Growth continues

Growth continues but some turbulence ahead

10-09-2008, ostatnia aktualizacja 10-09-2008 19:30

Most of Central European companies reporteddynamicgrowth in 2007. Region has been minimally affected by theeconomicslowdown in developed countries

It has been four years since Central Europe’s largesteconomiesjoined the European Union. Two more Central Europeancountriesbecame members in 2007 and the remaining states are in thequeue.The economies of the ‘New Europe’, which were once behind the‘IronCurtain’, are integrating dynamically with the ‘Old Europe’andgradually preparing to convert their currencies to the euro.Whatis even more noteworthy, they have become motors of growth intheEU, especially during the recent crisis in financial marketsandthe slow down in the euro zone.

How are these countries coping with the new politicalandeconomic realities, how are the various industries in theregiondeveloping and what are the challenges facing investorsandmanagers of the leading Central European companies, banksandinsurers? A comparison of the financial situation of the500largest companies and financial institutions in Central Europeisone of the tools for assessing trends in the region and thestateof its economy. This year, we are focusing on the growthstrategiesthe biggest companies in the region are following, howthey arecoping with the rising input costs, the appreciation oflocalcurrencies and the ever more scarce and costly labour force,which,not so long ago, was a resource significantly cheaper andmoreaccessible than in Western Europe.


Solid Growth


As in 2006, most Central European companies reporteddynamicgrowth. Average revenue in local currency grew by12 per centand ineuros by 15 per cent. This was a high rate compared toWesternEurope. It seems that the region has been only minimallyaffectedby the economic slowdown, despite the fact that the averagerevenuegrowth of the CE Top 500 companies remained at the samelevel forthe last two years and their average ROE and ROAfellimperceptibly.

The main companies increased their revenues mainlythroughacquisitions (PKN, CEZ) or through reorganisationsandconsolidations (PGE, Tauron). However, those companies, whichdidnot increase the scale of their activities through M&A,alsoreported double digit revenue increases.The total dynamicgrowth ofthe 500 largest companies in the region comes only partlyfrom thefirms at the top of the list. Despite the fact that therevenues ofthe ten largest firms grew by nearly 15 per cent in 2007and 25 percent in 2006 –similarly to the combined GDP growth forthe region,a large part of this increase should be attributed toforeignexpansion or consolidation. However, if we look at the first100companies on the list, we see that they reported an average 12percent revenue growth while the last 100 enterprises grew bynearly20 per cent.

The largest percentage growth of revenues in 2007 camefromcompanies in the Baltic countries and Serbia.Enterprisesfromcountries which were the first to join the EU -Poland, theCzech Republic, Hungary and Slovakia - saw revenuegrowth of 17 percent, 10 per cent, 13 per cent and 15 per centrespectively. Theseincreases are to a great extent linked to thesectoral structure ineach country. Both consumer products andindustrial productssectors reported high growth rates of 18 percent and 20 per cent.The revenues from the enterprises in theremaining sectors grew bylittle more than a half of these rates.


Consolidation and new investments


This significant presence of the Polish companies on the CETop500 list results from a combination of several factorsincluding:regional acquisitions (PKN, Ciech), consolidation of theenergycompanies (PKE, Tauron, Enea) and the dynamic growth (18 percentcompared to 2006) of locally based consumer productanddistribution companies (Metro, Jeronimo Martins, Carrefour,Tesco)and manufacturers such as FIAT, Saint – Gobain, MittalSteel.Similarly to Polish companies, the largest Slovak andUkrainianenterprises have increased their share in the totalrevenue of thelargest Central European firms.

Polish companies dominate the ranking with 176 companies inthelist. The combined revenue of these companies accounted for34.3per cent of the total 500 companies, which is not surprisinggiventhe size of the Polish economy in comparison to othereconomies ofthe region.

The positive impact and significance of greenfieldinvestments,especially in the automotive sector, have beenparticularlynoticeable in Slovakia. Slovakia’s largest companiesincreasedtheir share in the total revenue of the largest CentralEuropeancompanies by almost 100 basis points from 5 per cent to 6per centas a result of the opening of KIA Motors and PeugeotCitroenplants.

While most of the new EU members have benefited from theforeigndirect investments, Ukraine-based companies have grownprimarily asa result of mounting demand for heavy metals andenergy. Ukraine’slargest companies operate, above all, in heavymanufacturing andenergy sectors.

The combined revenue of Czech and Hungarian companiesaccountedfor 15 per cent and 14.5 per cent of total revenue of theCE`Top500 companies. The revenue of the largest companies fromthese twocountries is higher than the GDP share of the CzechRepublic andHungary. This confirms the strong position of theseentities in theCentral European market place. Despite high growthachieved bysingle companies (CEZ, Skoda, Audi Hungaria) and newgreenfieldinvestments (Toyota Peugeot in the Czech Republic,Philips Hungary,Suzuki Hungary), their share decreased slightlycompared tocompanies ranked in 2006. The Czech Republic and Hungaryhave onlyto a limited extent benefited either from theconsolidation in theenergy and raw materials sectors or theincreases in oil prices. Onthe other hand, Hungary stands out interms of the number of largeTMT companies including Nokia,Hungarian Telekom Samsung andFlextronics.

The latter recorded a fall in revenue in the fiscal yearendingon 31 March 2007, however, based on the information fromthecompany, the decreasing revenue trend was halted in the fiscalyearending on 31 March 2008.


PKN Orlen strengthens its position – Skoda drives East


Following the consolidation of the Lithuanian Mazeikiuoilcombine purchased in 2006, PKN has strengthened its position atthehead of the CE Top 500 ranking. The group has been thelargestcompany by reported consolidated revenue for years and withitsfinancial results consolidated with Mazeikiu, its revenues aremorethan 60 per cent higher than those of MOL, which follows PKNOrlenin the ranking.By comparison, the difference in revenuesbetweenthese two companies in 2006 and 2005 was only 24 per centand 3 percent respectively.Skoda Auto has been expanding itsproductioncapacity for several years. In 2007 the revenue ofthismanufacturer of popular cars selling to the east and west ofMladaBoleslav rose by 11 per cent. The company’s factories arelocatednot only in Central Europe (Slovakia, Bosnia and Herzegovinaandalso Ukraine) but also in China, India, Kazakhstan andRussia.Skoda is owned by Volkswagen, the largest foreign investorin CEand is the enterprise whose subsidiaries inCentral Europe havethehighest total revenue (i.e., estimated revenue ofVolkswagencontrolled entities) in the region. Like Skoda, anotherCzech firm- CEZ - is implementing a foreign expansion strategy,although thisis not always based on building new plants but alsothroughtakeovers of power generators in other countries of theregion(Poland, Bosnia and Herzegovina and Serbia).


The car industry changes gears


The automotive sector is well represented in the CE Top500ranking with 50 firms on the list. Total revenues ofthesecompanies reached EUR 38 billion in 2005 and around EUR 60billionin 2007. This is primarily the effect of major modernisationandexpansion of existing plants and moving production from WesterntoCentral Europe and especially to the Czech Republic andSlovakia.The group of 50 automotive companies contains five leadingcarmanufacturers, which have moved production to these twocountries.The CE Top 500 list shows the effect of these moves. Forexamplethe fact that two companies, Kia Motors and PCA Slovakia,came onstream in 2007, increased the revenues of this sector bynearly EUR2.7 billion and employment by 5,700 people. The growthraterecorded by car producers in Hungary, Ukraine, Romania orPoland(where FIAT is present), exceeded 20 per cent, however,asmentioned above, Volkswagen leads the way, well ahead ofothermanufacturers.


Steel industry


Steel is another significant sector in the region, which hasbeenconfirmed by the results of the CE Top 500 ranking. Productionofsteel and ferrous and non-ferrous metals has for severalyearsgenerated over 8 per cent of the total revenues of the CE Top500list. In 2007 alone, this sector’s revenues rose by over 14percent as a result of acquisitions made byMittal Steel, US Steelandothers.


Consumer goods


The consumer goods sector, which is relatively wellrepresentedin the CE Top 500 list (in total 133 out of 500companies, withalmost half of them based in Poland), saw its jointrevenues growby 22 per cent in 2007, although its share of thetotal revenue ofthe CE Top 500 stayed at the same level as in theprevious year.Also, food and beverages sub-sector was the source ofan almost 70per cent increase in revenues.




PKO BP has lost its number one position as the largestPolishbank by assets to Pekao S.A. (the second largest on the listofCentral European banks), which has finalised its merger withBPHS.A. It is worth noting that PKO BP is one of the few banks onthelist which are still state-owned. Indeed, there are a merefivestate-owned banks in the top fifty banks. In contrast tothemajority of banks on the list, the two largest Czech banks –CSOBand Ceska Sporitelna (first and fourth place, respectively) arenotlisted on the stock exchange. Also, the ranking shows thatthelargest Polish banks are less efficient than, say, Czech banks.Inthe case of PKO BP the amount of assets per employee is as lowasEUR 0,99 million and EUR 1.5 million in the case of PekaoS.A.,while for CSOB and Ceska Sporitelna these numbers are EUR4.2million and EUR 3 million, respectively.


The number of state owned companies is not gettinganysmaller


There are 120 companies on the CE Top 500, in which thestateholds a controlling share with 48 from Poland. The revenuesofstate-owned companies amounted to nearly 20 per cent oftotalrevenues of the companies on the list and despite the factthatprivatisation policies are being actively pursued, this shareisnot falling. This can be primarily attributed to thefailedprivatisation of energy and infrastructure companies, whicharegranted special status in many former socialist bloccountries.This can be seen very clearly in Poland, where the statetreasuryhas been trying to either privatise its ‘crown jewels’throughpublic offers, which enable it to retain control or simplyleavecertain companies on the privatisation ‘shelf’.However,foreigninvestors are widely present in the region and FDI continuestoflow to Central Europe. The operations of some of thoseinvestorsare so significant that they dominate the Top 500 list.Volkswagen,Arcelor Mittal, retail chains and telecom giants arewellrepresented in the region,not to mention financialinstitutionssuch as Erste or Unicredit Bank. Not only the revenuesgenerated inCentral Europe make them the leaders of the ranking,but moreimportantly, those revenues continues to grow at doubledigit rateswith only a few companies recording flat or slightlydecreasinggrowth. Foreign companies have mostly invested inautomotive andmetal processing industries, followed bytelecommunications and theconsumer goods sector, where the presenceof large westerndistribution networks is clearly visible.


Not much technology


Only 45 out of the CE Top 500 companies come from thetechnology,media and telecommunications sector. TelekomunikacjaPolska (TP SA),the largest company in the sector, takes the ninthplace on thelist. TP SA was unable to report revenue growth in2007. Instead,the group recorded a 2 per cent decline (measured inthe localcurrency). TP SA is struggling with the same problem asall theincumbent operators. They see a drop in fixed line revenuesat theexpense of income from mobile telephones and alternativeoperators.This is not a new phenomenon. The shrinking of the fixedline market(a drop of 11 per cent in Poland for example) has hadand willcontinue to impact the industry.

The former national operators in the other countries intheregion are further down the list: Magyar Telekom is at the33thposition and Telefonica O2 C.R. (the old Cesky Telecom) is at49thplace.Mobile operators are even further down. As befitscompaniesin the country with the biggest population, Polishcompanies arelarger than the others, but they are still outside thetop 50largest enterprises in the region.


CE Top 500 companies by market capitalisation


Only 71 out of the top 500 companies are public. Most of themarebased in Poland, although the biggest company in terms ofmarketcapitalisation is the formally Czech but now rather CentralEuropeanelectric utility, CEZ. We expect the number of publiclylistedcompanies to increase along the continued privatisationandcontinued growth of the private companies, especially in PolandandUkraine. The recent financial crisis has also affected theregionalstock exchanges – the median decrease of marketcapitalisationbetween 31 December 2007 and 31 July 2008 wasapproximately 20 percent, however, the appreciation of localcurrencies reduced thatloss to 14 per cent. The top places in ourranking are takengenerally by large enterprises from the energy andresourcessectors. It is similar to what we observe in other, globalrankings(FT Global 500 2008), however, while the energy companiesdominatethe revenue ranking, the largest publicly quoted companiesbymarket capitalization are mostly financial institutions or fromtheTMT sector.


Profitability fails to match revenue growth


The profitability of the Central European giants fellslightlylast year. The consumer goods production sector reportedthe worsthit - especially cars and pharmaceuticals. The reason liesmostlyin the growing cost of labour as well as the appreciation ofthelocal currencies, which has raised production costs. Problemswithboosting sales only worsened the situation. Companies wereunableto pass the additional costs onto their clients or neutralisetheincrease by improving productivity.

Tomasz Ochrymowicz - Valuation and Modelling Lead PartnerinDeloitte Central Europe


Posted by Ekonomia

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