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From Russia, with Love

09/22/2006 12:00 am EST


Robert Hsu

Editor, China Strategy and Asia Edge

International investment expert Robert Hsu manages to make the Far East come alive for his subscribers, uncovering fabulous opportunities. In this missive, he zooms in on an expanding industry throughout Russia as well as the "Stans".


"Vimpel Communications (VIP NYSE) is Russia's second-largest wireless operator, growing from about 300 subscribers in 1992 to more than 200 million today. The majority (97%) in Russia are on pre-paid plans, with the remaining 3% on contract plans, an advantage since pre-paid plans lower credit risk and make it easier for customers to sign up. VimpelCom's average acquisition cost per user is lower than that of Russia's largest wireless company, Mobile TeleSystems.


"According to Bloomberg, the Russian market for mobile phone service has over 90% penetration and is fast approaching the saturation point. That's normally a bad sign, but this is where VimpelCom separates itself from the competition. To keep its growth rate strong, VimpelCom has taken its services on the road, entering wireless markets through a series of acquisitions in other former Soviet states such as Ukraine, Uzbekistan, Tajikistan, and Georgia.


"In December 2005 VimpelCom acquired a 60% interest in Tacom, Tajikistan's dominant mobile operator. Earlier this year, VimpelCom bought Uzbekistan's two largest mobile companies, Bakrie Uzbekistan Telecom and Unitel, gaining nearly half a million subscribers. The company also recently acquired a mobile license holder in Georgia and plans to start full-scale commercial operations there in the beginning of 2007. And VimpelCom is the favorite to get a mobile license in the Russian Far East, where the penetration rate stands at a much lower 58%.


"In May, VimpelCom signed its first-ever collaboration with Internet search giant Google. VimpelCom estimates that phone-based Internet usage among its customers is just 10%, so this partnership might dramatically increase the usage rate soon.


"Second-quarter profits increased 23%, to $195 million. Revenues soared 45.7% to $1.12 billion, beating expectations and the first time revenue exceeded $1 billion. Subscriber rate grew to 51.9 million, 6% higher than last quarter and 45% more than the same period last year.


"The stock is trading at a P/E of 17.6, and its forward P/E is less than 14, cheap for a company with such solid growth, so now is a good time to get in. The strong earnings report lifted the shares out of their 52-week trading range of $38-$51, and recently VIP broke through its upper resistance level, reaching a record high of $60.79. The stock is up more than 55% in the last four months, and I look for it to move higher. Buy below $65. I think we could see gains of 25% or so in the next three-four months."

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