Emerging Europe
Investment Opportunities
2017
Karoll Financial Group
Mission
“Our goal is to create accessible vehicles,
tools and processes in helping global
investors harness the exciting potential of
Emerging Europe.”
Stanimir Karolev
Founder and Chairman,
Karoll Financial Group
Karoll Financial Group
25 EXCITING YEARS OF SUCCESS | TEAM OF 200 EXPERTS
Karoll Brokerage
Karoll Capital
Management
Advance Terrafund
Advance Equity
Karoll Investment
Leader by number of transactions on BSE for 15 years in a row
30% market share of of all transactions
Pioneered the first mutual fund in the country (2004)
Strategic partner of Schroders for the local markets
Largest farm land REIT in the country
IFC (World Bank) - key stakeholder
First Private Equity fund in Bulgaria
Executed the first IPO in Bulgaria (2004)
Karoll Financial Group
Product Offering
Brokerage
Bulgarian Capital
Market
Asset
Management
IPO & SPO
Activities
International
Capital Markets
Real Estate
ADVANCE
TerraFund
REIT
Investment
Banking
M&A
Restructuring
Wealth Management
Institutional Mandates
• Advance Invest
• Advance Eastern
Europe
• Advance Emerging
Europe Opportunities
• Advance Global Trends
• Advance Conservative
Fund
• Separately Managed
Accounts
• Emerging Europe
Opportunities
(Eastern Europe)
• Central Europe
• Balkan
• Thematic equity
• Mixed
Private Equity
ADVANCE
Equity
Holding
Karoll Capital Management Overview
Unique heritage in Emerging Europe
Founded in Sofia in 2003, our roots are truly in Emerging Europe
Independent and skilled Eastern Europe-based team with long tenure
Part of Karoll Financial Group with support of 200 professionals + 70 local offices
Steady business growth on solid reputation
AUM ~ USD 250 mln.
Assets split in various mutual funds, real estate investment trusts, wealth mgt & mandates
Manages 5 UCITS funds and multiple private accounts
Crisp focus on Emerging Europe
Helping clients harness the potential of Emerging Europe
Deep understanding of the cultures and dynamics of our markets
On-the-ground research coverage of strategically important holdings
Partnership with top international names
Local representative of Schroder Investment Management, UK
Partners with IFC (World Bank), European institutions and global players
Cheverny Capital – our Canadian representative
Our Unique Value Proposition
“Emerging Europe is a unique investment theme with
strong upside potential and low correlation to the
developed world. It is a truly overlooked opportunity!
We pick out high-growth sectors in a high-growth
region.
We generate alpha in the region while helping global
investors overcome local barriers.”
Deep
understanding
of local
markets
Entrepreneurial
Flexible
Independent
Daniel Ganev
Managing Director,
Karoll Capital Management
Karoll Capital’s Investment Committee
Seasoned investment team with long tenure and unique combination of skills:
Daniel Ganev, MBA, Managing Director

15+ yrs of experience in in fund management, financial products development and marketing,
business development in emerging markets
Nadia Nedelcheva, CFA, Head of Portfolio Management

15+ yrs of experience in portfolio management, research, valuations and modeling in Central &
Eastern Europe (CEE)
Alexander Nikolov, Portfolio Manager

18+ yrs of experience in portfolio management, financial analysis, technical analysis on the US,
European and CEE market
Katerina Atanassova, Portfolio Manager

15+ yrs of experience in portfolio management, technical analysis and trading on the global
developed and emerging markets
Georgi Georgiev, Portfolio Manager

13+ yrs of experience in research, fundamental analysis, valuations, portfolio management and
trading in the global emerging markets and USA
Karoll Capital’s Analytical Support
Our Sofia-based analysts have easy access to regional companies in search
of investment opportunities:
Dimitrios Latitaris, Investment Analyst
 4+ yrs of experience in research, investment banking,
fundamental analysis, valuations in Central & Eastern
Europe
Georgi Raykov, Investment Analyst
 3+ yrs of experience in research, fundamental analysis,
valuations in Central & Eastern Europe
International Partners and Clients
Karoll Capital’s Investment Process – the 4 S’s
Screen
The process starts with our on-the-ground analyst team screening the landscape in search of investment
opportunities in Emerging Europe. We apply filters in terms of liquidity (time needed to enter/exit investment),
market cap, transparency, corporate governance, etc. As a result, our investment universe comprises around 500
stocks out of some 3 000 listed companies in Central and Eastern Europe. Our major advantage is the freedom to
deviate from local indices based on our views. This gives us flexibility in our investment choice, regularly leading to
superior results and outperformance of benchmarks and peers. Using proprietary analytical tools and exchange
with local contacts, we seek to pinpoint stocks that are trading at a discount or that are in a position to undergo
some fundamental change. Examples of such events are turnaround situations, management changes, financial
results surprises, etc.
Study
The generation of investment ideas leads to the next step -- a thorough in-depth analysis conducted in house.
Because of market inefficiencies we believe Emerging Europe is abundant with mispriced assets. In estimating the
true value of a stock we study the firm’s business model and its ability to realize returns greater than the cost of
capital, the shareholder structure and management capabilities, sector dynamics and overall market position. We
strive to find companies with improving profitability margins and low debt levels that are traded at a discount to
peers. On-site visits and regular contact with company representatives are a key part of research as well. In
addition to employing valuation methods, we also consider investor psychology, liquidity and order flows. The
outcome of the investment assessment is the analyst proposal to the investment committee, which summarizes
the case, the rationale behind it, potential upside and associated triggers, as well as the risks involved.
Shape
Karoll Capital’s 4-member investment committee, supported by our analyst team, examines the selected
investment proposals in view of portfolio construction. In the case of managed accounts / mandates the decision
is collective. Convening each month, the committee decides on position weight changes and/or liquidations. At
each stage, compliance with regulatory guidelines and client-tailored requirements are factored in.
Scrutinize
Finally, the investment portfolio is monitored with all different positions being systematically scrutinized. The
investment team applies in-house processes and practices enabling it to adequately react to the different triggers
causing distortions to the investment case. As part of the process our analysts and portfolio managers follow up
with the companies’ management, screen the sector competitors and general business/political environment.
Conducting attribution and risk management analysis on the portfolio holdings is essential. Any resulting concerns
related to the investment case prompt reviews of the rationale behind the decision to add / hold/ reduce the stock
as a portfolio component.
Our Investment Universe
3,000+ listed companies in CEE
Investment Universe – 1,500
750
500
250
Survivors
150
Selection Filters:
Mkt cap & Liquidity
Corp Governance & Transparency
Sector Outlook & Company Competitiveness
Financial Strength
In-house Valuation
Karoll Capital’s Investment Process
Market cap and liquidity filter
-
For more liquid markets: up to 3 days for entry/exit
-
For less liquid markets: up to 7 days for entry/exit
-
Free-float > 25%
Corporate governance and transparency
Study and evaluate board composition, executive remuneration, communication with
shareholders, provided access to documents
Sector outlook and competitiveness
-
Identify key growth drivers and themes, assess sustainable competitiveness
Financial strength
-
Earnings: earnings cyclicality, recurring earnings, forecast sales and earnings
-
Analyze profitability, Leverage and funding, Debt service, Liquidity, Asset quality
In-house valuation
Our PMs and analysts use the following valuation methods:
-
Peers comparison
-
Discounted cash flows model
We aim to achieve sound riskadjusted performance
The risk management
department prepares a
monthly report for the Board,
as well as notifies portfolio
managers immediately upon
approaching of critical levels
of key risk indicators
Risk Management
The risk management
department supports the
investment process by
implementing and monitoring
the policy and procedures for
risk identification  constantly
monitors risk factors/indicators,
performs contribution analysis
and risk assessment
We define risk indicators/limits
regarding market risk, liquidity
risk, exposure to a single issuer,
to less liquid stocks/markets,
etc.
Risk management is executed on
a day-to-day basis by portfolio
managers who assess risk at
each level of the investment lifecycle  investment selection,
portfolio construction and
portfolio monitoring
Investment team meetings
Weekly meetings
- PMs and analysts
interact and exchange
ideas
- Portfolio reviews of
Monthly meetings
mutual funds / managed
accounts, contribution
analysis
- Overview of market
development -> modify
portfolios if necessary
Quarterly meetings
Ad-hoc meetings
- In-depth analysis of
investment portfolios
- Strategic asset allocation
decisions
- In the event of a trigger
from the in-house
surveillance system
Karoll Capital Management
Investment Capabilities & Results
Main strategies offered to institutional investors:
Emerging Europe Opportunities (Eastern Europe), Central Europe, Balkan, Thematic,
as well as mixed strategies based on specific mandate
Karoll Capital’s Investment Committee aims to construct for our institutional clients
Individually Managed Accounts / Mandates portfolios designed to take advantage of
the L.T. trends as well as hot opportunities in the market
Strategies results vs. benchmarks,
3 years,
5 years,
as of 31.01.2017
YTD
1 year
annualized annualized Volatility
Beta
Alpha
MSCI EFM Europe +CIS
-0.48% 27.26%
-1.72%
-4.13%
23.04%
MSCI EFM Europe +CIS ex RU
2.54% 6.13%
-5.22%
-4.61%
19.21%
Emerging Europe Opportunities
(Eastern Europe)
2.16% 20.53%
1.30%
2.63%
12.89%
0.70
2.08%
Central Europe strategy
5.33% 20.77%
-0.63%
0.73%
11.10%
0.70
2.60%
Balkan strategy
7.44% 25.95%
3.10%
4.75%
10.83%
0.58
5.54%
Emerging Europe High-growth
Exporters strategy
6.22%
32.69%
25.12%
n.a
12.14%
0.26
18.61%
Emerging Europe Opportunities
Strategy at a Glance
Invests in the stock markets of Emerging
(Central & Eastern Europe, the Baltics, Balkans)
Europe
Provides access to a robustly growing region, achieves better
performance vs. benchmarks
Invests in regional large-cap, but also small & mid-cap fast
growing companies, benchmark agnostic
Managed by a seasoned team with long tenure, based on the
ground, with profound understanding of local markets
10+ years track record of strategy
Karoll Capital’s
Emerging Europe Opportunities Strategy
Investment theme: invests across the stock markets of Emerging Europe (Central &
Eastern Europe, the Baltics, Balkans)
Investment style: blended (value and growth), stock-picking, bottom up combined with
top down and sector views
Target: to achieve higher return than the market at lower risk
Market cap: regional large cap, but also small & mid cap
Portfolio components: 70-100 positions
Low portfolio turnover and limited volatility
Offering format: Separately Managed Account
Minimum size of investment: €0.250 mln.
Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark
Highly-experienced team with long tenure & excellent understanding of local markets
Launch: October, 2006
Outperformance of Strategy
vs. benchmark
150
130
110
Strategy
90
Benchmark
70
50
30
04.10.2006
04.10.2008
04.10.2010
04.10.2012
04.10.2014
04.10.2016
5 years,
annualized
Annualized
(since
inception)
Volatility
Strategy vs. Benchmark,
performance,
as of 31.01.2017
1 month
YTD
1 year
3 years
annualized
MSCI EFM Europe +CIS
-0.48%
-0.48%
27.26%
-1.72%
-4.13%
-4.12%
23.04%
Emerging Europe
Opportunities Strategy
2.16%
2.16%
20.53%
1.30%
2.63%
-2.19%
12.89%
Beta
Alpha
0.7
2.08%
Emerging Europe Opportunities Strategy
Geographic breakdown (31.01.2017)
2.9%
2.5%
Sector breakdown
Russia
5.8%
12.4%
Oil and gas
Poland
3.0%
24.0%
3.2%
Hungary
Banks
25.0%
Metals
Czech Republic
3.6%
Turkey
4.0%
Romania
10.9%
Croatia
Serbia
Baltics
18.2%
7.0%
Ukraine
Austria
9.1%
10.0%
IT
Conglomerates
Bulgaria
6.6%
Retail
Healthcare
2.7%
6.4%
3.2%
Agriculture
Industrial
3.8%
6.2%
4.6%
5.4%
4.2%
4.7%
Cash
Transportation
Utilities
Precious metals
4.6%
Other
Top 5 positions
% of portfolio
Country
Sector
GMK Norliski Nikel
3%
Russia
Metals
X5 Retail Group
2.4%
Russia
Retail
RICHTER GEDEON
2.2%
Hungary
Healthcare
KRUK S.A.
2.1%
Poland
Financial
OTP BANK
2.1%
Hungary
Banks
Emerging Europe High-Growth Exporters
Karoll Capital’s highest alpha generating strategy
Investment theme: to invest in high-growth industrial, outsourcing and ICT companies
benefiting from low labor costs, highly skilled workforce and lowest taxes in a fast-growing
region with strategic location
Investment style: growth, benchmark agnostic, bottom-up
Market cap: small and mid cap.
Concentrated portfolio: 20-30 positions
Low portfolio turnover (<20%) and limited volatility
Offering format: Managed Account
Minimum size of investment: EUR 0.25 mln.
Fees: up to 1.5% on assets p.a. +15% performance fee, high-watermark
Highly-experienced team with long tenure and excellent understanding of local markets
Launch: April, 2013
Solid outperformance of Thematic Strategy
vs. benchmark
250
200
150
100
50
0
05.04.2013
05.04.2014
05.04.2015
MSCI EFM Europe +CIS
Strategy vs. Benchmark,
performance,
as of 31.12.2016
MSCI EFM Europe +CIS
Thematic strategy (Emerging
Europe High-Growth
Exporters)
05.04.2016
Strategy
Annualized
(since
inception)
Volatility
1 month
YTD
1 year
Since
inception
9.33%
24.58%
24.58%
-17.90%
-5.15%
23.04%
4.61%
22.06%
22.06%
100.35%
20.01%
12.21%
Beta
Alpha
0.26
17.31%
Emerging Europe High-Growth Exporters
Geographic breakdown (31.12.2016)
Hungary
4.15%
Bulgaria Czech
3.41% 2.40%
Ukraine
1.91%
Romania
7.37%
Poland
43.12%
Sector breakdown
Automotive
supplies
6.75%
Pharmaceutical
6.95%
Auto&Multi Agriculture
Utility Vehicles 1.91%
4.72%
IT services and
consulting
24.41%
Wood products
Furniture
8.63%
Turkey
14.61%
Machinery
8.66%
Household
appliances
8.90%
Russia
23.03%
Basic materials
19.83%
Chemical
9.24%
Top 5 positions
% of portfolio
Country
Sector
CD Projekt
8.26%
Poland
IT Services & Consulting
Uniwheels AG
6.75%
Poland
Automotive supplies
GMK Noril'skiy nikel' PAO
6.19%
Russia
Metals and mining
Novolipetsk Steel PAO
5.73%
Russia
Metals and mining
Fabryki Mebli Forte SA
5.01%
Poland
Furniture
Analytical Support for Institutional Clients
Accessing investment opportunities in Emerging Europe is often obstructed by various challenges related
to language barriers, cultural differences and transparency issues.
To help our institutional clients make the most of what the region has to offer we provide a number of
analytical tools:
quarterly strategy report & flash reports
individual sector and stock reports upon request
monthly performance statements, attribution analyses
conference calls and discussions with investment committee members
on-site client visits upon request
Karoll Capital’s UCITS Funds
Advance Mutual Funds Family
 Stock selection in Bulgaria & Romania
 Stock selection in Eastern Europe
 Stock selection in Central Europe
 Local deposits, fixed income, repo-agreements
 Flexible global multi-asset fund
Emerging Europe – the Overlooked Opportunity
Emerging Europe
buoyant region converging with the rest of Europe
incubator for thriving companies
increasingly participating in European & global supply chains  vast number of
companies shifting production here
While Central & Eastern Europe is a diverse region, it offers appreciable scale:
350+ mln
combined
population
USD 4+ trln GDP
(1/3 of euro-zone
total)
3,000+ listed
companies
USD 1+ trln total
market cap
Emerging Europe
among the fastest growing regions
World
Advanced economies
Euro area
European Union
Emerging market and developing
economies
Commonwealth of Independent
States
Emerging and developing Asia
Emerging and developing Europe
Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2014
3.4%
1.9%
1.1%
1.6%
2015 2016e 2017f
2018f
2019f
2020f
2021f
3.2%
3.1%
3.4%
3.6%
3.7%
3.7%
3.8%
2.1%
1.6%
1.8%
1.8%
1.8%
1.7%
1.7%
2.0%
1.7%
1.5%
1.6%
1.5%
1.5%
1.5%
2.3%
1.9%
1.7%
1.8%
1.8%
1.8%
1.7%
4.6%
4.0%
4.2%
4.6%
4.8%
5.0%
5.1%
5.1%
1.1%
6.8%
2.8%
1.0%
2.6%
5.1%
-2.8%
6.6%
3.6%
0.0%
2.1%
3.4%
-0.3%
6.5%
3.3%
-0.6%
3.2%
1.4%
1.4%
6.3%
3.1%
1.6%
3.2%
2.9%
1.7%
6.3%
3.2%
2.1%
3.4%
3.6%
2.1%
6.4%
3.1%
2.6%
3.6%
4.2%
2.2%
6.4%
3.2%
2.7%
3.7%
4.3%
2.4%
6.4%
3.2%
2.7%
3.6%
4.2%
Source: IMF October 2016 outlook
Emerging Europe
now a major production & services hub
CEE countries have become major
automotive producers  26% of
motor vehicles in Europe are
produced here
Local suppliers steadily moving up the
value chain
CEE is Europe’s Silicon Valley  IT
sector rapidly increasing its share of
GDP with fast growing number of
employees
Booming outsourcing sector  CEE
countries in top 20 ranking for
Business Process Outsourcing
Emerging Europe
growing much faster than developed Europe
GDP growth (%)
GDP growth (%)
8.0%
6.0%
4.0%
Euro area
2.0%
-4.0%
-6.0%
Source: IMF April 2016 outlook
2017f
2016f
2015e
2014
2013
2012
2011
2010
2009
2008
2007
2006
-2.0%
2005
0.0%
Emerging and
developing
Europe
Emerging Europe
growing at a much
faster pace vs.
developed Europe:
+3.5% on avg b/n
2005 and 2015 vs.
+0.8% for euroarea
Trend expected to
persist in the
following years
Solid performance of regional economies
continued in 2016
GDP growth Q2'16 y-o-y
5.9%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.5%
0.8%
1.3%
1.6%1.8%
2.0%2.0%2.1%
2.6%
3.0%3.1%3.1%
0.0%
-1.0%
-0.6%
-2.0%
Source: Eurostat, National statistics institutes
Most regional economies
are growing at a faster pace
compared to the euro-zone
average thanks to robust
domestic consumption
growth
Romania posted the highest
GDP growth rate in the EU
in Q2 2016
Recession in Russia is
easing as it experienced the
slowest contraction in Q2
2016 since it started to
contract at the beginning of
2015
Ukraine bottomed out and
returned to modest positive
growth in Q1 with GDP
figures accelerating in Q2
Low levels of GDP p.c. = solid catch-up potential
GDP per capita (EUR), 2015
Ukraine
Serbia
Rising but still
very low levels
of GDP per
capita: b/n 6 51% of eurozone average
Bulgaria
Romania
Russia
Turkey
Croatia
Poland
Hungary
Latvia
Lithuania
Estonia
Czech Republic
Euro area
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
Source: Eurostat, IMF
Compelling opportunities in Emerging Europe
Strategic location of the region  ideally situated for building trade links
between Western Europe, Middle East and Asia. Infrastructure has
significantly improved in the past years with major investments planned in
the mid term
 region now deeply integrated with pan-European transport corridors
Most countries are current or future members of EU, OECD and NATO
 major changes in their economies and business environment. Some
have already adopted the Euro. Legal, regulatory and business conditions
have marked solid improvement; regulatory framework synchronized
following EU accession.
CEE boasts well-educated and relatively inexpensive workforce
 labor force with tertiary education steadily increasing. Wages on the rise,
but still far below EU average.
Favorable tax regimes  significantly lower tax rates (e.g. 10% corporate
income tax in Bulgaria)
Stable economies with low level of
government debt
Government debt/GDP, 2015
Government debt
in CEE at low
levels: below 50%
of GDP on average
for the region vs.
91% for euro-zone
10%
Estonia
18%
Russia
27%
Bulgaria
33%
Turkey
36%
Latvia
38%
Romania
Czech Republic
41%
Lithuania
43%
51%
Poland
75%
Hungary
77%
Serbia
80%
Ukraine
87%
Croatia
91%
Euro area
0%
20%
40%
60%
80%
100%
Source: Eurostat, IMF
Emerging Europe
boasts favorable tax regimes
Corporate tax rates
10%
Lithuania
Serbia
Ukraine
Poland
Estonia
Russia
Slovak Republic
China
15%
15%
15%
16%
18%
19%
19%
19%
20%
20%
20%
20%
22%
25%
25%
India
Brazil
France
0%
10%
20%
Corporate and other
taxes much lower in
Central & Eastern
Europe vs. developed
world and major
manufacturing hubs
Most regional states
provide tax incentives
and additional stimulus
to attract foreign
investors
30%
30%
30%
34%
35%
30%
40%
55%
50%
60%
Emerging Europe
boasts highly educated & qualified workforce
People with tertiary education (% of population)
40.0
33.1
35.0
30.0
26.5
25.0
20.0
15.0
10.0
35.3
32.7
27.8
24.1
24.3
23.9
20.9
17.1
15.1
19.7
18.6
15.1
11.7
9.2
14.7
9.5
7.5
2000
2015
5.0
0.0
Source: Eurostat
Share of people with tertiary education in CEE steadily on the rise
Labor costs significantly below
those in the developed world
Labor costs per hour (EUR), 2015
Bulgaria
4.1
5.0
Lithuania
Hungary
Croatia
Slovakia
Malta
6.8
7.1
7.5
8.6
9.6
9.9
10.0
10.3
Cyprus
Spain
While convergence
has been driving
wages in CEE
higher, they are still
far below European
averages
13.0
13.2
15.6
15.8
Italy
Ireland
Austria
Netherlands
Luxembourg
Belgium
Norway
0.0
10.0
20.0
21.2
Min wages range
b/n €194 in
Bulgaria and €425
in Turkey,
compared to €1,473
in Germany and
€1,500 in UK
25.7
28.1
29.7
30.0
32.2
32.4
33.0
34.1
35.1
36.2
37.4
39.1
41.3
30.0
40.0
51.2
50.0
60.0
Source: Eurostat
High growth of employment in science & tech
Human resources in science and technology (% of active population)
35%
30%
25%
20%
32%
27%
30% 30%
25%
24%
28%
31%
30%
29%
22% 21%
28%
24%
Science & tech play
an increasing role
with R&D
expenditures
rising fast
26% 25%
24%
24%
21% 21%
19%
17%
15%
2005
10%
2015
5%
The Czech
Republic, Estonia,
Hungary, Lithuania
now spending over
1% of GDP on R&D
While this figure is
still low compared
to EU average of
2%, it is rapidly
rising
0%
Source: Eurostat
Emerging Europe
enjoys solid FDI flows
Source: UNCTAD
Services were the main recipient of FDI flows in the transition period driven by
extensive privatization processes + market seeking and supply cost optimization
Banking systems and telecom operators now mostly in the hands of foreign
investors, primarily from EU
FDI in manufacturing have been concentrated in: automotive sector, transport
equipment, electrical equipment, food, chemicals & metals
Emerging Europe
abundant resources provided by EU
Since these countries became EU members, EU co-financing has become
an essential factor for their development  EU Structural and Cohesion
Funds accounted for 11.3 - 25% of annual GDP in 2007-2013, fostering
regional cohesion
Large part of EU SCF financed major infrastructure projects, but also
environment projects, renewable energy, SMEs, education & health,
information society, increasing the adaptability of workers and
enterprises, strengthening of institutional capacity
EU funds, 2007-2013
(EUR, bln.)
EU funds/GDP (%)
Czech
Poland Republic Hungary Romania Slovakia Lithuania Bulgaria Latvia
67.19
17.2%
26.3
17.6%
24.92
25.4%
19.18
13.4%
11.65
16.2%
6.77
19.6%
6.67
16.7%
4.54
19.4%
Total: €175.7 bln = 16.2% of GDP on average
Slovenia Estonia Croatia
4.1
11.6%
3.4
18.5%
1
2.3%
EU cohesion policy 2014-2020 to provide
further boost to regional competitiveness
80
EU cohesion policy 2014-2020, allocation by country (EUR bln)
77.6
70
60
50
40
30
20
10
0
32.8
28.6
23 22 21.9 21.5
19.2
15.915.5 14
11.8
8.6
7.6 6.8
4.5 3.6 3.1
2.3 2.1 1.5 1.4 1.2
1.2 0.7 0.7 0.6 0.1
CEE to receive over 50% of EU 2014-2020 Cohesion Policy = more than €190 bln
EU 2014-2020 Cohesion Policy targets: R&D, ICT sector, sustainable transport,
SMEs, renewable energy & energy efficiency, environment, employment and
education
Competitiveness of local economies
steadily on the rise
Country
Estonia
Lithuania
Poland
Slovenia
Slovakia
Czech Republic
Romania
Mexico
Bulgaria
Hungary
Thailand
Russia
Turkey
Croatia
Vietnam
China
Serbia
Indonesia
India
Rank,
2006
18
22
56
42
32
59
62
58
48
46
23
95
60
115
75
89
78
114
116
Change
Rank,
of
2016
position
2
16
2
20
31
25
13
29
3
29
23
36
25
37
20
38
10
38
4
42
-26
49
44
51
5
55
50
65
-3
78
-1
90
-13
91
0
114
-14
130
Competitiveness of local
economies has registered
rapid advance as
measured by the Ease of
Doing Business Ranking by
the World Bank
Most CEE countries are in
top 50
5 countries hold a
position in top 30
Rising role in European value chains
Export of CEE countries to EU have
jumped by more than 80% b/n 2005 2015
Export of Emerging Europe countries to
EU (EUR bln)
Share in total EU imports now above
37% (2005: 29.8%) and significantly
lower before that
160.0
140.0
141.6
135.7
114.0
120.0
Most countries export over 50% of
production to EU
119.1
Share of export to the EU in total
export (2015)
100.0
72.4
80.0
60.0
56.7
61.6
54.0
41.6
40.0
20.0
36.2
2005
2015
40.2
15.8
14.9 14.1 12.8
8.7
7.5
7.9 4.57.7
5.7 6.2 8.7 4.8
3.2
1.2
0.0
Source: Eurostat, KCM calculations
Czech Republic
Hungary
Poland
Estonia
Romania
Latvia
Croatia
Bulgaria
Serbia
Lithuania
Turkey
Russia
Ukraine
2015
83.4%
81.4%
79.2%
75.2%
73.7%
69.5%
65.9%
64.2%
63.7%
61.3%
44.5%
44.4%
24.2%
Eastern Europe
becoming a major manufacturing hub for multinationals
For 15 years the regions has seen
massive inflows of foreign investors
Following the GFC there is a clear trend
of Emerging Europe establishing itself
as a major manufacturing hub
Much lower production costs – labor,
office rentals, electricity, taxes and
other incentives many multinationals
shifting production to Eastern Europe
Location becoming more important –
proximity, both in geographical and
cultural terms, favors Eastern Europe
over Asia and Latin America
EU membership and accession make
trading much easier
NEARSHORING
gaining popularity
Emerging Europe vs. Asia
Eastern Europe increasingly recognizing the importance of quality as a differentiator to
low-cost Asian producers
Wages have been growing robustly in Asia in the past years with wage gap b/n Eastern
Europe and Asia narrowing; wages in China have more than tripled in the past decade
Realizing the trend of nearshoring, even Asian companies are investing in the region
Emerging Europe now moving up the value chain  from low-cost manufacturing centers,
regional economies now facing the challenge to become innovative knowledge-based
economies
Rather than viewing the CEE region as a cheap production base, multinationals increasingly
consider it to be a source of expertise.
The trend will continue and a deep supplier base will emerge here as local companies
become integrated into global supply chains.
Production gains in CEE have come from better management rather than from growing
population and capital investment (the Asian case).
Automotive sector in CEE
Assessing the potential of the region, Western European and Asian companies invested in
local automakers and established new companies. Fiat acquired Poland’s FSM in 1992;
Volkswagen took over Škoda in the Czech Republic in 1991; and Renault bought Dacia in
Romania in 1998. Audi, Opel, and Suzuki all opened plants in Hungary; Peugeot, Toyota,
and Hyundai established operations in the Czech Republic; and Peugeot Citroën invested in
Slovakia. Renault, Toyota, Hyundai, Honda, Ford and Fiat all have production facilities in
Turkey. Russia is the top producer in the whole CEE region with sizable production by
Hyundai, Renault, Volkswagen, Nissan, General Motors and others.
Along with the automakers came automotive parts suppliers, creating automotive
clusters across the region. The factory of Audi in Hungary is now the biggest car engines
producer in the world.
Nearly 2/3 of automotive exports go to EU-15 markets, and 60% of sales are concentrated in
Germany, the UK, and France
Booming car production in CEE
Motor vehicles production in CEE (units)
1 384 399
1 358 796
1
354
504
1 303 603
1 400 000
1 200 000
1 000 001
1 000 000
879 452
660 603
613 200
800 000
602 237
600 000
400 000
200 000
495 370
2005
387 177
218 349
152 015
2015
194 802
83 630
14 179
0
Source: International Organization of Motor Vehicle Manufacturers
Car production
rose nearly 70%
from 2005 to 2015,
with Slovakia,
Czech Republic
and Hungary more
than doubling
production
Renault now with
over 35% of total
production in CEE
Eastern Europe – the new Silicon Valley
The human assets of the region make it a major player in technological
innovation  Forbes consistently ranks CEE at the top of the world in
educational achievement in math, science & technology.
In 2013, 16 out of the 24 finalists of Google's annual Code Jam programming
competition were from Central and Eastern Europe
Solid growth of number of employees in ICT sector (Estonia: +128% in the past
10 years, Romania: +120%, Bulgaria: +84%).
-
Many significant tech businesses have started in CEE:
Skype founded by Estonians, acquired by Microsoft for $8.5 bln
Whatsapp founded by Ukrainian, acquired by Facebook for $19 bln
Prezi launched in Hungary as online tool for creating presentations
Major cyber security companies - AVG Technologies, Avast and ESET, in the
Czech Republic and Slovakia
Abundant EU funding supports start-ups from the tech sector
Emerging Europe
stock markets lagging behind
300.000
Performance of MSCI
EFM Europe+CIS, EUR
as of 31.12.2016
250.000
3M
15.46%
YTD
24.4%
1Y
24.40%
3Y,
annualized
-3.91%
5Y,
annualized
-1.52%
50.000
10Y,
annualized
-5.43%
0.000
since 2007
peak
-49.7%
200.000
ACWI
150.000
EFM EUROPE + CIS
EM ASIA
EM LATIN AMERICA
100.000
EUROPE
NORTH AMERICA
48
Emerging Europe
attractive valuation ratios across the region
P/E ratios, ttm
Source: Reuters
Emerging Europe
P/E ratios by country (ttm)
Source: Thompson Reuters,
KCM calculations
50
Compelling reasons to invest in CEE
-Buoyant region with appreciable scale converging with the West
-Growing much faster than developed Europe
-Among lowest taxes in the world
-Low labor costs –> 27% of euro-zone average
-Well-educated & highly qualified workforce
-Abundant EU funding boosts competitiveness
-Geographic & cultural proximity to the West
-Greater focus on quality vs. low cost Asian producers
-CEE turning into major manufacturing hub -> rising role in global value chains (over 50% of exports to EU)
-Major global companies shift production here -> solid FDIs in automotive sector, transport equipment,
electrical equipment, food, chemicals & metals
-CEE turning into the new Silicon Valley due to highly qualified IT specialists
-Booming outsourcing sector -> CEE countries in top 20 for Business Process Outsourcing.
Why invest in Emerging Europe now
Solid catch-up potential based on lagging performance in
recent years
Improving sentiment towards emerging markets as a
whole has sparked uptrend
Attractive valuation ratios with multiples lower than peers
and historic averages
Low market penetration = solid catch-up potential
Improving liquidity
Take advantage of the Emerging Europe opportunities with
Karoll Capital’s flagship strategies:
>>> Emerging Europe Opportunities
>>> Emerging Europe High-Growth Exporters
Contact us at:
Daniel Ganev, MBA
Managing Director,
Karoll Capital Management
E-mail: [email protected]
Tel:
+359 2 400 8 382
Nadia Nedelcheva, CFA
Head of Portfolio Management,
Karoll Capital Management
E-mail: [email protected]
Tel:
+359 2 400 8 386
Headquarters Sofia
1 Zlatovrah Str., Sofia 1164, Bulgaria | (+359 2) / 4008 382 | [email protected] www.karollcapital.bg
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