reacted to therecent high cyclical global increase in sugar prices. We thinkprices are now moving back to their mid-cycle level of US$296/t,as the one-off problem with sugar cane in India is likely to beresolved this year, normalising the supply/demand balance in theglobal sugar market. Indeed, global sugar prices have declined40% over the past ten weeks. Ukrainian demand for sugaroutstrips local supply. Thus, Ukrainian sugar prices reflect importparity prices (ie, international raw sugar prices plus import taxes,transportation and processing fees). They have been historicallyhigher than global raw sugar prices by about US$150/t. Weexpect Ukrainian sugar prices to fall from US$760/t to US$569/tas global sugar prices correct.We expect Astarta’s costs to increase going forward despite anumber of cost-control and efficiency-improvement initiatives.Hryvnia stability in 2010F and double-digit inflation in Ukraine(CPI average 9.5% in 2010F and 12.7% in 2011F) will putpressure on the cost base. We forecast Astarta’s EBITDA marginto decrease by 7ppt to 37% in 2011F, when the effect ofincreased sugar prices will become less pronounced.We maintain our SELL rating for Astarta as we believe the stockprice will follow sugar prices downwards this year despite strongorganic volume growth. We increase our target price slightly toPLN49.1 mainly on the change in macro forecasts and one-yearforward move in our DCF model (from 2010-17F to 2011-17F).Astarta is trading at a 2011F PER of 7.4x, a 36% discount todeveloped international peers and a 43% discount to Asianpeers. More importantly, it is trading at a 2011F EV/EBITDA of5.5x. This is a 5% discount to developed international peers anda 14% discount to Eastern European peers. Given that webelieve that Astarta’s stronger organic volume growth is morethan outweighed by Ukrainian political and economic risks, webelieve at least a 20% discount to 2011F EV/EBITDA multiplesof developed peers is more appropriate.Price (19/07/10)Target price (12-mth)PLN58.95previously PLN44.20PLN49.10Forecast total return -16.7%Quarterly previewWe expect Astarta to report one more strong quarter, as newharvest sugar will be available only from 3Q10. A slight decreasein QoQ revenue is a function of a c.10% decline in sugar pricesand well as lower grain volumes at the end of the season.Lower profitability is mainly due to the decline in sugar prices butalso to several one-off items reported in 1Q10. We do not expectany unusual items below the EBITDA line.2Q10 preview(UAHm) 1Q10 2Q10FRevenue 421.0 401.8EBITDA 215.5 183.7EBITDA margin (%) 51 46Net income 198.6 169.3Source: Company data, ING estimatesEarnings drivers and outlookWe expect the performance of the sugar segment to be stable in2Q10. But following the availability of the new harvest in 2H10,we expect the correction in sugar prices to be followed by adecline in sugar-related revenue.Grain sales should actually be better than last year on strongvolumes (because of the good harvest and increase in landbank) and the international uptick in wheat and, potentially, cornprices.Astarta remains very sensitive to hryvnia/US$ movements,because of the company’s unfavourable foreign exchangeexposure, particularly its dollar-denominated debt. We do notenvisage any major devaluation risk but suggest monitoringpotential hryvnia moves.Alexandra Melnikova Moscow +7 495 755 5180 alexandra.melnikova@ingbank.com74

Polish Strategy Astarta July 2010NewsflowDateDescriptionFinancialsYear end Dec (Uhm) 2007 2008 2009 2010F 2011F 2012FAugust 2010November 2010April 2011Source: Company data, INGMajor shareholders (%)2Q and 1H10 results3Q and 9month 2010 results2010FY resultsVictor Ivanchyk 40Valeriy Korotkov 35Source: Company data, INGShare dataAvg daily volume (3-mth) 5,638Free float (%) 25.0Market cap (PLNm) 1,473.8Net debt (1F, Uhm) 739Enterprise value (1F, Uhm) 4,417Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance7060504030207/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)The biggest sugar producer in Ukraine with a landbank above 160,000ha, Astarta is a solid agricultureplay; although vulnerable to fluctuations in softcommodities, sugar prices as well as currency moves.RisksThe main risks for the company remain potentialincreases, higher than we expect, in grain and sugarprices. Changes in local regulations, in particular tothe subsidy system, might have an effect on the P&L.Income statementRevenues 615 971 1,355 1,995 2,105 2,189EBITDA 151 222 411 884 773 679EBIT 116 149 318 742 616 509Net interest (52) (344) (138) (93) (93) (93)AssociatesOther pre-tax items 95 78 148 0 0 0Pre-tax profit 159 (116) 329 649 523 416Tax 0.6 27 (5) (32) (26) (21)Minorities (10) (0.6) 0.1 0.1 0.1 0.1Other post-tax items 0 0 0 0 0 0Net profit 150 (90) 323 617 497 396Normalised net profit 150 (90) 323 617 497 396Balance sheetTangible fixed assets 577 818 1,220 1,360 1,502 1,590Intangible fixed assets 1.0 55 43 43 43 43Other non-current assets 56 68 169 169 169 169Cash & equivalents 8 60 22 244 430 612Other current assets 641 953 1,186 1,451 1,630 1,763Total assets 1,282 1,954 2,640 3,267 3,774 4,177Short-term debt 333 915 376 376 376 376Other current liabilities 93 180 186 196 206 213Long-term debt 48 134 606 606 606 606Other long-term liabilities 47 76 136 136 136 136Total equity 761 648 1,335 1,952 2,449 2,845Total liabilities & equity 1,282 1,954 2,640 3,267 3,774 4,177Net working capital 428 693 909 1,164 1,333 1,459Net debt (cash) 373 989 960 739 553 371Cash flowCash flow EBITDA 194 (44) 422 791 680 586Tax, interest & other 8 238 167 32 26 21Change in working capital (150) (215) (322) (255) (169) (126)Net cash from op activities 17 (47) 158 504 485 440Capex (157) (293) (118) (282) (300) (258)Net acquisitions 0 0 0 0 0 0Net financing cash flow 136 403 (89) 0 0 0Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents (12) 52 12 222 186 182FCF (95) (284) 145 222 186 182Performance & returnsRevenue growth (%) 42.1 57.8 39.6 47.3 5.5 4.0Normalised EPS growth (%) 267.6 n/a n/a 90.8 -19.4 -20.4Normalised EBITDA mgn (%) 24.5 22.9 30.4 44.3 36.7 31.0Normalised EBIT margin (%) 18.8 15.4 23.5 37.2 29.3 23.3ROACE (%) 12.9 10.5 15.9 28.3 19.4 14.0Reported ROE (%) 26.7 -13.2 32.8 37.6 22.6 15.0Working capital as % of sales 69.6 71.4 67.1 58.3 63.3 66.6Net debt (cash)/EBITDA (x) 2.5 4.5 2.3 0.84 0.72 0.55EBITDA net interest cvg (x) 2.9 0.64 3.0 9.5 8.3 7.3ValuationEV/revenue (x) 6.6 4.8 3.4 2.2 2.0 1.8EV/normalised EBITDA (x) 27.1 21.1 11.3 5.0 5.5 6.0EV/normalised EBIT (x) 35.2 31.3 14.6 6.0 6.9 8.0Normalised PER (x) 24.6 n/a 11.4 6.0 7.4 9.3Price/book (x) 5.1 5.8 2.8 1.9 1.5 1.3Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a 3.1 5.0 4.4 4.5Per share dataReported EPS (Uh) 5.99 (3.60) 12.94 24.68 19.89 15.83Normalised EPS (Uh) 5.99 (3.60) 12.94 24.68 19.89 15.83Dividend per share (Uh) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (Uh) (5.22) (13.45) 1.72 8.87 7.43 7.28BV/share (Uh) 29.06 25.49 53.38 78.06 97.94 113.76Source: Company data, ING estimates75

Polish Strategy CEDC July 2010CEDCFocus on organic growthMaintainedBuyPoland Market cap US$1,735.1mFood & Beverage Bloomberg CEDC USWe expect visible growth in sales volumes in Russia from3Q10. The departure from the Nemiroff acquisition improvedsentiment while divesment of the Polish distributionbusiness should transform the company into a pure vodkaproducer and an attractive target for corporate raiders. Wemaintain our BUY rating for CEDC with a DCF-based targetprice of US$31.Investment caseThe Russian vodka market remains very fragmented and wecontinue to see CEDC as a major consolidator. CEDC grew itsmarket share with key accounts in Russia and lost some share inits traditional trade channel. Management deployed large trademarketing budgets in 2Q10 to drive volume growth in smallshops in Russia, which should spur visible growth in volumesfrom 3Q10.Management did not proceed with the acquisition of the Nemiroffbrand in Ukraine. The risks of running the company after theacquisition must have had prevailed over its attractions.Confronted with a choice of striking a hard sell deal or focusingon organic growth in Russia, management opted for the latter.Management plans to use proceeds from the disposal of itsPolish distribution business to buy-back shares, reduce debtand/or buy-out the controlling stake in Whitehall.Management intends to address the decline of share in smallshops in Russia by redirecting an existing US$50m marketingbudget for 2010F. So far, the marketing effort has included morethan ten projects for all the RAG brands. The plan is to cut anumber of marketing projects and promotions to just a fewimportant ones and use the budget to provide kick-backs toregional distributors and retailers. CEDC will also launch a newmainstream vodka brand in Russia in the mainstream category.Effects should be visible shortly. We expect the company toreturn to growth in sales volumes in Russia from 3Q10.We understand CEDC is in negotiations to take operating controlover Whitehall and replace Whitehall as the partner in the jointventurewith LVMH. Current terms of the joint venture betweenWhitehall and LVHM are valid until June 2013, at which pointLVMH will have the option to acquire the remaining shares of theentity. We understand that the potential consideration for a 51%voting stake and a 20% equity stake is likely to be in the range ofUS$60-70m.CEDC trades at an 18% discount to its global peers based on a2010F PER of 11.2x, and at a 13% discount based on a 2010FEV/EBIDA of 10.0x. The discount is deeper when compared withthe three largest spirit companies Diageo, Remy and Pernod,which trade on a 2010F PER range of 15.5-19.7x and 2010FEV/EBITDA range of 11.0-14.4x.Price (19/07/10)Target price (12-mth)US$24.56MaintainedUS$31.0Forecast total return 26.2%Quarterly previewFor vodka sales we are looking for a visible 15% QoQ recoveryin volumes in Russia from a very low base of 1Q10 and amodest recovery of 5% QoQ in Poland. In Russia, we also factorin a 5% QoQ price increase in RUB terms, which the companyintroduced across its portfolio at the end of 1Q10. Russia shouldgenerate revenue of US$113m, Poland US$47m and HungaryUS$6m in 1Q10. We assume a gross profit margin of 52%, upfrom 49% in 1Q10. The SG&A cost ratio should fall to 30% as weexpect integration synergies in Russia. We forecast EBIT ofUS$36.5m, of which Russia should make up US$21.0m andPoland US$13.5m. Net interest costs should reach US$26.6mand we expect a US$3.0m contribution from associatedcompany, Whitehall. With the release of its 2Q10 results, weexpect CEDC to reiterate its full year 2010 guidance for revenueof US$900-1,050m, EBIT of US$262m and comparable EPS ofUS$2.1-2.2.2Q10 results preview(US$m) 2Q09 2Q10FRevenues 362.1 166.1EBIT (2Q09 is adjusted for one-offs) 41.9 36.5Comparable net profit 18.6 11.1Comparable EPS (US$) 0.38 0.16Source: Company data, ING estimatesEarnings drivers and outlookWe forecast vodka volume sales of 20.3m 9l cases in 2010F, upfrom an estimated 18.0m cases in 2009F. More aggressive trademarketing in traditional channels (small shops) and market sharegains from weaker competition should drive this growth involumes. We forecast sales volumes of 19.5m 9l cases in 2011Fas a result of an assumed 20% increase in excise tax, whichseem conservative given recent comments by the governmentthat the excise tax increase should remain at 10% in 2011.The Polish vodka market fell by an estimated 5% in 2009F to29.2m 9l cases. CEDC’s share slid to 27% as it lost market shareto Stock Polska. Management expects to recoup market share inPoland, from 27% to 30%, over the next two years. We forecastvolume sales of 8.8m cases in 2010F and 9.3m cases in 2011F,which should allow CEDC to grow its market share to 28% in2011F. The launch of a new mainstream vodka brand, as well asprice increases at a major competitor, should underpin growth inPoland.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com76

Polish Strategy CEDC July 2010NewsflowDateDescriptionFinancialsYear end Dec (US$m) 2007 2008 2009 2010F 2011F 2012F4 August 2010 2Q10 resultsAugust 2010 Disposal of Polish distribution business toEurocashSource: Company data, INGMajor shareholders (%)Blackrock Inc 7.0Bill Carey 5.6Wellington Management 3.7Morgan Stanley IM 3.6Vanguard Group 3.3Source: Company data, INGShare dataAvg daily volume (3-mth) 926,730Free float (%) 93.0Market cap (US$m) 1,735.1Net debt (1F, US$m) 936Enterprise value (1F, US$m) 2,694Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance4540353025207/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)CEDC is a leading producer of vodka in Russia,Poland and Hungary. The company holds severalbrands, such as Green Mark, Zhuravli, Absolwent,Bols, Soplica, Zubrowka and Royal. CEDC holds an80% stake in Whitehall, an importer of wines andspirits to Russia, and holds a 50% equity stake in ajoint venture with LVMH, which has sole rights for thedistribution of Moet Hennessy wines and spiritportfolio in Russia.RisksThe 2011 excise tax increase in Russia is a major riskfactor for CEDC and we assume the excise tax will beincreased by 20%. CEDC is facing particularly fiercecompetition in the small shops segment in Russiawhere Synergy regional brands and Five Lakesbrands have gained some market share from CEDCthis year. CEDC’s results are sensitive to a move inthe US dollar and its share price displays a closecorrelation with the currency.Income statementRevenues 1,190 1,647 1,507 939 1,003 1,141EBITDA 128 214 230 268 269 326EBIT 118 199 216 259 257 310Net interest (36) (50) (80) (107) (88) (86)Associates 0 (9) (13) 23 28 31Other pre-tax items 12 (133) (16) 0 0 0Pre-tax profit 94 7 106 175 197 255Tax (16) (13) (23) (30) (33) (44)Minorities (1) (10) (6) 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 77 (17) 78 145 164 211Normalised net profit 70 128 128 145 164 211Balance sheetTangible fixed assets 81 281 298 323 350 376Intangible fixed assets 1,123 1,316 2,505 2,384 2,384 2,384Other non-current assets 11 121 27 27 27 27Cash & equivalents 88 108 634 461 505 685Other current assets 479 658 983 624 663 733Total assets 1,782 2,484 4,447 3,819 3,928 4,205Short-term debt 45 112 646 163 163 163Other current liabilities 352 448 578 367 400 427Long-term debt 470 823 1,313 1,234 1,147 1,185Other long-term liabilities 100 106 202 202 202 202Total equity 816 994 1,708 1,853 2,017 2,228Total liabilities & equity 1,782 2,484 4,447 3,819 3,928 4,205Net working capital 230 319 533 319 344 399Net debt (cash) 427 827 1,325 936 805 663Cash flowCash flow EBITDA 140 72 201 291 297 358Tax, interest & other 60 201 92 114 94 99Change in working capital (72) (64) 12 147 (6) (43)Net cash from op activities 24 83 99 279 142 153Capex (26) (23) (19) (11) (11) (11)Net acquisitions (141) (652) (1,055) 0 0 0Net financing cash flow 56 636 1,513 (562) (87) 38Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents (71) 20 526 (173) 44 180FCF 37 117 165 495 219 228Performance & returnsRevenue growth (%) 26.0 38.4 -8.5 -37.7 6.8 13.8Normalised EPS growth (%) 35.6 67.8 -18.1 -7.5 6.1 29.0Normalised EBITDA mgn (%) 10.8 13.0 13.4 28.6 26.9 28.6Normalised EBIT margin (%) 9.9 12.1 12.4 27.6 25.7 27.2ROACE (%) 10.3 12.2 6.7 7.5 7.8 9.0Reported ROE (%) 11.5 -1.9 5.9 8.3 8.6 10.1Working capital as % of sales 19.3 19.4 35.4 34.0 34.3 35.0Net debt (cash)/EBITDA (x) 3.3 3.9 5.8 3.5 3.0 2.0EBITDA net interest cvg (x) 3.6 4.2 2.9 2.5 3.1 3.8ValuationEV/revenue (x) 1.8 1.6 2.0 2.9 2.6 2.1EV/normalised EBITDA (x) 16.9 12.2 15.3 10.0 9.5 7.4EV/normalised EBIT (x) 18.3 13.1 16.5 10.4 10.0 7.8Normalised PER (x) 14.2 8.5 10.3 11.2 10.5 8.2Price/book (x) 1.2 1.2 1.0 0.94 0.86 0.78Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) 1.7 4.5 5.3 18.4 8.6 9.4Per share dataReported EPS (US$) 1.91 (0.376) 1.45 2.20 2.33 3.01Normalised EPS (US$) 1.73 2.90 2.38 2.20 2.33 3.01Dividend per share (US$) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (US$) 0.026 1.52 1.57 5.89 1.87 2.02BV/share (US$) 20.10 19.98 24.28 26.11 28.45 31.46Source: Company data, ING estimates77

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Polish Strategy July 2010Insurance79

Polish Strategy PZU July 2010PZUWeak leverage to macroPreviously HoldSellPoland Market cap PLN32,295.6mInsurance Bloomberg PZU PWLast year’s agreement between the main shareholders andthis year’s IPO clear the way to smoother management ofPZU, but the changes will be difficult in a challengingenvironment. After the latest price rally its valuations havebecome demanding considering the low EPS growth in thefuture. We downgrade to SELL.Investment caseThe settlement of a ten-year dispute between the Polish StateTreasury and Eureko clarified the situation of the company andallows management to increase restructuring efforts. The currentstrategy assumes that the company will cut its staff numbers by4,000 FTEs (c.25%) by 2012, centralise part of the operations(claims handling), stop falls in market share in attractive products(eg, life insurance) and increase prices in loss-making ones.We view PZU’s current management as one of the best amongstate-owned companies. However, we also believe that after tenyears of “suspension” and frequent changes in management it willbe difficult to implement all the changes quickly. Additionally, weperceive the competitive environment as fairly unfriendly. PZU hasgood market shares (37% in non-life and 33% in life insurance), themarket is fragmented and its closest rivals have much lower shares(c.10%). However, these companies are mainly controlled by foreignstrategic investors that are eager to increase market share. There isgrowing pressure from direct channels (telephone and internet),which are weak at PZU. The advantage connected with the recent orplanned changes of ownership at competitors (AIG, ING) looks shortterm and the new owners will probably also be aggressive.There is also the issue of profitability of life insurance, whichaccounts for the majority of profits (69%). While the existing portfoliois relatively profitable, the margin on new business (13%), is muchlower than in Western competitors (c.40%). It is partly connectedwith weak margins in bankassurance products but we think this isalso the effect of strong competition and internal inefficiencies. Forthis reason it should be traded around 1.0x-1.1x P/EV, which is alsothe level of European peers. The current ratio of 1.3x is too high.The stock is also expensive on 2010F P/BV and PER (50% and172% premium to Western peers, respectively). One could arguethat Polish stocks were always expensive versus Western Europe.However, PZU is also fairly expensive in comparison with Polishbanks (its 2010-11F P/BV is higher than in any bank, 2011F PER is7% higher than banks average and the only ratio which is lower is2010F PER, ie, -17%). At the same time it offers much weakergrowth of earnings due to weaker leverage to macroeconomicrecovery (eg, banks earnings are still heavily depressed by highprovisions, volumes are likely to grow faster than in insurance).Therefore, after the recent rally, we downgrade the stock from Hold toSELL. We increase our target price – which is based on a comparativevaluation – due to changes in the peer group (we put more weighton Polish banks as many investors compare PZU with them).Price (19/07/10)Target price (12-mth)PLN374.00Previously PLN318.00PLN337.85Forecast total return -6.6%Quarterly previewWe expect weak results in PZU. The claims ratio is likely toremain high due to floods in 2Q10, although we do not expectfurther growth as flood losses were estimated to be c.PLN156m,which is similar to claims from snowfalls in 1Q10 (PLN161m).What will decide whether net profit is weak will be the profits frominvestment, which will suffer from depreciation of both equitiesand bonds (WIG was -7% in 2Q10 versus +6% in 1Q10; 2Y bondyields grew from 4.57% in March to 4.85% in June).2Q10F results preview (26 August)(PLNm) 1Q10 2Q10Net premiums 3,841 3,879Net claims (2,459) (2,484)Operating profit 1,029 451Net profit 807 342Source: Company data, ING estimatesEarnings drivers and outlookThis year PZU will probably record a major decline in profits aftera record high 2009. The main reasons will be the payout of thePLN12.75bn special dividend last year (it will substractPLN0.5bn interest income per annum); large losses connectedwith natural disasters (heavy snowfalls in 1Q10, heavy floods in2Q10 and possible drought in 3Q10). We expect also lowerreleases of reserves in life insurance, which are connected withthe conversion of long-term contracts into 1Y revolving contracts(last year it was PLN1.3bn but this source will be exhaustedsoon as most of the contracts have already been converted).2011-12 earnings are likely to show only high single-digit growth(c.7% pa), which will be the result of the low growth in premiums(further fall of market shares) and still falling releases of reservesfrom the conversion of long-term contracts in life insurance. Thesewill be offset with an improvement in costs (staff reductions) andthe claims ratio in the P&C business (restructuring of corporatemotor insurance; fewer natural disasters next years).We expect a mild improvement in the equity markets in themedium term, which should stabilise earnings changes. This isimportant as in the situation of a c.100% combined ratio in theP&C segment and low growth of premiums in life and non-lifebusiness, the volatility of investment income, especially equities,is decisive for volatility of earnings, eg, pre-tax profit changed+PLN1.6bn YoY in 2009 and -PLN1.5bn in 2008, while the resulton equities, after unit-linked contracts, changed +PLN2.3bn and-PLN2.4bn, respectively).Piotr Palenik, CFA Warsaw +48 22 820 5020 piotr.palenik@pl.ing.comAndrzej Nowaczek London +44 20 7767 6635 andrzej.nowaczek@uk.ing.com80

Polish Strategy PZU July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F17 May 2010 1Q10 result; shares included into WIG20 index10 Jun 2010 AGM approves additional dividend of PLN10.91(ex-div on 23 Aug)10 Jun 2010 End of stabilisation period for PZU shares26 Aug 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)Polish State Treasury 45.2Eureko 13.0Source: Company data, INGShare dataAvg daily volume (3-mth) 306,431Free float (%) 41.8Market cap (PLNm) 32,295.6Dividend yield (1F, %) 3.0Source: Company data, ING estimatesShare price performance400380360340320300Source: ING5/10 5/10 6/10 6/10 7/10 7/10PriceCompany profileDJStoxx Insurance (rebased)PZU is the largest Polish insurer, controlling around athird of the market in property & casualty and liveinsurance (in both segments it is #1 with a largeadvantage over peers). Life insurance accounts for56% of consolidated gross premiums and 70% ofoperating profits. Altogether PZU has 16m clients. Ithas small operations in Lithuania and Ukraine (1% oftotal assets; 2% of gross premiums of PZU group).RisksThe main risks to our Sell rating are: stronger-thanexpectedequity markets (boosting investment gains),faster-than-expected effects of cost restructuring, fastappreciation of PLN (lowering cost of claims in motorsegment); weaker competition due to problems at theforeign strategic investors of competitors.Income statementGross written premiums 14,080 14,565 14,365 14,154 14,529 15,256Property & casualty 8,196 8,435 8,024 7,623 7,737 8,124Life 5,884 6,130 6,341 6,531 6,792 7,132Segmental operating profitsLife 2,908 2,015 3,319 2,501 2,494 2,579Property & casualty 1,491 943 1,300 653 888 1,007Asset managementOther businessesNet interest 0 0 (36) (58) (58) (58)Corporate expenses/consd 24 (27) (17) (20) (20) (20)Operating profit 4,422 2,931 4,566 3,077 3,304 3,508Net capital gains (losses)Non-op income (expense) 0 0 0 0 0 0Pre-tax profit 4,422 2,931 4,566 3,077 3,304 3,508Tax (862) (601) (803) (615) (661) (702)Minorities 0 0 0 (7) (7) (7)Other post-tax items 0 0 0 0 0 0Net profit 3,560 2,330 3,763 2,454 2,636 2,800IFRS net operating profit 3,560 2,330 3,763 2,454 2,636 2,800EEV income statementLife new business value 170 79 95 117 142EEV operating profit 0 3,098 3,125 2,220 2,436 2,574TaxEEV net profit 0 2,077 3,494 2,220 2,436 2,574Opening embedded value 31,078 33,155 23,899 25,177 26,629Closing embedded value 0 33,155 23,899 25,177 26,629 28,146Balance sheetOpening shareholders funds 14,326 17,836 20,052 11,267 12,786 14,445Closing shareholders funds 17,836 20,052 11,267 12,786 14,445 16,194Ordinary equity 17,836 20,052 11,267 12,786 14,445 16,194Hybrid capitalPreferred equityEquity 17,836 20,052 11,267 12,786 14,445 16,194Minorities 0 0 0 0 0 0Total equity 17,836 20,052 11,267 12,786 14,445 16,194Total debt 0 0 4,779 4,779 4,779 4,779Total capital 17,836 20,052 16,046 17,565 19,224 20,973Performance & returnsAPE (new business) mgn (%) n/a 14.8 9.1 10.3 12.2 14.1PVNBP margin (%) n/a 1.4 0.82 0.94 1.1 1.3P&C combined ratio (%) 93.5 91.3 99.0 101.0 96.8 97.0IFRS net op profit growth (%) n/a -34.6 61.5 -34.8 7.4 6.2BV growth (%) n/a 12.4 -43.8 13.5 13.0 12.1Embedded value growth (%) n/a n/a -27.9 5.3 5.8 5.7Life ROEV (%) n/a 10.0 9.4 9.3 9.7 9.7Reported ROE (%) 39.9 12.3 24.0 20.4 19.4 18.3Solvency ratio (%) 573.0 587.1 326.5 359.2 395.1 434.6Gearing (%) 0.0 0.0 29.8 27.2 24.9 22.8ValuationPrice/embedded value (x) n/a 0.97 1.4 1.3 1.2 1.1Price/book (x) 1.8 1.6 2.9 2.5 2.2 2.0Price/tangible book (x) 1.8 1.6 2.9 2.5 2.3 2.0PER (IFRS net op EPS) (x) 9.1 13.9 8.6 13.2 12.3 11.5Dividend yield (%) 0.0 0.0 42.4 3.0 3.3 3.5Per share dataIFRS net operating EPS (PLN) 41.23 26.98 43.58 28.42 30.53 32.42IFRS net op EPS growth (%) n/a -34.6 61.5 -34.8 7.4 6.2Dividend per share (PLN) 0.00 0.00 158.56 11.40 12.24 13.00EEV per share (PLN) 0.00 383.95 276.76 291.57 308.38 325.94BV/share (PLN) 206.55 232.21 130.47 148.07 167.28 187.54Tangible BV/share (PLN) 204.86 231.17 129.26 146.83 166.00 186.23Source: Company data, ING estimates81

Polish Strategy July 2010This page is left blank intentionally82

Polish Strategy July 2010Media83

Polish Strategy Agora July 2010AgoraDeceptively cheap BUY with wider exposure to electronic mediaPreviously HoldBuyPoland Market cap PLN1,156.3mMedia Bloomberg AGO PWThe acquisition of Helios is a transforming milestone for thegroup, which should allow it to reduce its share of freefallingnewspaper advertising to just 24% of group revenuein 2011F. We increase our DCF- and earnings-multiplesbasedtarget price to PLN27.0 following the incorporation ofthe cinema business into our model, and raise ourrecommendation to BUY.Investment caseAgora has signed an agreement to buy at least an 84% equitystake in cinema network Helios for a maximum of €26m. Heliosruns 26 cinemas with 136 screens in 24 cities in Poland. Thecompany sold 7.7m tickets in 2009 and held a 24% share of totalcinema admissions in Poland, ranking third behind CCI (46%share) and Multikino (30% share) in the Polish cinema market.Revenue reached PLN186m with EBITDA of PLN34m, implyinga healthy EBITDA margin of 18%.We estimate Agora paid 6.1x 2010F EV/EBITDA and 5.6x 2011FEV/EBITDA for Helios. We believe Agora paid a reasonableprice for the asset, which should allow it to establish a firmmarket position in the promising cinema market, tap a greatershare of advertising budgets and reduce dependence ondeclining traditional media segments. There is significantexecution risk related to the acquisition as Agora’s track recordwith new acquisitions has been disappointing, but we believemanagement has a good opportunity to extract additional valuefrom this transaction.Internet advertising is growing by double digits YoY in Poland.We believe the increasing share of internet in Polish ad spend isa strong secular trend and Agora is rebuilding its internetbusiness model to capture this structural change. Agora’sinternet arm is significantly outperforming the market so far thisyear. The group continues to narrow the gap to its largestcompetitors through increased reach, a well-managed saleseffort and selective small-scale acquisitions of internet nichewebsites and specialist internet software companies such asAdTaily. Management will continue to put traditional mediacontent onto its portals and add multimedia content to improvepage clicks and stickiness of its pages. We forecast internetadvertising to make up 9% of group revenue in 2010F and 13%in 2010F. Agora's internet segment was EBITDA positive in1Q10 and we expect it to break even in 2010F.Our 2011F EBITDA estimate includes a PLN37m contribution fromHelios. We consider Agora’s shares to be visibly undervaluedbased on a 2011F EV/EBITDA multiple of 5.0x. Europeandiversified traditional media stocks trade at 6.4x 2011F EV/EVITDA.We raise our target price to PLN27 and our recommendation toBUY. We expect the share price to be driven by the integration ofthe cinema business and an increasing recognition of thebenefits of this transaction to company prospects and earnings.Price (19/07/10)Target price (12-mth)PLN22.70Previously PLN25.00PLN27.0Forecast total return 21.1%Quarterly previewWe forecast a 13% YoY decline in revenues, driven by an 8%YoY decline in newspaper advertising, despite the low base of2Q09 which saw a record decline in newspaper advertisingrevenue of 43%. Advertising revenue at Gazeta fell by 9% due toa significant decline in the advertising revenue of Gazeta’s localeditions. Metro ad revenue was flat YoY in 2Q10. Ten days ofnational mourning in April did not affect advertising revenue asnewspapers increased the number of advertising pages in thefollowing weeks. In outdoor we expect an 8% YoY decline as theshortened presidential campaign failed to boost sectoradvertising revenues. Agora outperformed the outdoor market,which fell by c.10% YoY in 2Q10. The internet did very well andwe expect a 25% YoY increase in internet segment revenue,underpinned by a surge in display advertising.Operating expenses increased by 9% YoY excluding a PNL7.7mnon-cash software impairment charge. Falling promotionalexpenses (10% decline YoY) and costs of materials (10%) drovethe drop.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 298 271EBITDA 35 25EBIT 15 4Net profit 12 3Source: Company data, ING estimatesNewspaper advertising continues to decline and we forecastAgora's newspaper advertising revenue to decline by 11% in2010F and 8% in 2011F. Since, at 31%, it still represents thelargest share of Agora’s total revenue in 2010, it will impact thegroup revenue trend. However, the acquisition of Helios willchange the picture significantly, as we expect the share ofnewspaper advertising to fall to 24% in 2011F and to 21% in2012F. The share of all Agora's electronic media should reach32% in 2011F and 39% in 2013F, up from only 9% in 2007.Helios cinemas operate at a significantly higher EBTDA marginthan the group average and we forecast a Helios EBITDA marginof 17% in 2011F and thereafter. We increase our EBITDAestimates for Agora by 10% in 2010F and by 28% in 2011F,reflecting the consolidation of Helios. We raise our 2010/11F netprofit estimates by 21% and 40%, respectively.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com84

Polish Strategy Agora July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F3 August Dividend payment day12 August 2Q10 results15 November 3Q10 resultsSource: Company data, INGMajor shareholders (%)BZ WBK AIB AM 37.0Agora Holding 13.1Source: Company data, INGShare dataAvg daily volume (3-mth) 48,259Free float (%) 87.0Market cap (PLNm) 1,156.3Net debt (1F, PLNm) (126)Enterprise value (1F, PLNm) 1,031Dividend yield (1F, %) 2.2Source: Company data, ING estimatesShare price performance28262422201816147/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Agora is a leading media group in Poland. It publishesthe largest opinion-forming newspaper, Gazeta, as wellas controlling the largest outdoor advertising companyin Poland, AMS. In addition, the group has interests inmagazines, radio stations, the free sheet Metro, as wellas the internet portal, www.gazeta.pl. The company isalso about to break into the cinema market as it hasannounced plans to acquire Helios, a country-widenetwork of cinema multiplexes.RisksThe migration of advertisers from traditional media toelectronic media is the largest risk factor to ourestimates for Agora. We expect newspaper advertisingto decline by 10% in 2010F. We expect outdoor adspend to increase by 5% and internet ad spend to growby 15% after a 10% increase in 2009. The companycould miss our earnings estimates should our ad spendassumption prove too optimistic.Helios plans network expansion in both existing andnew cities. Development capex could impact thedividend and buy-back plans of Agora in the future,should the capex turn out to be significant.Income statementRevenues 1,272 1,278 1,110 1,112 1,300 1,347EBITDA 199 156 134 155 192 189EBIT 120 72 53 73 111 109Net interest 9 (22) 3 4 3 5Associates 0.1 (2) (1) (1) (1) (1)Other pre-tax items 0 0 0 0 0 0Pre-tax profit 129 48 54 76 112 113Tax (29) (25) (17) (15) (22) (22)Minorities (0.1) 0.1 0 0 (5) (5)Other post-tax items 0 0 0 0 0 0Net profit 100 23 37 61 86 86Normalised net profit 100 23 37 68 86 86Balance sheetTangible fixed assets 616 651 613 602 586 574Intangible fixed assets 290 397 394 394 394 394Other non-current assets 47 44 16 120 120 120Cash & equivalents 401 264 279 238 314 386Other current assets 269 269 236 228 229 234Total assets 1,623 1,625 1,538 1,582 1,643 1,708Short-term debt 35 60 42 0 0 0Other current liabilities 203 233 200 193 194 198Long-term debt 104 95 52 112 112 112Other long-term liabilities 66 69 48 45 45 45Total equity 1,216 1,167 1,196 1,232 1,293 1,354Total liabilities & equity 1,623 1,625 1,538 1,582 1,644 1,709Net working capital 128 96 85 82 83 85Net debt (cash) (262) (109) (184) (126) (202) (274)Cash flowCash flow EBITDA 158 60 104 133 153 155Tax, interest & other (20) (47) (15) (10) (19) (16)Change in working capital (11) 36 3 1 (0.1) (0.8)Net cash from op activities 167 143 122 144 171 170Capex (55) (223) (41) (71) (65) (67)Net acquisitions 0 0 0 0 0 0Net financing cash flow (1) 16 (60) 17 0 0Dividends & minority distrib'n (82) (28) 0 (25) (25) (25)Net ch in cash & equivalents 65 (137) 15 (41) 76 72FCF 121 (102) 84 78 109 108Performance & returnsRevenue growth (%) 12.2 0.42 -13.1 0.18 16.9 3.6Normalised EPS growth (%) 213.1 -76.3 69.7 80.8 27.6 0.19Normalised EBITDA mgn (%) 15.6 12.2 12.1 14.6 14.7 14.0Normalised EBIT margin (%) 9.5 5.6 4.8 7.3 8.5 8.1ROACE (%) 9.0 5.4 4.0 6.1 8.1 7.6Reported ROE (%) 8.4 2.0 3.2 5.0 6.8 6.5Working capital as % of sales 10.1 7.5 7.7 7.4 6.4 6.3Net debt (cash)/EBITDA (x) (1.3) (0.70) (1.4) (0.81) (1.1) (1.5)EBITDA net interest cvg (x) n/a 7.0 n/a n/a n/a n/aValuationEV/revenue (x) 0.70 0.82 0.88 0.93 0.73 0.65EV/normalised EBITDA (x) 4.5 6.7 7.3 6.3 5.0 4.7EV/normalised EBIT (x) 7.4 14.6 18.4 12.7 8.6 8.1Normalised PER (x) 12.5 52.6 31.0 17.1 13.4 13.4Price/book (x) 1.0 1.1 0.97 0.94 0.89 0.85Dividend yield (%) 2.2 2.2 2.2 2.2 2.2 2.2FCF yield (%) 13.5 n/a 8.6 7.6 11.4 12.3Per share dataReported EPS (PLN) 1.82 0.432 0.733 1.20 1.69 1.69Normalised EPS (PLN) 1.82 0.432 0.733 1.33 1.69 1.69Dividend per share (PLN) 0.500 0.500 0.500 0.500 0.500 0.500Equity FCFPS (PLN) 2.04 (1.47) 1.60 1.45 2.09 2.02BV/share (PLN) 22.13 21.31 23.49 24.19 25.38 26.57Source: Company data, ING estimates85

Polish Strategy Cinema City (CCI) July 2010Cinema City (CCI)Mean and lean cash machineMaintainedBuyPoland Market cap PLN2,022.4mTravel & Leisure Bloomberg CCI PWCCI offers a rare combination of high free cash flows andyet decent underlying growth driven by cinema openingsand solid organic growth in ticket sales. The company is aplay on accelerated ticket sales, driven by a strong line-upof movies as well as cinema openings in the region andhigher ticket prices underpinned by 3D productions.Following the divestiture of its real estate business, CCI hasa strong balance sheet to expand through organic growthand/or selective acquisitions. We increase our target priceby 24% to PLN47 based on higher earnings estimates andlower discount rate assumptions.Investment caseFollowing a complete disposal of the real estate business in April2010, we see CCI now as a mean and lean cinema business.We forecast FCF of €22m in 2010F (excluding cash proceedsfrom the disposal) and €42m in 2011F, implying FCF yields of4.5% and 9.3% respectively. We forecast a decline in net debtfrom €84m at the end of 2009 to €45m at the end of 2010 andthe company should turn net cash positive in 2011F. We forecastnet debt to equity to fall to 20% at the end of 2010. Managementwill soon face the pleasant dilemma of what to do with excesscash. We understand that CCI is sympathetic to the idea ofdividend payments but shareholders, including institutionalshareholders, prefer to reinvest cash into operations. We believeCCI will continue to pursue its organic growth strategy with itslong-term target to run 1,000 screens by the end of 2012.Margins will be supported by digitalisation as digital projectorsshould service up to 30% of screens by 2012. Management willalso actively seek acquisitive opportunities in both existing andnew emerging markets of Europe.Shrek 4 saw a rather slow start in Poland as record temperaturesencourage outdoor entertainment rather than cinema going but themovie reported decent box office results in other CCI markets. Theline-up of movies for the rest of the year is solid, including four 3Dreleases in 3Q and five 3D releases in 4Q. The most awaitedpremieres are Wall Street 2: Money never sleeps, Harry Potter andthe Deathly Hallows, Step Up 3 and Salt. Local productions lookstrong for 2H10 with potentially successful movies such as SlubyPanienskie, Skrzydlate Swinie and Million Dolarow.Based on our revised estimates, CCI is trading at a 2011FEV/EBITDA of 6.1x and a 2011F PER of 11.3x. Our peer groupconsists of four developed market cinema operators and twocinema chains in emerging markets. The peer group trades at anaverage 2011F EV/EBITDA of 6.7x and an average 2011F PERof 11.1x. We believe CCI should trade at a sustainable 20%premium to the sector given significantly lower tickets sales percapita in CCI's markets, its strong free cash generation anddeleveraged balance sheet.Price (19/07/10)Target price (12-mth)PLN39.50Previously PLN38.00PLN47.00Forecast total return 19.0%Quarterly previewAfter record ticket sales in 1Q10, admissions fell back tonormalised levels in 2Q10. Total cinema admissions increased9% YoY to 5.9m tickets in 2Q10 according to our estimates.However, we estimate organic growth was a negative 5%. A fallin ticket sales in older cinemas was driven by Poland, whichsuffered from a weaker line-up of movies, ten days of nationalmourning in April and spectacularly good weather in June. Salesin other markets were also affected by the World Cup games.Ticket sales in Poland fell by 4% YoY in 2Q10 to 2.9m tickets.Elsewhere, we forecast growth in total ticket sales for the quarterof 4% YoY in Israel, 7% YoY in Hungary, and 24% in CzechRepublic. Romania should more than double tickets sales to550k from a low base in 2Q09. More expensive 3D tickets madeup circa 15% of all ticket sales, up from 11% in 2Q09 butsignificantly less than the 35% in 1Q10 due to a lower number ofpremier 3D productions.Appreciating local currencies helped company earnings in 2Q10.Our EBITDA estimate includes a €3.5m gain on the disposal ofreal estate assets. In 2Q09, CCI recognised a real estatedisposal gain of €4.1m so we forecast a 33% YoY surge incomparable EBITDA from cinema operations for CCI in 2Q10.2Q10 results preview(€m) 2Q09 2Q10FRevenues 38.6 48.7EBITDA 9.5 10.7EBIT 5.6 5.7Net profit 3.9 4.0Source: Company data, ING estimatesEarnings drivers and outlookWe forecast ticket sales of 32.6m in 2010F and 35.8m in 2011F,up from 27.5m in 2009 driven by new openings as well asincreasing ticket sales per capita. CCI plans to open fivecinemas during the rest of 2010, in Stara Zagora, Arad, Russe,Bytom and Walbrzych with 43 screens. In 2011, CCI aims toopen between 8-10 cinemas with 80-100 screens.We raise our 2010F cinema EBITDA estimate by 7% to €54.4mdue to stronger than expected earnings in 1Q10 and morefavourable FX assumptions in some of the key markets such asPoland and Israel. Our 2011F EBITDA estimate is increased by20% to €72.6m on stronger currencies and improved operatingmargins.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com86

Polish Strategy Cinema City (CCI) July 2010NewsflowDateDescriptionFinancialsYear end Dec (€m) 2007 2008 2009 2010F 2011F 2012F31 August 2010 2Q10 results19 November 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)IT International Theaters 64.4Aviva BZWBK 12.8BZ WBK AM 5.2Source: Company data, INGShare dataAvg daily volume (3-mth) 22,667Free float (%) 35.6Market cap (PLNm) 2,022.4Net debt (1F, €m) 6Enterprise value (1F, €m) 497Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance454035302520157/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)CCI is the largest multiplex cinema operator in CEE.At the end of 2009, CCI operated 70 theatres with 670screens. Poland represented 56% of ticket sales in2009 with contributions from Israel, Hungary, theCzech Republic, Bulgaria, and Romania of 15%, 14%,6%, 3% and 6%, respectively.RisksCCI is susceptible to declines in admissions and themovie pipeline can result in up to 5% volatility intheatre revenues in a given year. Depreciation of localcurrencies would impact on revenue and earnings asthe company reports in euro. We use a long-termPLN/€ rate of 3.6 (but a much weaker PLN/€exchange rate of 4.05 for 2010), ILS/€ rate of 4.89and a RON/€ rate of 4.18. New cinema openings arecritically dependent on real estate developers' abilityto completed shopping centres on time. Commercialreal estate markets are improving slowly in Polandand in the Czech Republic but remain difficult inRomania and Bulgaria. The failure to open newcinemas might lead to lower earnings in the future.Income statementRevenues 157 189 212 266 321 344EBITDA 35 49 46 58 73 80EBIT 19 31 30 37 52 60Net interest (3) (2) (2) (4) (2) 0.1Associates 0 0 0 0 0 0Other pre-tax items (1) (0.4) (0.1) 0 0 0Pre-tax profit 15 28 28 33 50 60Tax 0.6 (1) (2) (4) (7) (9)Minorities 1 1 0.6 0.8 0.8 0.8Other post-tax items (0.4) (2) (2) 0 0 0Net profit 17 27 24 30 44 52Normalised net profit 12 21 16 27 44 52Balance sheetTangible fixed assets 183 182 202 198 193 189Intangible fixed assets 1 1 1 1 1.0 1.0Other non-current assets 13 32 45 45 45 45Cash & equivalents 11 49 62 60 115 155Other current assets 35 37 40 50 60 65Total assets 243 302 350 354 413 455Short-term debt 19 34 13 16 19 0Other current liabilities 27 35 52 65 78 84Long-term debt 35 67 94 51 51 51Other long-term liabilities 8 9 11 5 5 6Total equity 154 157 180 217 261 315Total liabilities & equity 243 302 350 354 413 455Net working capital 24 24 27 34 41 45Net debt (cash) 43 53 45 6 (45) (105)Cash flowCash flow EBITDA 29 41 38 42 55 62Tax, interest & other (3) (4) (4) (8) (9) (9)Change in working capital (5) 6 18 (3) 2 1Net cash from op activities 23 47 56 39 57 64Capex (41) (38) (38) (17) (15) (16)Net acquisitions 1 (34) (3) 0 0 0Net financing cash flow (32) 35 (9) (32) 4 (16)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents (45) 4 10 (2) 54 40FCF (18) 8 18 22 42 48Performance & returnsRevenue growth (%) 9.5 20.1 11.9 25.8 20.6 7.3Normalised EPS growth (%) -16.4 75.0 -24.3 68.6 62.4 18.4Normalised EBITDA mgn (%) 18.6 22.0 17.2 20.4 22.6 23.3Normalised EBIT margin (%) 12.2 16.5 14.3 13.9 16.2 17.5ROACE (%) 9.0 13.4 11.1 13.0 17.0 17.3Reported ROE (%) 11.5 17.1 14.2 14.8 18.1 17.8Working capital as % of sales 15.1 12.5 12.8 12.8 12.8 13.1Net debt (cash)/EBITDA (x) 1.2 1.1 0.96 0.11 (0.62) (1.3)EBITDA net interest cvg (x) 12.6 20.8 24.9 14.6 35.8 n/aValuationEV/revenue (x) 3.4 2.9 2.5 1.9 1.4 1.1EV/normalised EBITDA (x) 18.3 13.1 14.7 9.1 6.1 4.8EV/normalised EBIT (x) 27.7 17.4 17.7 13.4 8.5 6.4Normalised PER (x) 40.9 23.4 30.9 18.3 11.3 9.5Price/book (x) 3.1 3.1 2.7 2.2 1.9 1.6Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a 1.6 3.4 4.5 9.3 12.4Per share dataReported EPS (€) 0.328 0.534 0.480 0.586 0.857 1.01Normalised EPS (€) 0.236 0.413 0.313 0.527 0.857 1.01Dividend per share (€) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (€) (0.358) 0.167 0.358 0.439 0.810 0.934BV/share (€) 3.08 3.15 3.60 4.32 5.16 6.22Source: Company data, ING estimates87

Polish Strategy Cyfrowy Polsat July 2010Cyfrowy PolsatA number of options to exploreMaintainedBuyPoland Market cap PLN3,823.3mMedia Bloomberg CPS PWCyfrowy is in an optimum position to address thechallenges of a decelerating Polish satellite TV market.Management has a number of options to grow ARPU andrevenue. We reduce our TP on lower earnings estimates dueto weaker currency, and maintain our BUY rating.Investment caseWe forecast 1.34m new contract subscribers in the next threeyears in Poland. Satellite TV contract subscriber penetrationshould reach 48% in 2012F, up from 39% in 2009F, implying7.06m subscribers vs 5.71m today. The market is fragmentedinto four platforms, therefore attractive programming is spreadwidely. Cyfrowy should capture 0.46m new subscribers, or 34%of new contract additions by 2012F vs 53% in 2007-09, to reach3.66m subscribers by 2012F (including TPSA and excludingTNK). The share of new additions of paying contract subscriberswill be higher, since some of TPSA’s new subscribers generatevery low revenue as TPSA offers satellite TV in a bundledpackage.Cyfrowy has captured a dominant market share and is nowexploring a number of strategic options to maintain growth inrevenue and earnings. The company is successfully migratingsubscribers into more expensive packages. At present, theoverwhelming majority of its subscribers buy just a single satelliteTV service. The saturation of its subscriber base with HD, NVODand broadband is in the low single digits. Its triple-play service isa compelling cross-selling offering and should become animportant differentiator, allowing Cyfrowy to reduce churn rates.We believe market is underestimating ARPU growth potential forthe company.Broadband entry has strong business logic. We expect 25%growth in this market in the next three years. More importantly,the addition of broadband should compress churn rates in thecore business. We forecast wireless broadband market to growat a CAGR of 25% in the next three years, from an estimated1.72m subscribers to 3.32m subscribers in 2012F, with Cyfrowycapturing 10% market share. At this level, the internet andMVNO segment should become EBITDA-positive, according toour estimates.We maintain our BUY rating for Cyfrowy. Our target price ofPLN16.2 is based on the average of three valuationmethodologies: DCF, a 2010F EV/EBITDA multiple of 6.7x and a2010F PER multiple of 15.2x. We expect the share price to bedriven by the market shifting attention from subscriber growth topositive trends in ARPU, solid earnings recovery and investorsplaying down concerns about the competition which is eitherfinancially constrained (N) or suffering from managerial shake-up(Cyfra+).Price (19/07/10)Target price (12-mth)PLN14.25Previously PLN17.70PLN16.23Forecast total return 18.6%Quarterly previewIt was a slow quarter for subscriber additions, as the change inT&CA increased considerably churn rates, particularly for themore expensive Familijny package subscribers. We forecastgross additions of 120k subs, and net additions of 20k, of whichFamilijny subs should decline by 15k and Mini and Mini Maxsubs should grow by 35k. Weak subscriber numbers shouldrepresent no surprise to investors, as management hadcommunicated the impact of a change in T&CA on subscribers'growth. We expect churn to peak in 2Q10 and start fallingthereafter.We forecast Familijny APRU at PLN41.5, up 4% YoY, and MiniARPU at PLN10.7, up 20% YoY. Blended ARPU should be flatYoY at PLN35.3. We forecast subscription revenue of PLN345m,up 19% YoY but down 2% QoQ owing to increased churn.On the cost side, content costs increased 18% to PLN105m andDMR costs (distribution, retention and marketing) grew 11% toPLN68m. Cyfrowy will also consolidate the mPunkt dealer shopnetwork for the first time, which is likely to contribute a smallEBITDA loss in 2Q10. As a result, we forecast a 25% YoY rise inEBITDA and a 14% YoY growth in net profit for Cyfrowy in 2Q10.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 306.8 365.6EBITDA 77.7 97.2EBIT 68.1 78.2Net profit 56.1 63.8Source: Company data, ING estimatesEarnings drivers and outlookWe lower our 2010/11F EBITDA estimates by 7%/2% and2010F/11F net profit estimates by 8%/3% respectively, reflectinga weaker zloty and higher content costs. We maintained ouryear-end subscriber target of 3.42m, including 2.74m Familijnypackage subscribers. Our subs estimates are based on 220knew additions and an additions share of 35%. The bulk of newadditions should materialise in the last four months.As subscriber growth is decelerating in Poland, ARPU becomesthe key value driver. A change in T&CA, a decline in the numberof base period contracts, a higher share of expensive packagesand new services such as VOD should drive 4/4/5% growth inARPU pa in 2010/11/12F respectively. Our ARPU projectionsexclude any uplift from purchases of premium programming.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com88

Polish Strategy Cyfrowy Polsat July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F26 August 2Q10 results5 November 3Q10 resultsSource: Company data, INGMajor shareholders (%)Polaris Finance 65.2Source: Company data, INGShare dataAvg daily volume (3-mth) 236,247Free float (%) 35.1Market cap (PLNm) 3,823.3Net debt (1F, PLNm) 230Enterprise value (1F, PLNm) 4,054Dividend yield (1F, %) 4.7Source: Company data, ING estimatesShare price performance242220181614127/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Cyfrowy Polsat is the largest satellite TV platform inPoland, with a market share of 56% in contractsubscribers. Cyfrowy had 3.2m subscribers at the endof 2009. The platform sells satellite TV subscriptionsin three starting packages (Familijny, Mini and MiniMax), which generated 94% of its revenue in 2009. In1Q10, Cyfrowy launched a commercial wirelessbroadband service. Cyfrowy also offers an MVNOservice.RisksChanges to T&CA have thrown up a significantincrease in churn, and we expect the quarterly churnto 5.5% in 2Q10. We also see significant executionrisks in wireless broadband project related to a slowerthan expected increase in technology reach, a highlycompetitive wireless broadband market with tumblingdata transfer prices and a lack of company controlover licences or infrastructure. With 49% of operatingexpenses and a large part of capex linked to the USdollar and the euro, our earnings projections arehighly sensitive to foreign exchange assumptions.Income statementRevenues 797 1,098 1,266 1,517 1,717 1,901EBITDA 166 348 327 401 490 567EBIT 145 324 285 335 411 476Net interest (7) 3 3 (0.4) 1 2AssociatesOther pre-tax items 2 6 6 0 0 0Pre-tax profit 140 334 294 335 412 479Tax (27) (64) (56) (64) (78) (91)MinoritiesOther post-tax items 0 0 0 0 0 0Net profit 114 270 238 271 334 388Normalised net profit 114 270 238 271 334 388Balance sheetTangible fixed assets 97 126 171 258 332 400Intangible fixed assets 11 12 14 13 10 10Other non-current assets 55 63 156 175 208 239Cash & equivalents 151 246 99 26 84 162Other current assets 281 310 335 402 459 515Total assets 595 757 775 874 1,093 1,326Short-term debt 298 264 260 256 283 309Other current liabilities 102 142 154 182 204 223Long-term debt 134 46 0 0 0 0Other long-term liabilities 1 12 31 13 13 13Total equity 61 293 330 423 594 781Total liabilities & equity 595 757 775 874 1,093 1,326Net working capital 209 215 254 322 379 434Net debt (cash) 281 63 161 230 199 147Cash flowCash flow EBITDA 175 369 336 401 491 569Tax, interest & other 40 76 56 64 78 91Change in working capital (24) 19 17 (15) (9) (10)Net cash from op activities 107 320 297 322 403 469Capex (55) (56) (65) (138) (134) (141)Net acquisitions 0.6 0.1 (25) 0 0 0Net financing cash flow (5) (100) (48) (47) 0 0Dividends & minority distrib'n 0 (38) (201) (179) (163) (200)Net ch in cash & equivalents 41 96 (147) (73) 58 78FCF 65 277 232 184 269 328Performance & returnsRevenue growth (%) 65.0 37.8 15.3 19.8 13.2 10.7Normalised EPS growth (%) 83.3 82.4 -11.7 13.9 23.1 16.2Normalised EBITDA mgn (%) 20.9 31.7 25.9 26.5 28.5 29.8Normalised EBIT margin (%) 18.2 29.5 22.5 22.1 23.9 25.1ROACE (%) 38.0 59.2 47.8 52.8 52.8 48.4Reported ROE (%) -14,686 152.2 76.4 72.1 65.7 56.4Working capital as % of sales 26.2 19.5 20.1 21.2 22.1 22.8Net debt (cash)/EBITDA (x) 1.7 0.18 0.49 0.57 0.41 0.26EBITDA net interest cvg (x) 23.3 n/a n/a 994.9 n/a n/aValuationEV/revenue (x) 5.1 3.5 3.1 2.7 2.3 2.1EV/normalised EBITDA (x) 24.7 11.2 12.2 10.1 8.2 7.0EV/normalised EBIT (x) 28.2 12.0 14.0 12.1 9.8 8.3Normalised PER (x) 25.9 14.2 16.1 14.1 11.5 9.9Price/book (x) 61.2 13.0 11.6 9.0 6.4 4.9Dividend yield (%) 0.0 1.0 5.3 4.7 4.3 5.2FCF yield (%) 1.6 7.1 5.8 4.5 6.7 8.2Per share dataReported EPS (PLN) 0.551 1.01 0.887 1.01 1.24 1.45Normalised EPS (PLN) 0.551 1.01 0.887 1.01 1.24 1.45Dividend per share (PLN) 0.00 0.143 0.750 0.666 0.606 0.747Equity FCFPS (PLN) 0.251 0.986 0.867 0.686 1.00 1.22BV/share (PLN) 0.233 1.09 1.23 1.58 2.21 2.91Source: Company data, ING estimates89

Polish Strategy TVN July 2010TVNLeveraged play on accelerated GDP growthMaintainedHoldPoland Market cap PLN5,606.6mMedia Bloomberg TVN PWWe increase our DCF-based target price for TVN to PLN18.0based on higher EBITDA estimates for 2010F and 2011F.With Polish GDP growth of 3.2% in 2010F and 3.9% in 2011F,TV advertising spend is likely to grow by 7% in 2010F and by10% in 2011F, supporting revenue growth in the company’sTV segment.Investment caseHistorically, GDP growth in excess of 3% has triggered muchstronger TV ad spend in Poland. This positive scenario shouldmaterialise once again. Management is cautiously optimisitic,indicating improving visibility of advertising booking, whichreached six weeks for the mainstream stations up from fourweeks at the beginning of the year. Advertisers’ budgets areunchanged or marginally higher for 2010F but we see morerobust ad spending in 2011F. We expect TV ad spend to grow by7% in 2010F and 10% in 2011F. As in the past, TVN should beable to capture market share as its channels maintain a superiorprofile of audiences and its sales team outperform thecompetition. Earnings growth will be additionally supported byimproving profitability of thematic channels that gradually gainsubscribers and advertisers.N increased its basic package prices by PLN6 in 2Q10, which wesee as an attempt to improve ARPU and profitability. Theplatform should be able to breakeven at the EBITDA level in2Q10 and 3Q10 but not in 4Q10 and not for the year yet. Thepaid TV market has been fairly quiet so far this year with playerspreparing compelling promotions for the critical last four monthsof the year. The key challenges for N remain churn andprogramming expenses management. Competition remainstough and N’s closest competitor, Cyfra+, is suffering from ahuge internal churn and very expensive promotions to the pointwhere it changed its CEO in 2Q10.We increase our DCF-based target price to PLN18 following anupward revision to earnings estimates in 2010F and 2011F. TheTVN story looks interesting going into 2H10 and 2011. The groupis in the sweet spot to grow operating profit and cash flow asincreasing advertising spend underpins revenue growth in theTV and internet segments. Programming costs are being kept incheck and we understand the group’s other costs are runningbelow budget for most divisions. Cash burn at N is still huge butthe platform is growing and should visibly narrow the EBITDAloss this year.TVN trades at an EV/EBITDA of 10.7x in 2010F and 8.2x in2011F. CME trades at a 2011F EV/EBITDA of 9.1x and themarket values CTC Media at a 2010F EV/EBITDA of 9.6x. Weargue that the real discount in TVN's valuation is likely to beeven higher. TVN's EV-based multiples are significantly inflatedby weak currency as 81% of TVN’s total debt of PLN2.6bn isdenominated in euro, and the PLN-value of company debt isartificially high at current exchange rates.Price (19/07/10)Target price (12-mth)PLN16.45Previously PLN16.0PLN18.0Forecast total return 11.0%Quarterly previewNational mourning in April reduced the company’s advertisingrevenue in its TV segment. The TVN channel was not able tocompensate fully for the April advertising break in May and June,despite extending the line-up of premiere formats until the end ofJune. We forecast 3% YoY revenue growth in the TV segmentwith an EBITDA margin of 50%, up from 49.4% in 2Q09.At N, we expect net subscriber additions of 20,000 to 744,000and ARPU of PLN61, which should generate revenue ofPLN145m, including PLN11m of revenue from pre-paid service,TNK. We expect N to report zero EBITDA in 2Q10. Investors willfocus on the implication of package price increases on expectedARPU and churn rates.The online segment enjoyed healthy growth rates as the internetadvertising market grew by 20% in 2Q10. We forecast a 20%increase in revenue for TVN's online division driven by displayadvertising as well as increased revenue of new ventures suchas sympatia.pl, zumi.pl and VOD service.An unrealised FX loss of PLN168m on euro bonds and an accruedtax charge of PLN14.0m will drive net earnings into a loss.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 580.0 647.3EBITDA 190.5 214.4EBIT 138.5 151.7Net profit 141.8 (92.9)Source: Company data, ING estimatesEarnings drivers and outlookWe increase our 2010F and 2011F EBITDA estimates by 2%and 5%, respectively, based on higher assumed EBITDAmargins in the TV segment which we now expect to reach 44%and 45%, respectively, up from 43% in 2009. The mainstreamchannel, TVN, continues to target a roughly unchangedprogramming budget for the mainstream station and theprogramming expenses of thematic channels (apart from TVN24)are also being kept in check. Prudent cost policies should resultin improved profitability in the TV segment once TV advertisingspend accelerates into high-single digits in 2H10 and 2011F.For N, we forecast 900,000 contract subscribers in 2010F and1.1m subscribers in 2011F. N should narrow its EBITDA loss toPLN30m in 2010F and we forecast EBTIDA profit of PLN38m in2011F. The platform is on track to turn free cash flow positive in2012.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com90

Polish Strategy TVN July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F12 August 2010 2Q10 results and analyst meeting10 November 2010 3Q10 resultsSource: Company data, INGMajor shareholders (%)ITI Holdings 56.4Source: Company data, INGShare dataAvg daily volume (3-mth) 447,350Free float (%) 43.4Market cap (PLNm) 5,606.6Net debt (1F, PLNm) 2,118Enterprise value (1F, PLNm) 7,361Dividend yield (1F, %) 1.3Source: Company data, ING estimatesShare price performance2119171513117/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)TVN is the largest commercial TV broadcaster inPoland, as measured by advertising revenue. Itoperates 14 TV channels and holds a 100% stake inthe leading Polish internet portal, onet.pl. TVadvertising accounts for an estimated 70% of grouprevenue, followed by TV non-advertising at 16%, andthe internet at 14%. The company has a 100% equitystake in N, the third largest SatTV platform in Poland.RisksThe Polish Sat TV market is very competitive as fourplatforms seek to sign subscribers. TVN's platform, N,will not breakeven at the EBITDA level in 2010F asincrease in APRU is slower than expected. N requiressubstantial funding before it turns EBITDA positive in2011F and cash flow positive in 2012F and N'sfunding needs will reflect adversely on TVN's ability topay dividends. In an attempt to drive faster growth inAPRU, N had recently increased the prices of itspackages and it remains to be seen if subscribersaccept higher bills. Churn management of N has beenmixed to date and we expect an increase in churnrates in 2H10, which could widen a likely EBITDA lossin 4Q10.Income statementRevenues 1,555 1,897 2,113 2,527 2,957 3,425EBITDA 554 712 795 687 866 1,065EBIT 482 632 612 436 575 726Net interest (92) (95) (272) (197) (171) (169)Associates 0 (94) (39) 0 0 0Other pre-tax items (92) 6 80 (37) 0 0Pre-tax profit 297 448 381 203 405 557Tax (54) (84) (35) (70) (64) (95)Minorities 0 0 75 3 0 0Other post-tax items 0 0 0 0 0 0Net profit 243 364 421 136 340 462Normalised net profit 319 362 209 165 340 462Balance sheetTangible fixed assets 258 647 800 936 950 1,100Intangible fixed assets 1,697 1,703 2,560 2,560 2,560 2,560Other non-current assets 144 202 361 409 408 415Cash & equivalents 135 650 629 483 545 685Other current assets 511 551 634 725 789 870Total assets 2,745 3,753 4,983 5,113 5,252 5,629Short-term debt 3 56 22 0 0 0Other current liabilities 346 412 653 778 892 1,015Long-term debt 791 1,465 2,632 2,601 2,439 2,439Other long-term liabilities 175 173 390 390 390 390Total equity 1,430 1,647 1,285 1,344 1,531 1,785Total liabilities & equity 2,745 3,753 4,983 5,112 5,252 5,629Net working capital 400 408 347 383 405 441Net debt (cash) 659 871 2,026 2,118 1,894 1,754Cash flowCash flow EBITDA 288 358 384 302 569 708Tax, interest & other (254) (226) (612) (267) (235) (264)Change in working capital (182) (68) (81) (91) (46) (53)Net cash from op activities 144 476 304 478 757 920Capex (124) (156) (672) (386) (305) (489)Net acquisitions (60) (324) (522) 0 0 0Net financing cash flow 80 644 1,123 513 (162) 0Dividends & minority distrib'n (128) (171) (194) (74) (153) (208)Net ch in cash & equivalents 6 391 128 (146) 62 140FCF (72) 224 (640) (105) 282 261Performance & returnsRevenue growth (%) 33.5 22.0 11.4 19.6 17.0 15.8Normalised EPS growth (%) 44.9 12.9 -41.6 -19.8 105.7 35.8Normalised EBITDA mgn (%) 35.7 37.4 25.0 27.2 29.3 31.1Normalised EBIT margin (%) 31.0 33.3 29.0 17.3 19.4 21.2ROACE (%) 22.4 23.5 17.2 11.1 14.5 17.7Reported ROE (%) 18.2 23.7 25.6 8.1 18.9 22.9Working capital as % of sales 25.7 21.5 16.4 15.1 13.7 12.9Net debt (cash)/EBITDA (x) 1.2 1.2 2.5 3.1 2.2 1.6EBITDA net interest cvg (x) 6.0 7.5 2.9 3.5 5.1 6.3ValuationEV/revenue (x) 4.0 3.4 3.4 2.9 2.4 2.0EV/normalised EBITDA (x) 11.3 9.1 13.8 10.7 8.2 6.6EV/normalised EBIT (x) 13.0 10.2 11.9 16.9 12.4 9.6Normalised PER (x) 17.9 15.8 27.1 33.9 16.5 12.1Price/book (x) 4.0 3.5 3.4 3.3 3.0 2.6Dividend yield (%) 3.0 3.0 3.5 1.3 2.7 3.7FCF yield (%) n/a 3.5 n/a n/a 4.0 3.7Per share dataReported EPS (PLN) 0.700 1.05 1.22 0.399 0.999 1.36Normalised EPS (PLN) 0.920 1.04 0.606 0.486 0.999 1.36Dividend per share (PLN) 0.490 0.490 0.570 0.219 0.450 0.611Equity FCFPS (PLN) 0.057 0.918 (1.07) 0.269 1.33 1.27BV/share (PLN) 4.12 4.71 4.83 5.01 5.56 6.31Source: Company data, ING estimates91

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Polish Strategy July 2010Oil & Gas93

Polish Strategy Lotos Group July 2010Lotos GroupAny serious bridegrooms?MaintainedSellPoland Market cap PLN4,019.6mOil & Gas Bloomberg LTS PWThe Polish government has announced it is looking for astrategic partner to buy its 53% majority stake in LotosGroup. We doubt it will be successful as domestic buyersare out of funds, while we see no interest coming frominvestors outside Poland.Investment caseThe Polish government hopes to invite bids in September for itsmajority stake in oil refiner Lotos Group, according to TreasuryMinister Aleksander Grad. The minister said the cabinet hasagreed to start procedures but that a final decision on whether tosell the stake would be made after the government receives theinitial bids. The Treasury holds 53.18% of Lotos, Poland's no. 2refiner. Grad declined to comment on whether the governmentwould amend the current energy sector policy to allow Poland'slargest refiner PKN Orlen to participate in the bid. Under currentpolicy, to maintain two independent and competing refiners, PKNOrlen would not be allowed to buy Lotos.We have our doubts that the sale will be successful. First, if welook at the two serious Polish candidates, PKN Orlen andPGNiG, we see several issues that could block the sale.PKN Orlen would be the top candidate to acquire its smaller peeras this merger would make the most of potential synergies. Dueto their hostile relationship, the two companies have not set upany product swaps, which could save both parties millions ofzloty. However, we see several reasons against PKN’sinvolvement. First, we doubt that PKN Orlen could divest eitherPolkomtel or Mazeikiu Nafta before the end of the year, whichwould be necessary to free up the appropriate PLN4.5-5.0bnneeded to take over Lotos Group. We do not think that the Polishgovernment would accept PKN shares as payment. Second,PKN Orlen would take on approximately PLN6bn of debt withLotos, which could push its already high debt of PLN10.3bn to alevel unacceptable to its lenders. Finally, Lotos Group has beenable successfully to lobby against takeover overtures from PKNOrlen in the past and we believe it could be successful this timetoo. The merger would also create some anti-trust problems andmay oblige the two companies to sell assets in a depressedmarket. This is less of an issue for PGNiG but the Polish gas firmhas a large capex commitment, which makes this acquisition lessaffordable. We would expect Lotos to lobby strongly against thismerger as well.We see less interest from international investors. Currently some1.2m bbl of refining capacity is available for sale in the US andEurope and interest has been lacklustre for these assets. Lotos’large debt also makes buyers cautious. We doubt therefore thatthere would be a bid from overseas satisfactory enough to getthe nod from the Polish government. We maintain our DCFbasedtarget price of PLN22.0 and our SELL recommendation.Price (19/07/10)Target price (12-mth)PLN30.95MaintainedPLN22.00Forecast total return -28.9%Quarterly previewWe expect Lotos Group to report good 2Q10 operating figures,driven by a higher downstream margin (North Sea Brent marginswere flat at US$3/bbl, while Ural/Brent spread widened toUS$2.0/bbl from US$1.1/bbl) and upstream earnings. Seasonally2Q10 is a good period with stronger production of high valueaddedproducts like diesel. On the financial side, the stronger USdollar and weakening euro vs US dollar will have hit earnings:Lotos is mainly indebted in US dollar, while we expect thestrengthening dollar vs. the euro to lead to some hedging losses.Overall we expect Lotos to be in red at net level.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 3,448 4,400EBITDA 226 265EBIT 151 185Net profit 739 -315Source: Company data, ING estimatesEarnings drivers and outlookLotos Group’s earnings are driven primarily by two externalfactors: refining margins and crude oil prices. We expect only agradual recovery in refining margins: our forecasts areUS$2.0/bbl for 2010, US$2.5/bbl for 2011 and US$3.0/bbl for2012, with a possible return to mid-cycle margins of US$4.0/bblby 2013. In terms of crude oil prices, we expect only a limitedupside to around US$85/bbl by 2013.The development of the Gdansk refinery, the so called 10+programme, is due for completion by the end of this year, whenthe new MHC unit is finished. The company is already operatingthe new CDU/VGU units, which increases primary distillationcapacity to about 8m tonnes this year from 6m tonnes, while theMHC unit will improve the overall product mix. In 2011 we expectthe Gdansk refinery to ramp up production and reach themaximum nameplate capacity of 10.5m tonnes. We forecastEBIT above PLN1bn by 2012, as margins improve and the newunits run at full speed.The company has an upstream target of 1m tonnes of crude oilcompared with the current 250k tonnes. The company’sNorwegian YME field is due to start production from 2H10 andcould add 400k tonnes pa to overall production. Lotos recentlystated that its 1m tonne production target is achievable post-2012, which we believe is more realistic due to high financialgearing.Tamas Pletser Budapest +36 1 235 8757 pletser.tamas@ing.hu94

Polish Strategy Lotos Group July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F26 August 2010 2Q10 results4 November 2010 3Q10 reportSource: Company data, INGMajor shareholders (%)State Treasury 53.19ING 5.02Free float 41.79Source: Company data, INGShare dataAvg daily volume (3-mth) 147,547Free float (%) 46.8Market cap (PLNm) 4,019.6Net debt (1F, PLNm) 5,990Enterprise value (1F, PLNm) 10,046Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance36343230282624227/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Lotos Group is Poland’s number two oil refiner. Thecompany fully owns the 10.5m tonne Gdansk refinery,operates 313 filling stations in Poland, and holds themajority stakes of two small Southern Polishrefineries. Lotos Group is the 99.3% owner ofPetrobaltic, the Baltic sea oil producer.RisksThe major risk to our Sell recommendation is if thePolish government successfully sells its majority stakein Lotos Group to a strategic investor, which underPolish law could lead to a buy-out offer for the minorityshareholders. A faster recovery in refining marginsand a higher crude oil price are the major upside risksfrom an operational perspective.Income statementRevenues 13,125 16,295 14,321 20,141 24,522 24,280EBITDA 1,020 169 705 1,056 1,348 1,717EBIT 714 (146) 420 435 708 1,129Net interest 3 (45) (154) (265) (252) (220)Associates 0 0 0 0 0 0Other pre-tax items 287 (286) 861 (50) (50) (50)Pre-tax profit 1,004 (477) 1,126 120 406 859Tax (190) 114 (198) (23) (77) (163)Minorities (37) (64) (21) 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 777 (427) 908 97 329 696Normalised net profit 777 (427) 908 97 329 696Balance sheetTangible fixed assets 3,471 5,533 9,362 9,241 9,201 9,213Intangible fixed assets 123 101 136 131 127 123Other non-current assets 914 1,477 438 279 279 279Cash & equivalents 1,049 1,019 409 413 416 420Other current assets 4,164 4,058 4,717 5,387 6,294 6,118Total assets 9,720 12,188 15,063 15,451 16,318 16,153Short-term debt 591 551 778 868 951 974Other current liabilities 1,762 1,975 1,941 1,904 3,046 2,971Long-term debt 852 3,589 5,243 5,534 4,830 4,028Other long-term liabilities 363 287 387 333 351 344Total equity 6,151 5,786 6,714 6,811 7,140 7,836Total liabilities & equity 9,720 12,188 15,063 15,451 16,318 16,153Net working capital 2,406 2,172 2,827 3,533 3,299 3,197Net debt (cash) 395 3,121 5,611 5,990 5,365 4,582Cash flowCash flow EBITDA 1,120 (48) 1,213 719 969 1,284Tax, interest & other (63) 418 (245) 15 35 10Change in working capital (901) 391 (268) (625) 267 100Net cash from op activities 189 339 711 109 1,271 1,393Capex (682) (2,479) (3,331) (500) (600) (600)Net acquisitions 66 (2) (16) 0 0 0Net financing cash flow 530 1,966 2,158 406 (667) (789)Dividends & minority distrib'n (50) (3) (2) 0 0 0Net ch in cash & equivalents (147) (112) (470) 14 4 4FCF (693) (2,076) (2,613) (391) 671 793Performance & returnsProduction growth (%) -27.0 14.0 -13.6 136.8 55.6 0.0Reserve replacement (%) 0 0 0 0 0 0Revenue growth (%) 2.5 24.1 -12.1 40.6 21.7 -0.98Normalised EPS growth (%) 14.3 n/a n/a -89.9 237.5 111.5Normalised EBITDA mgn (%) 7.8 1.0 4.9 5.2 5.5 7.1Normalised EBIT margin (%) 5.4 -0.89 2.9 2.2 2.9 4.6ROACE (%) 10.4 -1.7 3.7 3.4 5.4 8.8ROACE - WACC (%) 0.15 -11.9 -6.5 -6.9 -4.8 -1.5Reported ROE (%) 14.1 -7.6 15.1 1.4 4.7 9.3Net debt (cash)/equity (%) 6.4 53.9 83.6 87.9 75.1 58.5Net debt (cash)/EBITDA (x) 0.39 18.4 8.0 5.7 4.0 2.7EBITDA net interest cvg (x) n/a 3.7 4.6 4.0 5.3 7.8ValuationEV/DACF (x) 25.1 22.3 13.6 92.5 7.4 6.2EV/capital employed (x) 0.63 0.76 0.76 0.76 0.73 0.67EV/normalised EBITDA (x) 4.7 44.5 13.7 9.5 7.0 5.0Normalised PER (x) 4.5 n/a 4.2 41.2 12.2 5.8Price/book (x) 0.61 0.65 0.60 0.59 0.57 0.52Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a n/a n/a 7.1 9.2Per share dataReported EPS (PLN) 6.84 (3.74) 7.44 0.751 2.53 5.36Normalised EPS (PLN) 6.84 (3.74) 7.44 0.751 2.53 5.36Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) (6.09) (18.21) (21.42) (3.01) 5.16 6.11BV/share (PLN) 51.15 47.40 51.41 52.16 54.70 60.05Source: Company data, ING estimates95

Polish Strategy PGNIG July 2010PGNIGDowngrade on lower earnings estimatesPreviously BuyHoldPoland Market cap PLN20,355.0mOil & Gas Bloomberg PGN PWThe recovery in earnings is likely to hit the wall in 2H10. Wecut our earnings multiples-based target price from PLN5.10to PLN3.3, based on downward revisions to our 2010Fearnings estimates on the back of the adverse tariff regimein the trade segment, higher crude oil prices and US dollarrate assumptions. With a negative expected total return of-2% we cut PGNIG from Buy to HOLD.Investment caseIn June PGNIG obtained more favourable tariffs in distribution(we understand the current RAB return is 8.8%). Since last yearthe relatively small segment of storage has enjoyed good returnswith RAB return of 10.5%. However, PGNIG struggled to securefair returns in by far its largest segment of gas wholesale trade.In our view, the energy regulator (URE) remains openly hostile tocompany efforts to obtain a fair tariff regime in the tradesegment. This hostility is underlined by recent tariff decisions,which were delayed and failed again to meet companyexpectations both in terms of the magnitude of the tariff increaseas well as the tariff duration. As a result, we forecast PGNIG toreport an EBITDA loss of PLN139m in the T&S segment in3Q10. The outlook for the critical 4Q10 is uncertain, as thecurrent tariff remains in place until November and the companywould like to shorten it until the end of September, in line with itstariff application. In our model we factor in 8.5% wholesale gastariff increase from 1 October, but even with this relatively robustincrease we anticipate also an EBITDA loss of PLN288m in theT&S segment in 4Q10.To date Poland has awarded over 50 five-year licenses forunconventional gas exploration to a number of oil and gascompanies, including ExxonMobil, Chevron, Conoco Philips, andMarathon Oil. PGNIG holds 11 licenses covering areas that havethe potential to contain shale gas Furthermore, the company filedapplications for two other license areas. The first wells havealready been drilled in Eastern Poland with prospective results.PGNIG increased its capex to include a larger budget for shalegas drilling. We increased capex estimates for 2010 and 2011 toPLN3.2bn pa to bring it in line with company guidance, whichincludes increased spend on shale gas projects.Based on our revised estimates, PGNIG trades at 8.1x 2010FEV/EBITDA and 17.7x 2010F PER, premiums of 3% and 26% toEuropean utilities, respectively. The sector trades at an average 7.0x2010F EV/EBITDA and 10.6x 2010F PER. Our revised TP is basedon 8.4x 2010F EV/EBITDA and 12.7x 2010F PER. We believePGNIG will trade at a 20% premium to the sector as PGNIG’s tariffregime is currently suboptimal in the T&S segment and shouldchange favourably in future, once Poland opens up its gas marketfully. Also, PGNIG’s valuation should benefit from the shale gaspotential of Poland as the company appears to be the best localpartner for international gas companies seeking shale gas in Poland.Price (19/07/10)Target price (12-mth)PLN3.45Previously PLN5.10PLN3.30Forecast total return -2.0%Quarterly previewCold April weather and improving manufacturing demand helpedto drive distribution sales volumes 7% higher YoY to 2.7bn m³ ofgas in 2Q10. A 5% increase in distribution tariff from June 2010gave additional support to the profitability of this segment.The seasonal maintenance shutdown of the Dembo crude oilfield for four weeks in May reduced crude oil output and sales.We forecast sales of 95k tonnes, down from 138k tonnes in2Q09. We foresee a positive impact on profits from the highermarket price of crude oil. We expect the company tocommunicate increased capex with the release of 2Q10 resultsdue to planned spending on E&P.In the trade segment PGNIG bought imported gas at c.US$320per 1,000m³ in 2Q10, which left it already above its wholesaledistribution tariff. We forecast thin EBITDA profit in the T&Ssegment of PLN64m, as the company also sold some cheaperin-house produced gas from storage.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 3,874 3,820EBITDA 152 545of which: E&P 158 338T&S (64) 64Distribution 89 147Other (31) (4)EBIT (240) 170Net profit (94) 146Source: Company data, ING estimatesEarnings drivers and outlookWe cut our 2010F EBITDA/net profit estimates by 33%/51%,respectively, on the back of: (1) an increase in our 2010F crude oilprice assumption from US$70/bbl to US$76/bbl; (2) higher US$exchange rate of 3.23 versus 2.83 before; and (3) an unsatisfactoryrebalancing of the wholesale gas tariff. We also lower our 2011FEBITDA/net profit estimates by 30%/44% respectively, on ahigher crude oil price of US$80/bbl, up from US$75/bbl, and ahigher US dollar exchange rate of 3.12, up from 2.82.Gas demand in Poland is improving as manufacturing output isaccelerating. Recovery from the long winter, post-floodingreconstruction and more robust German imports are drivingmanufacturing output in Poland, and we expect these positive trendsto continue in 3Q09. We forecast gas volume sales of 14.0bn m3 in2010, up from 13.7bn m3 before, representing growth of 5.5% YoY.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com96

Polish Strategy PGNIG July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012FJuly 2010 €bond offering on the local marketJuly 2010 Markowola field shale gas drilling resultsannouncement2Q10 results 31 August 20104Q10 €bond offering on the international marketsSource: Company data, INGMajor shareholders (%)State Treasury 72.8Source: Company data, INGShare dataAvg daily volume (3-mth) 6,060,300Free float (%) 27.2Market cap (PLNm) 20,355.0Net debt (1F, PLNm) 4,338Enterprise value (1F, PLNm) 24,703Dividend yield (1F, %) 2.1Source: Company data, ING estimatesShare price performance6.05.55.04.54.03.53.07/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)PGNIG’s main business is the distribution of naturalgas in Poland, in which the company has a monopolyposition in the market. PGNIG also exploits crude oiland natural gas from onshore deposits in Poland aswell as providing drilling, geological and geophysicalservices for other crude oil and natural gas companiesin a number of markets in Asia, Europe and theMiddle East.RisksPGNIG’s earnings are mostly sensitive to the level oftariffs in the wholesale trade and distribution of gas,as well as prices of imported gas and PLN/US$exchange rates. Adverse changes in tariffs, costs ofimported gas and a depreciation of the zloty versusthe US dollar could have a material negative effect onour earnings projections.Income statementRevenues 16,652 18,432 19,290 19,533 21,528 22,906EBITDA 2,291 2,226 2,830 3,046 3,685 3,887EBIT 861 801 1,334 1,528 2,092 2,214Net interest 47 54 (2) (106) (113) (139)Associates (16) 0 0 0 0 0Other pre-tax items 120 81 111 0 0 0Pre-tax profit 1,012 935 1,443 1,421 1,979 2,075Tax (87) (70) (238) (270) (376) (394)Minorities (1) (0.4) (2) 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 924 865 1,202 1,151 1,603 1,681Normalised net profit 2,242 865 708 1,151 1,603 1,681Balance sheetTangible fixed assets 18,716 20,587 22,889 24,573 26,179 27,707Intangible fixed assets 85 152 173 173 173 173Other non-current assets 3,331 1,835 1,603 1,303 1,303 1,303Cash & equivalents 1,584 1,422 1,196 1,385 751 189Other current assets 4,687 5,750 5,221 5,283 5,794 6,147Total assets 28,402 29,745 31,082 32,718 34,201 35,519Short-term debt 2,515 4,094 4,717 4,119 4,402 4,597Other current liabilities 986 876 1,183 1,183 1,183 1,183Long-term debt 31 41 44 1,604 1,604 1,604Other long-term liabilities 3,848 4,018 3,736 3,680 3,681 3,682Total equity 21,022 20,716 21,402 22,132 23,332 24,453Total liabilities & equity 28,402 29,745 31,082 32,718 34,201 35,519Net working capital 4,547 5,438 4,939 5,001 5,512 5,865Net debt (cash) 962 2,713 3,566 4,338 5,254 6,012Cash flowCash flow EBITDA 2,315 2,274 2,460 2,293 2,707 2,821Tax, interest & other (135) (164) (114) (376) (489) (533)Change in working capital 427 846 (227) (28) 228 158Net cash from op activities 2,688 2,989 2,600 2,641 3,424 3,511Capex (2,934) (2,707) (3,051) (3,202) (3,200) (3,200)Net acquisitions 0 0 0 0 0 0Net financing cash flow (644) 729 453 1,227 0.5 3Dividends & minority distrib'n (153) (171) (260) (421) (403) (561)Net ch in cash & equivalents (1,956) (162) (226) 189 (634) (562)FCF (205) 331 (501) (667) 111 172Performance & returnsProduction growth (%) -4.7 -1.4 1.2 3.5 6.1 6.7Reserve replacement (%)Revenue growth (%) 9.6 10.7 4.7 1.3 10.2 6.4Normalised EPS growth (%) 68.9 -61.4 -18.1 62.5 39.2 4.9Normalised EBITDA mgn (%) 20.2 12.1 12.6 15.6 17.1 17.0Normalised EBIT margin (%) 13.1 4.3 4.4 7.8 9.7 9.7ROACE (%) 8.8 3.3 3.3 5.7 7.3 7.4ROACE - WACC (%) -0.73 -7.8 -7.6 -4.7 -3.2 -3.2Reported ROE (%) 4.4 4.1 5.7 5.3 7.1 7.0Net debt (cash)/equity (%) 4.6 13.1 16.7 19.6 22.5 24.6Net debt (cash)/EBITDA (x) 0.42 1.2 1.3 1.4 1.4 1.5EBITDA net interest cvg (x) n/a n/a 1,516 28.6 32.5 28.0ValuationEV/DACF (x) 7.8 7.6 9.2 9.7 7.7 7.8EV/capital employed (x) 0.90 0.93 0.91 0.89 0.87 0.86EV/normalised EBITDA (x) 6.3 10.4 9.8 8.1 7.0 6.8Normalised PER (x) 9.1 23.5 28.7 17.7 12.7 12.1Price/book (x) 0.97 0.98 0.95 0.92 0.87 0.83Dividend yield (%) 0.75 0.84 1.3 2.1 2.0 2.8FCF yield (%) n/a 1.4 n/a n/a 0.43 0.65Per share dataReported EPS (PLN) 0.157 0.147 0.204 0.195 0.272 0.285Normalised EPS (PLN) 0.380 0.147 0.120 0.195 0.272 0.285Dividend per share (PLN) 0.026 0.029 0.044 0.071 0.068 0.095Equity FCFPS (PLN) (0.043) 0.047 (0.085) (0.095) 0.038 0.053BV/share (PLN) 3.56 3.51 3.63 3.75 3.95 4.14Source: Company data, ING estimates97

Polish Strategy PKN Orlen July 2010PKN OrlenStill waiting for the breakthrough sale of non-core assetsMaintainedSellPoland Market cap PLN16,424.0mOil & Gas Bloomberg PKN PWPKN Orlen is looking to divest its non-core assets – Polkomtel,Anwil and Mazeikiu Nafta – its chances of achieving this haveimproved but the timing is still very unclear.Investment casePKN Orlen is still looking to solve its key problem, reducing itsmounting PLN10.2bn net debt. In 1Q10, the company signed adeal with Lambourn to divest part of its strategic reserves, whichfreed up some PLN0.8bn from the PLN6bn of mandatoryreserves. The company is working on a similar, though smaller,deal in 3Q10. The real solution to the mandatory reserves issue,however, would be the proposed government scheme which islikely to be achieved no earlier than 5-10 years.Outside of this Lambourn success, Orlen has not yet overcomethe main obstacles facing its other key divestment deals. Therehave been some developments: Polkemtel’s major shareholdershave agreed to sell their stakes collectively, probably in 1H11,but the problem remains of finding a strategic buyer for thecompany, which has an estimated market capitalisation ofPLN12-13bn. Orlen is also aiming to buy the remaining stakes inAnwil, increasing its holding from 85% to 100%. The plan wouldthen be to split up the firm and sell the fertiliser and chemicalparts separately. Orlen was in negotiations with Pulawy to buy itsmajority stake, but the talks failed when Orlen rejected the price.We believe there is now greater commitment from PKN Orlen todivest its ill- fated refinery Mazeikiu Nafta, but the company hasnot been able to conclude a deal with the Lithuanian governmentto acquire Klapeidos Nafta, the major port for oil products, whichwould significantly cut the logistics costs at Mazeikiu. Crude isstill not being received at Mazeikiu by the Druzhba pipeline,which would also boost profitability.Its high net debt makes it difficult for PKN Orlen to pursue growthvia acquisitions and new investments. The company is over thepeak of its previous capex cycle and may now be looking for newinvestment opportunities. We do not see the rationality ofbuilding up an upstream business, especially as only a meagrePLN700m is devoted to this side of the business. We expect anew 460MW gas powered CCGT power plant to be built inWloclawek. Refining and petrochemicals, however, remain themain focus of operations, and the company’s future still largelydepends on the development of these margins and the state ofthe Polish, German and Baltic economies. We expect retail’shigh profitability in these markets to soften as competitionintensifies and as the high prices weaken demand.The next two years are likely to remain difficult for PKN Orlen aswe expect the environment to remain harsh. The successfuldivestment of a major asset such as Polkomtel or Mazeikiu Naftaat an attractive valuation would be a major upside catalyst. Wemaintain our DCF based target price of PLN31 and our SELLrecommendation.Price (19/07/10)Target price (12-mth)PLN38.40MaintainedPLN31.00Forecast total return -19.3%Quarterly preview2Q10 saw good downstream margins: we estimate PKN’sindicator margin rose to US$4.7/bbl from US$4.0/bbl in 1Q10,while the Ural/Brent differential rose to US$2.0/bbl fromUS$1.4/bbl in 1Q10. The petrochemical business should alsohave benefited from rising margins. The complex margin rose to€600/t from €540/t in 1Q10 and €430/t in 2Q09. We expectaround PLN300m in inventory gains, primarily due to thestrengthening of the USD vs. PLN. The financial line howevercould see a loss of around PLN200m on foreign-exchangedenominated loans. Overall we expect 2Q10 to be a goodquarter for PKN Orlen.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 16,770 18,500EBITDA 1,317 1,480EBIT 661 830Net profit 1,171 540Source: Company data, ING estimatesEarnings drivers and outlookPKN Orlen’s future earnings are still primarily driven bydownstream and petrochemical margins. We expect only agradual recovery in refining margins: our forecasts areUS$2.0/bbl for 2010, US$2.5/bbl in 2011 and US$3.0/bbl in2012. Petrochemical margins are expected to follow a similarpath.On a short-term outlook, we expect the strong refining andpetrochemical margins seen in 1Q-2Q10 to ease in 2H10 owingto higher capacity utilisation, new capacities and slowingEuropean economic growth. This could dent profit growth, andthe company may also suffer in the short term from the weakzloty against the US dollar and euro, as PKN Orlen financesitself primarily through euro-denominated loans.We expect PKN’s stock price also to be driven by news on itsdivestments. The company could announce the further sale ofmandatory reserves (similar to the Lambourn transaction), duringthe latter part of the year. The Polkomtel sale could take place in1H11, and we expect further developments on the divestmentsof Anwil and Mazeikiu, again during 2011 rather than 2010.These divestments would be major catalysts for the stock price,but unfortunately we do not see these catalysts being realised in2010.Tamas Pletser Budapest +36 1 235 8757 pletser.tamas@ing.hu98

Polish Strategy PKN Orlen July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F29 July 2010 2Q10 trading statement31 August 2010 Half-yearly report21 October 2010 3Q10 trading statement10 November 2010 3Q10 reportSource: Company data, INGMajor shareholders (%)State Treasury 27.52ING OFE 5.17Aviva OFE 5.08Free float 62.2Source: Company data, INGShare dataAvg daily volume (3-mth) 984,122Free float (%) 73.0Market cap (PLNm) 16,424.0Net debt (1F, PLNm) 9,503Enterprise value (1F, PLNm) 28,578Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance4240383634323028267/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)PKN Orlen is Poland’s flagship oil & gas company.The company has 6 refineries with a combined CDUcapacity of 33.3m tonnes and a network of 2,570filling stations in Poland, Germany, Czech Republicand the Baltic countries. Orlen controls CzechRepublic’s Unipetrol (63% stake) and Lithuania’sMazeikiu Nafta with a 100% holding.RisksThe major upside risks to our recommendation are astrong improvement in the environment for refiningand petrochemical companies and quicker thanexpected divestment of its non-core assets includingPolkomtel, Anwil and Mazeikiu at attractive valuations.We also estimate shrinking per unit profitability in thecompany’s retail business: it would be a positivesurprise to us should the company maintain its retailmargins in the future.Income statementRevenues 63,793 79,533 67,928 95,637 100,939 107,315EBITDA 5,035 888 3,665 4,400 4,850 5,381EBIT 2,604 (1,603) 1,097 1,579 1,867 2,222Net interest 140 (1,579) 71 (534) (440) (485)Associates 0 0 0 0 0 0Other pre-tax items 267 267 272 241 229 217Pre-tax profit 3,011 (2,915) 1,441 1,286 1,656 1,954Tax (531) 389 (140) (231) (305) (363)Minorities (68) 21 8 19 (72) (201)Other post-tax items 0 0 0 0 0 0Net profit 2,412 (2,505) 1,309 1,074 1,279 1,391Normalised net profit 2,412 (2,505) 1,309 1,074 1,279 1,391Balance sheetTangible fixed assets 25,535 27,830 28,472 28,814 28,992 29,490Intangible fixed assets 531 645 690 609 588 569Other non-current assets 724 806 565 633 709 637Cash & equivalents 1,690 1,396 2,973 3,820 3,850 3,880Other current assets 17,673 16,299 16,460 18,045 19,465 18,279Total assets 46,153 46,976 49,160 51,921 53,604 52,855Short-term debt 1,719 11,282 1,594 1,110 860 800Other current liabilities 10,841 10,528 12,617 14,137 15,157 13,541Long-term debt 8,743 2,752 11,744 12,213 11,783 11,593Other long-term liabilities 2,312 1,882 1,498 1,699 1,690 1,644Total equity 22,538 20,532 21,707 22,762 24,113 25,277Total liabilities & equity 46,153 46,976 49,160 51,921 53,604 52,855Net working capital 8,064 7,031 4,539 4,583 4,961 5,369Net debt (cash) 8,772 12,639 10,364 9,503 8,794 8,514Cash flowCash flow EBITDA 5,460 (157) 3,282 4,518 5,035 5,568Tax, interest & other 561 (122) (586) 643 701 816Change in working capital (2,867) 1,332 1,813 (38) (416) (408)Net cash from op activities 1,965 3,617 5,162 4,249 4,314 4,797Capex (3,585) (3,969) (2,671) (2,919) (2,979) (3,481)Net acquisitions (294) (537) (1,018) (8) 0 0Net financing cash flow 27 1,307 (1,025) (584) (1,406) (1,386)Dividends & minority distrib'n 0 (693) 0 0 0 0Net ch in cash & equivalents (853) (154) 1,597 839 30 30FCF (816) (3,264) 3,271 1,330 1,335 1,316Performance & returnsProduction growth (%) n/a n/a n/a n/a n/a n/aReserve replacement (%) 0 0 0 0 0 0Revenue growth (%) 20.7 24.7 -14.6 40.8 5.5 6.3Normalised EPS growth (%) 21.5 n/a n/a -18.0 19.1 8.7Normalised EBITDA mgn (%) 7.9 1.1 5.4 4.6 4.8 5.0Normalised EBIT margin (%) 4.1 -2.0 1.6 1.7 1.8 2.1ROACE (%) 8.0 -4.7 3.2 4.4 5.1 6.0ROACE - WACC (%) -1.7 -14.4 -6.5 -5.2 -4.6 -3.7Reported ROE (%) 12.5 -13.3 7.1 5.5 6.2 6.4Net debt (cash)/equity (%) 38.9 61.6 47.7 41.8 36.5 33.7Net debt (cash)/EBITDA (x) 1.7 14.2 2.8 2.2 1.8 1.6EBITDA net interest cvg (x) n/a 0.56 n/a 8.2 11.0 11.1ValuationEV/DACF (x) 14.0 32.3 5.8 6.7 6.5 5.8EV/capital employed (x) 0.84 0.92 0.84 0.79 0.76 0.74EV/normalised EBITDA (x) 5.5 35.8 8.0 6.5 5.8 5.2Normalised PER (x) 6.8 n/a 12.6 15.3 12.8 11.8Price/book (x) 0.83 0.92 0.86 0.82 0.77 0.73Dividend yield (%) 4.2 0.0 0.0 0.0 0.0 2.6FCF yield (%) n/a n/a 11.1 4.7 4.8 4.7Per share dataReported EPS (PLN) 5.64 (5.86) 3.06 2.51 2.99 3.25Normalised EPS (PLN) 5.64 (5.86) 3.06 2.51 2.99 3.25Dividend per share (PLN) 1.62 0.00 0.00 0.00 0.00 1.00Equity FCFPS (PLN) (1.96) (0.531) 7.76 3.11 3.12 3.08BV/share (PLN) 46.52 41.65 44.51 47.02 50.01 52.26Source: Company data, ING estimates99

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Polish Strategy July 2010Real Estate101

Polish Strategy Dom Development July 2010Dom DevelopmentSlower 2Q. Will the buyers return after the summer break?Previously BuyHoldPoland Market cap PLN1,155.5mReal Estate Bloomberg DOM PWWe downgrade our rating on Dom Development from Buy toHold and cut our earnings forecasts for 2010 and 2011. Thecompany pre-announced weaker than expected new unitsales in 2Q10. We also expect the summer months to beslow in terms of new unit sales, with potential improvementexpected in September and in 4Q10.Investment caseDom has recently finalised the acquisition of two land slots inWarsaw, located in the Bemowo and Wola districts. Managementexpects the gross profit margin to reach 25-30% on both projectsat current market prices and construction costs 10% higher thanprevailing on the market. Both projects could be launchedcommercially in 2011. Dom introduced four housing projects with638 units for sale in 1Q10, including phase 2 of the highlypopular Saska Kepa project, and two projects in 2Q10 inBialoleka district. In addition, Dom is ready to begin eighthousing projects with 1900 housing units but the introduction ofthese projects depends on September’s new unit sales and areturn of buyers in 4Q10. We assume Dom will start four projectswith circa 900 units in 2H10. If new monthly unit sales in the lastfour months of the year exceed 120-140 units per month, thecompany might start more projects in early 2011. New startsshould allow the company to maintain its target level of unit stockat 12m historical rolling unit sales.We lower our 2010 earnings estimates due to expectedprovisioning for future client claims. Based on legal opinion,purchasers of housing units could claim compensation forconstruction faults from developers for up to ten years afterhandover. Such a long construction warranty period requires anincrease in future claim provisions. We assume Dom will putaside PLN8.0m in future claim provisions in 2010F, which willlower reported earnings with no impact on cash flows. Weassume provisions will represent 2.5% of company revenuegoing forward. Our 2011 earnings estimates are also affected bydelays in the handover of housing units.Despite weaker than expected earnings in 2010F, the companywill be free cash flow positive in 2H10 with cash proceeds fromclients of c. PLN370m, construction cash costs of PLN125m,land purchases at PLN120m and debt repayment of PLN50m.Dom drew an additional construction loan of PLN100m to fundthe new projects it plans to start in 2H10. We regard Dom’sliquidity position as comfortable with cash of PLN161m in 1Q10,net debt of PLN301m and likely positive free cash flow in 2Q10.We cut our target by 12% to PLN47.4 due to downward revisionin earnings in 2010F and in subsequent years. Our target price isbased on a discounted cash flow model as well as a 2011F PERmultiple of 10.0x, as we believe 2010F earnings are generallyreflective of past trends in demand.Price (19/07/10)Target price (12-mth)PLN48.00Previously PLN53.40PLN47.4Forecast total return 1.7%Quarterly previewWe forecast new sales of 310 housing units in 2Q10, down 10%qoq and up 99% yoy. This will bring 1H10 sales to 653 units vs262 units in 1H09. Dom noticed a reduced number ofprospective clients visiting sales offices and fewer closedtransactions. Unit handovers were 33% lower qoq and 62%lower yoy at 181 units. We expect the gross profit margin toincrease to 24.0%, up from 21.6% in 1Q10 but down from 27.0%in 2Q09. High-margin Grzybowska project handovers kick in on alarger scale in 2Q10. In 2Q10 Dom handed over 45 units atGrzybowska project. However, the company is also offloadingthe stock of unprofitable units in two unsuccessful projects ofRegaty and Laguna, where we expect 39 handovers at very lowmargins in 2Q10. The company placed two projects, Debry 11and Debry 20, on the market in 2Q10 with 177 housing units.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 192.0 131.2EBITDA 31.3 20.8EBIT 30.7 20.2Net profit 22.6 14.3Source: Company data, ING estimatesEarnings drivers and outlookHousing sales volumes, housing prices, construction costs andland prices are the key earnings drivers for Dom. Sales volumesrecovered well until 1Q10 but slumped in 2Q10, which webelieve is somewhat worrying.We cut our handover target from 656 to 575 in 2010 due to slowsales and handovers at Grzybowska project. We also cut ourhandover target from 2,138 to 1,376 units in 2011F as postponeexpected handovers on Gorczewska, Targowek and Regaty IV,Regaty V, Regaty VI projects.Construction costs are stable and the company is able to signcontractors at PLN3,000-3,500/sqm, excluding costs of land.We believe construction costs are likely to be higher in themedium and long term, so it makes sense for the company toperhaps build the units and increase stock somewhat. ForGorczewska project, which is likely to be the next launch,management signed contractors at fairly low unit constructioncosts of PLN3,300/sqm.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com102

Polish Strategy Dom Development July 2010NewsflowDateDescriptionFinancial statementsP&L account, PLNm 2009 2010F 2011F 2012FAugust 24November 11Source: Company data, INGMajor shareholders (%)2Q10 results3Q10 resultsDom Development BV 63.1Jarosław Szanajca 6.2Grzegorz Kiełpisz 5.2Source: Company data, INGShare dataAvg daily volume (3-mth) 8,616Free float (%) 24.0Market cap (PLNm) 1,155.5Dividend yield (1F, %) 1.7Source: Company data, ING estimatesShare price performance65605550454035307/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Dom Development is the largest housing developer inWarsaw by number of units sold, as well as byrevenue and earnings, with a 12% market share in2009. The company develops desirable flats,apartments, luxury apartments and houses in Warsawand Wroclaw. Dom sold 13,700 housing unitsbetween its inception in 1996 and the end of 2009.RisksHousing developers are greatly dependent on banks’’willingness to fund housing development projects.Banks are slowly facilitating easier access tomortgage funding, although the share of cheaper fxmortgages fell to c. 25% of new signings. At themoment Dom sells c. 90% of housing units onmortgage credit.Revenue 704 300 894 701% change (20) (57) 198 (22)EBITDA 113 41 121 84% change (59) (64) 198 (30)Margin, % 16.0 13.5 13.5 12.0EBIT 111 39 118 82Pre-tax 105 45 120 81Tax (20) (9) (23) (15)Minorities 4 5 6 7Net profit 80 37 97 66% change (64) (54) 164 (32)Margin, % 11.4 12.2 10.8 9.4Source: ING estimatesBalance sheetPLNm 2009 2010F 2011F 2012FCash 557 164 428 53Other current assets 1,136 1,489 1,432 1,711Total current assets 1,693 1,654 1,860 1,765PPE 7 7 7 7Other 12 12 12 12Intangibles 1 1 1 1Other fixed assets 3 3 3 3Total fixed assets 22 22 22 22Total assets 1,716 1,676 1,882 1,788ST debt 85 150 150 50Other cur liabilities 381 259 378 341Total current liabilities 466 409 528 391LT debt 434 434 434 434Other LT liabilities 24 24 24 24Total LT liabilities 458 458 458 458Minorities 0 0 0 1Equity 792 808 896 938Total liabilities & equity 1,716 1,676 1,882 1,788Source: ING estimatesCash flowPLNm 2009 2010F 2011F 2012FCF from operations 123 (64) 188 41CF from investment 169 (395) 76 (316)CF from funding 159 65 0 (100)Change in cash 451 (393) 264 (375)Cash last year 106 557 164 428Cash year end 557 164 428 53Source: ING estimatesForecasts and ratiosYear to Dec 2009 2010F 2011F 2012FRevenue (PLNm) 704 300 894 701EBITDA (PLNm) 113 41 121 84Net income (PLNm) 80 37 97 66EPS (PLN) 3.20 1.47 3.87 2.64PER (x) 15.0 32.7 12.4 18.2EV/EBITDA (x) 11.6 34.4 12.4 17.8P/BV (x) 1.5 1.5 1.3 1.3ROE (%) 10.5 4.6 11.4 7.2Source: ING estimates103

Polish Strategy GTC July 2010GTCOut of the U-turn and shifting into higher gearPreviously HoldBuyPoland Market cap PLN5,001.7mReal Estate Bloomberg GTC PWWe increase our SOTP-based target price by 19% followingadditions of new projects, announced disposal of offices atfavourable valuations and a much more robust outlook forrents. With 30% upside to our revised target price weupgrade GTC to a Buy. Asset appreciation, positiverevaluations, increasing rents and slowly decliningcapitalisation rates in the region should drive growth in NAVand push the share price higher.Investment caseThe commercial real estate markets of Central Europe are slowlybut steadily improving. Office demand is improving in Poland, asoffice rents in Warsaw hit the bottom in late 2009 and early 2010and stabilised. Prague is doing better as well, while the Budapestmarket is weaker. Rents in Warsaw outside CBD are around€14-15/sqm, Prague rents out for €13-14/sqm and Budapest at€10-11/sqm, excluding service charges. Office rents remainunder pressure in the secondary cities of the region. Retail rentsremain stable across locations but visitors' numbers and turnoverremain visibly below 2008 levels.Office markets in the region, particularly in Warsaw and Prague,are likely to tighten in the course of 2011 with a likely supply gapproviding a more robust backdrop for office rental operations. Sofar management planned to spend €200-250m pa on projectdevelopment, a level it deemed appropriate given the toughmarket conditions and funding at hand. Now we expect themanagement to accelerate longer-tail of the current pipeline ofprojects. Based on our revised model which reflects up-to-datedevelopment plans, completions should reach 91k m 2 in 2010F,161k in 2011F and a record high 440k m 2 in 2012 in both officeand retail segments.At the end of 1Q10 GTC held cash of €193m, an undevelopedland bank of €529m, its leverage ratio was 63% and averageloan to value ratio was 49%. Of the total debt of €1.4bn, debtmaturing within the next three years was only €210m. Weestimate present value of company office and retail pipeline at€1.14bn based on current construction costs, excluding projectsunder construction. In our NOI-valuation we assumed 75% ofthis project value will be started and completed with the next fiveyears.After NAV erosion in 2009 we expect NAV growth of5%/13%/28% in 2010/11/12F in € terms for GTC. Assetappreciation should drive P/NAV down to 0.96x in 2010F and0.92x in 2011F. We regard these valuation levels as attractive fora company with a proven track record of selective decisionmaking and region-unmatched ability to source funding forprojects. We expect GTC to trade back at a premium to NAVonce investors recognise the asset appreciation potential ofGTC.Price (19/07/10)Target price (12-mth)PLN22.8Previously PLN25.0PLN29.7Forecast total return 30.4%Quarterly previewWe forecast rental and service revenue of €31.3m in 2Q10, up43% yoy and 2% qoq, with qoq growth driven by increasingoccupancies at City Gate building in Bucharest followingcompletion in 4Q09 and signing of next rental agreements.Housing revenue should remain at a similar level to 1Q10, or at€6.5m in 2Q10.We forecast a small positive revaluation of €5.0m in 2Q10coming from office properties under construction which thecompany is slowly renting out. GTC did not change itsassumptions on capitalisation rates or rental rates despiteannouncing the recent disposal of two office buildings in Warsawat capitalisation rates which we believe are below thecapitalisation rates used in real-estate portfolio valuation.We estimate net interest costs were €13.7m, unchanged qoq.Income from associates should reach €2m and we also expect aminorities loss of €2.2m.2Q10 results preview(€m) 2Q09 2Q10FRevenues 38.3 37.8EBIT 10.8 20.6Profit from cont'd ops (17.9) 25.6Net profit (12.0) 13.3Source: Company data, ING estimatesEarnings drivers and outlookWe expect rental income to rise due to openings of new officeand shopping centres as well as an expected increase in rentalrates for office which are slowly recovering from the lows of2009. We forecast 9%/32% yoy growth in rental (and service)revenue in 2010/11F with stable gross rental margins of 75%.GTC made a strategic decision last year to downshift the scale ofits housing operations including redesigning some of the projectsinto commercial real estate. We forecast a housing revenuedecline of 43% yoy in 2010F to €35m.For GTC’s portfolio we expect a 25bp downward shift in caprates in 2010F to 7.75% and a 50bp decline to 7.25% in 2011F.Appreciation of investment property will support positiverevaluation of €76m in 2010F, vs a revaluation loss of €172m in2009. Due to an expected decline in cap rates as well as growingnumber of completed projects and high space of completedbuilding, revaluation should increase to €233m in 2011F.Andrzej Knigawka Warsaw +48 22 820 5015 andrzej.knigawka@pl.ing.com104

FinPolish Strategy GTC July 2010NewsflowDateAugust 31November 15Source: Company data, INGMajor shareholders (%)Description2Q10 results3Q10 resultsGTC RE 43.1ING NN 8.1AVIVA CU BZWBK 7.2Source: Company data, INGShare dataAvg daily volume (3-mth) 202,552Free float (%) 56.9Market cap (PLNm) 5,001.7Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance323028262422207/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)GTC has 15 years of experience as the leadingdeveloper of retail, office and housing real estate inCentral Europe, the Balkans and the CIS. GTC’scurrent portfolio includes 442,000m² of net rentablearea. The company is expected to complete 1.8m m²of commercial and housing space, currently at variousstages of the pipeline, in 10 countries.RisksRestricted access to bank funding or capital marketsfor projects in the pipeline, severe falls in occupancyand rental rates, residential prices and negativerevaluations are the major risk factors for GTC. Ourvaluation assumes GTC will start and commission75% of projects in the pipeline, excluding projectsunder construction. Failure to source funding for theseprojects might result in lower completions,,revaluations and consequently a lower share price.Income statement(€m) 2007 2008 2009 2010F 2011F 2012FRental and service 52 72 96 104 137 194Housing 21 42 60 34 78 81Total revenue 74 115 156 139 215 275% change (9) 56 37 (11) 55 28EBITDA 28 40 34 71 106 421% change (8) 41 (16) 108 50 296EBIT 28 40 55 69 104 419Revaluation of existing property 93 33 (138) 51 147 115Revaluation of new property 199 203 10 25 86 172Profit from continuing operations 323 284 (117) 146 339 708Net interest (7) (5) (37) (78) (95) (109)Other financial (22) (10) (3) 0 0 0Associates 5 (1) (3) 16 0 0Pre-tax 299 268 (160) 84 244 600Tax (38) (79) 25 (13) (46) (114)Minorities (27) (24) 11 (8) (24) (60)Net profit 234 165 (123) 63 173 426% change 20 (30) (174) (151) 176 146Source: Company data, ING estimatesBalance sheet(€m) 2007 2008 2009 2010F 2011F 2012FCash 346 201 215 358 339 126Other current assets 296 426 324 341 383 427Total current assets 641 627 539 699 723 553PPE 286 1 1 150 271 515Goodwill &intangibles 8 1 0 0 0 0Investment property 861 1,828 1,972 2,115 2,469 3,000Other fixed assets 65 101 110 126 126 126Total fixed assets 1,220 1,931 2,083 2,391 2,866 3,641Total assets 1,861 2,558 2,623 3,089 3,589 4,195ST debt 32 54 65 65 65 65Other current liabilities 66 110 86 65 118 138Total current liabilities 98 164 151 130 183 203LT debt 578 926 1,234 1,650 1,900 2,000Other LT liabilities 196 312 227 227 227 227Total LT liabilities 775 1,239 1,461 1,877 2,127 2,227Minorities 29 57 47 55 79 139Equity 959 1,099 964 1,027 1,200 1,625Total liabilities & equity 1,861 2,558 2,623 3,089 3,589 4,195Source: Company data, ING estimatesCash flow statement(€m) 2007 2008 2009 2010F 2011F 2012FCF from operations (125) 6 36 (55) (23) 177CF from investment (88) (395) (220) (232) (243) (488)CF from funding 282 243 309 318 248 98Change in cash 68 (145) 125 31 (18) (213)Cash last year 278 346 201 327 358 339Cash year end 346 201 215 358 339 126Source: Company data, ING estimatesForecasts and ratios(€m) 2006 2007 2008 2009 2010F 2011F 2012FRevenue 81 74 115 156 139 215 275Profit from cont. ops. 233 323 284 (117) 146 339 708EBITDA 31 28 40 34 71 106 421Net income 195 234 165 (123) 63 173 426EPS (PLN) 3.54 4.04 2.66 (2.43) 1.15 2.89 6.99PER (x) 6.4 5.6 8.6 (9.4) 19.8 7.9 3.3P/BV (x) 1.77 1.46 1.11 1.26 1.25 1.16 0.85P/NAV (x) 1.25 1.10 0.87 0.96 0.96 0.92 0.72NAVPS growth (%) 23 13 27 (9) (0) 4 28Source: Company data, ING estimates105

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Polish Strategy July 2010Retail107

Polish Strategy EM&F July 2010EM&FMore further into e-businessPreviously HoldSellPoland Market cap PLN1,867.1mRetail Bloomberg EMF PWEM&F’s share price has been a stable performer. We believethe good outlook for 2Q10 is priced in, while the market isconcentrating too much on the transaction with Merlin(relatively small and expensive) and forgetting about dilutionfrom the new option plan and the expensive multiples paid for‘safety’ in the form of currency hedging. With a new DCFbasedTP of PLN16.5, we downgrade the stock to SELL.Investment caseEM&F’s business model is oriented towards lifestyle goods. Eventhough average ticket prices are only high in the F&Bbusinesses, we expect demand for such goods to pick up notearlier than in 2011. Factoring in organic expansion plans inPoland, CIS countries and Germany and latest transaction withMerlin, we expect sales to grow at a 2009-12F CAGR of 14%.We believe that the Media & Entertainment (M&E) division willremain dominant. All of Empik’s sales should be generateddomestically, as due to a reduction in ownership the UkrainianBukva stores are no longer consolidated. Smyk’s sales shouldremain more diversified, due to its presence in Germany (via theSpiele Max subsidiary only, liquidation of two stand-aloneshops), CIS and fledgling operations in Turkey and Romania, inaddition to Poland. Fashion & Beauty (F&B) has higher averageprices and thus we believe its LFL sales should be moresensitive to weak trends in consumption. In Poland theoperations of Ultimate Fashion should be supported by theintroduction of two new concepts (New Look and Peacocks), withthe latter already proven in the CIS-oriented Maratex subsidiary.We believe EM&F’s EBIT margins should gradually recover fromthe bottom in 2009. The key reasons should be: (1) moderatenew opening plans for 2010, translating into an acceptableincreased fixed-cost base; (2) cost reductions conducted within2009 (especially in costs of shops and stronger bulk discounts atsuppliers); and (3) currency hedging for the majority of FXpositions, securing the budget attainment. We expect theadjusted EBIT margin to be around 5% in the medium-term.EM&F announced its intention to merge its Empik.com businesswith Merlin.pl. EM&F is to conduct an in-kind contribution ofthose assets to Merlin.pl in exchange for a 60% stake incombined assets. The price for 40% of the combined assets(Merlin.pl) was set at PLN115-130m. Although the cashpayments in the coming months are low, we do not like themultiples of the transaction, which are above those ofAmazon.com. Our forecasts for the combined business are inline with those of EM&F management.At 20.8x 2010F PER, EM&F trades at a 7.5% premium todomestic peers. We believe the premium to LPP and NG2 is notwarranted due to: lower EBIT margins and ROE, no dividendpayments and more generous stock option plans.Price (19/07/10)Target price (12-mth)PLN18.00Previously PLN15.5PLN16.5Forecast total return -8.6%Quarterly previewWe expect EM&F to report good 2Q10 numbers on 26 August.We forecast 2Q10 group sales of PLN636m, flat YoY, withfloorspace from continued operations up c.7% YoY. Due tochanges in cost recognition, we expect the gross profit margin todeteriorate to 43.4% in 2Q10 versus 47.6% in 2Q09. We expectthe cost reductions to be visible, translating into 2Q10 EBIT ofPLN21.4m, up 80% YoY on a reported but 37% on an adjustedbasis. Factoring in PLN6.5m of net financial costs and thestatutory tax rate, we forecast 2Q10 earnings of PLN10.5m, flatYoY on a reported basis but up 17.4% YoY.2Q10F results preview(PLNm) 2Q09 2Q10FSales 633.3 635.9EBITDA 31.8 44.4EBIT 11.9 21.4Net income 10.5 10.5Source: Company data, ING estimatesEarnings drivers and outlookWe forecast 2010F group EM&F sales of PLN3.1bn, up 14.6%YoY. We factor in the opening of 85 new shops, which translatesinto eop floorspace from continued operations of c.307,000m².We forecast M&E sales of PLN2.3bn, up 16.8% YoY. WithinM&E, we expect Empik sales of PLN1.2bn with Smyk sales(including Spiele Max) at PLN0.9bn. Languages and Licomp salesshould remain far smaller revenue contributors. We expect F&Bsales of PLN0.8bn, up 8.5% YoY, with PLN0.35bn from Maratexand PLN0.2bn from Ultimate Fashion (which is developing at asmaller pace than in the rebounding CIS countries) in 2010.We expect the gross profit margin to gradually improve in 2010to 41.3%, from 40.8% in 2009, due to: (1) a more favourable FXand hedging strategy; and (2) better purchasing terms fromsuppliers. On the SG&A line, we believe that cost-cuttingundertaken in the areas of HR and rental expenses (mostly eurodenominated),should support the EBIT line. We also point outthat group EBIT should no longer be charged with excessiveshop closing. We forecast 2010 EBIT of PLN142.5m (up 64%YoY), with adjusted EBIT at PLN150.5m, up 44.4% YoY.We forecast net financial activity to be in the red by PLN25m in2010. We do not forecast any tax one-offs for 2010 (there was aPLN16.8m one-off in 2009) and forecast 2010 net earnings ofPLN89m, up 66% YoY, with adjusted at PLN90m, up 76% YoY.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com108

Polish Strategy EM&F July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F30 Jul 2010 EGM on stock option plan26 Aug 2010 Publication of 1H10 results15 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)Empik Centrum Investments 60.2Aviva pension fund 11.9Pioneer funds 6.5BZ WBK funds 5.2Source: Company data, INGShare dataAvg daily volume (3-mth) 29,704Free float (%) 39.7Market cap (PLNm) 1,867.1Net debt (1F, PLNm) 166Enterprise value (1F, PLNm) 2,050Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance2018161412107/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)EM&F is one Poland's largest retailers, specialising inlifestyle goods. Its operations are diversified amongcosmetics distribution, clothing and accessories(Mexx, Hugo Boss, Aldo, Esprit, New Look, Peacocksfranchises), children's products (Smyk) and books andnewspaper stores (Empik). Apart from Poland, EM&Foperates in other CEE countries (Czech Republic andSlovakia with cosmetics distribution), CIS (Russia andUkraine, franchise clothing stores and Smyk outlets),Germany, Turkey and Romania. At end-2Q10, EM&Fhad 678 locations and 283,187m2 of floorspace.RisksUpside risk lies in a stronger-than-expected reboundin CEE/CIS economies. Both upside and downsiderisks lies in the hedging policy of EM&F. Upside riskalso could come from the company’s furtheracquisition plans in online, while there is downsiderisk from a potential overpayment in suchtransactions.Income statementRevenues 1,585 2,297 2,720 3,117 3,546 4,026EBITDA 157 243 204 245 298 337EBIT 109 80 87 143 183 202Net interest (8) (28) (33) (30) (27) (22)Associates 7 14 0.4 2 2 2Other pre-tax items (1) 80 29 5 3 (0.5)Pre-tax profit 107 147 83 119 161 182Tax (24) (21) 4 (23) (32) (37)Minorities 1 (2) (4) (7) (10) (5)Other post-tax items 0 (5) (29) 0 0 0Net profit 84 118 54 89 119 140Normalised net profit 63 79 51 90 120 142Balance sheetTangible fixed assets 377 505 524 586 653 715Intangible fixed assets 357 373 378 375 372 370Other non-current assets 161 169 74 81 87 93Cash & equivalents 202 312 296 218 213 201Other current assets 567 872 892 1,025 1,152 1,293Total assets 1,663 2,231 2,164 2,285 2,478 2,674Short-term debt 188 229 173 100 71 128Other current liabilities 625 822 825 928 1,027 1,137Long-term debt 64 317 328 284 242 98Other long-term liabilities 371 357 341 368 398 431Total equity 415 506 497 604 739 879Total liabilities & equity 1,663 2,231 2,164 2,285 2,478 2,674Net working capital (72) 16 27 52 75 98Net debt (cash) 51 234 205 166 101 25Cash flowCash flow EBITDA 157 243 204 245 296 336Tax, interest & other 0.9 (76) (38) 65 79 79Change in working capital 77 (222) (107) (38) (31) (33)Net cash from op activities 186 (29) 63 203 259 289Capex 1 0.1 (0.3) 0.0 0.1 0.1Net acquisitions (198) (218) (151) (157) (174) (187)Net financing cash flow 34 87 (50) (147) (26) 35Dividends & minority distrib'n 72 145 (17) 9 (67) (140)Net ch in cash & equivalents 105 (15) (154) (103) (25) (104)FCF 187 (29) 63 203 259 290Performance & returnsRevenue growth (%) 40.2 44.9 18.4 14.6 13.8 13.5Normalised EPS growth (%) 26.3 24.7 -35.6 74.7 31.3 17.3Normalised EBITDA mgn (%) 8.2 8.1 7.2 8.1 8.5 8.4Normalised EBIT margin (%) 5.1 5.0 3.8 4.8 5.3 5.1ROACE (%) 14.5 13.2 10.2 15.2 18.4 19.0Reported ROE (%) 22.9 26.1 10.9 16.6 18.3 17.9Working capital as % of sales -4.5 0.72 1.00 1.7 2.1 2.4Net debt (cash)/EBITDA (x) 0.32 0.96 1.0 0.68 0.34 0.07EBITDA net interest cvg (x) 20.4 8.7 6.1 8.1 10.9 15.5ValuationEV/revenue (x) 1.2 0.92 0.77 0.66 0.56 0.48EV/normalised EBITDA (x) 14.9 11.4 10.7 8.1 6.6 5.7EV/normalised EBIT (x) 23.7 18.5 20.0 13.6 10.6 9.4Normalised PER (x) 29.1 23.4 36.3 20.8 15.8 13.5Price/book (x) 4.5 3.7 3.8 3.2 2.7 2.3Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.56FCF yield (%) 9.7 n/a 3.0 9.9 13.0 15.1Per share dataReported EPS (PLN) 0.822 1.15 0.519 0.856 1.12 1.31Normalised EPS (PLN) 0.618 0.770 0.496 0.866 1.14 1.33Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.100Equity FCFPS (PLN) 1.82 (0.285) 0.609 1.95 2.45 2.72BV/share (PLN) 3.98 4.83 4.69 5.59 6.72 7.89Source: Company data, ING estimates109

Polish Strategy LPP July 2010LPPTop pick in general retailMaintainedBuyPoland Market cap PLN2,985.8mPersonal & Household Goods Bloomberg LPP PWLPP’s share price has been a stable performer in the pasttwo months, with the positive earnings outlook offset by adepreciating zloty. With a decent outlook for 2Q10, wemaintain our BUY rating with a DCF-based TP of PLN2,025.Investment caseThe economic slowdown has proven a harsh one for retailers,not sparing LPP and its five mainstream brands. We are seeingthe first positive signs in consumption patterns, with May andJune revenues showing YoY growth. We would expect thesituation to gradually improve along with rising employment andsalaries in Poland. Still, on top of like-for-likes we expect the toplineto grow along with floorspace development. LPPthoughtfully, in our opinion, used the weakness of itscompetitors, cheaply obtaining stores from bankrupt competition.Management wants to maintain rapid growth with c.40,000m² offloorspace to be opened in 2010. We believe that in 2010 theexpansion will still be oriented on Poland, while from 2011onwards stronger weight will be put on foreign expansion. Weforecast 2009-12F sales CAGR of 11.6%.We expect group margins to expand in the coming years, due toexpected: (1) improvements in gross profit margin (even thoughwe have factored in less favourable FX assumptions, we believethat with improved demand these could be transferred onto theconsumer to a greater extent); (2) cost cutting conducted; and (3)stronger consumer demand from 2011. We expect the group’sgross profit margin to be in the region of 59% in the coming years.We also believe that SG&A should remain under control, after thedeep cuts of the past year, although we point out that the majorityof rentals are in euro. As a result, we expect the operating marginto be in the range of 11-13% in the medium term.Seeing LPP’s organic development plans and that it took overshops rather than its competitors at the bottom of the market, webelieve LPP is unlikely to take the role of consolidator now. Wevery much like the cash flow improvement conducted by LPP –implementation of the JIT system resulted in inventory per m²falling by c.30%, freeing cash and space at the new logisticscentre. As a result, LPP was able to pay out a dividend for thefirst time in its history from 2009 earnings (PLN86m, c.3% yield,payment day 4 October). We believe that operating cash flowshould remain strong in the coming years, proving that lastyear’s convertible bonds issuance (conversion at PLN1,600) wasunnecessary.At 16.8x 2010F PER, LPP trades at 13% discount to domesticpeers, which we do not find warranted, due to the strongearnings outlook, deliverable management and high ROE. Wealso believe that LPP should be the biggest beneficiary ofexpected further zloty appreciation. The cut in valuation resultsfrom lower forecasts incorporating worse-than-expectedconsumption in 1H10.Price (19/07/10)Target price (12-mth)PLN1,710Previously PLN2,175PLN2,025Forecast total return 23.5%Quarterly previewWe expect LPP to report decent 2Q10 numbers on 27 August.Group sales should be PLN479m, down 2.4% YoY, (alreadyreported), with the YoY fall showing the impact of the economicslowdown. As the floorspace is up c.19% YoY, this points todouble-digit negative like-for-like dynamics. Contrary to sales,the gross profit margin should expand from 52.6% in 2Q09 to56.5% in 2Q10F (also announced), showing the impact of anappreciating zloty in earlier months. We believe that SG&A costswere under control, but taking into account growing floorspace,we expect 2Q10F group EBIT of PLN42.2m, up 6% YoY.Factoring in financial charges and FX gains, we expect group2Q10 earnings at PLN31.7m, up 5.3% YoY.2Q10F results preview(PLNm) 2Q09 2Q10FSales 490.8 479.0EBITDA 63.9 65.6EBIT 39.8 42.2Net income 30.0 31.7Source: Company data, ING estimatesEarnings drivers and outlookWe expect LPP’s group sales to come in at PLN2,157m in2010F, up 7.7% YoY, fuelled largely by floorspace development(up 14.7% YoY), as we expect to see more favourable trends inconsumption from 4Q10. We expect foreign sales to contribute29.5% of sales but 32.5% of floorspace. We believe that themost mature Reserved brand will remain the biggest contributor,with revenues reaching PLN1.3bn, up 12% YoY, followed by theteenage-oriented Cropp brand (at PLN0.4bn, up 19% YoY), stillexceeding the contribution of House. The youngest Esotiq andMohito concepts are likely to remain of low importance.Although the recent FX trends have not been favourable, we stillexpect the gross profit margin to expand to 58.5% in 2010F fromthe low 52.8% base. We expect monthly SG&A per m² to reachc.PLN270 versus c.PLN280 in 2009, factoring in the full-yearimpact of cost reductions, which translates into 2010 EBIT ofPLN243m, up 34% YoY, and an EBIT margin of 11.2%.Assuming no FX gains and losses and a statutory tax rate, weexpect reported net earnings of PLN175.5m in 2010, up as muchas 67.6% YoY.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com110

Polish Strategy LPP July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F27 Aug 2010 Publication of 1H10 results10 Sep 2010 Dividend record date4 Oct 2010 Dividend payment date10 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%) equity/votesMarek Piechocki, CEO, founder 18.53/32.53Jerzy Lubianiec, founder 12.93/29.4Grangefont 20.00/11.11Treasury shares 1.22/0.68Source: Company data, INGShare dataAvg daily volume (3-mth) 507.0Free float (%) 47.3Market cap (PLNm) 2,985.8Net debt (1F, PLNm) 159Enterprise value (1F, PLNm) 3,145Dividend yield (1F, %) 2.9Source: Company data, ING estimatesShare price performance2,1002,0001,9001,8001,7001,6001,5001,4001,300Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePriceWIG20 (rebased)LPP is one of the largest clothing retailers in Poland.Aside from Poland, LPP has stores in several foreigncountries: Czech Rep., Slovakia (franchise only),Hungary, Russia, Ukraine, Lithuania, Latvia, Estonia,Bulgaria and Romania. Following the merger withArtman, the group operates five brands: Reserved(mainstream general brand), Cropp and House(brands for teenagers), Esotiq (underwear) andMohito (mainstream brand for women). The majorityof clothes are sourced from China. In 2Q10, the grouphad 875 stores and 299,412m2 of floorspace.RisksDownside risk lies in the economy, which could showfurther negative trends in consumption. A secondnegative lies in FX, as LPP’s earnings could suffer ifthere is a strong depreciation of the zloty against theUS$ and/or euro.Income statementRevenues 1,274 1,623 2,003 2,157 2,452 2,783EBITDA 225 281 277 340 380 424EBIT 175 215 181 243 277 322Net interest (6) (18) (28) (24) (20) (20)Associates 0 0 0 0 0 0Other pre-tax items (3) 16 (14) 0.4 0.0 (0.4)Pre-tax profit 166 213 139 219 257 301Tax (31) (46) (35) (44) (51) (60)Minorities 0 0.0 0 0 0 0Other post-tax items 0 0.0 (0.1) 0 0 0Net profit 135 167 105 176 206 241Normalised net profit 142 169 105 176 206 241Balance sheetTangible fixed assets 258 469 442 443 435 429Intangible fixed assets 12 275 274 275 276 277Other non-current assets 18 23 24 26 29 33Cash & equivalents 56 90 198 216 295 334Other current assets 354 569 424 438 505 584Total assets 697 1,426 1,362 1,398 1,540 1,658Short-term debt 57 247 82 102 179 213Other current liabilities 190 280 240 237 262 297Long-term debt 28 306 343 273 203 133Other long-term liabilities 16 28 11 11 13 15Total equity 406 565 686 775 884 1,001Total liabilities & equity 697 1,426 1,362 1,398 1,540 1,658Net working capital 160 284 176 193 235 277Net debt (cash) 29 463 227 159 87 11Cash flowCash flow EBITDA 225 281 277 340 380 424Tax, interest & other 103 122 102 125 145 164Change in working capital (42) (67) 126 (19) (46) (47)Net cash from op activities 173 195 318 268 285 319Capex (98) (253) (95) (90) (96) (98)Net acquisitions 0 (331) 0 0 0 0Net financing cash flow (53) 418 (139) (74) (16) (60)Dividends & minority distrib'n 0 0 0 (86) (97) (123)Net ch in cash & equivalents 23 36 108 18 78 40FCF 75 (57) 223 178 189 221Performance & returnsRevenue growth (%) 56.3 27.4 23.4 7.7 13.7 13.5Normalised EPS growth (%) 260.0 19.5 -39.0 67.5 16.9 16.7Normalised EBITDA mgn (%) 18.3 17.4 13.8 15.8 15.5 15.2Normalised EBIT margin (%) 14.4 13.3 9.0 11.2 11.3 11.6ROACE (%) 41.0 26.9 16.3 21.5 23.0 24.6Reported ROE (%) 39.8 34.5 16.7 24.0 24.8 25.5Working capital as % of sales 12.6 17.5 8.8 8.9 9.6 10.0Net debt (cash)/EBITDA (x) 0.13 1.6 0.82 0.47 0.23 0.03EBITDA net interest cvg (x) 36.3 15.9 10.0 14.4 18.7 20.7ValuationEV/revenue (x) 2.4 2.1 1.6 1.5 1.3 1.1EV/normalised EBITDA (x) 12.9 12.2 11.6 9.2 8.1 7.1EV/normalised EBIT (x) 16.4 15.9 17.7 13.0 11.1 9.3Normalised PER (x) 20.6 17.2 28.2 16.8 14.4 12.4Price/book (x) 7.2 5.2 4.4 3.8 3.4 3.0Dividend yield (%) 0.0 0.0 0.0 2.9 3.2 4.2FCF yield (%) 2.5 n/a 7.0 5.7 6.2 7.4Per share dataReported EPS (PLN) 79.10 98.56 60.60 101.51 118.64 138.43Normalised EPS (PLN) 83.09 99.29 60.60 101.51 118.64 138.43Dividend per share (PLN) 0.00 0.00 0.00 49.98 55.57 71.05Equity FCFPS (PLN) 43.81 (33.80) 129.39 103.00 109.03 127.11BV/share (PLN) 238.13 327.55 391.70 448.06 509.75 575.73Source: Company data, ING estimates111

Polish Strategy NG2 July 2010NG2Focused on ambitious targetsPreviously HoldBuyPoland Market cap PLN2,096.6mRetail Bloomberg CCC PWThe NG2 shares have been a stable performer over the pastmonth. As we expect to see more favourable trends inmainstream consumption in 2H10 and with an outlook forgood 2Q10 numbers, we upgrade the stock to BUY with anew DCF-based 12-month forward target price of PLN62.6.Investment caseNG2 continues to focus its growth strategy on organicdevelopment in the domestic market, as its Czech operations areunlikely to reach a material scale within the next few years. Therevised long-term plans show the target number of shops at1,070 (1,000 in Poland) versus 1,490 previously, due toconcentration on larger towns. The plans encompass: 400 CCCstores in Poland (100 franchise), 70 CCC stores in CzechRepublic, 100 Quazi stores and 500 Boti stores (100 franchise).The medium-term targets are even more ambitious. NG2 wantsto have a 20% share in the shoe market in Poland in 2012(c.PLN1.8bn sales) versus a current market share of c.11%. Weexpect a 2012 market share of 15%, leaving upside potential.This implies a 2009-12F sales CAGR of 13%.NG2’s operating margins are the highest among the generalretailers we cover and we believe this is likely to be maintained,as NG2 also has its own – albeit limited – production facilities.The operating cost structure seems lean, thus we believe thatmargin expansion could only come from the operating leverageeffect. We also point out that slower expansion should positivelyimpact the EBIT margin as the proportion of new shops in theoverall number of stores should be lower and thus lessen theburden on profitability. Overall, we expect 2010-12 cumulativenet earnings adjusted for the impact of the stock option plan ofPLN472m, which is above the minimum target of PLN450mneeded to trigger the management stock option plan (but thisincludes the impact of the tax optimisation policy).In order to secure medium-term shop expansion, NG2 is makinginvestments in the back office. NG2 has started the constructionof a new logistics centre which should become operational inNovember 2011. The overall cost should reach PLN97m, butPLN38.8m is to be financed from EU subsidies. The logisticscentre is going to be financed from its own cash proceeds andbank debt. We do not believe that the usage of the approved upto 10% equity issuance (issuance price at three-month average)will be needed. However, we point out that ahead of theinvestment cycle a moderate dividend of PLN1 per share (versusDPS of PLN1-2 signalled) will be paid in 2010.At 16.4x 2010F PER, NG2 trades at a 15% discount to itsdomestic peers. We do not believe a discount is warranted givenit has the highest margins in the sector. We expect the macroenvironment in Poland in 2010 to be more favourable formainstream retailers such as NG2. There is a risk that the CEOwill continue to reduce his stake.Price (19/07/10)Target price (12-mth)PLN54.60Previously PLN57.5PLN62.6Forecast total return 16.4%Quarterly previewWe expect NG2 to report good 2Q10 numbers on 31 August.2Q10 sales of PLN245m have been announced. Theserepresent a 4% YoY contraction, showing the impact of theslowdown. We expect the gross profit to improve, as a result ofpast appreciation of the zloty versus US$ and bulk discounts,from c.54% in 2Q09 to c.57% in 2Q10. We expect SG&A costs tocome in at c.39% of sales in 2Q10 versus 37.6% in 2Q09, as weexpect PLN2.2m of additional taxes from the Swiss operations tobe booked. Assuming PLN1m of FX gains, we expect group EBITof PLN42.9m, up 9.4% YoY. We expect a PLN18.7m one-off taxasset to be recognised. We forecast reported 2Q10 earnings ofPLN51.9m, with adjusted earnings at PLN35.1m, up 14% YoY.2Q10 results preview2Q092Q10FSales 255.6 245.0EBITDA 43.6 48.9EBIT 39.2 42.9Net income 30.9 51.9Source: Company data, ING estimatesEarnings drivers and outlookWe believe that in 2010 NG2 will exceed the threshold of PLN1bnin revenues. We expect 2010 sales of PLN1,061.9m, up 15% YoY.We have factored in that NG2 plans to slow its expansion in 2010.For 2010 we assume the closure of 11 franchise stores (eight atCCC and three at Boti). We assume the opening of 20 companyownedstores CCC in Poland and ten in the Czech Republic, fivenew CCC franchise stores, ten new Quazi stores, 40 newcompany-owned Boti stores and two new franchise Boti stores.Thus, at the end of 2010 NG2 should have 768 stores with167,000m² of floorspace. We forecast that the CCC brand willremain the most important (Polish operations stronger thanCzech ones), with Boti and Quazi being of lesser importance.We expect the gross profit margin to improve to 54.6% in 2010from 52.2% in 2009. Expanding gross profit, coupled with SG&Acosts under control, should make the operating leverage work infavour of the company. As a result, we expect the reported EBITmargin to grow to 15.3% in 2010F, from 11.7% in 2009. Animprovement on the operating line triggers growth on the bottomline. We forecast 2010 reported earnings of PLN141.5m, up 69%YoY. We forecast earnings adjusted for the impact of tax issuesand the stock option programme at PLN128.2m, up 53% YoY.The increase in our DCF comes from new macro assumptions.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com112

Polish Strategy NG2 July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 Publication of 1H10 results10 Sep 2010 Dividend record date27 Sep 2010 Dividend payment date15 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%) equity/votesDariusz Milek, CEO 44.92/48.84Leszek Gaczorek 10.94/13.21ING pension fund 6.45/5.5Pioneer funds 8.52/7.26Source: Company data, INGShare dataAvg daily volume (3-mth) 34,343Free float (%) 42.2Market cap (PLNm) 2,096.6Net debt (1F, PLNm) 121Enterprise value (1F, PLNm) 2,218Dividend yield (1F, %) 1.8Source: Company data, ING estimatesShare price performance6055504540357/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)NG2 is the largest Polish retailer, importer andproducer of footwear. The company operates mostlyin Poland, where it has three brands: the mainstreamCCC, upper market Quazi and low end Boti. The onlyforeign operations are based in the Czech Republic.NG2 operates both company-owned and franchisestores. At end-2Q10 NG2 had 706 stores in Poland:329 CCC stores, 49 Quazi stores and 288 Boti storeswhile in the Czech Republic there were 40 CCCstores. In 2009 own factory supplied 17% of goods. In2009 NG2 sold 15.4m pairs of shoes (55.8% women,27.5% children, and remainder to men).RisksDownside risk lies in the economy and in consumerspending. A second downside risk would be a sharpzloty depreciation against US$ and euro, which wouldhurt operating margins (via growing COGS andrentals). A third risk is the further sale of shares by theCEO.Income statementRevenues 544 754 922 1,062 1,181 1,317EBITDA 72 145 127 179 226 265EBIT 63 132 108 162 208 241Net interest (4) (9) (7) (8) (9) (8)Associates 0 0 0 0 0 0Other pre-tax items (1) (0.7) (1) (1) (0.9) (0.9)Pre-tax profit 58 122 100 153 199 233Tax (11) (20) (16) (12) (40) (47)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 48 102 84 141 158 186Normalised net profit 48 102 84 128 165 193Balance sheetTangible fixed assets 127 177 203 246 258 254Intangible fixed assets 0.3 1 1 5 6 6Other non-current assets 4 6 6 7 8 9Cash & equivalents 11 15 61 95 120 184Other current assets 185 292 280 409 458 512Total assets 327 492 551 762 850 965Short-term debt 82 96 40 156 147 146Other current liabilities 47 85 88 100 110 123Long-term debt 0.2 13 80 60 45 34Other long-term liabilities 4 3 3 3 3 3Total equity 193 295 340 443 545 659Total liabilities & equity 327 492 551 762 850 965Net working capital 137 204 190 306 345 385Net debt (cash) 71 93 59 121 72 (5)Cash flowCash flow EBITDA 72 145 127 179 226 265Tax, interest & other 13 30 17 21 50 56Change in working capital (29) (82) 21 (117) (40) (42)Net cash from op activities 31 44 125 50 146 176Capex (39) (58) (46) (64) (30) (19)Net acquisitions 0 0 0 0 0 0Net financing cash flow 59 19 4 86 (34) (23)Dividends & minority distrib'n (38) 0 (38) (38) (57) (71)Net ch in cash & equivalents 2 4 46 34 25 64FCF (8) (15) 78 (15) 115 157Performance & returnsRevenue growth (%) 35.8 38.5 22.3 15.1 11.2 11.5Normalised EPS growth (%) -10.5 115.0 -18.4 53.3 28.8 16.6Normalised EBITDA mgn (%) 13.3 19.2 13.7 17.3 19.6 20.5Normalised EBIT margin (%) 11.6 17.5 11.7 15.8 18.1 18.7ROACE (%) 26.3 38.9 25.0 29.9 30.6 31.3Reported ROE (%) 25.3 42.0 26.3 36.1 32.0 30.8Working capital as % of sales 25.2 27.0 20.6 28.8 29.2 29.3Net debt (cash)/EBITDA (x) 0.98 0.64 0.47 0.68 0.32 (0.02)EBITDA net interest cvg (x) 19.1 16.1 18.0 23.3 25.8 33.6ValuationEV/revenue (x) 4.0 2.9 2.3 2.1 1.8 1.6EV/normalised EBITDA (x) 30.0 15.1 17.0 12.1 9.4 7.7EV/normalised EBIT (x) 34.3 16.6 19.9 13.3 10.2 8.5Normalised PER (x) 44.0 20.5 25.1 16.4 12.7 10.9Price/book (x) 10.9 7.1 6.2 4.7 3.8 3.2Dividend yield (%) 1.8 0.0 1.8 1.8 2.7 3.4FCF yield (%) n/a n/a 3.6 n/a 5.3 7.5Per share dataReported EPS (PLN) 1.24 2.67 2.18 3.68 4.12 4.84Normalised EPS (PLN) 1.24 2.67 2.18 3.34 4.30 5.02Dividend per share (PLN) 1.00 0.00 1.00 1.00 1.47 1.85Equity FCFPS (PLN) (0.210) (0.378) 2.04 (0.383) 3.00 4.08BV/share (PLN) 5.02 7.69 8.86 11.54 14.19 17.17Source: Company data, ING estimates113

Polish Strategy Vistula Group July 2010Vistula GroupNWC in the spotlightPreviously BuyHoldPoland Market cap PLN292.20mPersonal & Household Goods Bloomberg VST PWVistula’s management has done a good job in reducingcosts. However, with increased floorspace and high debt,the company is now trying to find financing for theincreased scale of operations at debtholders, which may putpressure on its credit premium. With a new DCF-basedtarget price of PLN2.7, we downgrade the stock to HOLD.Investment caseDuring the past two years Vistula Group has undergone sizeablechanges. The merger with W.Kruk Group, which added jewelleryand upmarket women’s clothing, pushed the group’s positioningfurther towards the higher-end of the market. To counteract this,the current management took action to lower the positioning ofthe Vistula and Wolczanka brands, in order to make them lesssusceptible to the slowdown. The strongest underperformance,however, took place at the megastore Galeria Centrum (GC)brand, which is currently under Chapter 7. We believe that due toits up-market positioning, more positive trends in sales are likelyto emerge in 2011.Long-term financing no longer seems to be a burning issue forVistula Group. At the end of July 2009, Vistula Group signed along-term bank loan agreement with Fortis Bank, which allowsthe company to repay PLN198m of debt and €4m in guaranteesby 5 January 2018. The remaining PLN50m is to be repaid by 5January 2012. This was supported by Fortis Bank itself acquiring8.25m of new issuance shares at PLN4.85 (far above the currentmarket price). The PLN40m obtained in the issuance was usedto reduce debt and Fortis Bank is now a c.7% shareholder. Withthe increased scale of operations (especially these of W.Kruk),Vistula is now looking for PLN50m of debt financing in order topay another crediting bank and finance the inventory acquisitionfor December. Although we believe this is likely to be successful,it could also raise the credit premium.To motivate management and key employees, the AGM agreedto issue 5.4m shares based on share performance and financialresults. The share price targets were set for December 2009,2010 and 2011 at PLN3, PLN4 and PLN4.5, respectively. 2010targets imply net earnings of c.PLN28m.We believe that as long as Alma Market (the WSE-listedupmarket delicatessen network and franchise of luxury brands)remains a shareholder (9.3% stake), the market will speculateabout a potential merger between these two players, with theidea of creating a diversified holding.On a 2010F PER of 23.4x, Vistula Group trades at a 21%premium to its domestic peers. Given the expectations for arecovery in distressed earnings and our forecasts being stronglybelow management targets for 2010-11F, we do not believe thatthe PER itself is the best multiple to look at. The cut in our DCFcomes from factoring in lower-than-expected 1H10 sales.Price (19/07/10)Target price (12-mth)PLN2.59Previously PLN3.0PLN2.7Forecast total return 3.3%Quarterly previewWe expect Vistula Group to report decent 2Q10 results on 31August. We forecast 2Q10 sales of PLN87.5m, down 11% YoY,with the fall showing the impact of the economic slowdown onupmarket brands, especially the jewellery brand W.Kruk. Weexpect only a moderate gross profit margin improvement, due tofavourable FX relationships in the past and less intensive selloffs,from 55.5% in 2Q09 to 56.6% in 2Q10. We assume PLN1mone-off charges related to the liabilities of Galeria Centrum(under Chapter 7). We forecast EBIT of PLN7.5m, down 74%YoY, but up 52% YoY on an adjusted basis. Assuming negativenet financial activity, PLN1.5m of FX losses and the statutory taxrate, we expect reported net earnings of PLN0.4m, down 98%YoY. We expect adjusted earnings of PLN1.4m in 2Q10 versusPLN1m in 2Q09.2Q10F results preview(PLNm) 2Q09 2Q10FSales 97.8 87.5EBITDA 32.0 11.8EBIT 29.1 7.5Net income 24.9 0.4Source: Company data, ING estimatesEarnings drivers and outlookWe forecast 2010 group revenues of PLN372.2m, down 9%YoY. The fall results from the lack of consolidation of GC, whichis now under Chapter 7, and which in 1Q09 added PLN30.5m togroup sales. On a comparable basis we expect a 2% YoY fall. Inline with management statements, we assume the opening of 15new stores, which translates into eop floorspace of 25,800m², up4% YoY. In our forecasts we assume that the jewellery brandW.Kruk will remain the biggest contributor (at PLN151.4m),followed by Vistula (PLN93m) and Deni Cler (PLN46.7m). Thefall also results from expectations of reduced revenues fromlicence brands, wholesale and exports.We expect the group’s gross profit margin to improve in 2010 to55.1%, versus 51.5% in 2009. With reductions in SG&A costs weexpect group EBIT of PLN30.3m in 2010, with adjusted EBIT ofPLN32.5m versus PLN5m in 2009. We believe that in 2010, likein 2009, the financial line will constitute a sizeable chargeagainst earnings. We expect reported net earnings of PLN10.2min 2010, with adjusted earnings at PLN12.3m versus a loss ofPLN11.6m in 2009. Our expectations are below managementtargets.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com114

Polish Strategy Vistula Group July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 Publication of 1H10 results15 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)PZU pension fund 17.85ING pension fund 9.66W.Kruk and family 9.30Alma Market 9.25Fortis Bank 7.30Source: Company data, INGShare dataAvg daily volume (3-mth) 100,623Free float (%) 81.5Market cap (PLNm) 292.20Net debt (1F, PLNm) 222Enterprise value (1F, PLNm) 514Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance3.43.23.02.82.62.42.22.07/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Vistula Group is an up-market retailer, whosebusiness model is oriented on: i) jewellery, with 63stores W.Kruk stores, ii) 30 Deni Cler stores, upmarketwomen clothing, and iii) Vistula andWolczanka (V&W) brands, offering mainstream toupper-market men formalwear. At end of 2Q10, thecompany had 234 shops with 23,725m2 of floorspace.Galeria Centrum is now under Chapter 7 protection.Vistula Group is a restructuring story, with thecompany almost going bankrupt in 2009, due toexcessive debt taken for expensive W.Krukacquisitions.RisksWe see upside risk from a rebound in the economy,while downside in: (1) PLN depreciation versus theeuro; (2) a possible merger with Alma Market; and (3)possible issuance (the debt remains high andmanagement may be tempted to issue shares,especially if there is a rally in the stock price).Income statementRevenues 412 505 408 372 394 426EBITDA 73 (110) 58 46 55 66EBIT 59 (130) 40 30 38 50Net interest (0.6) (21) (27) (20) (20) (20)Associates 0 0 0 0 0 0Other pre-tax items 6 (7) (2) 2 0.4 (0.1)Pre-tax profit 64 (159) 11 13 19 31Tax (5) (0.7) 6 (2) (4) (6)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 59 (159) 17 10 15 25Normalised net profit 22 (8) (12) 12 18 25Balance sheetTangible fixed assets 86 128 81 86 89 93Intangible fixed assets 158 363 363 365 364 364Other non-current assets 10 15 20 17 17 18Cash & equivalents 64 28 21 11 12 20Other current assets 166 268 166 151 157 168Total assets 484 802 651 630 639 663Short-term debt 15 317 46 23 40 53Other current liabilities 106 109 57 49 53 60Long-term debt 30 43 206 210 180 155Other long-term liabilities 10 96 45 41 44 47Total equity 322 238 297 307 323 347Total liabilities & equity 484 802 651 630 639 663Net working capital 58 155 109 102 103 107Net debt (cash) (19) 331 231 222 208 188Cash flowCash flow EBITDA 73 (110) 62 47 55 67Tax, interest & other (61) 148 (59) 16 25 29Change in working capital (8) (30) 47 9 (1) (5)Net cash from op activities (0.9) (22) 29 49 52 59Capex (37) (44) (20) (15) (18) (19)Net acquisitions 0 (295) 0 0 0 0Net financing cash flow 3 290 (19) (37) (35) (33)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents (17) (37) (6) (2) 0.7 8FCF (38) (66) 9 33 34 39Performance & returnsRevenue growth (%) 127.6 22.6 -19.1 -8.9 5.9 8.0Normalised EPS growth (%) 207.2 n/a n/a n/a 41.5 40.4Normalised EBITDA mgn (%) 7.5 8.9 5.6 12.9 14.4 15.6Normalised EBIT margin (%) 4.0 4.8 1.2 8.7 10.3 11.8ROACE (%) 5.0 5.1 0.88 6.0 7.5 9.2Reported ROE (%) 20.2 -57.0 6.3 3.4 4.9 7.4Working capital as % of sales 14.0 30.7 26.7 27.5 26.2 25.2Net debt (cash)/EBITDA (x) (0.26) n/a 4.0 4.9 3.8 2.8EBITDA net interest cvg (x) 114.2 n/a 2.1 2.3 2.8 3.4ValuationEV/revenue (x) 0.66 1.2 1.3 1.4 1.3 1.1EV/normalised EBITDA (x) 8.9 13.9 23.1 10.7 8.8 7.2EV/normalised EBIT (x) 16.8 25.5 103.9 15.8 12.3 9.5Normalised PER (x) 9.3 n/a n/a 23.4 16.6 11.8Price/book (x) 0.65 0.96 0.97 0.95 0.91 0.84Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a 1.7 6.5 6.8 8.2Per share dataReported EPS (PLN) 0.748 (1.97) 0.165 0.091 0.137 0.219Normalised EPS (PLN) 0.277 (0.096) (0.113) 0.110 0.156 0.219Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) (0.484) (0.816) 0.088 0.298 0.299 0.349BV/share (PLN) 4.01 2.70 2.66 2.72 2.86 3.08Source: Company data, ING estimates115

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Polish Strategy July 2010Technology117

Polish Strategy Asbis July 2010NewsflowDateDescriptionFinancialsYear end Dec (US$m) 2007 2008 2009 2010F 2011F 2012F11 Aug 2010 Publication of 1H10 results09 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)KS Holdings Ltd (CEO) 46.26Maizuri Enterprises Ltd 8.65Alpha Ventures 5.77Yurij Ulasovich (key manager) and his wife 5.05Source: Company data, INGShare dataAvg daily volume (3-mth) 8,395Free float (%) 34.3Market cap (PLNm) 233.10Net debt (1F, US$m) 9Enterprise value (1F, US$m) 83Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance5.55.04.54.03.53.02.52.01.57/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Asbis is an IT distributor with wide EMEA coverage:CEE, CIS, Western Europe, MEA. The group ispresent in 75 countries, of which the key ones areRussia, Slovakia, Ukraine, Cz. Rep., Belarus, UAE,Saudi Arabia and Qatar. Asbis is a complex providerof servers, PCs and laptops, but also components andperipherals. Asbis offers solutions from globalcompanies such as Intel, AMD, Seagate, Samsungand Microsoft, and two private labels, Canyon andPrestigio. The group attempts to be a “one-stop-shop”for its customers. Apart from its Cyprus headquarters,Asbis has 33 warehouses.RisksThe upside risk to our rating comes from the macrosituation (especially retail and corporate demand forhardware); the downside risk is from FX exposure,with Asbis being affected by the depreciation ofregional (CEE, CIS) currencies versus the US$.Income statementRevenues 1,397 1,495 1,162 1,305 1,386 1,466EBITDA 28 19 6 14 17 18EBIT 26 16 4 11 14 15Net interest (5) (7) (6) (5) (4) (3)Associates 0 0 0 0 0 0Other pre-tax items 0.1 (2) (0.4) 0.5 0.2 0.2Pre-tax profit 21 7 (3) 7 10 11Tax (3) (3) (0.2) (0.9) (2) (2)Minorities 0 (0.1) (0.2) (0.2) (0.4) (0.4)Other post-tax items 0 0 0 0 0 0Net profit 19 4 (3) 6 8 9Normalised net profit 19 4 (3) 6 8 9Balance sheetTangible fixed assets 16 24 25 26 27 28Intangible fixed assets 1 2 3 3 4 4Other non-current assets 0.1 0.2 0.6 0.6 0.7 0.7Cash & equivalents 45 41 53 13 17 23Other current assets 303 295 305 281 295 311Total assets 366 363 386 323 344 367Short-term debt 41 54 36 20 21 22Other current liabilities 221 204 251 199 211 224Long-term debt 2 5 4 2 1 0.8Other long-term liabilities 6 4 4 5 5 5Total equity 96 95 91 97 106 115Total liabilities & equity 366 363 386 323 344 367Net working capital 83 88 54 81 84 87Net debt (cash) (2) 18 (13) 9 5 0.6Cash flowCash flow EBITDA 28 19 6 14 17 18Tax, interest & other 4 0.4 14 1 2 2Change in working capital (21) (5) 21 (27) (2) (3)Net cash from op activities 1 (0.6) 34 (17) 10 10Capex (8) (14) (5) (5) (5) (5)Net acquisitions 0.0 (0.7) 0 0 0 0Net financing cash flow 24 1 (7) (18) (0.3) 1Dividends & minority distrib'n (1.0) (3) 0 0 (0.3) (0.4)Net ch in cash & equivalents 16 (16) 24 (40) 4 5FCF (7) (15) 29 (22) 5 4Performance & returnsRevenue growth (%) 38.5 7.0 -22.3 12.3 6.2 5.8Normalised EPS growth (%) 99.6 -81.6 n/a n/a 41.7 10.5Normalised EBITDA mgn (%) 2.0 1.2 0.56 1.1 1.2 1.2Normalised EBIT margin (%) 1.9 1.0 0.31 0.87 1.0 0.99ROACE (%) 22.3 10.7 2.5 9.0 11.2 11.0Reported ROE (%) 24.0 4.2 -3.5 6.2 8.2 8.4Working capital as % of sales 5.9 5.9 4.7 6.2 6.0 5.9Net debt (cash)/EBITDA (x) (0.08) 0.96 (2.0) 0.65 0.27 0.03EBITDA net interest cvg (x) 5.9 2.7 1.1 2.9 4.4 5.2ValuationEV/revenue (x) 0.05 0.06 0.05 0.06 0.06 0.05EV/normalised EBITDA (x) 2.5 4.9 9.3 5.8 4.6 4.2EV/normalised EBIT (x) 2.7 5.8 16.7 7.3 5.6 5.1Normalised PER (x) 3.3 18.1 n/a 12.4 8.8 7.9Price/book (x) 0.66 0.77 0.80 0.75 0.70 0.64Dividend yield (%) 1.5 4.6 0.0 0.0 0.40 0.57FCF yield (%) n/a n/a 48.9 n/a 6.2 6.0Per share dataReported EPS (US$) 0.389 0.072 (0.058) 0.106 0.150 0.165Normalised EPS (US$) 0.394 0.072 (0.058) 0.106 0.150 0.165Dividend per share (US$) 0.020 0.060 0.00 0.00 0.005 0.007Equity FCFPS (US$) (0.147) (0.264) 0.530 (0.400) 0.087 0.081BV/share (US$) 1.99 1.71 1.64 1.75 1.89 2.05Source: Company data, ING estimates119

Polish Strategy Asseco Business Solutions July 2010Asseco Business SolutionsStrong outlook for 2Q10FMaintainedBuyPoland Market cap PLN307.45mTechnology Bloomberg ABS PWABS’s share price has fallen 9% over the past three months,underperforming the WIG index by 3.5ppt. We find such amediocre performance unwarranted. With a strong outlookfor 2Q10 we maintain our BUY rating with a DCF-based TP ofPLN10.5.Investment caseDespite the double-digit growth expected in the Polish ERPmarket in the medium term, the market was difficult in 2009 andthe situation is improving only gradually in 2010, as IT is not thecore of small and medium companies’ businesses. Nonetheless,we believe that ABS should remain a strong player, due to itsdiversification into Oracle and Microsoft software and synergiesoffered by Anica’s SFA products. According to ComputerWorldTop200 in 2008, ABS was the second-biggest ERP company inPoland, coming after SAP but ahead of Oracle. For 2009 thestatistics show only ERP revenues (we think rather licences) andABS ranks seventh.In our forecasts suggesting 2009-12F revenues and earningsCAGRs of 3.5% and 6.4%, respectively, we do not take intoaccount the impact of new products. ABS has recentlyimplemented new solutions for factoring companies (the marketfor which is estimated at PLN20m). New solutions for the Softlabsystem are prepared, with new interfaces, web access andbudgeting functionality. We note that there is also potentialupside to our forecasts from intra-group transactions, as the ABSSoftlab ERP system is to be the primary solution for the entireAsseco group. In the first stage the focus could be on unifyingthe accounting solutions used by Asseco group. The first foreignimplementation should take place at Asseco DACH. Once theimplementation is successful, further contracts could follow, withAsseco SEE and Asseco Spain being the most likely candidates.Despite paying out a record high PLN25m dividend in 2010, webelieve that ABS’s cash position should remain strong. Weexpect normalised dividend payments from 2010 earnings, as webelieve that the cash generated is likely to be used foracquisitions. ABS has stated that it is looking for softwareproducers, whose products would be complementary rather thancompetitive versus its own solutions. ABS has said it is looking atseveral small and medium-sized players. We consider M&A likelyin 2011. We also believe that in future Asseco will have a groupERP division similar to current attempts to create a regionalbanking pillar. We think that preliminary work on strongerintegration of the ERP divisions within Asseco group (ERPsoftware is in Czech, Slovakia and Germany) may start aroundthe end of 2010.On a 2010F PER of 12.3x ABS trades at a 2% discount to itsdomestic peers, which grows in 2011F. We believe that ABSdeserves to trade at a premium to its peers, due to its focus onsoftware and resultant superior operating margins.Price (19/07/10)Target price (12-mth)PLN9.20MaintainedPLN10.5Forecast total return 18.6%Quarterly previewWe expect ABS to post strong 2Q10 figures on 19 August. Weforecast group sales of PLN38m, up 1%. We believe that therevenue split should improve YoY. We expect ERP revenues ofPLN32.5m, up 7.6% YoY, in 2Q10, while we expect thereduction to take place in outsourcing and other revenues alongwith ABS’s policy of concentrating on higher-margin softwaresolutions. We believe that an improved sales mix should allowfor some gross profit margin expansion, despite the ERPsegment being competitive. We expect the gross profit margin tobe 30.7% in 2Q10 vs 30.0% in 2Q09. Factoring in costreductions, we expect SG&A costs to come in at 13.5% of salesvs 18% in 2Q09. We expect EBIT of PLN6.6m, up 34.5% andearnings of PLN5.6m, up 35.3% YoY on 2Q09.2Q10 results preview(PLNm) 2Q09 2Q10FSales 37.7 38.0EBITDA 7.3 9.3EBIT 4.9 6.6Net income 4.2 5.6Source: Company data, ING estimatesEarnings drivers and outlookWe forecast ABS 2010 sales of PLN155.8m, flat YoY, with 90%of revenues coming from ERP and the salesforce applicationsystems. We believe that ERP revenues should be fuelled byinvestments in the partner network for the box-type WA-PROsolutions as well as by an upgraded product offering (eg, theimprovement in the factoring applications as well as upgrades inthe core Softlab system).We believe that by concentrating on higher-margin software andcost restructuring, ABS has the potential to record aboveaveragemargins. We expect the gross profit margin to expand to33.2% in 2010 from 32.4% in 2009. We expect SG&A to come inat PLN22m, down 10% YoY, in 2010. We do not expect anynegative effects related to the move to new offices in Lublin. Weexpect 2010 EBIT of PLN30m, up 12% YoY, implying an EBITmargin of 19.2% in 2010 versus 17.1% in 2009.We forecast 2010 net earnings of PLN25m, up 12%. As ournumbers are above consensus, we would expect the latter tocontinue to upgrade.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com120

Polish Strategy Asseco Business Solutions July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F19 Aug 2010 Publication of 1H10 results03 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)Asseco Poland 46.47Amplico pension fund 10.37Mr. Wojciech Barczentewicz 3.0Mr. Piotr Maslowski 2.8Mr. Romuald Rutkowski 1.3Mr. Mariusz Lizon 0.7Source: Company data, INGShare dataAvg daily volume (3-mth) 3,445Free float (%) 53.5Market cap (PLNm) 307.45Net debt (1F, PLNm) (40)Enterprise value (1F, PLNm) 268Dividend yield (1F, %) 8.2Source: Company data, ING estimatesShare price performance111098767/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Asseco Business Solutions is one of the largestdomestic ERP companies. ABS is 46.5% owned byAsseco Poland, and was created from the merger offive companies: Incenti, Safe, Softlab, WAPRO andAnica Systems. The company has both Oracle andMicrosoft platform-oriented products and salesforceapplications. The company employs 660 people.RisksWe believe ABS’ biggest risk lies in the economy. TheERP segment was among the hardest hit and the riskis that SMEs will take time to recover and investmentsin IT will not be a priority. Secondly, acquisition riskexists – even though management has proven that itis able to consolidate businesses. Thirdly, we see arisk that Asseco Poland could in future be interestedin delisting ABS.Income statementRevenues 96 168 156 156 164 173EBITDA 20 39 37 40 42 43EBIT 15 29 27 30 31 33Net interest 0 0.4 0.9 0.8 0.7 0.5Associates 0 0 0 0 0 0Other pre-tax items 0.4 0.6 0.4 0.3 0.3 0.3Pre-tax profit 15 30 28 31 32 33Tax (1) (6) (6) (6) (6) (6)Minorities (0.7) (1) 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 13 23 22 25 26 27Normalised net profit 13 23 22 25 26 27Balance sheetTangible fixed assets 18 18 18 18 20 21Intangible fixed assets 132 181 182 182 182 182Other non-current assets 2 3 1 1 2 2Cash & equivalents 20 34 49 43 54 60Other current assets 44 48 38 39 42 46Total assets 215 284 289 284 299 311Short-term debt 0.6 0.8 0.6 3 6 8Other current liabilities 25 21 20 17 17 18Long-term debt 1 2 0.8 0.8 0.8 0.8Other long-term liabilities 9 10 8 4 4 4Total equity 180 251 259 259 270 280Total liabilities & equity 215 284 289 284 299 311Net working capital 18 26 18 21 24 27Net debt (cash) (18) (32) (48) (40) (46) (52)Cash flowCash flow EBITDA 20 39 37 40 42 43Tax, interest & other 2 4 8 5 6 6Change in working capital (5) (4) 4 (7) (3) (3)Net cash from op activities 14 28 39 27 33 34Capex (6) (14) (10) (11) (12) (13)Net acquisitions (73) (0.8) 0 0 0 0Net financing cash flow 58 (2) (1) 2 4 0.8Dividends & minority distrib'n 0 0 (14) (25) (15) (17)Net ch in cash & equivalents 13 19 15 (6) 10 6FCF 7 14 29 16 21 22Performance & returnsRevenue growth (%) 226.0 75.5 -7.3 -0.23 5.4 5.5Normalised EPS growth (%) 132.4 1.7 -7.5 11.6 3.9 4.0Normalised EBITDA mgn (%) 20.6 22.8 23.5 25.7 25.4 25.0Normalised EBIT margin (%) 15.6 16.9 17.1 19.2 19.0 18.9ROACE (%) 13.8 13.0 10.4 11.4 11.5 11.5Reported ROE (%) 12.8 10.9 8.8 9.7 9.8 9.8Working capital as % of sales 18.9 15.2 11.3 13.6 14.8 15.8Net debt (cash)/EBITDA (x) (0.92) (0.82) (1.3) (0.99) (1.1) (1.2)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 3.1 1.6 1.7 1.7 1.6 1.5EV/normalised EBITDA (x) 15.1 7.2 7.1 6.7 6.3 5.9EV/normalised EBIT (x) 20.0 9.7 9.7 9.0 8.4 7.8Normalised PER (x) 12.9 12.7 13.7 12.3 11.8 11.4Price/book (x) 1.5 1.2 1.2 1.2 1.1 1.1Dividend yield (%) 0.0 0.0 4.6 8.2 4.9 5.5FCF yield (%) 2.4 5.2 11.0 6.0 8.1 8.5Per share dataReported EPS (PLN) 0.713 0.735 0.671 0.749 0.778 0.809Normalised EPS (PLN) 0.713 0.725 0.671 0.749 0.778 0.809Dividend per share (PLN) 0.00 0.00 0.420 0.750 0.449 0.506Equity FCFPS (PLN) 0.392 0.456 0.855 0.484 0.635 0.654BV/share (PLN) 5.98 7.51 7.76 7.76 8.09 8.39Source: Company data, ING estimates121

Polish Strategy Asseco Central Europe July 2010Asseco Central EuropeStep by step improvementMaintainedBuyPoland Market cap PLN472.70mTechnology Bloomberg ACS PWAsseco CE’s share price has been a poor performer over thepast two months, largely due to the unfavourable Uniquaretransaction. As we expect decent group 2Q10 numbers, wemaintain our BUY recommendation for the stock with a newDCF-based target price of PLN29.Investment caseAfter a difficult 2009, we believe that 2010 is likely to be only mildlybetter. For Czech and Slovak corporates IT spending is not apriority, while some of the large public tenders still wait to be signed.In such a difficult environment Asseco CE seems to be doing well,with several new contracts signed. In Slovakia contracts forproprietary banking solutions were signed with Wuestenrot Groupand Poistovna VZP, in addition to the new appendix fordevelopment and support at Erste’s Slovak operations. In theCzech Republic contacts with the Ministry of Finance and theCzech depository followed. Management signalled that there ismore to come, both in Czech and in Slovakia.The slowdown was mostly visible in Austria, with Uniquare’soperations being the biggest underperformer. With limitedoutlook for improvement (earnings are dependent on the sale ofnew licences) Asseco CE decided to divest its 60% stake to theoriginal owner. The €17.8m amount was split into: (1) €12.3m withwhich source codes to the front-office software were purchased;and (2) €5.5m cash to be obtained by the end of 2011. We viewthis transaction negatively. We would have preferred Asseco CEto change the CEO and manage Uniquare itself. Purchasing of itssoftware results in the creation of intangible, depreciated and thusdecreased earnings from 2011. We believe the potential benefitsfrom the software will come at Asseco Poland.Seeing mediocre developments on the organic growth side,Asseco CE has intensified its focus on cross-selling opportunitieswithin the group. Several potential contracts are on the agenda,including cooperation with Asseco Systems (part of AssecoPoland) on its datawarehouse system; participation with AssecoPoland in the e-toll tender announced by the Polish Ministry ofTransportation; cooperation with Asseco SEE in introducingGlobeNet healthcare software in hospitals in the region; andoffering the LCS ERP system in the DACH region.We believe that the M&A activity will continue in 2010, but it islikely to be focused on the CEE region. The end of 2009 and early2010 have seen the acquisition of two Hungarian companies: a70% stake in Statlogics (consumer credit applications) and a60% stake in GlobeNet (healthcare player). A further opportunityis a Slovak ERP player, which is at the pre-due diligence stage.At 10.6x 2010F PER, Asseco Slovakia is the most attractivelypriced Polish software IT company in our coverage (with a 16%discount). We find the scale of the discount warranted, due to thegroup’s high margins and net cash position.Price (19/07/10)Target price (12-mth)PLN22.13Previously PLN30.0PLN29.0Forecast total return 34.2%Quarterly previewWe expect decent 2Q10 numbers to be reported on 19 August.The group structure has changed YoY, with the consolidation ofHungarian Statlogics and 2M of Uniquare losses. We expect group2Q10 sales at €30.6m, up 3.5% YoY, still showing the impact ofthe economic slowdown. We forecast Asseco Czech to be thebiggest contributor (at €8.4m) followed by the Asseco CE parentcompany (at €6.8m) and Slovanet (€8.1m). We expect the grossprofit margin to deteriorate from 32.4% in 2Q09 to 28.9% YoY in2Q10F. However, we expect cost reductions to be visible andoffset the €0.4m loss at Uniquare, translating into group EBIT of€2.8m, up 5.6% YoY. We forecast 2Q10 group earnings of €0.5m.Adjusting for a €1.5m loss on the sale of Uniquare, we expectearnings of €1.7m, down 40% YoY (tax asset in the base).2Q10F results preview(€m) 2Q09 2Q10FSales 29.6 30.6EBITDA 4.3 3.8EBIT 2.7 2.8Net income 2.9 0.5Source: Company data, ING estimatesEarnings drivers and outlookWe expect Asseco CE group revenues of €143.3m, up 4.3%YoY, in 2010, showing only a gradual YoY recovery, as IT is nota priority for corporates at present. We believe that the threebiggest revenue contributors should be: Asseco Czech parent,Asseco CE parent (supported by key banking and healthsegments) and Slovanet. From 2H10 we incorporate theacquisition of the Hungarian company Globenet.We assume a gross profit margin of 34.2% in 2010F, largely flatYoY, as we expect the pressure on prices from customers to bepartially offset by the cost reductions that have been conducted.We incorporate 5M losses at Uniquare in 2010 and Globenetconsolidation from 2H10. We assume that Datalock and MPI willbe in the red in 2010, though we point out the latter was recentlyincorporated to the Slovak parent company. As a result, weforecast 2010 EBIT of €14.2m, up 27% YoY, implying theoperating margin rising from 8.2% in 2009 to 9.9% in 2010F.We assume a €1.5m loss on the sale of Uniquare to be booked innet financial activity. Factoring in tax liabilities as well as minorities,we expect reported earnings of €9.7m, down 10% YoY, while at€10.8m, flat YoY, after adjusting for the loss on the sale.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com122

Polish Strategy Asseco Central Europe July 2010NewsflowDateDescriptionFinancialsYear end Dec (€m) 2007 2008 2009 2010F 2011F 2012F19 Aug 2010 Publication of 1H10 results5 Nov 2010 Publication of 3Q10 resulstSource: Company data, INGMajor shareholders (%)Asseco Poland 40.07ING IM 6.59Source: Company data, INGShare dataAvg daily volume (3-mth) 4,116Free float (%) 59.9Market cap (PLNm) 472.70Net debt (1F, €m) (12)Enterprise value (1F, €m) 106Dividend yield (1F, %) 4.1Source: Company data, ING estimatesShare price performance34323028262422207/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Asseco Central Europe (formerly Asseco Slovakia) isa diversified software house, 40.1%-owned by AssecoPoland. Following the sale of the Austrian Uniquarebanking company (May 2010), Asseco CE operates inthree countries: Slovakia (top three IT company; Slovakparent company recently merged with MPI, DatalockERP company, Slovanet telco operator), Czech Republic(top ten player; Czech parent company merged withBerit and LCS ERP company) and Hungary(Statlogics and GlobeNet). Key revenue sources are:banking, ERP, telco, healthcare, integration andpublic. The group employs c.1,800 people.RisksBoth upside and downside risks to our rating lies inthe economic performance of the CEE countries. Wesee a downside risk in shorter depreciation of theUniqaure software. There is upside and downside riskfrom Asseco Poland’s strategy, which may involve anincorporation and price/ parity risk.Income statementRevenues 73 143 137 143 151 159EBITDA 13 24 17 20 24 25EBIT 11 17 11 14 17 18Net interest 0.6 0.5 0.3 (0.2) (0.6) (0.7)Associates 0.0 0.3 0.2 0.0 0.0 0.0Other pre-tax items (0.3) 0.9 0.1 (2) (0.1) 0.2Pre-tax profit 11 19 12 12 16 17Tax (2) (3) (1) (2) (3) (3)Minorities (2) (2) 0.4 (0.6) (0.9) (1.0)Other post-tax items 0 0 0 0 0 0Net profit 7 13 11 10 12 13Normalised net profit 7 13 11 11 12 13Balance sheetTangible fixed assets 9 17 16 16 16 15Intangible fixed assets 25 72 64 65 64 64Other non-current assets 3 3 3 3 4 4Cash & equivalents 18 43 25 24 31 38Other current assets 45 40 35 42 45 48Total assets 100 175 144 151 159 169Short-term debt 13 6 5 4 3 3Other current liabilities 28 45 25 30 31 33Long-term debt 6 27 9 9 9 9Other long-term liabilities 4 4 11 10 10 10Total equity 49 93 93 98 107 113Total liabilities & equity 100 175 144 151 159 169Net working capital 14 (7) 7 9 10 12Net debt (cash) 0.9 (11) (10) (12) (19) (25)Cash flowCash flow EBITDA 13 24 17 20 24 25Tax, interest & other 3 0.3 (1) 3 4 4Change in working capital (12) 5 (3) (4) (1) (2)Net cash from op activities (0.4) 24 11 14 20 20Capex (4) (15) (5) (7) (7) (7)Net acquisitions (42) (9) (13) 0 0 0Net financing cash flow 7 28 (1) (4) (1) 0.7Dividends & minority distrib'n (5) (6) (10) (5) (5) (7)Net ch in cash & equivalents (13) 25 (19) (0.6) 7 6FCF (5) 9 6 8 13 13Performance & returnsRevenue growth (%) 93.0 94.4 -3.7 4.3 5.4 5.1Normalised EPS growth (%) 25.4 54.7 -23.0 1.2 12.3 7.3Normalised EBITDA mgn (%) 18.4 16.5 12.5 14.3 16.0 16.0Normalised EBIT margin (%) 14.7 12.2 8.2 9.9 11.1 11.1ROACE (%) 20.5 18.0 9.6 13.0 14.6 14.5Reported ROE (%) 19.8 21.2 12.0 10.5 12.4 12.5Working capital as % of sales 19.4 -5.1 5.0 6.4 6.9 7.7Net debt (cash)/EBITDA (x) 0.07 (0.45) (0.60) (0.57) (0.80) (1.00)EBITDA net interest cvg (x) n/a n/a n/a 129.4 42.9 38.7ValuationEV/revenue (x) 1.7 0.76 0.78 0.74 0.66 0.60EV/normalised EBITDA (x) 9.5 4.6 6.2 5.2 4.1 3.7EV/normalised EBIT (x) 11.9 6.2 9.5 7.5 5.9 5.4Normalised PER (x) 12.8 8.3 10.8 10.6 9.5 8.8Price/book (x) 2.3 1.3 1.3 1.2 1.1 1.1Dividend yield (%) 5.5 5.0 8.8 4.1 4.2 6.4FCF yield (%) n/a 8.0 5.4 7.4 13.4 14.3Per share dataReported EPS (€) 0.429 0.687 0.503 0.452 0.572 0.613Normalised EPS (€) 0.419 0.648 0.499 0.505 0.568 0.609Dividend per share (€) 0.293 0.267 0.470 0.220 0.226 0.343Equity FCFPS (€) (0.298) 0.443 0.271 0.367 0.624 0.632BV/share (€) 2.33 4.18 4.21 4.45 4.79 5.06Source: Company data, ING estimates123

Polish Strategy Asseco Poland July 2010Asseco PolandOne bridge too farPreviously BuyHoldPoland Market cap PLN4,390.2mTechnology Bloomberg ACP PWDespite an equity issuance, Asseco Poland’s share pricehas been a stable performer. With plans for anotherissuance to finance the US acquisition and a mediocreoutlook for 2Q10, we downgrade our rating from Buy toHOLD with a new DCF-based target price of PLN60.Investment caseAsseco Poland’s group revenues come from two sources:domestic medium-term contracts and foreign subsidiaries. Webelieve that in 2010 and beyond the company should continue tobe a beneficiary of the dedicated solutions implemented at keycustomers (ZUS, PZU, ARMiR, TPSA) but we expect the level ofbusiness with PKO BP to shrink as the implementation phase ofthe Alnova system has been completed. We expect foreignsubsidiaries to add 46% to 2010 revenues and remain at aroundthis level. Even though the number of foreign companies growseach year, their contribution will be negatively affected byexpected PLN/EUR appreciation. The current backlog ofPLN2.2bn, covers 72.5% of our 2010 forecast. We expect a2009-12F sales CAGR of 2.3%.We point out that due to the medium-term contracts and strictcost cautiousness, the situation at Polish companies is superiorto foreign subsidiaries, where the slowdown was felt to a greaterextent. We believe that stronger improvement at the foreignoperations should be visible from 2011 onwards. Expected zlotyappreciation eats into any recovery, translating into a 2009-12Fadjusted EPS CAGR of negative 4.5%.Asseco Poland wants to continue purchases in 2010 in order tobecome a global IT company in 2011. PLN209m was obtainedfrom the equity issuance in May, with the cash scheduled to gotowards acquisitions in Western Europe. Target companies arebeing sought in Scandinavia, Spain, Italy and Switzerland. Inaddition, Asseco SEE plans further purchases within the SEEregion (including entry into Turkey), while Asseco CE group isconsidering further investments in the core CEE region.However, Europe is not enough. By the end of 2010, AssecoPoland hopes to acquire a majority stake in a US-listedcompany. Little information has been released, but with still somuch to do in terms of integration of the European businessesand obtaining revenue synergy, we believe that a US acquisition ispremature. We perceive the potential acquisition as a craving forgrowth rather than value creation. We point out that any potentialUS acquisition is likely to result in Asseco Poland selling itsremaining 5.4m treasury shares to the market. We think it islikely that the SPO price would be lower than PLN54 achieved inthe May issuance, putting pressure on the share price.On a 2010F adjusted PER of 11.1x, Asseco Poland trades at an11% discount to its peers, which we find warranted given theshare overhang and the scale of the risk of a US acquisition. Wecut our target price in line with our forecast reductions.Price (19/07/10)Target price (12-mth)PLN56.60Previously PLN65.00PLN60.0Forecast total return 7.9%Quarterly previewWe expect Asseco Poland to report mediocre 2Q10 numbers on27 August. We expect group sales of PLN720m, up 2% YoY,with growth restricted by the limited impact of new assets and aslowdown in the region. Seeing pricing pressure from customers,we expect the gross profit margin to come down to 35.1% in2Q10 from 36.7% in 2Q09. Factoring in cost reductions (inaddition to EU subsidies obtained), we expect EBIT ofPLN129m, down 6.6% YoY. We expect net financial activity at aloss of PLN31m (PLN20m goodwill write-off). Factoring in thestatutory tax rate and PLN40m of tax asset, we expect reportedearnings at PLN111m, up 10% YoY. We expect adjusted 2Q10earnings at PLN96m, down 5.2% YoY.2Q10F results preview(PLNm) 2Q09 2Q10FSales 707.3 720.2EBITDA 166.5 159.5EBIT 137.9 128.8Net income 101.4 111.3Source: Company data, ING estimatesEarnings drivers and outlookWe expect 2010 group sales of PLN3.1bn, flat YoY, with full-yearconsolidation of assets offset by the impact of economicslowdown. From 2010, the parent company was merged withABG, thus we expect a boost to parent sales at PLN1.2bn versusPLN946m in 2009. We expect a contribution from Asseco CEgroup of PLN577m and Asseco SEE of PLN451m. We expectforeign sales to constitute 46% of 2010F sales.We expect 2010 group EBIT of PLN506m, down 3.7% YoY.Similarly to sales, the EBIT of the parent company should besupported by the merger with ABG and EU subsidies obtained.Thus, the merger will hide the impact of a lower PKO BPcontribution. We expect parent company EBIT of PLN296m,down 4.4% YoY. The parent constitutes 58.5% of 2010F groupEBIT. The remaining EBIT contributors are diversified, with ABSadding PLN30m, Asseco Slovakia group adding PLN57m andAsseco SEE PLN57m. We expect the normalised EBIT margin tofall to 16.9% in 2010F from 17.1% in 2009 (still high).Below EBIT we expect several one-offs (goodwill write-offs,financial gains and tax assets). We forecast group reported netearnings at PLN373m, flat YoY. On a normalised basis, weexpect 2010F net income at PLN359m, down 2.4% YoY.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com124

Polish Strategy Asseco Poland July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F27 Aug 2010 Publication of 1H10 results12 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)CEO, Mr Adam Goral 10.4Treasury shares 7.0Aviva pension fund 9.6ING pension fund 7.2PZU pension fund 5.5Source: Company data, INGShare dataAvg daily volume (3-mth) 124,896Free float (%) 82.6Market cap (PLNm) 4,390.2Net debt (1F, PLNm) (373)Enterprise value (1F, PLNm) 4,721Dividend yield (1F, %) 2.6Source: Company data, ING estimatesShare price performance7570656055507/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Created through a series of M&A, Asseco Poland isthe biggest Polish IT company and a WIG20 member.Within the CEE region, the company is among theleading IT companies in Poland, Czech and Slovakia,and is developing its Hungarian operations. AssecoSEE is among the leading IT companies in SouthEastern Europe region. Asseco Poland is graduallyexpanding its Western European operations, with apresence currently in Germany, Spain and Denmark.Asseco Poland’s software solutions are provided tobanks, corporates and public (largely dedicatedsystems). The group employs c.8,000 people.RisksUpside risk lies in the economies of CEE/SEE regionand Western Europe. Downside lies in stronger-thanexpectedzloty appreciation and ACP choosing thewrong partners in the M&A process. The third risk isshare overhang, treasury shares (7% of equity) couldbe sold to finance a potential US purchase.Income statementRevenues 1,282 2,787 3,050 3,063 3,122 3,270EBITDA 274 592 646 650 663 664EBIT 237 494 526 506 514 509Net interest 0 0 0 0 0 0Associates (3) 3 2 2 2 2Other pre-tax items 2 (4) (13) (6) (5) (8)Pre-tax profit 235 493 514 501 511 502Tax (45) (94) (77) (61) (105) (102)Minorities (30) (78) (65) (68) (68) (68)Other post-tax items 0 0 0 0 0 0Net profit 161 322 373 373 338 333Normalised net profit 161 296 368 359 345 339Balance sheetTangible fixed assets 93 334 367 397 428 396Intangible fixed assets 1,700 3,822 3,918 3,929 3,933 3,932Other non-current assets 505 125 138 138 139 143Cash & equivalents 258 484 360 615 798 1,064Other current assets 700 963 933 964 989 1,034Total assets 3,256 5,729 5,715 6,042 6,286 6,567Short-term debt 61 128 126 26 22 24Other current liabilities 496 761 565 567 560 583Long-term debt 412 669 338 216 170 147Other long-term liabilities 166 388 369 370 377 391Total equity 2,121 3,783 4,318 4,863 5,157 5,423Total liabilities & equity 3,256 5,729 5,715 6,042 6,286 6,567Net working capital 107 120 297 326 357 376Net debt (cash) 215 313 103 (373) (606) (892)Cash flowCash flow EBITDA 274 592 646 650 663 664Tax, interest & other (17) (50) 20 61 107 102Change in working capital (118) 134 (63) (28) (28) (12)Net cash from op activities 49 488 439 557 529 543Capex (39) (122) (126) (165) (172) (122)Net acquisitions (459) (516) (126) (20) (13) 0Net financing cash flow 594 (95) (75) (12) (50) (21)Dividends & minority distrib'n (19) (33) (70) (105) (112) (135)Net ch in cash & equivalents 202 164 (110) 254 183 266FCF 10 365 312 392 358 422Performance & returnsRevenue growth (%) 157.7 117.3 9.5 0.41 1.9 4.8Normalised EPS growth (%) 64.7 43.3 8.1 -5.1 -6.6 -1.7Normalised EBITDA mgn (%) 21.4 21.4 20.7 21.2 21.2 20.3Normalised EBIT margin (%) 18.4 18.2 17.1 16.9 16.7 15.8ROACE (%) 15.9 14.2 11.2 10.5 10.0 9.4Reported ROE (%) 14.2 12.1 10.5 9.5 7.9 7.4Working capital as % of sales 8.3 4.3 9.8 10.6 11.4 11.5Net debt (cash)/EBITDA (x) 0.79 0.53 0.16 (0.57) (0.91) (1.3)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 3.7 1.8 1.7 1.5 1.5 1.3EV/normalised EBITDA (x) 17.5 8.5 8.1 7.3 6.9 6.5EV/normalised EBIT (x) 20.3 10.0 9.8 9.1 8.7 8.4Normalised PER (x) 16.3 11.4 10.5 11.1 11.9 12.1Price/book (x) 1.5 1.1 1.0 0.98 0.93 0.89Dividend yield (%) 0.64 0.97 1.6 2.6 2.5 3.1FCF yield (%) 0.21 7.2 6.1 8.3 7.8 9.7Per share dataReported EPS (PLN) 3.48 5.42 5.47 5.31 4.69 4.62Normalised EPS (PLN) 3.48 4.99 5.39 5.11 4.78 4.70Dividend per share (PLN) 0.364 0.550 0.902 1.47 1.44 1.74Equity FCFPS (PLN) 0.215 6.16 4.58 5.59 4.96 5.85BV/share (PLN) 37.64 49.86 53.95 57.66 60.80 63.54Source: Company data, ING estimates125

Polish Strategy Comarch July 2010ComarchProblems in Germany continuePreviously HoldSellPoland Market cap PLN660.73mTechnology Bloomberg CMR PWComarch’s share price has been a weak performer recentlydue to disappointing 1Q10 figures. With an even worseoutlook for 2Q10, we downgrade our recommendation fromHold to SELL with a new DCF-based target price of PLN78.5.Investment caseComArch is a diversified software house that sells its solutions inPoland and abroad. The company offers proprietary solutionsfor: telecoms, banking and finance, industry and trade (includingsuccessful ERP and loyalty systems) as well as publicadministration, for which dedicated solutions were created. Webelieve that in the coming years moderate sales growth rates willbe possible in Poland, unless sizeable contracts in the publicsector materialise. We believe that Comarch will wish to spur itsgrowth abroad, where the company still holds a cost advantage,with the CEO indicating the need to invest in branches andpeople (especially in Germany and France).Comarch’s German acquisition, SoftM, is proving painful. Costreductions (largely HR lay-offs) resulted in the lowering of the fixedcost base. However, we expect losses to continue in SoftM in 2010(contrary to the CEO’s statements about break-even), as we believethat the revenues obtained are insufficient to cover even thedecreased cost base. We believe a rebound could take place themoment sentiment towards IT spending improves on the Germanmarket and once the product offering is augmented (the best sellingsolution is the Java-based Semiramis ERP product). We also pointout that Comarch no longer holds an 81% stake in SoftM (nowrenamed Comarch). The stake has fallen to c.49% as a result of acapital increase conducted by a venture related to the CEO.We recognise Comarch’s devotion to further development of itsnew ventures. Currently six new ventures are running. However,we find the current results disappointing. With PLN8.3m of EBITloss in 2009 (larger than guided), we believe break-even in 2010is unlikely. We also see Comarch is focused on developing theAsian markets. Offices in China and Vietnam have beenestablished and demand for software is being tested. Comarchwas also considering running a JV with Inspur, a key Chinese ITcompany, to promote its ERP products. Nevertheless,cooperation has not been established so far.Although the above-mentioned businesses contribute negatively togroup EBIT, we believe that these could bring value in the mediumterm. However, we fail to see value generation in investments insports clubs. The CEO stated that PLN30m of equity increase forCracovia is being considered and could materialise this year.On an adjusted 15.4x 2010F PER, ComArch trades at a 23%premium to its domestic peers, which we find excessive given theearnings outlook. There is a new stock option plan for 2011-13,which entitles employees to 3.6% of the growth in market cap. Thereduction in our TP comes from lower forecasts for 2010F onwards.Price (19/07/10)Target price (12-mth)PLN83.00Previously PLN98.0PLN78.5Forecast total return -5.4%Quarterly previewWe expect Comarch to publish weak 2Q10 figures on 31 August.We expect SoftM to record €8.8m sales (down 11% YoY), whileComarch and new ventures should add PLN110m (down 8%YoY), translating into group sales of PLN147 (down 10% YoY).We expect group EBIT to be PLN11.8m in the red, flat YoY. Weexpect SoftM’s loss to shrink and reach €0.9m. We forecastComarch stand-alone EBIT at PLN5.2m and the loss of newventures at PLN2m. Still, we believe that a PLN10m goodwillwrite-off on SoftM will be needed. We expect reported loss ofPLN7.9m in 2Q10 versus PLN4.3m in 2Q09. Correcting for thegoodwill impairment, we expect adjusted earnings of PLN2.1mversus a loss of PLN3.7m in the base.2Q10F results preview(PLNm) 2Q09 2Q10FSales 163.8 147.0EBITDA 2.3 (4.1)EBIT (12.8) (11.8)Net profit (4.3) (7.9)Source: Company data, ING estimatesEarnings outlookWe expect Comarch group 2010 sales of PLN749.2m, up 2.7%YoY. We expect Comarch stand-alone sales at PLN587.3m(including the expected PLN3.6m contribution from newventures), up 5% YoY. Growth is supported by 2010 backlogdata, at PLN396.5m, up 4% YoY, covering 67.5% of our full-yearforecasts. We expect SoftM group revenues at PLN161.9m,down 4.6% YoY, due to expected appreciation of PLN versusEUR eating up euro-based dynamics.We expect EBIT improvement in 2010, visible on all lines.However, we point out that after weak 1Q10 numbers and with apoor outlook for 2Q10, we have sizeably cut our earningsexpectations. We expect Comarch’s old business to showPLN41.3m EBIT (including the PLN10m goodwill write-off, flatYoY after adjustments). We expect losses at SoftM to continue,though decrease YoY, both in euro and PLN terms. Thus, weforecast a PLN7.5m loss at SoftM. We expect the new venturesto decrease EBIT by PLN5.9m. Overall, we expect group EBIT ofPLN27.9m versus PLN14.4m in 2009.Assuming favourable net financial activity and higher minoritiesat SoftM, we expect group earnings of PLN31m (flat YoY), withadjusted earnings of PLN43.4m in 2010 vs PLN21.4m in 2009.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com126

Polish Strategy Comarch July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 Publication of 1H10 results12 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)Janusz Filipiak, CEO 32.54Elzbieta Filipiak, CEO’s wife 10.51BZWBK AIB funds 34.23Source: Company data, INGShare dataAvg daily volume (3-mth) 3,261Free float (%) 57.1Market cap (PLNm) 660.73Net debt (1F, PLNm) (62)Enterprise value (1F, PLNm) 616Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance12011010090807060Source: ING7/09 9/09 11/09 1/10 3/10 5/10PriceCompany profileWIG20 (rebased)Comarch is a diversified software house operatingdomestically and actively targeting exports (Europeand the US). Comarch offers its software in fivesectors: banking, telco, trade/services, industry andpublic. Via its venture fund, Comarch is developingstart-up businesses (currently six). Comarch owns a48.6% stake in German ERP producer, SoftM, as wellas 49.15% in Cracovia football club. The group(excluding the sports club) employs c.3,300 people.Comarch also owns real estate, largely officebuildings in the special economic zone in Cracow.RisksUpside risk lies in a potential stronger-than-expectedrebound in IT spending and lower losses on newventures and from the JV in China. Downside riskcomes from Comarch’s ability to obtain high margincontracts, covering for the high fixed-cost base.Income statementRevenues 581 701 729 749 776 840EBITDA 61 66 56 65 90 100EBIT 44 46 14 28 54 63Net interest (0.8) 8 4 4 4 6Associates 3 0.0 (0.5) (0.2) 0 0.1Other pre-tax items (1.0) 190 0.3 0.2 0.2 0.2Pre-tax profit 46 245 18 32 58 69Tax (3) (43) 8 (0.2) (9) (11)Minorities 0.4 (2) 6 (0.6) 0.5 (0.6)Other post-tax items 0 0 0 0 0 0Net profit 43 199 32 31 50 57Normalised net profit 43 60 21 43 49 56Balance sheetTangible fixed assets 183 257 256 274 277 285Intangible fixed assets 39 125 127 117 118 119Other non-current assets 21 24 30 32 35 40Cash & equivalents 77 222 218 178 200 228Other current assets 239 287 264 296 306 332Total assets 558 915 895 898 936 1,004Short-term debt 5 27 13 48 43 47Other current liabilities 119 109 120 112 118 131Long-term debt 78 94 83 68 53 38Other long-term liabilities 56 151 125 94 97 105Total equity 301 534 554 576 625 683Total liabilities & equity 558 915 895 898 936 1,004Net working capital 109 170 136 176 180 192Net debt (cash) 6 (101) (122) (62) (104) (143)Cash flowCash flow EBITDA 61 66 56 65 90 100Tax, interest & other 4 (104) (43) (42) 8 13Change in working capital (21) (20) 54 (36) (6) (17)Net cash from op activities 39 54 87 (9) 78 79Capex (60) (90) (37) (55) (40) (46)Net acquisitions 0 (45) (32) 0 0 0Net financing cash flow 25 22 (26) 16 (25) (15)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents 5 147 (12) (39) 21 28FCF (21) (36) 51 (64) 38 33Performance & returnsRevenue growth (%) 18.2 20.6 4.1 2.7 3.6 8.3Normalised EPS growth (%) -14.0 39.7 -64.5 100.9 13.4 14.3Normalised EBITDA mgn (%) 10.7 11.4 8.1 9.1 11.5 11.9Normalised EBIT margin (%) 7.8 8.5 2.4 5.5 6.9 7.5ROACE (%) 13.0 11.5 2.7 6.2 7.6 8.5Reported ROE (%) 16.2 50.9 6.3 5.7 8.5 9.0Working capital as % of sales 18.8 24.2 18.6 23.5 23.1 22.8Net debt (cash)/EBITDA (x) 0.09 (1.5) (2.2) (0.96) (1.2) (1.4)EBITDA net interest cvg (x) 78.0 n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.2 0.85 0.76 0.82 0.74 0.64EV/normalised EBITDA (x) 10.9 7.5 9.4 9.0 6.4 5.4EV/normalised EBIT (x) 15.0 10.0 32.0 14.9 10.7 8.5Normalised PER (x) 15.3 11.0 30.9 15.4 13.6 11.9Price/book (x) 2.3 1.3 1.2 1.2 1.1 1.0Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a n/a 9.1 n/a 6.6 6.2Per share dataReported EPS (PLN) 5.37 25.02 4.06 3.85 6.15 7.08Normalised EPS (PLN) 5.41 7.55 2.68 5.39 6.11 6.99Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) (2.60) (4.58) 6.35 (7.94) 4.71 4.14BV/share (PLN) 36.00 62.33 67.49 69.36 75.51 82.59Source: Company data, ING estimates127

Polish Strategy Comp July 2010CompGood outlook for 2Q10MaintainedBuyPoland Market cap PLN323.81mTechnology Bloomberg CMP PWComp’s share price has been stable in the past two months,despite the buy-back that was conducted. With a goodoutlook for 2Q10 and improving prospects at the Novitussubsidiary, we maintain our BUY recommendation with analmost unchanged DCF-based target price of PLN78.5.Investment caseIn the coming years, we believe Comp will be a key beneficiaryof security expenditure by corporates and public institutions, as aresult of its leadership position and broad offering (both hardwareandsoftware-oriented solutions), strengthened by past M&Aactivity. As outlays for security are not vital in all sectors, webelieve that recovery in spending will rather take place from 2011.With top-line supported by the SDE project and a high 2010backlog of PLN157m, we expect 2009-12F sales CAGR at 4%.We believe that the SDE project for the Ministry of Justice forelectronic supervision of prisoners (worth PLN185m overall) will bean important EBIT contributor in the coming years. Due to a highcontribution from proprietary services, the margins on the contractshould be high. The contract should last for five years, although wewould expect maintenance revenues to continue after 2014. We alsosee a possibility for Comp to obtain a sizeable exports contract – theCzech government would also like to introduce electronicsupervision system, with Comp’s offer being on the shortlist.We point out that Comp managed to keep a high 9.5% operatingmargin during the slowdown of 2009, due to cost reductions, theSDE contract and the expansion of the Safe Computing group.We believe the margin could be expanded in 2010 on the back ofan improved economic outlook (especially if the delayedcorporate security projects are finalised), as well as in the yearsto come, when we expect the operating margin to be in theregion of 11%.We also see favourable developments taking place at the level ofthe Novitus subsidiary. We point out that the latter was strengthenedby the shift of retail assets from Comp. After the failure to increaseequity at LSI Software and acquire a stake in this retail softwareproducer, Novitus began consolidation in its core cash registersmarket. Novitus acquired 2.24/9.88% of equity/votes in Elzab, acash registers producer, with the agreement signed to acquire a12.62/19.54% stake overall. Cost and revenue synergies from apotential merger seem obvious, though agreements with theremaining Elzab shareholders need to be signed.Comp has also managed to conduct a buyback. 7% of equity wasacquired at PLN70, meaning an outlay of c.PLN23m. Overall, thecompany has an approval for the buyback of up to 12% of equity,with the shares to be purchased at PLN40-75 per share by the endof 2010. On 13.3x 2010F PER, Comp trades at a 6% premium toits peers, which we believe is warranted by its services-orientedmodel, stable cash position and outlook for new contract signing.Price (19/07/10)Target price (12-mth)PLN68.20Previously PLN78.7PLN78.5Forecast total return 15.1%Quarterly previewWe expect the Comp group to report good 2Q10 numbers, whichare due to be published on 30 August. We expect group sales atPLN62m, up 14% YoY (a consequence of the growing backlog).However, we expect the structure to be more biased towardssales of goods. Thus, we expect the gross profit margin to fall to40% in 2Q10, from 41.4% in 2Q09. We expect SG&A to come inat 32% of sales in 2Q10 versus c.37% in 2Q09, as we expect costreductions to be visible, despite likely losses at Safe Computinggroup. We forecast group EBIT at PLN4.8m, up 138% YoY. WithPLN0.3m negative net financial and a PLN1.1m contribution fromNovitus, we expect group income at PLN4.4m, up c.92% YoY.2Q10F results preview(PLNm) 2Q09 2Q10FSales 54.4 62.0EBITDA 4.0 6.8EBIT 2.0 4.8Net income 2.3 4.4Source: Company data, ING estimatesEarnings drivers and outlookDespite the high backlog, the contribution from the SDE contractand the full-year consolidation of new assets, we conservativelyassume flat YoY revenues in 2010, at PLN258.9m. We expectrevenues from the SDE contract to reach PLN31.4m in 2010(versus c.PLN20m in 2009), translating into parent companysales of PLN208.9m in 2010 (flat YoY). We expect thesubsidiaries’ contribution to reach PLN55.2m in 2010 (up 7.5%YoY), as we assume no further deterioration at Safe Computingand consolidate Safe Technologies.After weak 1Q10 numbers and a shift of retail assets to theNovitus subsidiary, we lower our EBIT expectations. We nowexpect Comp’s group 2010 EBIT to be PLN26.4m, up 9% YoY.We believe the parent company should remain the biggestcontributor, adding PLN14.9m in 2010 (PLN12.3m in 2009). Weexpect the contribution from subsidiaries to fall from PLN12.8min 2009 to PLN11.6m in 2010F, as we assume lower margins incorporate security.We point out that following the divesture of assets there was aPLN7m gain on discontinued operations. With a growingcontribution from the Novitus subsidiary we expect reportedearnings of PLN30.6m, with adjusted at PLN23.6m, up 9% YoY,below Comp’s guidance for double-digit earnings dynamics.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com128

Polish Strategy Comp July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F30 Aug 2010 Publication of 1H10 results12 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)Jacek Papaj, CEO 17.2Amplico pension fund 9.7Pioneer funds 9.8Novitus 8.7Pekao pension fund 8.2Source: Company data, INGShare dataAvg daily volume (3-mth) 178.0Free float (%) 75.8Market cap (PLNm) 323.81Net debt (1F, PLNm) (8)Enterprise value (1F, PLNm) 252Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance8580757065607/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Comp specialises in security, both qualified (publicinstitutions) and corporate (software and hardwaresolutions). With the CSS merger, Comp broadened itsproduct offering in the services segment. Comp ownsa 46% stake in Novitus, which is the leading cashregister producer and is present in the trade market(software for retailers). Comp employs c.690 people.RisksBoth upside and downside risk lies in the macrosituation and IT outlays, especially in the key publicadministration. Upside risk could come from newacquisitions, both at the level of Comp and theNovitus subsidiary. Downside risk could come fromproblems with the conduct of the large SDE contract.Income statementRevenues 181 317 255 259 273 286EBITDA 31 25 32 34 37 40EBIT 27 18 24 26 29 31Net interest 0 0 0 0 0 0Associates 2 4 4 5 6 6Other pre-tax items 1 (1) (2) 5 (2) (3)Pre-tax profit 30 20 26 37 32 35Tax (4) (3) (5) (6) (6) (7)Minorities (2) (0.1) (0.8) (0.5) (0.7) (0.8)Other post-tax items 0 0 0 0 0 0Net profit 24 17 21 31 25 27Normalised net profit 22 17 22 24 25 27Balance sheetTangible fixed assets 12 12 19 20 21 23Intangible fixed assets 160 172 193 193 193 193Other non-current assets 73 62 72 72 72 73Cash & equivalents 25 23 30 18 38 60Other current assets 162 184 105 115 121 127Total assets 431 453 420 418 445 475Short-term debt 18 15 15 6 5 5Other current liabilities 75 91 51 52 54 57Long-term debt 19 12 6 4 2 1Other long-term liabilities 20 25 12 12 13 14Total equity 299 310 336 344 370 398Total liabilities & equity 431 453 420 418 445 475Net working capital 76 87 47 56 59 61Net debt (cash) 11 4 (9) (8) (30) (54)Cash flowCash flow EBITDA 31 25 32 34 37 39Tax, interest & other 2 1.0 1 6 6 7Change in working capital (15) (3) 20 (9) (3) (3)Net cash from op activities 14 19 46 30 32 34Capex (8) (9) (8) (9) (10) (10)Net acquisitions 0 (2) (23) 0 0 0Net financing cash flow 39 (12) (10) (34) (3) (1)Dividends & minority distrib'n 0 0 0 0 0 0Net ch in cash & equivalents 3 (2) 9 (13) 20 22FCF 6 9 38 22 22 24Performance & returnsRevenue growth (%) 31.4 75.5 -19.5 1.4 5.4 4.9Normalised EPS growth (%) 77.0 -46.8 23.5 13.3 11.9 6.2Normalised EBITDA mgn (%) 17.2 8.0 12.6 13.3 13.7 14.0Normalised EBIT margin (%) 15.0 5.8 9.5 10.2 10.6 10.8ROACE (%) 11.1 5.5 7.0 7.4 7.9 7.9Reported ROE (%) 12.2 5.6 6.6 9.1 7.2 7.1Working capital as % of sales 42.3 27.3 18.4 21.5 21.4 21.4Net debt (cash)/EBITDA (x) 0.37 0.18 (0.29) (0.23) (0.81) (1.4)EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.5 0.86 0.98 0.97 0.84 0.72EV/normalised EBITDA (x) 8.7 10.8 7.8 7.3 6.1 5.2EV/normalised EBIT (x) 9.9 14.9 10.3 9.5 8.0 6.7Normalised PER (x) 9.9 18.6 15.0 13.3 11.8 11.2Price/book (x) 1.1 1.1 0.97 0.89 0.82 0.77Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 0.0FCF yield (%) 2.3 3.4 15.2 8.6 9.8 11.5Per share dataReported EPS (PLN) 7.65 3.59 4.44 6.68 5.76 6.11Normalised EPS (PLN) 6.90 3.67 4.54 5.14 5.76 6.11Dividend per share (PLN) 0.00 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) 2.02 1.97 7.98 4.72 5.09 5.40BV/share (PLN) 62.57 64.85 70.01 76.94 82.70 88.82Source: Company data, ING estimates129

Polish Strategy Sygnity July 2010SygnitySmaller but profitable… from 2011MaintainedHoldPoland Market cap PLN152.86mTechnology Bloomberg SGN PWSygnity announced a 2010-12F strategy which promisesearnings in 2011-12, but we expect high losses to persist in2010. With a poor outlook for 2Q10, the weakest amongpeers, we maintain our HOLD recommendation with a new12-month DCF-based target price of PLN14.7.Investment caseSygnity has faced serious management changes in the past fewmonths, starting with the resignation of the former CEO, Mr PiotrKardach, and the dismissal of the COO, Mr Andrzej Marciniak.Three new members have been appointed in that time, includingthe CEO, Mr Norbert Biedrzycki. In addition, recently the CFO ofthe company was also replaced, with Ms Ilona Weiss nominatedas a board member (formerly at Sage). Although we understandthat fresh blood is needed, especially in this troubledorganisation, we point out that of the five board members, onlyone has more than a six-month term at Sygnity.The new management has identified the company’s mainproblems and started to address the burning issues. The keymeasures undertaken include: intra-group consolidation, a neworganisation model, concentration on the key sectors (banking,public and utilities), creation of targets for employees and forbusiness units, as well as tools for their verification, and creationof a technology strategy for Sygnity (which should provide themajor source of new revenues in coming years).The realisation of this strategy should lead to an end to revenuecontraction from 2011 onwards. Taking into account the impactof: (1) the planned sale of unprofitable assets; (2) further HRreductions (a target of 1,500 employees versus c.1,960 at theend of 2Q10); and (3) renegotiation of agreements withsubcontractors, Sygnity aims to achieve revenues of PLN650-700m and an EBIT margin of 5-7% by 2012, which translatesinto 2012 EBIT of PLN32.5-49.0m, significantly aboveconsensus. Our forecasts are lower as we believe such an EBITmargin could only be achieved if the majority of sales wereservices and products, which may prove challenging. Our marginforecasts are far lower than management’s expectations.Even though management gave a bright outlook for 2012 andpromised EBIT and earnings in the black in 2011, we believe that2010 numbers will still be in the red. We believe the effects of therestructuring are likely to appear from 2011 onwards, due tonotice periods for the laid-off employees. We expect aPLN29.5m loss in 2010 (assuming no goodwill impairment).We believe that in the coming months, Sygnity will continue todepend on corporate bonds to a greater extent than debt. Due toexpected losses in 2010 and Sygnity barely breaking even in2011, we believe that only 2012 multiples are comparable andthe market will rather be looking for signs of recovery ordeterioration rather than at multiples.Price (19/07/10)Target price (12-mth)PLN12.86Previously PLN15.5PLN14.7Forecast total return 14.2%Quarterly previewWe expect Sygnity to report weak 2Q10 numbers, the worst inthe sector, on 31 August. We expect group revenues to come inat PLN101m, down 28.5% YoY, due to contracting demand forSygnity’s product offering. We point out that the gross profit andoperating margins are not comparable YoY, as PLN60.3m ofprovisioning was booked in 2Q10. We expect the group grossprofit margin to come in at 16.4% in 2Q10 versus a negative22.5% in 2Q09. We expect SG&A costs of PLN35m versusPLN62.5m in 2Q09. We forecast group 2Q10 EBIT at a loss ofPLN18.6m in 2Q10 – the base adjusted for provisions showedan operating loss of PLN25.1m. We expect the net financialactivity to be PLN1.7m in the red. Assuming no taxes, we expectthe bottom line to be PLN17.8m in the red. We point out that thenumber is higher than the PLN13m loss signalled in our latestupdate, as we have factored in additional provisioning that maybe conducted by the new CFO.2Q10 results preview(PLNm) 2Q09 2Q10FSales 141.1 100.9EBITDA (78.1) (11.4)EBIT (85.4) (18.6)Net income (75.5) (17.8)Source: Company data, ING estimatesEarnings drivers and outlookPlease note that in our forecasts we do not include the impact ofthe to-be-sold assets, due to the lack of data provided. The lastreported backlog came in at PLN366m, showing some 8% YoYfall, and 66% coverage of our 2010 forecasts. We expect 2010sales at PLN554.3m, with the percentage of hardware at c.20%.We expect banking revenues at PLN162m, public administrationsales at PLN177.5m, and utilities revenues at PLN215m in 2010.We expect the gross profit margin to come in at 18% in 2010versus 12.4% in 2009, with growth coming from increasedutilisation rather than product mix change. We believe that thepositive effects of the restructuring should rather appear in 2011onwards, eg, there are three-month-long notice periods andbonuses are paid to the leaving employees. As a result, weexpect EBIT to come in at a loss of PLN26m in 2010. Assuminga tax asset, we expect the net loss to reach PLN29.5m in 2010.We point out that the slightly lower valuation results from newmacro assumptions and the inclusion of additional provisions in2010.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com130

Polish Strategy Sygnity July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 Aug 2010 Publication of 1H10 results15 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)Legg Mason AM 12.47Pioneer IM 8.59ING IM 6.15Source: Company data, INGShare dataAvg daily volume (3-mth) 26,239Free float (%) 93.3Market cap (PLNm) 152.86Net debt (1F, PLNm) 19Enterprise value (1F, PLNm) 174Dividend yield (1F, %) 0.0Source: Company data, ING estimatesShare price performance24222018161412107/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Sygnity is an IT integrator, created through the mergerof the former ComputerLand and Emax. The companyoperates largely in Poland, in three key areas:banking (banks, brokerage houses, insurance); publicadministration; and utilities (including industry andtelecommunications). The company employs c.2,000people.RisksThe key risks to our forecasts include: (1) slower-thanexpectedgrowth of the Polish IT market; (2) continuedlosses leading to breaking covenants on bank debt;(3) investment in new technologies, which could meanincreased technological advantages or R&D write-offs;(4) continuing losses may lead to the necessity forgoodwill write-offs reducing the equity.Income statementRevenues 1,202 996 563 554 621 711EBITDA (16) 57 (63) 3 31 42EBIT (72) 12 (98) (26) 4 17Net interest (12) (10) (8) (7) (6) (6)Associates 0.0 0.2 0.0 0.0 0.0 0.0Other pre-tax items (1) 1 0.9 1 1 1Pre-tax profit (85) 3 (106) (32) (0.8) 12Tax 4 (4) 7 3 2 (0.9)Minorities 16 (0.2) (0.2) (0.2) (0.2) (0.3)Other post-tax items 0 0 0 0 0 0Net profit (66) (1) (99) (30) 1.0 11Normalised net profit (69) 3 (103) (19) 10 20Balance sheetTangible fixed assets 42 32 20 20 23 26Intangible fixed assets 252 231 213 200 191 185Other non-current assets 24 18 20 19 21 24Cash & equivalents 58 91 74 21 29 37Other current assets 486 402 209 222 245 276Total assets 862 773 536 483 509 549Short-term debt 172 98 69 38 41 39Other current liabilities 248 200 90 98 110 130Long-term debt 3 5 2 2 2 2Other long-term liabilities 93 94 106 104 113 125Total equity 347 376 270 241 242 253Total liabilities & equity 862 773 536 483 509 549Net working capital 232 159 99 103 112 121Net debt (cash) 118 12 (4) 19 15 4Cash flowCash flow EBITDA (16) 57 (63) 3 31 42Tax, interest & other 14 5 6 (4) (0.6) 4Change in working capital 0.3 14 62 (4) (6) (6)Net cash from op activities (7) 58 10 (6) 23 33Capex (31) (20) (7) (16) (19) (22)Net acquisitions (4) 0 0 0 0 0Net financing cash flow 15 (45) (42) (31) 4 (2)Dividends & minority distrib'n (10) 0 0 0 0 0Net ch in cash & equivalents (8) 43 (11) (53) 7 9FCF (38) 38 3 (22) 4 11Performance & returnsRevenue growth (%) 29.6 -17.2 -43.4 -1.6 12.1 14.4Normalised EPS growth (%) n/a n/a n/a n/a n/a 93.7Normalised EBITDA mgn (%) -3.3 4.5 -14.6 0.55 5.0 5.9Normalised EBIT margin (%) -6.4 1.5 -18.4 -2.4 2.5 3.9ROACE (%) -13.7 3.0 -25.3 -4.2 5.6 9.6Reported ROE (%) -20.2 -0.41 -30.9 -11.7 0.40 4.5Working capital as % of sales 19.3 16.0 17.6 18.7 18.0 17.0Net debt (cash)/EBITDA (x) n/a 0.22 n/a 6.2 0.48 0.09EBITDA net interest cvg (x) n/a 5.7 n/a 0.40 5.1 7.6ValuationEV/revenue (x) 0.23 0.17 0.27 0.31 0.27 0.22EV/normalised EBITDA (x) (6.9) 3.7 (1.8) 57.5 5.5 3.8EV/normalised EBIT (x) (3.6) 11.1 (1.5) (13.2) 10.8 5.7Normalised PER (x) n/a 49.0 n/a n/a 14.9 7.7Price/book (x) 0.40 0.41 0.57 0.64 0.64 0.61Dividend yield (%) 7.3 0.0 0.0 0.0 0.0 0.0FCF yield (%) n/a 22.7 2.2 n/a 2.2 7.0Per share dataReported EPS (PLN) (6.95) (0.125) (8.33) (2.49) 0.081 0.920Normalised EPS (PLN) (7.36) 0.263 (8.71) (1.62) 0.866 1.68Dividend per share (PLN) 0.938 0.00 0.00 0.00 0.00 0.00Equity FCFPS (PLN) (4.04) 3.22 0.274 (1.88) 0.322 0.936BV/share (PLN) 31.77 31.38 22.56 20.07 20.16 21.08Source: Company data, ING estimates131

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Polish Strategy July 2010Telecommunications133

Polish Strategy Netia July 2010NetiaConsolidation: one step closer?MaintainedHoldPoland Market cap PLN1,899.8mTelecommunications Bloomberg NET PWAre things different this time? M&A noise across the telecomindustry has increased, involving the mobile companies (P4,Polkomtel) and also fixed lines (Exatel, Dialog) and cables(Aster). Speculation regarding potential consolidation of thePolish telecoms market is not new. We view a few elementshinting that things are now heading towards consolidation.First, the Polish press reports that financial and legaladvisors have been or are about to be mandated for the saleof Exatel and Aster. Second, some of the potential targetspublished improved financials in 2009 (Exatel, Dialog), whichshould help the valuation. Moreover, some potential acquirersare working on raising money. Third, operators are nowemphasising and developing non-historical businesses:TPSA is pushing its TV operation, Aster became an MVNOand satellite operators are now bundling broadband servicestogether with TV.Investment caseWhat does this mean for Netia? Netia’s management hasrepeatedly flagged its interest in both Exatel and Dialog.Although these companies are similar in size, acquiring one orthe other would be a very different deal. Dialog has a retailstrategy and a regional network, while Exatel focuses its strategyon the corporate segment through a national network. PGE,Exatel’s shareholder, confirmed that it hopes to sell Exatel assoon as possible and that the process has already started.Hence, we think Exatel is likely to be Netia’s next M&A attempt(rather than Dialog). Moreover, we understand the book value ofExatel should not be a constraint as it could be for Dialog,making the sale easier.Risks. We think an acquisition of Exatel would be riskier thanDialog, because of uncertainties. Indeed, a significant number ofits clients are public administration or state-owned companies, andwe think these contracts could be seen as risky once the link withthe government is broken. Moreover, the Tele2 business waspurely wholesale-based, targeting retail clients. As a result, Netiaappeared the most obvious buyer, and network synergies wereappealing. In the case of Exatel, we think potential buyers wouldinclude mobile companies looking for a fixed-line infrastructure(Polkomtel), but also other fixed-line operators, such as GTS.Therefore, bidding should prove more competitive. A key questionconcerns Polkomtel’s real intentions and PGE’s shareholding inboth Polkomtel and Exatel. Indeed, it means: (1) should Polkomtelwant to buy Exatel, PGE as a shareholder of both companies, mayfavour Polkomtel; (2) should Polkomtel not be willing to buy Exatel,it may just be a tactic to increase the pressure on bidders.How to deal with consolidation? Although the number oftelecom participants is high, listed ones are far more limited(TPSA, Netia and some TV/telecom companies). For us, Netiaappears the best available vehicle to deal with consolidation.Price (19/07/10)Target price (12-mth)PLN4.88MaintainedPLN4.97Forecast total return 3.8%First, its recent record of M&A deals is reasonably good. Theacquisition of Tele2 marked a tipping point in the company’sstrategy and financials, the price paid looked reasonable, andthe company delivered on synergies. Second, we also think thatthe reported interest from Polkomtel for Exatel confirms therationale for mobile operators to acquire a fixed-line network.Netia could come next.Quarterly previewNetia will publish its 2Q10 results on 5 August; we expect nosurprises.On the subscriber acquisition front, the second quarter istraditionally quiet, and the Smolensk air crash did not help. Onthe pricing side, the new broadband tariff only affects the highestspeed. The cost plus methodology was due in June, so itspostponement is not affecting the second quarter result.Overall, we expect Netia to gain 21,000 broadband subscribers,and to publish revenues up 4.0%, together with a margin in linewith its full year guidance (around 23%).Thus, we think investors would focus on non-operationaldevelopments such as Exatel and the implementation of themargin squeeze test.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 373,679 388,978EBITDA 73,752 89.465EBIT (4,984) 14,465Net profit (14,521) 9,975Source: Company data, ING estimatesEarnings drivers and outlookOver recent quarters, Netia has significantly improved itsprofitability and should improve it further, thanks to its cost savinginitiatives, the migration to LLU and scale effects.Nine months after TPSA signed its deal with the regulator, there isstill no margin squeeze test. TPSA is likely to launch newcommercial offers once this test is sorted out.Jean-Baptiste Bouillaguet London +44 20 7767 5888 jean-baptiste.bouillaguet@uk.ing.comDalibor Vavruska London +44 20 7767 6972 dalibor.vavruska@uk.ing.com134

Polish Strategy Netia July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F5 August 2010 2Q10 results26 July 2010 EGMSource: Company data, INGMajor shareholders (%)Third Avenue Management 24.1ING OFE 10.3SISU Capital 10.0Pioneer Pekao 10.0Free float 45.6Source: Company data, INGShare dataAvg daily volume (3-mth) 195,269Free float (%) 43.6Market cap (PLNm) 1,899.8Net debt (1F, PLNm) (392)Enterprise value (1F, PLNm) 1,508Dividend yield (1F, %) 1.9Source: Company data, ING estimatesShare price performance5.45.25.04.84.64.44.24.03.87/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)Netia mainly offers direct voice (own network andWLR) and broadband services (own network, LLU,BSA) to retail and business clients. The companyhas a broadband-driven growth strategy andtargets the 1m broadband subscriber milestone in2012.RisksNetia’s business model relies on a favourableregulatory environment, and any changes couldaffect the company significantly. Netia is anindependent company in the midst of an economicstorm, and unlike other participants, it is notbacked by a strong international group.Income statementRevenues 838 1,121 1,506 1,567 1,607 1,642EBITDA 171 171 313 371 391 412EBIT (104) (100) 14 82 114 140Net interest 2 0.8 (13) 13 19 22AssociatesOther pre-tax items (165) 331 0 0 0 0Pre-tax profit (267) 232 1 96 133 161Tax (2) (1) 88 (5) (7) (8)Minorities (0.6) 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit (269) 231 89 91 126 153Normalised net profit (269) 231 89 91 126 153Balance sheetTangible fixed assets 1,409 1,416 1,368 1,315 1,295 1,286Intangible fixed assets 268 411 414 416 418 420Other non-current assets 195 61 61 61 61 62Cash & equivalents 58 195 243 392 505 543Other current assets 141 200 277 290 297 304Total assets 2,071 2,283 2,361 2,474 2,576 2,613Short-term debt 7 0 0 0 0 0Other current liabilities 234 328 416 436 447 457Long-term debt 87 0 0 0 0 0Other long-term liabilities 14 27 36 38 39 39Total equity 1,728 1,928 1,910 2,000 2,091 2,117Total liabilities & equity 2,071 2,283 2,361 2,474 2,576 2,613Net working capital (89) (121) (127) (133) (137) (140)Net debt (cash) 37 (195) (243) (392) (505) (543)Cash flowCash flow EBITDA 6 501 387 380 403 425Tax, interest & other 172 (323) (65) 2 1 1Change in working capital 39 (7) (22) 6 3 3Net cash from op activities 217 171 300 389 408 429Capex (235) (257) (238) (239) (259) (265)Net acquisitions (167) (133) (115) 0 0 0Net financing cash flow 94 (108) (7) 0 0 0Dividends & minority distrib'n 0 0 0 0 (36) (126)Net ch in cash & equivalents (86) 135 (12) 150 112 38FCF (12) 382 113 150 149 165Performance & returnsRevenue growth (%) -2.8 33.8 34.3 4.1 2.5 2.2Normalised EPS growth (%) n/a n/a -61.6 2.5 39.2 21.3Normalised EBITDA mgn (%) 20.4 15.2 21.4 23.0 24.4 25.1Normalised EBIT margin (%) -12.4 -8.9 0.94 5.2 7.1 8.5ROACE (%) -5.5 -5.3 0.74 4.2 5.6 6.6Reported ROE (%) -14.7 12.6 4.6 4.6 6.2 7.3Working capital as % of sales -10.6 -10.8 -8.4 -8.5 -8.5 -8.5Net debt (cash)/EBITDA (x) 0.22 (1.1) (0.78) (1.1) (1.3) (1.3)EBITDA net interest cvg (x) n/a n/a 23.8 n/a n/a n/aValuationEV/revenue (x) 2.3 1.5 1.1 0.96 0.87 0.83EV/normalised EBITDA (x) 11.3 10.0 5.1 4.2 3.6 3.3EV/normalised EBIT (x) (18.7) (17.1) 116.8 18.3 12.2 9.7Normalised PER (x) n/a 8.2 21.4 20.9 15.0 12.4Price/book (x) 1.1 0.99 0.99 0.95 0.91 0.90Dividend yield (%) 0.0 0.0 0.0 1.9 6.7 8.1FCF yield (%) n/a 22.4 6.8 9.9 10.7 12.1Per share dataReported EPS (PLN) (0.692) 0.592 0.228 0.233 0.325 0.394Normalised EPS (PLN) (0.692) 0.592 0.228 0.233 0.325 0.394Dividend per share (PLN) 0.00 0.00 0.00 0.093 0.325 0.394Equity FCFPS (PLN) (0.031) 0.982 0.291 0.385 0.383 0.423BV/share (PLN) 4.44 4.95 4.91 5.14 5.37 5.44Source: Company data, ING estimates135

Polish Strategy TPSA July 2010TPSAEnough of Wonderland, it’s time to show resultsMaintainedBuyPoland Market cap PLN20,569.0mTelecommunications Bloomberg TPS PWWe have revised our model ahead of the 2Q10 resultsrelease. We cut our forecasts following weak operationalresults in the last two quarters and slower than expectedimplementation of the regulatory deal, which has alsoimpacted the roll-out of TPSA’s new commercial policies.That said, we think that the essence of our story, which isbased on more balanced regulation and industryconsolidation, remains intact. We remain BUYers of TPSA.Investment caseOur DCF fair value is PLN18.8 and our 12m ex-div target isPLN19.3. We think that the 10% dividend yield is both attractiveand sustainable in the medium term.Still awaiting key catalysts. We are waiting not only forregulatory announcements about the BSA margin squeeze tests,which are expected to be followed by TPSA’s new broadbandoffers, but also for clarity about issues such as the DPTG legalcase, EU regulatory cases or the 4G licence tender. After yearsof regulatory attacks, TPSA is naturally vulnerable, and hencelong-awaited clarity on these subjects is crucial.Time to doubt our positive story? Nine months after TPSAsigned its deal with the regulator there is still little clarity aboutthe parameters of the key margin squeeze test. TPSA appears tobe delaying its investments, pointing to a tough winter in 1Q10and floods in 2Q10. Hence, the regulatory deal has so far failedto have much direct impact on TPSA’s operating trends,although reduced regulatory hostility is positive. Doubters maysay that the importance of the deal has been exaggerated andthat TPSA’s cat and mouse game with the regulator is ongoing.There are concerns that the negotiations are getting difficult andthat the EU might create additional obstacles. We remainoptimistic, but aware that lack of progress on the key issuesentails risks. We still hope for clarity on BSA and the newcommercial offers by the end of the summer. Otherwise, wewould have to assess whether the ‘regulatory peace’ is bringingthe desired benefits.Flow of positive surprises is not guaranteed, but remainsreasonably likely, while dividend yield provides downsideprotection. It appears that TPSA’s new mobile marketingcampaign launched in April has been a success. Competitivetrends in fixed-line might have softened. The company isclaiming PLN0.8bn for USO services and it is poised to sellassets (including TP Emitel). Selected acquisitions (for exampleof cable TV or wireless assets) during the upcomingconsolidation might also help, in our view.Price (19/07/10)Target price (12-mth)PLN15.40PLN18.68Forecast total return 31.0%Quarterly previewTPSA will report its 2Q10 results on 28 July 2010. In theprevious quarters TPSA posted disappointing numbers, whichstill reflected the company’s past strategy of confronting theregulator. This strategy not only escalated regulatory hostilitytowards the company, but also discouraged business expansion,which all affected the top line starting in the year 2007. AlthoughTPSA signed a deal with the regulator in October, this has notyet had any major impact on operating trends. In 1Q10, TPSAlost 10.2% of revenue and 14.3% EBITDA y-o-y. We expect thetrends to start improving in 2Q10, but only gradually. So far, wesee the improvements driven primarily by changes in thecommercial strategy in mobile and the fact that the flow ofadverse regulatory news is now limited.2Q10 results preview(PLNm) 2Q09 2Q10FRevenues 4,185 3,884EBITDA 1,556 1,438EBIT 500 488Net profit 375 292Source: Company data, ING estimatesDalibor Vavruska London +44 20 7767 6972 dalibor.vavruska@uk.ing.comJean-Baptiste Bouillaguet London +44 20 7767 5888 jean-baptiste.bouillaguet@uk.ing.com136

Polish Strategy TPSA July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F28 July 2010 2Q10 results27 October 2010 3Q10 results24 February 2011 FY10 resultsSource: Company data, INGMajor shareholders (%)France Telecom 49.8State Treasury 4.1Other shareholders 46.1Source: Company data, INGShare dataAvg daily volume (3-mth) 5,051,624Free float (%) 46.1Market cap (PLNm) 20,569.0Net debt (1F, PLNm) 6,375Enterprise value (1F, PLNm) 26,958Dividend yield (1F, %) 9.7Source: Company data, ING estimatesShare price performance21201918171615147/09 9/09 11/09 1/10 3/10 5/10Source: INGPriceCompany profileWIG20 (rebased)TPSA is one of central Europe’s leading telecomoperators, an integrated incumbent operator inPoland. It is controlled by France Telecom. Its mobilesubsidiary, Orange Polska, is one of the country’sthree similarly-sized leading mobile operators. In2006-09 TPSA’s business suffered substantially as aresult of incumbent-unfriendly regulation, initiallytargeting the fixed-line business, later also focusing onmobile. In 2010, the overall regulatory framework inPoland has stabilised, partly reflecting a deal betweenTPSA and the regulator. We expect marketconsolidation to follow.RisksRegulation continues to pose a key risk to our positivecase on TPSA. Other risks include possiblemacroeconomic challenges, TPSA’s commercial,execution and competitive challenges, and risksrelated to TPSA’s role as an acquirer in theanticipated telecom market consolidation in Poland.Income statementRevenues 18,244 18,165 16,560 15,530 15,421 15,930EBITDA 7,687 7,649 6,246 5,625 5,855 6,109EBIT 3,248 3,332 2,096 1,698 1,892 2,193Net interest (418) (718) (499) (556) (489) (467)AssociatesOther pre-tax items 0 0 0 0 0 0Pre-tax profit 2,830 2,614 1,597 1,142 1,403 1,726Tax (555) (405) (315) (217) (267) (328)Minorities (2) (2) (2) (2) (2) (2)Other post-tax items 0 0 0 0 0 0Net profit 2,273 2,207 1,280 923 1,134 1,396Normalised net profit 2,273 2,207 1,280 923 1,134 1,396Balance sheetTangible fixed assets 21,120 19,589 17,743 19,190 18,639 18,092Intangible fixed assets 7,091 6,908 6,783 6,033 5,276 4,512Other non-current assets 749 483 641 661 681 702Cash & equivalents 642 1,640 2,218 621 617 637Other current assets 2,820 2,614 1,971 1,876 1,841 1,896Total assets 32,422 31,234 29,356 28,381 27,053 25,840Short-term debt 4,077 2,114 464 449 386 327Other current liabilities 7,195 5,301 4,758 4,454 4,193 4,197Long-term debt 1,920 5,075 6,094 6,547 6,412 5,862Other long-term liabilities 1,457 1,514 1,447 1,418 1,418 1,418Total equity 17,773 17,230 16,593 15,512 14,643 14,035Total liabilities & equity 32,422 31,234 29,356 28,381 27,053 25,840Net working capital (1,649) (953) (773) (687) (568) (510)Net debt (cash) 5,355 5,549 4,340 6,375 6,182 5,552Cash flowCash flow EBITDA 7,687 7,435 6,117 5,515 5,745 5,999Tax, interest & other 173 647 705 661 644 683Change in working capital 300 381 (35) (209) (225) (52)Net cash from op activities 6,214 6,645 5,541 4,641 4,872 5,260Capex (4,356) (3,591) (2,308) (4,624) (2,655) (2,606)Net acquisitions 0 0 (9) 0 0 0Net financing cash flow (444) 855 (635) 438 (197) (609)Dividends & minority distrib'n (1,869) (1,960) (2,003) (2,003) (2,003) (2,003)Net ch in cash & equivalents (402) 2,594 620 (1,597) (4) 20FCF 2,333 4,149 3,650 463 2,596 3,011Performance & returnsRevenue growth (%) -2.0 -0.43 -8.8 -6.2 -0.70 3.3Normalised EPS growth (%) 8.5 -2.9 -42.0 -27.9 22.9 23.0Normalised EBITDA mgn (%) 42.1 42.1 37.7 36.2 38.0 38.4Normalised EBIT margin (%) 17.8 18.3 12.7 10.9 12.3 13.8ROACE (%) 13.1 13.8 8.8 7.4 8.6 10.5Reported ROE (%) 12.7 12.6 7.6 5.8 7.5 9.7Working capital as % of sales -9.0 -5.2 -4.7 -4.4 -3.7 -3.2Net debt (cash)/EBITDA (x) 0.70 0.73 0.69 1.1 1.1 0.91EBITDA net interest cvg (x) 18.4 10.7 12.5 10.1 12.0 13.1ValuationEV/revenue (x) 1.4 1.4 1.5 1.7 1.7 1.6EV/normalised EBITDA (x) 3.4 3.4 4.0 4.8 4.6 4.3EV/normalised EBIT (x) 8.0 7.8 11.9 15.9 14.1 11.9Normalised PER (x) 9.0 9.3 16.1 22.3 18.1 14.7Price/book (x) 1.2 1.2 1.2 1.3 1.4 1.5Dividend yield (%) 9.7 9.7 9.7 9.7 9.7 9.5FCF yield (%) 9.0 15.9 14.6 1.7 9.7 11.5Per share dataReported EPS (PLN) 1.70 1.65 0.96 0.69 0.85 1.04Normalised EPS (PLN) 1.70 1.65 0.96 0.69 0.85 1.04Dividend per share (PLN) 1.50 1.50 1.50 1.50 1.50 1.46Equity FCFPS (PLN) 1.43 2.73 2.45 0.013 1.66 1.99BV/share (PLN) 13.30 12.89 12.41 11.60 10.95 10.50Source: Company data, ING estimates137

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Polish Strategy July 2010Utilities139

Polish Strategy CEZ July 2010CEZManagement guidance at riskPreviously SelllHoldCzech Republic Market cap Kc466,330mUtilities Bloomberg CEZ CPThe CEZ share price has fallen c.8% within the last month,largely owing to a mediocre 2010-11F earnings outlook andthe sale of energy assets on the WSE. As we no longer havedownside, we upgrade CEZ to HOLD with a new 12-monthtarget price of Kc811.5.Investment caseThe EEX electricity price curve has rebounded from this year’slows caused by oversupply of gas and speculation on shale gasapplications. The curve is an upward sloping one. We believethat CEZ will not be a full beneficiary of the rebound, owing to itshedging strategy. CEZ is fully hedged for 2010. Moreover, 68%of volumes for 2011 are hedged at €52, 24% of volumes for 2012are hedged at €51 while 4% of 2013 volumes at €52-53.We believe the financial gearing of CEZ is likely to rise, alongwith more ambitious capex plans, both retrofit and newbuild andpotentially acquisitions. We point out that CEZ increased itsorganic capex guidance for 2010 from Kc67.5bn to Kc92.5bn,with the aim of benefiting from subsidiaries for solar plants. Otheroutlays include scheduled upgrades and the retrofitting ofexisting power plants (Dukovany, Tusimice, Prunerov) andconstruction of new CCGTs. On top of those come payments forTurkish assets (instalment for Sedas, SPO at Akenerji) and thepurchase of PT and Dalkia CR.We point out that the net debt levels will also depend on theCzech State Treasury, which may use CEZ to support thebudget. With the current government, we believe there is littlelikelihood of an additional dividend payment from CEZ. However,we believe that at some point in the future, following the actionsof the Polish State Treasury, the Czech government may decideto reduce its stake in CEZ and funds, eg, pension reform.As a result of hedging of electricity prices, growing interestexpenses and the still limited contributions from newly acquiredcompanies, we see earnings falling 7% in 2010F and flat in2011F. Our forecasts are largely in line with the 2010management guidance indicating 2010 EBITDA at Kc88.7bn andearnings at Kc46.7bn. In our forecasts, we do not factor in theKc1-2bn threat to the guidance signalled by CEZ from higherpayments for solar energy distribution.With the listing of PGE, Tauron and Enea, CEZ is no longer thesole investable CEE utility. We believe CEZ would like toestablish a foothold in the Polish electricity market, although it isnot willing to overpay. CEZ has rejected filing a bid for ZEPAK(lignite PP) and is considering filing a bid for Energa. We believeEnerga will go to PGE, leaving CEZ with Enea as the solepossibility (CEZ declined to file a bid for it last year).On a 2011F adjusted EV/EBITDA of 7.0x, we continue to findCEZ expensive versus the Polish energy companies.Price (19/07/10)Target price (12-mth)Kc866.80Previously Kc811.00Kc811.50Forecast total return -0.3%Quarterly previewWe expect group 2Q10 revenues of Kc42.5bn, flat YoY. Weexpect CEE to contribute Kc35.9bn (largely the CEZ parentcompany), negatively influenced by falling electricity prices, whileSEE should add Kc6.6bn (already with Albania). We expectgrowing costs, especially purchased power, and thus expectgroup EBIT at Kc14.3bn, down 11% YoY (the majority fromCEE). We expect net financial activity at a small negative, withinterest charges partially offset by expected Kc0.7bn gain onMOL. We forecast group earnings at Kc11.4bn, down 9% YoY.2Q10F results preview(Kc bn) 2Q09 2Q10FSales 42.3 42.5EBITDA 21.6 19.9EBIT 16.1 14.3Net income 12.6 11.4Source: Company data, ING estimatesEarnings drivers and outlookWe expect CEZ group 2010 revenues of Kc208bn, up 6% YoY,owing to the inclusion of new assets (PT and Dalkia CR) andhigher generation volumes partially offsetting falling hedgedelectricity prices. Despite decreasingly favourable hedging, webelieve generation should remain by far the biggest contributor,fuelled by the Czech parent company. We expect the group togenerate 69.3TWh, up 8% YoY, of which CEZ’s parent companyshould add 63.8TWh (up 7% YoY, slightly above CEZ’s guidanceof 63.6TWh). We already factor in the impact of the launch ofRomanian WPP. Distribution revenues should be supported byhigher tariffs in the Czech Republic and full-year impact ofAlbanian OSSH.We expect group EBITDA of Kc89.9bn, down 1.3% YoY, notfactoring in the potential charges from solar energy distribution.We believe that like sales, generation should remain the biggestitem, despite the negative impact of hedged electricity prices.The CEE region should still generate the majority of EBITDA,owing to the CEZ parent company (Polish operations remainsmall), but SEE should increase its contribution, along with theRomanian WPP exceeding that of Varna).Factoring in YTD gains on the MOL option, growing financialleverage (and thus rising interest expenses), as well as theimpact of equity-method consolidated companies, we should seeearnings falling 7% in 2010F to Kc47.9bn.Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com140

Polish Strategy CEZ July 2010NewsflowDateDescriptionFinancialsYear end Dec (Kcm) 2007 2008 2009 2010F 2011F 2012F10 Aug 2010 Publication of 2Q10 numbers09 Nov 2010 Publication of 3Q10 numbersSource: Company data, INGMajor shareholders (%)Czech government 69.78Source: Company data, INGShare dataAvg daily volume (3-mth) 113,073Free float (%) 30.2Market cap (Kcm) 466,330Net debt (1F, Kcm) 197,789Enterprise value (1F, Kcm) 618,336Dividend yield (1F, %) 6.1Source: Company data, ING estimatesShare price performance1,3001,2001,1001,000900800Source: ING7/09 9/09 11/09 1/10 3/10 5/10Company profilePricePX 50 (rebased)CEZ is a vertically integrated electricity conglomerate.The group is based in Czech Republic, but presentalso in Poland, Bulgaria, Romania, Turkey, Albaniaand Germany. At the end of 1Q10 installed fullmethodcapacity reached 14,383MW, with CEZ groupoperating: coal, nuclear, gas and renewables.Generation assets are based primarily in CzechRepublic (largely nuclear and lignite (62% in housesupply, developing solar projects), with smallercapacities based in Poland and Bulgaria (hard coal)and Turkey (gas and renewables). Distribution andtrade assets are in Czech Rep. and the SEE region.RisksUpside risk could come from the electricity price curvemoving upwards from current price levels orsteepening for future years. Downside risk comesfrom the appreciating Czech koruna to the euro, whichcould make it difficult for CEZ to continue to hedge atthe current favourable levels.Income statementRevenues 174,563 183,958 196,352 207,970 218,649 231,619EBITDA 75,326 88,701 91,075 89,892 91,070 93,338EBIT 53,203 66,654 68,199 63,459 64,009 65,841Net interest (791) (1,261) (804) (2,916) (2,483) (5,083)Associates 40 12 2,996 1,427 1,942 1,953Other pre-tax items (1,301) (4,689) (5,445) (2,476) (2,176) (2,076)Pre-tax profit 51,151 60,716 64,947 59,494 61,292 60,635Tax (8,387) (13,365) (13,091) (11,304) (11,646) (11,521)Minorities (1,209) (841) (308) (268) (569) (636)Other post-tax items 0 0 0 0 0 0Net profit 41,555 46,510 51,547 47,922 49,078 48,479Normalised net profit 41,600 50,883 47,498 46,599 49,201 48,602Balance sheetTangible fixed assets 277,165 290,826 328,805 392,533 435,620 484,987Intangible fixed assets 19,060 18,074 18,654 22,525 22,014 21,344Other non-current assets 16,856 37,337 67,497 90,860 115,864 140,080Cash & equivalents 13,518 17,630 27,077 18,547 18,389 16,563Other current assets 44,343 109,308 88,227 93,104 97,912 103,603Total assets 370,942 473,175 530,259 617,569 689,798 766,578Short-term debt 21,274 39,875 37,889 103,525 150,835 203,623Other current liabilities 36,174 104,551 95,095 100,609 106,011 109,870Long-term debt 48,855 65,045 118,921 112,811 109,146 106,946Other long-term liabilities 80,413 78,294 71,679 74,110 76,398 79,064Total equity 184,226 185,410 206,675 226,515 247,408 267,076Total liabilities & equity 370,942 473,175 530,259 617,569 689,798 766,578Net working capital (6,874) (56,271) (39,845) (40,310) (41,085) (39,470)Net debt (cash) 56,611 87,290 129,733 197,789 241,593 294,006Cash flowCash flow EBITDA 75,326 88,701 91,075 89,892 91,070 93,338Tax, interest & other 8,076 14,807 19,691 16,464 17,262 17,266Change in working capital (5,357) (257) 6,023 1,157 997 (1,344)Net cash from op activities 59,219 70,583 87,354 80,941 83,321 81,013Capex (34,066) (46,186) (70,791) (91,890) (73,407) (79,813)Net acquisitions (2,460) (874) (12,445) (5,355) 0 0Net financing cash flow (28,426) 15,301 48,791 59,526 43,645 50,588Dividends & minority distrib'n (11,694) (21,218) (26,561) (28,351) (28,753) (29,447)Net ch in cash & equivalents (17,934) 4,496 10,563 (8,530) (159) (1,825)FCF 25,153 24,397 16,563 (10,949) 9,914 1,200Performance & returnsRevenue growth (%) 17.1 5.4 6.7 5.9 5.1 5.9Normalised EPS growth (%) 55.3 30.4 -6.8 -1.9 5.6 -1.2Normalised EBITDA mgn (%) 43.2 48.3 45.2 42.8 41.7 40.4Normalised EBIT margin (%) 30.5 36.3 33.5 30.1 29.3 28.5ROACE (%) 20.9 24.5 20.1 15.5 13.5 12.2Reported ROE (%) 22.7 27.0 27.6 22.8 21.3 19.4Working capital as % of sales -3.9 -30.6 -20.3 -19.4 -18.8 -17.0Net debt (cash)/EBITDA (x) 0.75 0.98 1.4 2.2 2.7 3.1EBITDA net interest cvg (x) 95.2 70.3 113.3 30.8 36.7 18.4ValuationEV/revenue (x) 3.2 3.1 2.9 3.0 2.9 2.9EV/normalised EBITDA (x) 7.4 6.4 6.5 6.9 7.0 7.1EV/normalised EBIT (x) 10.5 8.5 8.7 9.9 10.0 10.1Normalised PER (x) 11.9 9.1 9.8 10.0 9.4 9.6Price/book (x) 3.0 3.0 2.3 2.1 1.9 1.8Dividend yield (%) 2.3 4.6 5.8 6.1 6.2 6.3FCF yield (%) 4.5 4.3 2.9 n/a 1.6 0.18Per share dataReported EPS (Kc) 72.91 87.00 96.24 89.47 91.63 90.51Normalised EPS (Kc) 72.98 95.18 88.68 87.00 91.86 90.74Dividend per share (Kc) 20.00 40.00 50.00 52.93 53.68 54.98Equity FCFPS (Kc) 44.13 45.64 30.92 (20.44) 18.51 2.24BV/share (Kc) 289.34 292.55 372.43 408.80 446.58 481.96Source: Company data, ING estimates141

Polish Strategy Enea July 2010EneaAwaiting the bidsMaintainedHoldPoland Market cap PLN8,104.9mUtilities Bloomberg ENA PWEnea’s share price has been stable over the last twomonths. We believe the outlook for growing earnings in2010 was offset by risks relating to the potential ZEPAKacquisition (now gone), and the appearance of a strategicinvestor. With our DCF-based 12-month forward target priceof PLN20, we maintain our HOLD rating on the stock.Investment caseEnea is the third-largest vertically integrated electricityconglomerate in Poland. Its business model concentrates onthree key areas: i) energy generation (hard-coal Kozienice plantand small hydro plants); ii) distribution; and iii) supply. With2.9GW, Enea generated 12.2TWh (largely from the c.36 year oldKozienice plant), while it sold 20.6TWh, implying a short positionin generation. Enea is ranked fourth in distribution in Poland, with16.3TWh of electricity distributed in 2009.We believe it was its short position in generation that wasworrying Enea’s management, and was the reason behindinterest in ZEPAK (2.5GW lignite plant). We are in favour of thedecision to step away from the transaction, as we considered therisk of buying a non-controlling stake to be too high versus thepotential profits. We also believe the resignation from the ZEPAKacquisition increases Enea’s chances of finding a strategicinvestor. In our opinion, GDF, CEZ or Kulczyk Holding could beamong the bidders. The decision on the sale of Energa, whichseems to be a preferred Polish asset, will be crucial. We believeEnerga will be sold to PGE, leaving the other companies withEnea or nothing. Last year, the sale of Enea did not proceed(RWE backed out) owing to the state’s high price expectations. Ifa similar situation materialises this year, we believe thegovernment may decide to sell some or its entire stake in Eneato financial investors, which creates a share overhang risk. Webelieve a final decision will be taken this year, so as to boost thebudget inflows.In our opinion, newsflow related to the sale of the stake would bemore important than fundamentals. We expect Enea’s 2010Fearnings to be PLN793m, up as much as 54% YoY.Subsequently, we assume more normalised growth rates. Webelieve that the key reason for the earnings growth could be thedistribution segment, fuelled by higher tariffs as a consequenceof a RAB increase. We are cautious about the cost reductionstargeted by the company, as employment guarantees last until2018/2019. The CEO guided for PLN1bn net profit in 2011,which we find too optimistic on an underlying basis.On 2011F EV/EBITDA of 4.0x, Enea trades at a discount toPGE. We find the discount warranted, owing to its limitedpresence in the generation segment, which we consider to bethe best place to be in the Polish energy market, and lack of owncoal resources (thus, dependence on suppliers).Price (19/07/10)Target price (12-mth)PLN18.1MaintainedPLN20.00Forecast total return 12.6%Quarterly previewWe expect Enea to publish good 2Q10 numbers on 31 August.We forecast group revenues at PLN1.85bn, up 8% YoY, largelyowing to increased tariffs in distribution. Before consolidationexclusions, we believe the sale of the energy segment should bethe largest revenue contributor, while generation should be thesmallest. We expect group EBIT of PLN253m, up 26.5% YoY,similar to revenues fuelled by the key distribution segment.Assuming a positive impact from net financial activity, we expectgroup earnings of PLN242m, up 27% YoY, in 2Q10.2Q10F results preview(PLNm) 2Q09 2Q10FRevenues 1,707 1,850EBITDA 359 417EBIT 200 253Net profit 190 242Source: Company data, ING estimatesEarnings drivers and outlookWe expect Enea’s group 2010F revenues to be PLN7.4bn, up2.2% YoY. Without the impact of consolidation exclusions, webelieve that the sale of the energy segment will be the largestrevenue contributor, at PLN4.8bn. We expect 2010F revenuesfrom the generation and distribution segments should be similar,at PLN2.7bn and PLN2.4bn. We assume Enea will generate12.3TWh of electricity (up 0.6% YoY), while selling 17TWh (up1.4% YoY) in 2010F.We believe trends in EBIT excluding G&A costs (as reported byEnea) should differ from revenues. Apart from consolidationexclusions and G&A costs, generation should be the biggestcontributor, followed by distribution (the impact of the revisedRAB) and sale of energy segments (hit by a shortage incertificates). Overall, we expect Enea’s group 2010F EBIT ofPLN0.85bn, up 85% YoY, implying an 11.5% operating margin.Factoring in the favourable net cash position as well as astatutory tax rate, we expect 2010F earnings of PLN0.8bn, up54% YoY. We point out that 2010F free cash flow is likely to bebarely in the black; later we expect negative free cash flows dueto construction starting on the new Kozienice block and retrofitcapex.Tamas Pletser, CFA Budapest +36 1 235 8757 pletser.tamas@ing.huMilena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com142

Polish Strategy Enea July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F31 August 2010 2Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 60.4Vattenfall 18.6Free float 20.9Source: Company data, INGShare dataAvg daily volume (3-mth) 141,933Free float (%) 20.9Market cap (PLNm) 7,990.1Net debt (1F, PLNm) (1,835)Enterprise value (1F, PLNm) 6,179Dividend yield (1F, %) 2.1Source: Company data, ING estimatesShare price performance282624222018167/09 9/09 11/09 1/10 3/10 5/10Source: INGCompany profilePriceWIG (rebased)ENEA is the third-largest energy company in Poland.It has interests in the three segments of the industry;generation (the Kozienice hard coal power plant,hydro stations in north-west Poland); distribution(north-west Poland covering 58,000km²) and supply(2.3m Polish wholesale and retail customers). It holdsa 20% and 14% share in the Polish distribution andsupply segments, based on 2009 data. Its coal planthas capacity of 2,880MW, while its hydro powerstations have 56MW. The company provides 8% ofthe country’s electricity needs and plans furtherinvestment to increase output.RisksThe major risk for ENEA is the change of electricitymarket regulation in Poland, which could affect all ofits business segments. ENEA is running anoperational risk at its generation and distributiondivisions, while its Kozienice power plant has a hardcoal supply risk, because it receives coal from fewsources. The stock price could be affected by thegovernment’s decision on whether to sell the majorityholding to a strategic investor or to financial investors.Income statementRevenues 5,515 6,239 7,246 7,407 8,925 9,497EBITDA 554 883 1,167 1,619 1,796 1,960EBIT 83 251 506 854 970 1,079Net interest 45 92 173 152 157 139Associates 0 0 0 0 0 0Other pre-tax items (19) (51) (25) (27) (96) (125)Pre-tax profit 109 293 653 979 1,031 1,092Tax 413 (78) (139) (186) (196) (208)Minorities 0 0 0 0 0 0Other post-tax items 0 0 0 0 0 0Net profit 522 215 514 793 835 885Normalised net profit 522 215 514 793 835 885Balance sheetTangible fixed assets 7,876 8,135 8,251 8,885 9,459 9,778Intangible fixed assets 41 37 48 46 44 42Other non-current assets 34 33 81 75 875 2,375Cash & equivalents 993 2,726 2,611 2,947 2,332 1,429Other current assets 872 1,056 1,239 1,258 1,516 1,613Total assets 9,816 11,986 12,230 13,211 14,226 15,237Short-term debt 70 53 48 70 85 113Other current liabilities 1,593 1,390 1,359 1,397 1,591 1,689Long-term debt 521 593 516 1,042 1,429 1,871Other long-term liabilities 867 925 934 934 935 936Total equity 6,766 9,024 9,373 9,769 10,186 10,629Total liabilities & equity 9,816 11,986 12,230 13,211 14,226 15,237Net working capital 76 185 235 220 265 282Net debt (cash) (403) (2,080) (2,047) (1,835) (818) 555Cash flowCash flow EBITDA 522 851 1,185 1,667 1,804 1,968Tax, interest & other 0 52 (7) 101 136 194Change in working capital 0 (13) (328) 19 (64) 1Net cash from op activities 522 825 850 1,570 1,589 1,759Capex 0 (632) (764) (1,400) (2,200) (2,900)Net acquisitions 0 (287) (1,584) 1,597 0 0Net financing cash flow 0 1,855 (33) 674 412 679Dividends & minority distrib'n 0 (101) (203) (396) (417) (442)Net ch in cash & equivalents 522 1,680 (1,718) 2,045 (615) (903)FCF 522 147 (19) 92 (662) (1,145)Performance & returnsRevenue growth (%) 1.4 13.1 16.1 2.2 20.5 6.4Normalised EPS growth (%) 126.1 -71.2 94.0 54.4 5.3 6.0Normalised EBITDA mgn (%) 10.0 14.1 16.1 21.9 20.1 20.6Normalised EBIT margin (%) 1.5 4.0 7.0 11.5 10.9 11.4ROACE (%) 2.3 3.0 5.2 8.2 8.6 8.9Reported ROE (%) 15.4 2.7 5.6 8.3 8.4 8.5Working capital as % of sales 1.4 3.0 3.2 3.0 3.0 3.0Net debt (cash)/EBITDA (x) (0.73) (2.4) (1.8) (1.1) (0.46) 0.28EBITDA net interest cvg (x) n/a n/a n/a n/a n/a n/aValuationEV/revenue (x) 1.4 0.95 0.82 0.83 0.81 0.90EV/normalised EBITDA (x) 13.7 6.7 5.1 3.8 4.0 4.4EV/normalised EBIT (x) 91.1 23.6 11.8 7.2 7.4 7.9Normalised PER (x) 8.7 30.2 15.6 10.1 9.6 9.0Price/book (x) 0.67 0.89 0.85 0.82 0.79 0.75Dividend yield (%) 1.6 2.1 2.5 2.1 5.0 5.2FCF yield (%) 6.9 2.5 n/a 1.5 n/a n/aPer share dataReported EPS (PLN) 2.09 0.600 1.16 1.80 1.89 2.00Normalised EPS (PLN) 2.09 0.600 1.16 1.80 1.89 2.00Dividend per share (PLN) 0.281 0.382 0.460 0.382 0.898 0.946Equity FCFPS (PLN) 2.09 0.593 0.232 0.384 (1.38) (2.58)BV/share (PLN) 27.05 20.37 21.18 22.08 23.02 24.02Source: Company data, ING estimates143

Polish Strategy PGE July 2010PGEThe leader in Polish energyMaintainedBuyPoland Market cap PLN31,323.3mUtilities Bloomberg PGE PWPGE has been a stable performer in the past month. Webelieve once the employee share overhang and mediocre2Q10 numbers have passed (both end-August), the marketwill concentrate on the strong outlook for 2011. With anunchanged DCF-based 12-month forward TP of PLN25, wemaintain our BUY rating.Investment caseWith its 12.4GW of capacity and 53.8TWh of electricitygenerated, PGE is the leader in the generation segment of thePolish electricity market. We believe this is the best place to be,as we see electricity prices growing because of ageing capacity;tightening reserve margins due to scheduled decommissioningand low interconnection possibilities. PGE’s position isstrengthened further by: a younger-than-average generation fleet(27 years vs more than 30 on average); low variable cost ligniteplants (53% of capacity in 2009) and a long position ingeneration (we believe that owing to the limited contribution fromlarge industrial customers, volumes sold to end customers arelikely to grow more slowly than generation).We expect PGE earnings to fall 16% to PLN2.8bn in 2010,largely because of falling PPA compensation (PLN1.5bn in 2009versus PLN0.4bn in 2010F). Following the CFO’s guidance, webelieve the market’s expectations have been properly adjusted,although consensus has not caught up yet. However, in 2011 weexpect earnings to grow 20% and see 2009-12F NI CAGR at14% (adjusted for PPAs), owing to: (1) growth in electricityprices; (2) the launch of the 858MW new lignite block atBelchatow; (3) RAB transition path (the value of distributionassets grew from c.PLN5.4bn to c.PLN13.4bn). Note that in ourforecasts we do not incorporate changes in minorities.PGE estimates 2009-12F capex at c.PLN39bn, excluding thenuclear power plant. However, we believe that the 2GW targetfor renewable investments is unlikely to be met. Thus, taking intoaccount the dividend policy of 40-50% payout (a decent 3.6%yield), we expect the generation base to rise from 12.4GW in2009 to 15.5GW in 2019F. We point out that the cash position(PLN2.9bn net cash in 2009) should be improved by the sale ofnon-core assets stakes in Polkomtel, Exatel, AutostradyWielkopolskie) that we value at PLN4bn (book value PLN2.2bn).We believe 2011F multiples show the trends in the sector moreappropriately. On 2011F EV/EBITDA of 5.0x, PGE trades at a25% premium to Enea and a 29% discount to CEZ. We believe ahigher premium to Enea is warranted by Enea’s short generationposition. We believe the discount to CEZ should be lower. Eventhough the share overhang from the state is higher at PGE, theearnings pattern is superior.Price (19/07/10)Target price (12-mth)PLN21.30MaintainedPLN25.0Forecast total return 21.0%Quarterly previewWe expect mediocre 2Q10 numbers from PGE on 31 August2010, which will partially be incomparable, because of a differentconsolidation approach. We see group 2Q10 revenues atPLN5.0bn, down 13% YoY, owing to an expected reduction inPPAs, and a decline in EBIT for the same reason. We expectgroup EBIT at PLN1bn, down 25% YoY, and a PLN0.2bncontribution from the distribution segment, PLN0.6bn fromgeneration, while the remainder comes from the sale of theenergy segment. We see a neutral impact of net financial activityand forecast group earnings at PLN0.7bn, down 25% YoY, in2Q10.2Q10F results preview(PLNm) 2Q09F 2Q10FSales 5,752.6 4,995.9EBITDA 2,007.9 1,672.8EBIT 1,318.3 992.8Net income 921.5 690.5Source: Company data, ING estimatesEarnings drivers and outlookWe expect group revenues at PLN20.7bn in 2010, down 4% YoYand the sale of the energy segment to remain the largestrevenue contributor with revenues from wholesale and retail atPLN26.1bn in 2010, up 4.2% YoY. Generation revenues, thesecond biggest revenue contributor, should reach PLN13.3bn in2010, down 4%, with the fall coming from an assumed sizeablereduction in PPA compensations, as we keep the electricity priceflat YoY. We forecast distribution revenues to reach PLN4.9bn in2010, up 5.8% YoY, showing the impact of increased tariffs.We expect group EBIT at PLN4.2bn in 2010, down 21% YoY,and the generation and mining segment to remain the keycontributor, adding PLN2.8bn, down 30% YoY. The majority ofthe contribution should come from conventional generation, whilethe fall stems from an expected decline in PPA compensations(PLN1.5bn in 2009, PLN0.4bn in 2010F). We believe that thesale of energy segment should be the second largest EBITcontributor; the contribution should reach PLN0.9bn (PLN0.55mfrom wholesale and PLN0.35bn from retail). We forecastdistribution EBIT at PLN0.4bn. Our forecasts imply a reported2010 operating margin of 20.5%.We expect PGE earnings down 16% to PLN2.8bn in 2010,largely owing to falling PPA compensation (PLN1.5bn in 2009versus PLN0.4bn in 2010F).Milena Olszewska, CFA Warsaw +48 22 820 5039 milena.olszewska@pl.ing.com144

Polish Strategy PGE July 2010NewsflowDateDescriptionFinancialsYear end Dec (PLNm) 2007 2008 2009 2010F 2011F 2012F3 Aug 2010 EGM on merger of PGE with PGE GiE andPGE Energia31 Aug 2010 Publication of 1H10 results15 Nov 2010 Publication of 3Q10 resultsSource: Company data, INGMajor shareholders (%)State Treasury 85Source: Company data, INGShare dataAvg daily volume (3-mth) 567,206Free float (%) 15.0Market cap (PLNm) 31,323.3Net debt (1F, PLNm) (1,454)Enterprise value (1F, PLNm) 38,275Dividend yield (1F, %) 3.6Source: Company data, ING estimatesShare price performance29272523211912/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10Source: INGPriceCompany profileWIG20 (rebased)PGE is a vertically integrated electricity conglomerate.It is the largest energy company in Poland, andsecond largest in CEE, after CEZ. PGE in its currentform was created only in 2007. The groupconcentrates on three key areas: (1) generation(12.4GW, both conventional and renewables) andmining (lignite only); (2) distribution; (3) trade (bothwholesale and retail customers). PGE is the leader ingeneration in Poland (by capacity installed andvolume generated), in the supply segment by numberof customers, and holds second place in distribution(to Tauron, by a narrow majority).RisksKey external risk factors are: electricity prices, risk oftariffs, RAB revision, state ownership, changes in theenergy law, CO 2 emission risk and rising coal prices.The internal risk factors are: streamlining of PGE’soperations, attainment of cost-cutting targets, PPAs,delays in investments. We also consider theexpensive purchase of Energa a risk factor.Income statementRevenues 23,091 19,409 21,623 20,716 21,745 22,967EBITDA 5,975 5,847 7,983 6,943 8,136 9,088EBIT 2,134 3,262 5,345 4,237 5,196 5,852Net interest (240) (102) (122) 64 61 (74)Associates 239 239 242 210 204 199Other pre-tax items 1,689 (229) (86) (104) (106) (108)Pre-tax profit 3,823 3,170 5,379 4,406 5,355 5,868Tax 948 (499) (1,041) (837) (1,017) (1,115)Minorities (803) (750) (967) (725) (926) (1,011)Other post-tax items 0 0 0 0 0 0Net profit 3,968 1,920 3,371 2,844 3,412 3,742Normalised net profit 757 1,691 3,561 2,806 3,412 3,742Balance sheetTangible fixed assets 37,025 39,317 40,326 43,945 48,539 53,781Intangible fixed assets 139 142 153 171 222 278Other non-current assets 1,257 1,242 1,485 1,431 1,492 1,565Cash & equivalents 3,432 2,551 7,931 3,740 3,480 3,319Other current assets 3,457 3,939 4,552 4,420 4,595 4,823Total assets 45,309 47,191 54,448 53,706 58,329 63,766Short-term debt 1,312 3,038 970 2,286 3,492 4,291Other current liabilities 3,353 2,892 3,216 3,106 3,231 3,379Long-term debt 5,739 4,471 4,056 0 0 1,000Other long-term liabilities 5,484 6,615 7,324 7,179 7,413 7,685Total equity 29,420 30,176 38,882 41,136 44,193 47,411Total liabilities & equity 45,309 47,191 54,448 53,706 58,329 63,766Net working capital 24 929 1,105 1,088 1,133 1,206Net debt (cash) 3,619 4,958 (2,905) (1,454) 12 1,972Cash flowCash flow EBITDA 5,975 5,847 7,983 6,943 8,136 9,088Tax, interest & other (3,934) 1,085 1,818 533 770 1,102Change in working capital 58 (454) (454) (12) (11) (32)Net cash from op activities 5,683 5,387 7,299 5,958 7,018 7,945Capex (3,635) (4,124) (4,022) (6,343) (7,585) (8,535)Net acquisitions 0 (1,916) (265) 0 0 0Net financing cash flow (2,761) (228) 2,840 (2,869) 1,094 1,571Dividends & minority distrib'n 0 (300) (942) (1,315) (1,280) (1,535)Net ch in cash & equivalents (589) (586) 5,569 (4,270) (482) (310)FCF 2,048 1,262 3,277 (384) (567) (590)Performance & returnsRevenue growth (%) -5.1 -15.9 11.4 -4.2 5.0 5.6Normalised EPS growth (%) -97.5 50.9 107.5 -32.0 21.6 9.7Normalised EBITDA mgn (%) 25.2 28.9 38.0 33.3 37.4 39.6Normalised EBIT margin (%) 8.6 15.5 25.8 20.2 23.9 25.5ROACE (%) 5.0 8.1 13.7 9.6 11.4 11.7Reported ROE (%) 16.3 8.7 12.5 8.9 10.1 10.4Working capital as % of sales 0.10 4.8 5.1 5.3 5.2 5.3Net debt (cash)/EBITDA (x) 0.61 0.85 (0.36) (0.21) 0.00 0.22EBITDA net interest cvg (x) 24.9 57.1 65.4 n/a n/a 122.2ValuationEV/revenue (x) 1.9 2.2 1.7 1.8 1.9 1.9EV/normalised EBITDA (x) 7.4 7.8 4.4 5.6 5.0 4.8EV/normalised EBIT (x) 21.7 14.5 6.5 9.1 7.8 7.5Normalised PER (x) 28.0 18.5 8.9 13.1 10.8 9.8Price/book (x) 1.5 1.4 1.2 1.1 1.1 0.99Dividend yield (%) 0.0 0.96 2.6 3.6 3.5 4.2FCF yield (%) 4.8 2.9 9.1 n/a n/a n/aPer share dataReported EPS (PLN) 3.99 1.31 2.26 1.64 1.97 2.16Normalised EPS (PLN) 0.762 1.15 2.39 1.62 1.97 2.16Dividend per share (PLN) 0.00 0.204 0.544 0.760 0.740 0.887Equity FCFPS (PLN) 2.06 0.858 2.20 (0.222) (0.328) (0.341)BV/share (PLN) 14.45 15.51 18.03 18.92 20.15 21.43Source: Company data, ING estimates145

Polish Strategy PGE July 2010Disclosures AppendixANALYST CERTIFICATIONThe analyst(s) who prepared this report hereby certifies that the views expressed in this report accurately reflect his/herpersonal views about the subject securities or issuers and no part of his/her compensation was, is, or will be directly orindirectly related to the inclusion of specific recommendations or views in this report.IMPORTANT DISCLOSURESCompany disclosures and ratings charts are available from the disclosures page on our website athttp://research.ing.com or write to The Compliance Department, ING Financial Markets LLC, 1325 Avenue of theAmericas, New York, USA, 10019.Valuation and risks: For details of the valuation methodologies used to determine our price targets and risks related to theachievement of these targets refer to the main body of this report and/or the most recent company report available athttp://research.ing.com.The remuneration of research analysts is not tied to specific investment banking transactions performed by ING Groupalthough it is based in part on overall revenues, to which investment banking contribute.Securities prices: Prices are taken as of the previous day’s close on the home market unless otherwise stated.Job titles. The functional job title of the person/s responsible for the recommendations contained in this report is equityresearch analyst unless otherwise stated. Corporate titles may differ from functional job titles.Conflicts of interest policy. ING manages conflicts of interest arising as a result of the preparation and publication of researchthrough its use of internal databases, notifications by the relevant employees and Chinese walls as monitored by INGCompliance. For further details see our research policies page at http://research.ing.com.FOREIGN AFFILIATES DISCLOSURESEach ING legal entity which produces research is a subsidiary, branch or affiliate of ING Bank N.V. See back page for theaddresses and primary securities regulator for each of these entities.RATING DISTRIBUTION (as of end 2Q10)RATING DEFINITIONSEquity coverageInvestment Banking clients*Buy: Forecast 12-mth absolute total return greater than +15%Buy 49% 55%Hold 42% 45%Sell 10% 46%100%* Percentage of companies in each rating category that are Investment Bankingclients of ING Financial Markets LLC or an affiliate.Hold: Forecast 12-mth absolute total return of +15% to -5%Sell: Forecast 12-mth absolute total return less than -5%Total return: forecast share price appreciation to target price plus forecast annualdividend. Price volatility and our preference for not changing recommendations toofrequently means forecast returns may fall outside of the above ranges at times.146

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