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CAPITAL MARKET REPORT

VSŽ among few stocks still attracting foreign investors

The bearish mood continued on the BCPB floor market during the second half of April, with no impetus in sight to change this situation. Recent political events including confirmation that Slovakia will be eliminated from the first group of central European countries invited to join NATO and the apparent reorientation of the country towards Russia during Russian Prime Minister Viktor Chernomyrdin's visit to Slovakia together with weak 1996 corporate results will likely further deter potential investors.
The recent short-term government measure dealing with import deposits aimed at decreasing imports and prepared measures which should protect domestic producers, increase exports and tighten fiscal discipline probably will not help the capital market either. Unlike the Czech Republic, the government refused to discuss establishing an independent Securities and Exchange Commission. However, export support measures could provide an advantage to companies with Russian market links, such as VSŽ and Chirana-Prema.

The bearish mood continued on the BCPB floor market during the second half of April, with no impetus in sight to change this situation. Recent political events including confirmation that Slovakia will be eliminated from the first group of central European countries invited to join NATO and the apparent reorientation of the country towards Russia during Russian Prime Minister Viktor Chernomyrdin's visit to Slovakia together with weak 1996 corporate results will likely further deter potential investors.

The recent short-term government measure dealing with import deposits aimed at decreasing imports and prepared measures which should protect domestic producers, increase exports and tighten fiscal discipline probably will not help the capital market either. Unlike the Czech Republic, the government refused to discuss establishing an independent Securities and Exchange Commission. However, export support measures could provide an advantage to companies with Russian market links, such as VSŽ and Chirana-Prema.

Recently introduced Czech import deposits will predominantly affect Slovak companies with strong exposure to the Czech market, having Czech competitors and/or producing consumer goods. We believe that Plastika, Slovnaft, Považské Strojárne, Harmanecké Papierne, Drôtovňa, OTF and VSŽ should be among those affected. According to our estimates, these companies' financial costs could increase by 15-20% in a worst case scenario.

VSŽ remained the most liquid share on the floor market with its share price trading in the Sk720-740 band. The steel company is among the few still attracting foreign investors. An EGM at VSŽ elected a new Supervisory Board, out of which former transportation minister Alexander Rezeš was elected as supervisory board chairman. The number of supervisory board members has been reduced from nine to five. Shareholders also approved a Sk3bn ($90m) bond issue, with a minimum maturity of three years. The issue is aimed at improving VSŽ's liquidity, increasing the proportion of long-term financing, financing strategic goals (mainly the production of container and auto sheets) and, finally, insuring against the unstable behavior of Slovak banks. According to Rezeš, VSŽ is preparing a JV for producing cars with the Japanese automobile manufacturer Toyota. VSŽ is also preparing to transform itself into a holding company, but there is no current Slovak legislation regulating holding companies.

Slovnaft traded at prices fluctuating around its par value of Sk1,000. The refinery announced that it made a pre-tax profit of Sk790m ($23.6m) for 1Q97 which means that the company is again back on track for profits. The result could be a buy signal for foreign investors, since the share at the current price is moderately undervalued.

The jet engine plant currently part of Považské Strojárne (PS) will be transformed into an independent j.s.c. called DAS PS Letecke Motory. The reason for the transformation is that the plant requires investment in order to fulfill a contract with the Russian Army to produce 25 - 35 jet engines between 1998 and 2000. PS is not able to provide the funds, and potential investors are asking for PS's separation and for Letecké Motory's assets and cashflow.

The Slovak privatization agency FNM officially announced that it is ready to start negotiations with an unspecified but prominent Asian investor regarding the sale of its stake in the Czech commercial bank Komerční Banka Prague (KB). The FNM acquired its stake as a result of the division of former Czechoslovak property. We anticipate that following Prime Minister Mečiar's visit to Japan and his cordial relations with Nomura, this company might be the prominent Asian investor which is interested in purchasing the 15% FNM stake in KB. The announcement could also be understood as a move to place pressure on the Czech FNM to resolve the problem of unravelling the cross-ownership of the Czech FNM's stake in Všeobecná Úverová Banka (VÚB) (Czech FNM owns a 33% stake in VÚB) and the Slovak FNM's stake in KB quickly, as there is a strong will to privatize VÚB as soon as possible.

Prepared by ING Bank N.V., Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.,a.s.

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