macroeconomics monthly report - wirtualna polskai.wp.pl/a/dibre/rmiesieczne/november__2005.pdf ·...

BRE Bank Securities

7 November 2005

Monthly Report BRE Bank Securities

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04-10-27 05-02-22 05-06-20 05-10-16

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WIG BUX PX50

BRE Bank Securities

Periodic Report

Monthly Report November

Equity Market Recent political events and speculations concerning zloty weakening could induce market players to invest in “exporters.” However, this could prove a risky strategy, due to the fact that higher bond yields and larger spreads, in relation to bonds, will attract capital thereby influencing the currency market. Exporters could be a refuge in the case of a mass capital withdrawal from Poland (and other emerging markets). However, no one is predicting this scenario yet. Banks. We are awaiting 3Q results. Income should be similar to that noted in the first half of the year, but we expect higher provisioning as well as some worsening in net interest income. This should not have a negative impact on the evaluation of the sector. Media. Prior to results for 3Q Agora issued a warning about a probable increase of costs that result from preparing new projects, which lowered investor expectations concerning 3Q results. In the light of this information, the published results were a pleasant surprise, mainly due to maintaining the EBITDA margin above 20% and good outlook for 4Q. With this in mind, we believe the sector’s prospects are good. Telecommunications. PiS announced that it will accelerate liberalization of telecommunications market. Changes in the law include strengthening the role of the URTiP president and releasing the local loop. PIS also plans to appoint a new URTiP president. Telecom stocks should perform in line with the market over the next month. IT. Comarch obtained a major client for its proprietary loyalty system. Com-puterland announced a new forecast for 2005, assuming revenues of more than PLN 800 m and a net profit of more than PLN 20 m. It also obtained its first outsourcing contract on the local government market. The consortium comprising of Computerland, ABG Ster-Projekt, Comarch and Emax, signed major contracts with the Ministry of Education for equipping computer labs in schools. Softbank finalised the purchase of Incenti and Gladstone and will increase its stake in Comp Rzeszow. Construction. According to CSO data, 10.7 thous dwellings were com-pleted in September, i.e. by 50.1% more than last year and 10% more than in August. From the beginning of the year to September, 17.3 thous dwell-ings were completed (19% more than in the same period last year). Elektro-budowa decided to go forward with building a switchgear factory in Russia. Following the unsuccessful PRInż acquisition, Polimex-MS remains inter-ested in entering the segment of road and railway construction. Pharmaceuticals. According to PharmaExpert, drug sales increased by 7.2% in September in relation to the same period last year. In turn, accord-ing to IMS Heath, the entire drug market grew by 8.4% in this period in rela-tion to September of the previous year. Bioton has increased its commit-ment in SciGen to 44.78% and will announce a call for the remaining shares in the near future. The Management Board of Farmacol expects good 3Q results and is considering paying off a dividend if the eventual acquisition is not finalised.

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

Analysts:

Marta Jeżewska (+48 22) 697 47 37 Marta.Jeż[email protected]

Tomasz Mazurczak (+48 22) 697 47 35 [email protected]

Michał Marczak (+48 22) 697 47 38 [email protected]

Sławomir Sklinda (+48 22) 697 47 41 [email protected]

Andrzej Lis (+48 22) 697 47 42 [email protected]

Krzysztof Radojewski (+48 22) 697 47 01 [email protected]

Przemysław Smoliński (+48 22) 697 49 64 [email protected]

Macroeconomic Analysts (BRE Bank S.A.)

Janusz Jankowiak Akadiusz Grabarczyk Jacek Kotłowski Artur Ulbrich (+48 22) 829 01 66 www.brebank.com.pl

7 November 2005

WIG vs. indices in the region

Equity Market Macroeconomics

Avg daily trading volume (3M)

Average P/E 2006

Average P/E 2005

WIG 33 318 17.7

16.4

PLN 772 m

BRE Bank Securities

BRE Bank Securities

7 November 2005 2


Questions about the End of Deflation

Equity Market

Spring corrections on equity markets in 2004 and 2005 were connected with the increase of US bond yields: respectively to 4.9% and 4.6% on 10-year bonds. Currently, the latter level has been exceeded again, but equity markets have already experienced a downward wave of several percent. Recently, data concerning a better than expected increase of labour efficiency in 3Q (4.1%) as well as the decline of labour costs caused a marked recovery. This shows only that the markets are very sensitive to inflation in the US. US corporate profits increased in 3Q as expected (some 15% y/y). General EPS of US compa-nies is at record levels and account for almost 12% of GDP. Dynamics of EPS in US - S&P 500

Source: CNN based on First Call data This level is accompanied by a general consensus that EPS growth in 2006 will be high, which is somewhat of a threat to the market. Moreover, in the context of high valuations (higher aver-age P/E than in Europe) and increasing interest rates (more than in Europe) it is likely that the US equity market will be disappointing next year. However, the Polish equity is more concerned about the economic growth of US as well as the target level of interest rates than about the performance of US equities. If there is no economic growth in the US, equity markets around the world will not develop. The forecast of 3.5% in-crease of GDP in the US should be sufficient to maintain a strong global economic growth and a positive climate for equities, and particularly to maintain a strong growth of the Asian econo-mies. Forecasts of the Fed rate fluctuate between 4.25% and 5% for 2006. Hedge funds lever-aging positions in USD are again under pressure. The relative increase of the attractiveness of US assets will probably be weakened with the prospect of subsequent depreciation of USD. Nevertheless, all parameters important for US inflation (labour efficiency, labour costs, em-ployment, utilisation of production capacity, base inflation) will continue to exert a strong influ-ence on equity markets. Political uncertainly in Poland has probably peaked – the formation of the government may even improve the investment climate. In addition, the government’s economic achievements should no longer (at least for the next several months) dampen the investment climate – decla-rations of postponing the date of adopting the euro has already cast a shadow over the mar-ket. Yields on 10-year bonds are almost 1 percentage point higher than last month and amount to 5.6%. Global threats of deflation are have passed and therefore Poland will have to confront a steeper profitability curve. This phenomenon will improve the margins of banks, however, in the short-term, it will negatively influence the value of the trading portfolio. Banks that sold their bonds earlier will benefit from this. Recent political events and speculation concerning zloty weakening could induce market play-ers to invest in “exporters.” However, this could prove a risky strategy, due to the fact that higher bond yields and larger spreads, in relation to bonds, will attract capital thereby influenc-ing the currency market. Exporters could be a refuge in the case of a mass capital withdrawal from Poland (and other emerging markets). However, no one is predicting this scenario yet.

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2000 2001 2002 2003 2004 2005 2006

BRE Bank Securities

7 November 2005 3


Current recommendations of BRE Bank Securities S.A.

Company Recommendation Target price Date issued

BPH PBK Suspended BZWBK Hold 119.00 2005-09-26 GETIN Suspended HANDLOWY Suspended ING BSK Suspended KREDYT BANK Suspended MILLENNIUM Suspended PEKAO Suspended PKO BP Suspended AGORA Accumulate 74.00 2005-08-05 BUDIMEX Reduce 38,1 2005-09-20 COMARCH Under review COMPUTERLAND Under review ECHO INVESTMENT Under review ELEKTROBUDOWA Hold 35.00 2005-09-19 EMAX Under review FARMACOL Accumulate 39.60 2005-09-06 FORTE Buy 13.80 2005-03-18 HOOP Accumulate 14.50 2005-03-18 INDYKPOL Suspended JELFA Buy 70.00 2005-02-25 KĘTY Hold 129.50 2005-08-04 KGHM Reduce 34.70 2005-08-08 KROSNO Under review LOTOS Hold 35.50 2005-09-05 MONDI Accumulate 49.00 2005-11-02 NETIA Under review 4.50 ORBIS Under review PGF Hold 58.10 2005-09-06 PKNORLEN Hold 58.90 2005-09-05 POLIMEX Hold 43.80 2005-09-19 POLMOS LUBLIN Accumulate 35.00 2005-08-22 PROKOM Buy 145.00 2005-10-25 SOFTBANK Accumulate 36.70 2005-09-02 TELEKOMUNIKACJA POLSKA Hold 19.50 2005-02-08 TORFARM Accumulate 45.90 2005-09-06

BRE Bank Securities

7 November 2005 4


Changes in recommendations within the last month

Recommendation Statistics

Company Recommendation Target price Date issued

MONDI Accumulate 49.00 2005-11-02

PROKOM Buy 145.00 2005-10-25

All Issuers for which BRE Bank Securities S.A. has rendered services

Statistics Sell Reduce Hold Accumu-late Buy Sell Reduce Hold Accumu-

late Buy

number 0 2 8 7 3 0 1 2 3 1

percentage 0.0% 10.0% 40.0% 35.0% 15.0% 0.0% 14.3% 28.6% 42.9% 14.3%

BRE Bank Securities

7 November 2005 5


The Polish financial market did not at first respond badly to the victory of Law and Justice (PiS) in the Parliamentary elections. It ignored the unpredicted nomination of the unknown candidate for the Prime Minister. Even after the PiS candidate won the second round of the Presidential elections, the correction was still minor, though it already became clear that PiS took it all and the Civic Platform (PO) lost the whole lot. The market was patiently waiting for the cabinet to be formed. Nervousness crept in when it became clear that there would be no PiS-PO coali-tion. The Zloty depreciated immediately by over 2%, market interest rates rose by over 40 basis points, and the stock exchange fell by over 3%.

Valuation of PLN-denominated assets failed to feature a scenario of no majority PiS-PO gov-erning coalition (this scenario was considered highly unlikely). No wonder. All in all, the elec-torate, both of PiS and of the PO, knew in advance that a coalition of these two parties would take power. They had been reassured a number of times by PiS and PO leaders. No one was expecting that this fundamental promise would be broken. Today, one may wonder whether in fact PiS was not playing the PO card right from the scratch in order to upkeep its chances in the elections, never really intending to share its victory with the economic “liberals”. If such was the case, then everyone (PiS voters included) fell for the masterful plan of the Kaczyński brothers.

A government formed by PiS only may merely put into operation PiS electoral program, since there is no other plan. The attempt at implementation of this program will have no serious ad-verse consequences for the 2006 budget, as it is simply too late now. However, the risk to the 2007 budget is now on the rise. The PiS program involves multiplying public spending without indicating the sources of financing. It is a program whereby the State being a market player will intervene at taxpayers’ cost. The program fails to guarantee an effective use of labor and capital. It will neglect to avail of the know-how and expertise in order to improve the competi-tive edge of our economy.

Poland’s duty to reduce the public finance deficit under the excessive deficit procedure (EDP) will serve as a rigid restraint upon costly interventions anticipated by the PiS program. The EDP procedure requires the deficit to be reduced by at least 0.5 percent of GDP year by year. Infringement of the EDP procedure would jeopardize Poland’s access to the structural funds. Hence, the spending spree is being been kept in check, although not all local politicians seem to be aware of it. We believe that no government would dare to expose Poland to a risk of a potential loss of approx. EUR b 11, available during the term of office of the newly elected Parliament. In other words: it is not possible to implement the entire version of the PiS pro-gram. Yet, a part of it may be put into practice with the support of Samoobrona, LPR and PSL

In our opinion, the negative reaction of the market to a minority PiS government will be moder-ated over a short term, within the horizon of the coming few months, by to the already highly determined structure of the next year’s budget, left behind by Minister Gronicki. During this period, the scale of market interest rate growths and the weakening of the Zloty will depend not so much on assessment of new legislative bills (which will fail to appear) as on potential proposals of amendments to the structure of financing the next year’s deficit (more domestic issues, less foreign issues). However, the real market test for the minority PiS government (should it survive at all) will come next spring when the government will have to present the draft 2007 budget and the related legislation.

Macroeconomics

BRE Bank Securities

7 November 2005 6


Macroeconomics Main Macroeconomic Indicators

Aug 04 Sep 04 Oct 04 May 05 Jun 05 Jul 05 Aug 05 Sep 05 Oct 05 GDP and Output GDP 4.9% 2.8% 3.3% Domestic demand 5.2% -0.3% 1.7% Private consumption 3.6% 1.5% 2.1% Gross fixed asset investments 4.3% 3.8% 6.0% Value added 4.6% 2.8% 3.2% in industry 7.3% 2.6% 3.7% in the construction sector -3.1% 10.8% 8.2% in the market services sector 4.5% 2.7% 2.8% Industrial production growth y/y 13.7% 9.5% 3.5% 0.9% 6.9% 2.6% 4.8% 5.5% 6.1% Industrial production growth m/m 1.8% 9.0% -0.3% -4.8% 9.0% -7.9% 4.0% 9.8% 1.5% Retail sales y/y 9.6% 8.8% 4.0% 8.0% 10.5% 5.0% 7.9% 5.4% 6.3% Retail sales m/m -1.5% 0.7% 2.3% 0.2% 4.6% 0.7% 1.2% -1.7% 3.1% Labor Market Average wages in enterprise sector (in PLN) 2412.66 2439.59 2386.34 2423.92 2512.78 2506.55 2480.56 2483.99 2472 Wages growth m/m (CPI-adjusted) -0.2% 1.1% -2.8% -2.2% 3.9% 0.0% -0.9% -0.3% -1.0% Wages growth y/y (CPI-adjusted) 0.3% -0.6% -2.0% 0.5% 3.0% 1.9% 1.2% 0.0% 1.9% Employment m/m -0.1% 0.1% 0.3% 0.1% 0.3% 0.0% 0.1% 0.2 % 0.2% Employment y/y -0.8% -0.6% -0.4% 1.6% 1.7% 1.8% 2.0% 2.2% 2.1% Unemployment rate 19.1% 18.9% 18.7% 18.3% 18.0% 17.9% 17.7% 17.6% 17.4% Foreign Trade Current account (in US$) -410 -971 -505 -961 93 -531 -468 -266 Foreign trade in goods balance- payment basis (in US$) -364 -420 -199 -631 -209 -345 -453 -328 Exports – payment basis y/y (in US$) 35.8% 30.6% 25.4% 17.7% 13.2% 11.0% 16.3% 16.4% Imports – payment basis y/y (in US$) 35.2% 31.5% 23.1% 20.1% 11.2% 6.8% 16.7% 14.4% Current account (in EUR) -338 -797 -407 -754 77 -438 -380 -217 Foreign trade in goods balance- payment basis (in EUR) -299 -344 -160 -495 -172 -286 -368 -267 Exports – payment basis y/y (in EUR) 24.3% 20.0% 17.5% 11.3% 12.9% 12.9% 15.5% 15.8% Imports – payment basis y/y (in EUR) 23.8% 20.7% 15.3% 13.5% 10.8% 8.7% 15.5% 13.8% Current account (% GDP) -4.0% -4.3% -4.6% -2.6% -2.2% -1.9% -1.9% -1.6% Prices CPI m/m -0.4% 0.3% 0.6% 0.3% -0.2% -0.2% -0.1% 0.4% 0.4% CPI y/y 4.6% 4.4% 4.5% 2.5% 1.4% 1.3% 1.6% 1.8% 1.6% CPI annual average 2.5% 2.8% 2.9% 4.0% 3.7% 3.5% 3.2% 3.0% 2.9% HICP y/y 4.9% 4.7% 4.6% 2.2% 1.4% 1.5% 1.8% 1.8% 1.7% Net inflation y/y 2.3% 2.4% 2.4% 1.5% 1.4% 1.4% 1.3% 1.3% 1.3% PPI m/m 0.3% -0.1% 1.2% -0.2% 0.3% 0.2% 0.1% 0.0% -0.1% PPI y/y 8.5% 7.9% 7.6% -0.5% 0.0% 0.0% -0.2% -0.2% -0.6% Money Aggregates Money supply (M3) 356.6 355.9 375.5 393.4 391.5 389.5 396.2 401.2 406.0 Money supply y/y 13.2% 10.8% 10.4% 11.1% 12.7% 8.1% Cash in circulation 50.9 50.1 50.5 52.9 53.8 55.3 55.2 55.4 Total loans 263.7 264.8 282.8 285.5 281.8 283.3 287.3 290.4 Total household loans 111.3 112.4 128.1 130.0 125.6 128.8 131.8 133.7 Total corporate loans 124.1 123.8 124.6 126.1 125.9 125.6 125.3 125.7 Total deposits 300.7 300.3 319.4 329.6 325.3 324.4 330.9 335.6 Total household deposits 192.3 191.5 194.7 200.1 199.7 200.6 201.2 200.2 Total corporate deposits 76.7 76.5 78.1 83.9 85.9 83.6 88.4 93.1 Forex Rates US$/PLN rate (end of month) 3.6816 3.5569 3.396 3.3845 3.3518 3.3508 3.2527 3.2611 3.3074 EUR/PLN rate (end of month) 4.4465 4.3832 4.3316 4.1675 4.0392 4.0692 4.0146 3.9201 3.9642 Interest Rates NBP intervention rate 6.50% 6.50% 6.50% 5.50% 5.00% 4.75% 4.50% 4.50% 4.50% Lombard rate 8.00% 8.00% 8.00% 7.00% 6.50% 6.25% 6.00% 6.00% 6.00% Deposit rate 5.00% 5.00% 5.00% 4.00% 3.50% 3.25% 3.00% 3.00% 3.00% Mandatory reserves rate 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% WIBOR 3M 7.00% 6.91% 6.84% 5.24% 4.70% 4.48% 4.41% 4.30% 4.43% Bond yield 2Y 7.82% 7.06% 6.87% 5.114% 4.560% 4.645% 4.415% 4.026% 4.60% Bond yield 5Y 7.64% 6.98% 6.74% 5.168% 4.660% 4.892% 4.634% 4.529% 5.083% Bond yield 10Y 7.30% 6.74% 6.45% 5.125% 4.683% 4.910% 4.741% 4.647% 5.293%

Source: GUS, NBP, Eurostat, Reuters, BRE Bank SA

BRE Bank Securities

7 November 2005 7


USA – Longer and Longer Inflation Shadow There seems to be no end to the discussion on the upside and downside balance of risks upon the future inflation and growth in the Unites States. Difference of opinions remains wide. And although facts seem to more and more favor those who forecast a greater jeopardy on the side of inflation rather than growth, there are still some who say that low market interest rates’ level is a sign of an opposite phenomenon.

Source: EcoWin In September the CPI in the United states rose to 4.7 percent on a yearly basis. Manufacturer prices increased up to 6.9 percent, the highest level in 14 years. Although the yields of 10Y bonds reached a peak since March this year and exceeded 4.5 percent, the value of the CPI has for the first time since the 80-ties outrun the yields of 10Y bonds. Market interest rates are indeed growing, but the process is very slow and divulges investors’ wavering moods as re-gards their assessment of prospects of the US economy. It is worthy of note that 10Y bond yields in the United States being close to 4 percent have historically corresponded to a growth of roughly 1.3 percent of GDP. Hence, even considering a worst-case scenario of GDP dynamics, the present interest rate level seems unsustainable. During the forth quarter of the year and the first quarter of 2006, the GDP dynamics in the States should exceed 4 percent in order to stabilize at 3.5-3.8%, i.e. close to the potential, at the year end. In our view, the economic growth in the states may decelerate noticeably during 2007-2008 due to potential increase of tax burden, higher rental costs, lower consumption and reversal from an accommodating monetary policy. Until then, interest rates will keep on grow-ing. Replacement of the Fed chairman will not stop the process. The fed funds rate at the turn of the first and second quarter of 2006 should reach 5 percent. The market interest rates should rise to 5.50-5.75 percent during the same period. A passing nature of the CPI growth following the supply shock may not certainly be an argu-ment against tightening of the monetary policy. The present stabilization of core inflation at the level of approx. 2 percent must be perceived in the context of its impact upon the core dollar index. Studies which have been well-documented on long time series indicate that an impact of a weak dollar has some 2.5 year lag upon the core inflation growth. The dollar ceased to depreciate at the end of 2004, and it means that the core index should go up at the end of 2006 and in the first half of 2007.

Source: EcoWin

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Jan-0

4

Mar-04

May-04

Jul-0

4

Sep-04

Nov-04

Jan-0

5

Mar-05

May-05

Jul-0

5

Sep-05

PPI CPI 10Y

Macroeconomics Trends

1

1.1

1.2

1.3

1.4

Jan-0

3

May-03

Sep-03

Jan-0

4

May-04

Sep-04

Jan-0

5

May-05

Sep-05

EUR/USD

BRE Bank Securities

7 November 2005 8


Considering the economic growth forecasts, today we can state with a great certainty that the new cycle of monetary policy easing may begin in the United States only after the inflation expectations stabilize in the mid-2007. The Euroland – 6 Bad Years The GDP dynamics in the Euroland will not exceed 1.2 percent this year. Forecasts indicate that also in the forthcoming year, for a sixth time in a row, the rate of Euroland growth will be below the long-term 2-percent trend. At the same time, mainly due to high oil price level, the CPI will remain below the ECB target, growing up to 2.6 percent in September.

Source: EcoWin The conditions in the real sphere of the economy and inflation prospects place the ECB in a highly difficult position. However, beginning from May, when the Bank has not precluded inter-est rate reductions as yet, the shift of risk in the balance of risks towards inflation becomes more and more visible. The market which until June discounted the first 25-point interest rate increase in the Euroland not before the spring of 2007 (EONIA swap based forward contracts), is now clearly expecting a tightening of the monetary policy much earlier. At present, the first interest rate increase is anticipated to take place in the second quarter of 2006. The market evaluates its likelihood at 50 percent.

Source: EcoWin The changes in the balance of risks are followed by a progressive increase in the market inter-est rates in the Euroland. Beginning from the bottom level of 3.02 percent, the German 10Y bonds should hit as much as 3.50 percent at the year end, reaching 4.0-4.25 percent at the end of 2006, yet still far from last year’s 4.42 percent. Arguments in favor of higher interest rate increase could be as follows: the Euroland economy reacts to a shock caused by high oil prices better than could have been expected, the leading indicators are heading upwards, consumer confidence index which has been nose-diving sta-bilized during the summer; weakening of the euro during the period of September-October corresponds to some 25 basis point reduction of the interest rate; money supply is accelerat-ing. However, there are serious arguments against interest rate increases as inflation expectations are still well anchored, the core inflation is stable, there is no second round effects, internal demand is goring more slowly than the GDP which is sill low (1 percent); and high money sup-ply fails to translate into the growth of consumption or investments.

IFO

86889092

949698

100

Jan-0

3

Apr-03

Jul-0

3

Oct-03

Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Oct-05

Macroeconomics

00.5

11.5

22.5

3

2003Q1

2003Q3

2004Q1

2004Q3

2005Q1

2005Q3

CPI GDP

BRE Bank Securities

7 November 2005 9


In our opinion the arguments against interest rate increase in the Euroland are still stronger than beyond this zone. We believe that the ECB will soon focus its efforts on anchoring the inflation expectations, which is most easily attainable by intensification of anti-inflationary rhetoric.

Macroeconomics

Monetary Policy

Inflation – Hike Lower than Worldwide As a result of high fuel prices, in September the inflation in Poland rose up to 1.8% y/y (by 0.4% m/m from 1.6% in August). However, the “oil shock” in Poland was relatively lower than in the United States or in the Euroland, mainly due to reduced excise on fuels and apprecia-tion of the zloty. Fuel prices rose by 3.4% “only”.

We believe that this inflation hike is only temporary. The CPI should remain close to the bot-tom-level inflation target in the remaining months until the end of the year. In the first quarter of 2006, the inflation may growth (the base effect and the anticipated increase of excise on fuels, by even PLN 0.35/liter), but it should not exceed 2%. All these phenomena are taking place under the conditions of stable and low base inflation. The net inflation remained at an unaltered level of 1.3%; the remaining measures give no cause for concern as well. The inflation anticipations are beginning to grow as well, up to 1.4% in September (from 1.3% in August). The structure of this index implies further upward movement in the coming months. First of all, the inflation with a 2-period lag on the basis of which the expectations are shaped is now beginning to grow (inflation expectations in September correspond to CPI for July, when it totaled 1.3%, i.e. the bottom level this year). Secondly, the future inflation indica-tor published by Ipsos fell below 100 points already, which means an expected acceleration of inflation. However, it must be added that the inflation expectations should not remain perma-nently anchored at a level below the bottom target line. Despite a continued growth of fuel prices, the PPI dynamics remains low. August figures have been revised downwards to �0.2%y/y, in September, prices reported a decline at the same pace. By December, this dynamics should remain close to 0%. We are facing a situation of absence of inflation pressure on the one hand and companies’ incapacity to transfer higher fuel prices upon recipients on another hand. Cost indexes re-ported in figures on corporate results are growing faster than their sales revenues, while dete-rioration of financial performance undermined propensity to invest, above all in small and me-dium companies which are most prone to fluctuations of demand and costs driven by external factors. In the business tendency studies so far the largest companies reported the highest propensity to invest, whereas in the third quarter of the year the drop was highest in this group. Small companies report higher than average propensity to finance investments from bank loan. How does this relate to figures on money supply? Corporate deposits rose by some PLN b 5 second month in a row. A major portion of these funds stand for special deposits (Poland’s telecom operator TP S.A. accumulated funds to acquire shares in PTK Centertel – almost PLN b 5, gas and mining giant PGNiG deposited IPO proceeds on bank accounts, i.e. some PLN b 2.7), yet it is clear anyway that these com-panies still refrain from reaching to use their reserves and spend them on investments.

Contribution to CPI m/m

-0.8%-0.6%-0.4%-0.2%0.0%0.2%0.4%0.6%0.8%1.0%

02 2

004

03 2

004

04 2

004

05 2

004

06 2

004

07 2

004

08 2

004

09 2

004

10 2

004

11 2

004

12 2

004

01 2

005

02 2

005

03 2

005

04 2

005

05 2

005

06 2

005

07 2

005

08 2

005

09 2

005

OthersTransport Dwelling Clothing and footwear Alcoholic beverages, tobacco Food and non-alcoholic beverages

BRE Bank Securities

7 November 2005 10


In addition, corporate loan dynamics remains very low. Although we have been observing positive dynamics of these indexes in recent months, yet the 2% y/y level of corporate borrow-ing can hardly be considered a sign of investments’ growth.

Source: NBP Even a very high FDI growth reported in the revised figures on the C/A account beginning from the launch of 2004 cannot trigger investments’ growth. This hike is purely statistical by nature (please refer to the text box below). This growth cannot stand as an argument in favor of a higher investments dynamics than reported by the Central Statistical Office (GUS). Money supply figures reveal an accelerating dynamics of household borrowing, which is near-ing 20% y/y. It is partly a result of mortgage loans. By August, the volume of household bor-rowing increased since the start of the year by some b 17, of which b 9 stands for home loans (by and large denominated in foreign currencies). The figures on consumption reveal no sign of the effect of increased household borrowing. Purchase of furniture, radio and television equipment & household appliances are made at the cost of reduced vehicle purchases. Most probably it has altered the structure of loans for pur-chase of products, yet the volume has picked up only slightly.

Source: NBP In the light of salary & wage figures, a sustainable acceleration o private consumption should not be expected at the moment. Next year’s indexation of pensions and illness benefits and higher subsidies for farmers may be an impulse. Nil Movement of Real Salaries Real growth of salaries in the corporate sector could have been observed for a period of 5 months. It ended faster than we could have expected, even despite no substantial hike of infla-tion in September. We did expect a lower annual salary dynamics (high base for the last year), but the drop has surprised us. 1.8% y/y growth means that the salary growth has merely offset the inflation increase.

-10%

0%

10%

20%

30%

40%

Jan-0

2

May-02

Sep-02

Jan-0

3

May-03

Sep-03

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4

May-04

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5

May-05

Sep-05

Corporate deposits y/y Corporate loans

020 00040 00060 00080 000

100 000120 000140 000

Jan-0

3

Apr-03

Jul-0

3

Oct-03

Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Housing loans Hire purchase loansHousehold loans

Macroeconomics

BRE Bank Securities

7 November 2005 11


Source: GUS When broken down into sectors, the changes seem stable over the period of the last few months. Salaries in industrial processing are growing at a rate slightly surpassing 2%. On the other hand, in construction the growth topples 5%. Then again, labor efficiency and producer prices are growing faster in this sector. Salary dynamics may be greater in October, as the base is much more favorable. In our view, growth of even as much as 4% should be no surprise. Yet, this tendency is not sustainable. Average rate of salary increase should return to below 3% in the coming months. As we have mentioned a month ago, low salaries are yet another item in a puzzle depicting corporate envi-ronment. Salaries growth is curbed by 2 factors: high unemployment rate limits salary de-mands, while high fuel prices reduce the propensity of entrepreneurs to satisfy these claims. Given such conditions, the effects of the second round may only be spoken of in theory. Nonetheless, if MPC members accentuate that the second round effects are the sole factor jeopardizing the inflation, and November was pointed to as the month of interest rate reduc-tions, the market reaction to publication of figures on salaries in November may be quite nerv-ous. Employment in the corporate sector is on the rise (growth by 0.2% m/m in September), reach-ing 2.2% on an annual basis. If the former monthly growth dynamics of 0.1-0.2% were to be continued, at the turn of 2006 the annual dynamics would have fallen to some 1.5% (January of 2005 witnessed a leap growth of employment). The rate of unemployment continues to all, though due to seasonal factors, the decline is slower and slower. In December and January the unemployment may rise (due to seasonality), yet, despite weaker rate of economic growth, the rate of unemployment will anyway be 1 percentage point lower than a year ago (we esti-mate it at 17.8%). Output, i.e. Feeble Domestic demand Figures on output are no surprise. Growth of industrial production by 5.5% y/y is higher than in the past months. Yet, along with figures on construction and assembly sector (10.5% y/y, much weaker than in Q2) this data can hardly be considered impressive. Growth of industrial output should be analyzed with foreign trade dynamics. If the exports grow (15% y/y in August) despite a relatively low production dynamics, how would the internal de-mand progress? Major growth of output is reported in exports-oriented sectors, such as machines and equip-ment, metal products, non-metal products.

Source: GUS, NBP

-2%

0%

2%

4%

6%

8%

Jan-0

2

May-02

Sep-02

Jan-0

3

May-03

Sep-03

Jan-0

4

May-04

Sep-04

Jan-0

5

May-05

Sep-05

Nominal wages y/y Real wages y/y

-5%0%5%

10%15%20%25%30%35%

Jan-0

3

Apr-03

Jul-0

3

Oct-03

Jan-0

4

Apr-04

Jul-0

4

Oct-04

Jan-0

5

Apr-05

Jul-0

5

Exports y/y Industrial output y/y

Macroeconomics

BRE Bank Securities

7 November 2005 12


Figures confirm the earlier information on the economic growth based on the former forecasts: Q3 will be somewhat better than Q2 (majority of GDP growth forecasts have been reduced to 3.3-3.6% in Q3, we are near the bottom line). Figures on domestic demand dynamics will be of particular importance. According to our esti-mates, it will remain low, though its contribution to GDP should not be negative. If domestic demand is found not to accelerate, it is hard to expect of the Monetary Policy Council to re-main indifferent. Despite objections of some of the Council’s members, including its Chairman Balcerowicz, the MPC managed to push though 2 interest rate reductions in July and in Au-gust. We are convinced that in the case of low pace of domestic demand dynamics, the same ma-jority will vote in favor of successive interest rate reductions. Basically, all the MPC members who made announcements in this issue spoke in unison that the decisions on interest rates must be deferred until November (GDP figures in Q3 are published by the Central Statistical Office (GUS) on November 29, i.e. on the day the MPC holds its meeting. If an interest rate reduction took place in November, most probably it would not have been the last one. Successive reduction could be anticipated in Q1 2006, if intensification of political risk resulting from tensions along the PO-PiS line of contacts would not prevent it. Assumptions of Monetary Policy for 2006 Are such conclusions as regards the MPC conduct justified in the light of “2006 Monetary Pol-icy Guidelines”? What are the differences versus the earlier documents of the same type? Let us point out the major items of the Guidelines that may constitute better foundations to forecast the course of the monetary policy than the scarce content of the communiqués issued after the successive monthly meetings of the MPC. 1. Starting from the next year, the Council has decided to put an end to the three-grade sys-tem of monetary policy bias which it adopted only a year ago. The decision may or may not be agreed with (there are differences of opinions, both amongst MPC members as well as amongst market players). However, it is difficult to concede that the central bank abandoned the bias without a single word of explanation. The bias simply disappeared from the monetary policy toolbox. Leaving aside complaints on lack of transparency, the following question is, however, unavoidable: should the bias be discontinued while it is expansive, neutral, or tight-ening? Or perhaps the Council believes it is of no pertinence? The answer to this question remains an unknown as the issue is not mentioned in the “Guidelines”. 2. The Monetary Policy Council has emphasized that the inflation target is to keep the CPI close to 2.5 percent rather than within the band. The “Guidelines” highlight the symmetry of the target. According to the Council, this means that a downward deviation from 2.5 percent is undesired in the same way as a surplus of 2.5 percent (based on a twelve-month continuous target). This is a novelty indeed. This principle, obvious to a number of central banks, has never before found its way to any official documents of the Council. Notice is made of this with a particular appreciation and satisfaction. 3. After a yearly absence, the F/X market interventions are back again in the “Guidelines” as a monetary policy instrument permitted as part of the floating F/X rate regime. This may seem trivial, yet it is appreciable, since interventions were out of question a year ago without any sound reason. 4. A definitive statement that Poland will join ERM2 with a floating F/X rate has been repeated, which – as it seems - should put a stop to all speculations about the Council’s approval of some form of a fixed rate system, (such as a currency board for example). What would this mean if the zloty continues to appreciate strongly? It would bring about problems with eco-nomic growth, low inflation, and low interest rates, not to even mention the political problems with the government. 5. The MPC has once again emphasized the importance of core inflation indicators as a tool in assessing inflationary pressure in the economy. Notably, this time it was said in the context of deliberations as regards the central bank’s possible reactions to supply shocks (these delib-erations deserve a high praise). It should constitute a prime-rate information for market play-ers given alone that the CPI is growing as a result of oil price increases and lower food price rises; furthermore, there is a consensus that in Q1 2006 the CPI will rise briefly close to the target, yet the core inflation is and will remain very stable at 1.3 – 1.4 percent. This information

Macroeconomics

BRE Bank Securities

7 November 2005 13


should be important news, but would it? Hard to say, since a number of individual Council members accentuated the threat of CPI growth and carefully overlooked the informative value of core inflation indicators. 6. Another innovation in the “Guidelines” is the emphasized statement that it is not the level of real interest rates, but also the real fx rates that determine the degree of restrictiveness of the monetary policy. This clichéd assertion gains particularly in importance if we look at the MCI levels throughout 2001—2005. The present MCI level only slightly differs from the fast disinfla-tion phase in 2001. It is so mainly due to currency appreciation. According to all available infor-mation, appreciation pressure in H1 2006 will be comparable to H2 2005. Much depends on the manner of financing the budget deficit by the new government. Continuation of the formula whereupon foreign borrowing exceeds domestic financing, proposed by Gronicki, will intensify the potential appreciation pressure (the limit of the government’s currency exchange in the central bank is too low to absorb all foreign issues). 7. Another novelty is the highlight on the balance of risks to future inflation and growth. How-ever, it is hard to refrain form putting a question at this point: why had such important informa-tion, highlighted in the “Guidelines”, been missing from the communiqué issued after the last MPC meetings? Neither the September nor October communiqués did not specify any balance of risks. 8. The „Guidelines” also mention the information that deviation of the inflation path from fore-casts published in inflation projections suggests that economic processes defy expectations. This is incontestable: half a year or even a quarter ago no one could have fathomed a nega-tive contribution of domestic demand to GDP. 9. The balance of risks reflected in the „Guidelines” is such that GDP growth may be expected to come close to the potential while inflation may be expected to hit the target during the time horizon of the monetary policy impact. Clearly, interest rate change may hold back or put off the closing down of the output gap. However, the “Guidelines” fail to explicitly specify the Council’s preferred scenario on this issue. 10. Stabilization of inflation expectations close to the target might be decisive for interest rates. The Council had stated in its „Guidelines” that such stabilization might be difficult to achieve in 2006. The problem is that - as we all know very well - the inflation expectations are bound to rise at this point in time (it would be difficult to keep them at some 1 percentage point below the inflation target even without oil price rises). The point is to keep them from exceeding the target. Can interest rates do it? 11. And so the notorious “second round effects” are back. The question is why should the ef-fect of the second round appear after the “oil shock”, while it did not surface after the “EU ac-cession shock”? There is no answer to this question in the Guidelines, other than a little hint that the situation on the labor market continues to fight a growing payroll pressure. It is defi-nitely hard to question. Reading the Guidelines, we come to a conclusion that there is still a majority in the Council (decisive to the outcome of the July and August votings when the Chairman of the Council was outvoted) willing to pursue such monetary policy, the priority of which would imply bringing inflation close to the target (symmetrical deviation) as fast as pos-sible, to stabilizing the inflation expectations around the target, and a fast growth of the observed GDP close to the potential level (stable balance of risks). Based on the infor-mation contained in the „Guidelines”, we hold up our opinion that in the current macro-economic environment, the monetary policy will remain accommodative. It would have been altered only by a major escalation of political risk.

Macroeconomics

BRE Bank Securities

7 November 2005 14


A Surplus Turned Into a Deficit, i.e. One More Change in the Methodology Q2 2005 C/A figures published at the end of September brought about a considerable revision of figures from the years 2004-05. Following that revision, the cumulated annual C/A balance as at the end 2004 equaled –4.4% GDP (-1.5% before the revision) and -2.2% at the end of Q2 2005 (-0.4% before the revision).

This is attributable to a change in the posting of certain profits of companies with foreign capi-tal share of at least 10%. To date, the published C/A figures covering the years 2004-2005 factored in only the dividend paid out to the foreign shareholder – such an item was reported in the balance of incomes. The remaining profit attributable to foreign investors was included as zero transfer. Now, it is treated as re-investment. This changes the disbursements in the balance of income by the amount equal to the differ-ence between profits from companies with foreign shareholders and the sum of losses of such companies and the dividend paid out in a given year. If total profits of enterprises exceed the dividend paid out in a given period and total losses, disbursements are increased (as was the case in 2004 and 2005). An effect to the contrary was observed till 2002 – profits were lower than the sum of losses and the dividend which triggered off revisions ultimately curbing dis-bursements in the balance of incomes thus improving the C/A balance. In 2003 the profits were close to the sum of losses and dividends, hence the revision was minor.

What happens to the reinvestment amount? It changes in the opposite direction the balance of foreign direct investments (FDI) of the period, being a part of the financial account. Hence, the balance of payments does not actually alter as compared to figures from before the revision, yet the C/A balance changes (it has deteriorated – in the last 2 years) at the expense of the inflow of FDIs reported by the NBP. From that angle, the year 2004 was exceptional – enterprises reported very high current profits and, at the same time, the dividend paid out for 2003 was low. In 2005, the scale of the revi-sion is far more limited, the dividend paid out for 2004 is high and the current result generated by enterprises proves worse. In order to avoid similar considerable revisions of figures in the future, NBP commenced to initially assess figures on reinvestments on a regular basis. In Q2 2005 such a change in methodology translates into the curbing of the C/A by approx. EUR m 250 against approx. EUR m 900 a year ago. Ultimately, these figures will be revised in a year’s time, with its direc-

-5%

-4%

-3%

-2%

-1%

0%

Jan-0

4

Mar-04

May-04

Jul-0

4

Sep-04

Nov-04

Jan-0

5

Mar-05

May-05

C/A (%GDP pre revision)C/A (%GDP post revision)

Change in disbursements due to revision(m EUR)

-100

0

100

200

300

400

500

600

700

Jan-0

4

Mar-04

May-04

Jul-0

4

Sep-04

Nov-04

Jan-0

5

Mar-05

May-05

Macroeconomics

BRE Bank Securities

7 November 2005 15


tion being impossible to be determined now. We hope that at least the scale of the revision will be limited. For example – in 2004 an enterprise generated a profit, of which EUR m 10 is attributable to a foreign investor. At the same time, in 2004 EUR m 1 worth of 2003 dividend was paid out to that investor. Initially published data, disclosed EUR m 1 in the C/A disbursements, while fol-lowing the revision C/A disbursements increased by EUR m 9 worth of reinvestments, and FDI revenues rose by the very same EUR m 9. All in all, the revision of data for 2004 and incorporation of current estimates of reinvestments to C/A figures alter the picture emerging from an analysis of C/A data. According to new data, Poland no longer reports a surplus on the current account, as a result of that change the C/A balance may be by approx. 1.5% GDP lower than we previously estimated, reaching approx. -1%. Although Poland’s balance of payments is not modified, the considerable deterioration of the C/A balance cannot go unnoticed. For those who lack a deeper insight – a rapid worsening of the C/A balance may turn out an unpleasant surprise.

Macroeconomics

Fiscal Policy

2005 Budget, It’s Gonna Be Great

According to MF figures, after September actual budget deficit equaled 50.81%, a very good result bearing in mind that the rate of economic growth, and the inflation alike, falls approx. 2 percentage points below budget forecasts. Both sides of the budget, i.e. revenues and expenditures look satisfactory, and the realization of all tax income categories is higher than planned. Moreover, the “other income” item proved higher in September than had been anticipated. The expenditures side of the budget features a much-lower-than-expected subvention to the Social Security Fund (FUS) and Pension Fund (FER) as well as lower payment of interest on domestic debt in September. We expect that the actual deficit may total approx. PLN b 28 this year, instead of PLN b 35 provided for in the Budget Act, owing to revenues being by nearly PLN b 5 higher, and expen-ditures – by approx PLN b 2 lower. Following the month of September, the deviation from the linear trend indicated a budget position by even as much as PLN b 8.5 better than planned.

Q1 2005 Q2 2005 Q3 2005 Sep 2005 Q1-Q3 2004Revenues 23.78% 49.47% 76.16% 9.03% 73.12%Indirect taxes 23.97% 47.76% 73.58% 8.46% 70.94%Corporate income tax 33.82% 50.80% 75.34% 7.23% 91.58%Personal income tax 20.02% 44.24% 71.57% 9.57% 66.35%Income of state units financed from the budget 26.06% 58.60% 96.84% 12.24% 77.28% Of which: income from customs duty 18.62% 38.77% 59.83% 7.40% 102.17%Other income 5.76% 79.02% 100.33% 15.23% 97.84%Expenditures 25.69% 50.04% 71.93% 7.19% 71.03%Interest payment of domestic debt 15.98% 51.71% 67.63% 4.11% 60.06%Interest payment of foreign debt 37.85% 46.65% 56.67% 3.56% 62.34%Pension Fund subventions 26.64% 53.03% 78.82% 7.34% 75.72%Social Security Fund subventions 36.62% 67.83% 91.60% 4.13% 98.86%Local governments subventions 35.27% 58.74% 82.24% 7.73% 82.61%Deficit 35.22% 52.90% 50.81% -2.02% 63.92%

source: MF

Budget deficit 2004-2006

0

10 000

20 000

30 000

40 000

50 000

01 02 03 04 05 06 07 08 09 10 11 12

mln

PLN

2004 (execution) 2005 (execution) 2004 (plan)2005 (forecast) 2006 (plan)

BRE Bank Securities

7 November 2005 16


Budget 2006 and Not Strong Enough Mech’s Anchor As announced by Cezary Mech, PiS economy expert, the new government intends to correct the 2006 budget inherited from Minister Gronicki and Belka’s government. The deficit is to be curbed to PLN b 30. The revenues that PiS wants to write down in the Budget Act are to be by PLN b 0.4 higher (VAT proceeds are to increase thanks to the launching of a construction pro-gram) while expenditure are to be lower by PLN b 2.2 (reduction of administrative expendi-ture). In our opinion, the “lifting” of the revenues side is incredible. As we have mentioned before, the Minister Gronicki’s draft already provided for highly inflated revenues. The calculation of some of revenue categories (for example, following the assessment of reduction in the reve-nues attributable to the refund of VAT on construction materials) are highly uncertain. What’s more, before the presidential elections, PiS announced an additional investment relief for en-trepreneurs and a fuel relief for farmers, which would undoubtedly further limit revenues. Similarly incredible is the announced curbing of administrative expenditures. Beyond any doubt, savings are advisable in that area, but cannot be achieved by merging or winding up governmental agencies whose tasks, in an unchanged form, are to be assigned to other bod-ies. We are even more critical of „Mech’s anchor” than we were of „Belka’s anchor”. True, Belka announced the reduction of budget expenditures by 1 percentage point above the level of in-flation which he never managed to achieve as a Finance Minister, but Mech promises to an-chor the nominal value of deficit at the level of PLN b 30 in the forthcoming 4 years, which cannot prove successful with such a developed program of expenditures and revenue short-ages. What’s more, in accordance with the Public Finance Act, once the first safety threshold is passed, i.e. once the value of public debt exceeds 50% of GDP, the budget deficit/expenditures ratio in the subsequent year cannot be worse than in the base year. Hence, if the execution of this year’s deficit totals PLN b 28, the revenue/deficit ratio will drop to approx. 15.5%, if the already-raised projection of next year’s revenues reaches PLN b 191.7, it follows from a simple calculation that, under the law in force, the deficit at the level of PLN b 30 is too ample. And, as we know, the insufficient „Mech’s anchor” fails to provide for the implementation of Eurostat’s recommendations that a 20% subvention for the Social Security Fund, to set off a decrease in revenue from transfers to OFE, should be added to budget expenditures annually. We do not know either, how the anchoring of the nominal deficit of the state budget relates to the deficit of the public finance sector, that is being assessed when determining whether the criterion of nominal convergence is met. Forecast measures of public finance imbalance (% of GDP)

Source: MPC opinion on the Budget Act 2006 Summing up: the financial market will not calm down just hearing the announced introduction of ‘Mech’s anchor” Any politician who believes that the announced PLN b 30 deficit and re-sumption of negotiations with Eurostat and the European Commission on OFE classification are to satisfy investors, is bound to be bitterly disappointed.

2004 2005 2006 2007

Central budget balance -4.7% -3.3% -3.3%

General government sector balance -5.0% -4.5% -4.0% -2.7%

Primary balance of the general government sector -2.2% -1.3% -0.8% 0.3%

Cyclically adjusted balance of general government -4.5% -3.8% -3.5% -2.4%

Cyclically adjusted primary balance of general government -1.8% -0.6% -0.3% 0.6%

General government balance according to ESA ’95 (Open Pension Funds included) -3.9% -3.4% -2.8% -2.0%

General Government balance according to ESA ’95 (Open Pension Funds excluded) -6.0% -5.4% -4.8% -3.9%

Macroeconomics

BRE Bank Securities

7 November 2005 17


Other Financing? If the new Finance Minister has any room to maneuver the 2006 budget, it is certainly not in the area of planned revenues, expenditure, deficit. Moreover, other macroeconomic relations than those proposed by Minister Gronicki in his bill are rather hard to imagine. By all means, it is the structure of deficit financing that allows for most far-reaching modifications. Would these, however, be changes for the better? Minister Gronicki wanted to issue more bonds on the for-eign market than on the domestic market. Cezary Mech announced he would not support that intention and, as he put it: „we will pay off (foreign) debt and we will issue debt on the domestic market”. It is one of possible ways out. The question is: what about yields if the supply of bonds for the domestic market increases substantially? How does the undertaking that ends with an increase in market interest rates relate to the rationalization of costs of interest on public debt? And how to reconcile this with the charges, addressed against the MPC, that the level of short-term interest rates is too high? If we believed that incoherent and mutually exclusive announcements from the economic pro-gram of PiS were to be implemented, we would have to dispose of Polish bonds at fast a rate, particularly of those with longer maturity dates. Since it is not the case, and the net outflow from the treasuries’ market did not exceed PLN m 500 in the week immediately preceding the elections in the setting of the total involvement of foreign investors amounting to over PLN b 70, we could safely say that the credibility of program announcements by PiS is very low.

Macroeconomics

BRE Bank Securities

7 November 2005 18


Macroeconomics EUROMONITOR

4 convergence criteria

The blue area is delineated by the Maas-tricht criteria, the line within means that the

criteria have been met.

Spread against interest rates in the Euroland

Deviation of the nominal currency rate from the current value

Poland

Source: MF, GUS, Reuters, Eurostat, EC, BRE Bank S.A.

Inflation

Interest rates

Deficit

Public debt

Criteria area

Degree of adjustment

Source: Reuters, BRE Bank SA

0.4

1.4

2.4

3.4

4.4

5.4

01-0

3

04-0

3

07-0

3

10-0

3

01-0

4

04-0

4

07-0

4

10-0

4

01-0

5

04-0

5

07-0

5

10-0

5

2Y

5Y

10Y


-25%

-20%

-15%

-10%

-5%

0%

5%

01-0

204

-02

07-0

210

-02

01-0

304

-03

07-0

310

-03

01-0

404

-04

07-0

410

-04

01-0

504

-05

07-0

510

-05

EUR/PLN

The Czech Republic

Source: MF, CNB, CSO, Reuters, Eurostat, EC, BRE Bank SA

Inflation

Interest rates

Deficit

Public debt


-0.7

-0.4

0.0

0.4

0.7

01-0

3

04-0

3

07-0

3

10-0

3

01-0

4

04-0

4

07-0

4

10-0

4

01-0

5

04-0

5

07-0

5

10-0

5

2Y

5Y

10Y


-25%

-20%

-15%

-10%

-5%

0%

5%

01-0

204

-02

07-0

210

-02

01-0

304

-03

07-0

310

-03

01-0

404

-04

07-0

410

-04

01-0

504

-05

07-0

510

-05

EUR/CZK

Hungary

Source: MF, HNB, Reuters, Eurostat, EC, BRE Bank SA

Inflation

Interest rates

Deficit

Public debt


1

2

3

4

5

6

7

8

9

01-0

3

04-0

3

07-0

3

10-0

3

01-0

4

04-0

4

07-0

4

10-0

4

01-0

5

04-0

5

07-0

5

10-0

5

3Y

5Y

10Y


-25%

-20%

-15%

-10%

-5%

0%

5%

01-0

204

-02

07-0

210

-02

01-0

304

-03

07-0

310

-03

01-0

404

-04

07-0

410

-04

01-0

504

-05

07-0

510

-05

EUR/HUF

Since May 1, 2004, the reference values for monetary criteria are calculated for EU-25 countries. Explanations: First colum: Figures concerning debt and deficit of the public sector relate to the year 2004. The quoted values have been calculated according to ESA 95 methodology and

published by Eurostat. In accordance with a decision of the European Council the costs of the pension system reform are subtracted from the value of deficit for Poland (and Hungary).

Figures concerning the inflation (HICP) and long-term interest rates are quoted as of the end of September 2005. Interest rates have been calculated as mean daily yield (1 Y) for T-bonds with a 10-year maturity date (semi-annual capitalization). The reference countries in-

clude Denmark, Finland and the Netherlands (instead of Sweden). Second colum: T-bond yields are quoted for Hungary and the IRS rate for Poland, the Czech Rep. and the Euroland.

BRE Bank Securities

7 November 2005 19


Macroeconomics 4 CONVERGENCE CRITERIA

CRITERION POLAND THE CZECH REP. HUNGARY

Interest rates 5,43% 5,42% 3,61% 6,84% Inflation 2,4% 3,0% 1,7% 4,1% Deficit 3,0% 3,9% 3,0% 5,4% Debt 60,0% 43,6% 36,8% 57,4% ERV 8,55% 4,83% 3,04% ERV max 10,92% 6,29% 9,98% ERV min 7,28% 3,65% 3,04% Explanations: Upper lines – description at the preceding page. Lower lines: • The ERV (Exchange Rate Volatility) is a measure of exchange rate volatility applied by the EMI and the ECB in the convergence reports. The meas-

ure is calculated on the basis of daily exchange rates of the last 20 days of the month. The quarterly figure is the mean for 3 months. • The ERV (forecast) of the last quarter (June – August 2005) as well as maximum and minimum values of the quarterly ERV of the last eight periods

have been quoted. • The ERV is interpreted as a standard deviation of the annual exchange rate in the next year, assuming that the rate volatility does not change versus

the present rate. Forex stability of a currency is reflected by its lowest possible value.

YIELD CURVE

POLAND THE CZECH REP. HUNGARY

Source: Reuters, BRE Bank

0%

2%

4%

6%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

PLNEUR


0%

2%

4%

6%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

CZKEUR


0%

2%

4%

6%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

HUFEUR

EMU/USA


0

1

2

3

4

5

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2025

2045

BundsUS Treasuries


-1.6

-1.2

-0.8

-0.4

0

0.4

0.8

Feb-

00

Aug-

00

Feb-

01

Aug-

01

Feb-

02

Aug-

02

Feb-

03

Aug-

03

Feb-

04

Aug-

04

Feb-

05

Aug-

05

Spread 10Y Bundsvs. 10Y US


0

0.2

0.4

0.6

0.8

1

1.2

sty

99

lip 9

9

sty

00

lip 0

0

sty

01

lip 0

1

sty

02

lip 0

2

sty

03

lip 0

3

sty

04

lip 0

4

sty

05

lip 0

5

Spread 2Y/5YBunds

Explanations:

Curves based on quotations as at October 24, 2005.

BRE Bank Securities

7 November 2005 20


Banking Sector Foreign loans more available The European Commission intends to make it easier for consumers to obtain loans abroad and to uphold the rights of consumers to resign from a loan within 14 days of concluding a loan agreement. These are proposals to improve the directive concerning consumer loans. The new proposals involve loans of up to EUR 50 thous and do not include mortgage loans. We do not believe that the introduction of these changes will result in increasing competition among banks in various countries. A consumer loan is essentially a loan that is not earmarked for a serious investment. We doubt whether a consumer would travel abroad to find a cheaper loan. How-ever, it will be convenient for people who reside permanently outside their country of origin. The right to resign from a loan within 14 days is already in force, but not all consumers are aware of this fact. Largest bank in the region – Poland ahead According to The Banker, PKO is the largest bank in Central and Eastern Europe in terms of assets. The top 10 also includes Pekao, BPH and ING. The top 100 banks under consideration, includes 10 Polish banks. In terms of capital, PKO BP ranks third, but the accumulated value of capital of the 10 Polish banks ranks Poland first with a 30.7% share in the capital of the 100 banks. However, all this will change if the merger of Pekao and BPH goes forward. The merged banks will have more than PLN 120 bn of assets at their disposal and will be the largest bank in Central and Eastern Europe. Credit cards increasingly more popular The number of credit cards in Poland grew almost 50% the last year. Currently, more than 2.5 m credit cards have been issued. Bank Handlowy remains the leader in credit card sales (565 thous), although PKO BP managed to reduce the distance to the leader from 200 thous to 75.5 thous (489 thous). Broadening the offer of credit cards, even before the merger of BPH and Pekao, is a part of the bank’s strategy to become the leader in all segments of the market and effectively compete with the bank that has greater assets. ING, Kredyt Bank and MultiBank noted the highest dynamics of growth. Nominally, the highest growth was noted by PKO BP, Lukas Bank and BPH. The comparison was prepared by Rzeczpospolita, daily. Mortgage loans – situation remains good The indebtedness of Poles from residential housing loans at the end of August 2005 totalled PLN 40.8 bn, according to the Real Estate Financing Committee. The situation on the real es-tate market remains good. Due to the demand for housing and falling interest rates the Poles increasingly more frequently decide to purchase a dwelling. The banks, whose increase of loan volumes this year largely depend on selling their mortgage products, benefit to a largest extent from this fact. Central bank on loans in foreign currencies The representatives of the Central Bank warned the chiefs of commercial banks against grant-ing residential loans in foreign currencies. The annual meeting of the presidents of these banks with Leszek Balcerowicz was held in October. As long as the zloty strengthens, foreign cur-rency loans are attractive. The problem occurs when the currency weakens. However, it is diffi-cult to resign from offering a product, which given the current macroeconomic conditions is so competitive. However if a real threat appears, the banks that have consistently granted loans only in the currencies in which the client received an income (i.e., mainly in zlotys) will benefit the most. These banks are BZ WBK, ING and Pekao. EFG to enter the Polish market EFG Eurobank announced its intention to open a branch in Poland. It has not yet applied for a separate banking license. This is not a new information to us. The recent announcement is only the official confirmation from a representative of the bank. The new bank will increase competition on the Polish mar-ket. The Greek bank is a very aggressive player, which probably decided to enter the Polish market due to the chances of obtaining a share in the very dynamically developing Polish bank-ing market. Optimistic approach to the future Pengab published the banking climate index. In October, the index reached 38.6. According to data of the company, publicly traded banks and banks with a share of foreign capital offered the lowest valuation of the market climate. Cooperative banks have the highest perception of the market. In turn, banks listed on the Warsaw Stock Exchange are reporting the best financial

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results. The index is a secondary indicator that evaluates what is happening on the market. We do not believe that publicly traded banks will begin reporting much worse results in the future. The index is a good reflection of the current situation on the market. In 2005 banks in Poland will manage to improve financial results once again.

The Merger – Another Month of Waiting for Decisions

Course of UCI call for shares of HVB and BA CA October was the month in which the issue of the UCI call for HVB shares was settled. The call was originally to last until 10 October, but UCI extended it 2 weeks (to 24 October), because it failed to purchase the minimum 65% of HVB shares in the first phase. Investors waited until the last moment to respond to the UCI offer, counting on either the offer changing or a coun-teroffer from the Saudi investors. The Saudi investors withdrew from submitting a counteroffer for HVB shares. One of them, Mansour Almalik, stated that they were resigning due to the fact that UCI’s acquisition of HVB was too advanced. When the offer of UCI did not change and the speculations concerning a counteroffer did not prove true, investors decided to exchange their shares. UCI purchased approximately 80% of HVB’s stock. The call for BA CA shares occurred in conjunction with the HVB call. The call was prolonged in this case as well. The original deadline was 17 October, but it was extended to 31 October. A total of 10.6% of BA CA shareholders exchanged their shares for either cash (EUR 79.60) or for UCI shares (19.92 UCI shares for 1 BA CA share). UCI currently owns a 88.2% stake of the Austrian bank, and 77.5% was acquired through the successful call for the shares of HVB—previously the principal shareholder of BA CA. As a result of the successes of the two calls, UCI formally became the principal shareholder of BPH. However, it still waits for the agreement of the Polish Banking Supervision Commission and Securities and Exchange Commission in order to become the majority shareholder of BPH and execute its voting rights at the General Meeting of Shareholders. When will the actual merger occur? UCI will acquire HVB at the beginning of 2006, and not at the end of 2005 as stated earlier. It is due to shifting the publication of HVB’s 3Q report in order to coincide with the publication of UCI’s report. The Polish issue, or lack of agreement from the Polish supervisory bodies for the merger of Pekao and BPH and for the UCI call for BPH’s shares could be one of the factors retarding the process. The European Commission agrees to HVB and UCI merger The European Commission agreed to the merger of HVB and UCI. The Commission did not confirm the cases in which the merger would threaten competition on the local markets. This also means that there are no circumstances that would threaten the merger of Pekao and BPH, subsidiary entities of the banks in Poland. PiS, the winner of the parliamentary elections, appealed earlier to the Polish supervisory bodies to block the merger. The decision of the European Commission was expected precisely at this time and the market expected such a decision of the Commission. Banking Supervision Commission – decision regarding Polish market BSC continues to consider the question of the Pekao and BPH merger as well as the right of UCI to execute votes during BPH’s General Meeting of Shareholders. UCI was asked several times to provide additional documents. According to representatives of UCI and BSC the pro-ceedings could last from 2 to 5 months. The press office of NBP released a communiqué on the topic of the proceedings currently oc-curring in BSC. This was connected with articles in the press on this topic and speculation that involved the issue of what the banking regulator was actually doing since the European Com-mission gave the green light for the UCI and HVB merger. NBP stressed that BSC has to issue the permissions to execute voting rights. Among the collected documents and information, the possibility of BSC having an effective supervision over the bank following the investor gaining control is also being verified. The decision in this specific issue is important as UCI’s taking control over BPH and the likely merger of Pekao and BPH would be an unprecedented opera-tion in the European Union. Pekao is the second, and BPH the third largest bank in Poland, and their merger will lead to the establishment of not only the largest bank in Poland but also in Central and Eastern Europe.

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Attitude of UCI representatives The president of UCI, Alessandro Profumo, is convinced that the merger of UCI and BPH will be successful. He is also determined to conduct the merger of BPH and Pekao on the Polish market. Apart from the Polish regulators, Profumo is also waiting for the agreement of supervi-sory bodies in several other countries (the merger of UCI and HVB will cause a change in the structure of the banking sector in 20 countries), and will be as complicated in Croatia as it is in Poland. However, the president of UCI states that delays will not have a significant influence on the HVB acquisition. Attitude of Pekao and BPH employees to the merger The Association of Social Interest (SIS) stated that it will block the merger of the two banks if UCI (the current owner of Pekao) does not present a social benefit package to the employees and does not secures the interests of minority shareholders. At the beginning of September SIS asked to participate in the administrative proceeding conducted by BSC and SEC. The commis-sions have 2 months to agree to the association’s participation. If they do not do this, SIS plans to file suit in administrative court. The stronger the trade unions, the more difficult the situation of the management board. However, the investors could have expected such a course of events. According to initial estimates, the merger of the two banks will lead to reducing employ-ment by 2–3 thousand. Therefore, the merger could cost UCI more than originally planned. Structure of UCI – HVB group following the merger UCI released general information concerning the structure of the bank following the merger. There are plans to establish 4 departments. The retail and asset management departments will be run from Milan. The other 2, corporate and MSE as well as investment banking will be lo-cated in Munich. Moreover, the division for Central and Eastern Europe will be headquartered both in Vienna and Munich. The communiqué did not contain information concerning Poland, but the head of UCI, Alessandro Profumo, stated that Poland will obtain a status equal to Ger-many and will have a considerable degree of independence. The detailed plans concerning Poland should be known soon. It was earlier speculated that the Polish regulators will not agree to UCI’s acquisition of BPH, precisely due to the choice of location for the central office of the Central and Eastern Europe division. However, the Italians did not change their decision. Member of Supervisory Council resigns Albrecht Schmidt, chairman of the supervisory council of HVB, resigned from his post as he opposed to the merger of HVB and UCI. HVB development following the merger HVB Group wants to increase its share in the German market, through acquisitions, following the bank’s takeover by Unicredito, said president Dieter Rampl in an interview with Die Welt. – We are not satisfied with our current position on the German market – he said. He stressed that HVB does not yet have selected takeover targets.

BPH PBK

Good results on mortgage loan sales BPH increased sales of mortgage loans by 37.5% to PLN 1.1 bn in 3Q. Since the beginning of the year the bank has granted PLN 3.3 bn of residential housing loans. The bank plans to grant PLN 4.5 bn of mortgage loans by the end of the year. BPH’s entire portfolio in this area totalled PLN 9 bn at the end of September. We believe that the bank will meet its sales target. It is an aggressive player, second in terms of mortgage loan sales, and is obtaining new clients.

BZ WBK

Mortgage loan sales – still no breakthrough Representatives of BZ WBK announced that the bank intends to grant a total of PLN 50 m of new mortgage loans in 2005. Following the first half of the year, the bank’s sales in this area totalled PLN 316.3 m, in 3Q BZ WBK granted PLN 201.6 m of mortgage loans. The total vol-ume of sales following the first three quarters reached PLN 518 m. Last year, during the first three quarters, BZ WBK sold PLN 516 m of mortgage loans and PLN 637 m during the entire year. The bank believes it will manage to achieve higher sales due to falling interest rates. BZ WBK grants loans only in the Polish currency. We considered the weak results of BZ WBK’s loan sales in our recommendation. Current data indicates that our assumptions will not change. However, we do not know the sales results of other loan products, but it is precisely residential

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housing loans that are responsible for 3/5 of the increase ofloans in the banking sector this year .

Bank Handlowy

Net profit higher than expected The representatives of the bank confirmed that net profit for 2005 will be decidedly higher than in 2004 (PLN 416.4 m). This will be achieved even without the participation of TFI’s sales and sales of the asset management company planned for 4Q. This transaction, according to the bank’s representatives, will have a significant impact on results for the last quarter of the year. Following the first half of the year, the bank reported a net profit of PLN 314 m.

Dividend less than 100% of net profit However, this does not mean that this year’s dividend will amount to 100% of net profit (not to mention the reduction in capital by the payment of a dividend which occurred this year). The bank has development plans and wants to accumulate capital for this purpose. The bank in-tends to concentrate on developing 3 core segments: credit cards, treasury operations and mediation in sales of the financial offer. The development of Citifinancial, the department grant-ing cash loans to less affluent clients, is also to strengthen the bank’s position.

The bank’s representatives mentioned for the first time a dividend of less than 100% of net profit during the presentation of results following the first half of the year. If the bank manages to stimulate the growth in the volume of assets to a level that the solvency ratio would decline, the dividend will be smaller. However, it will continue to consider a high dividend if a solvency ratio of 10-12% will not be achieved by a growth in the volume of assets. This does not mean that the dividend yield will be lower, as it will depend on the reported profit. Last year, the bank paid more than PLN 3 per share (the dividend also included a payment from the bank’s capital, a total of PLN 12), but this year it could be even more than PLN 3 per share due to the dynam-ics of net profit. Other Philip V. King resigned from the post of vice president of Bank Handlowy. He has not been a member of the management board since 26 October.

PKO BP

Quarterly results of Kredyt Bank Ukraina Kredyt Bank Ukraina, a subsidiary entity of PKO BP, earned approximately PLN 1.3 m (UAH 2 m) in the first half of the year. PKO BP purchased 66.5% of the company’s shares from Kredyt Bank last year. It has invested PLN 110 m in this subsidiary so far. In 1H05 the loan portfolio of KBU increased by 16% (approximately by PLN 108 m), and deposits by 29% (by ca. PLN 137 m). PKO BP is currently interested in subsequent acquisitions of banks in Central-Eastern Europe countries. Therefore, we expect further investments in this bank by PKO BP and the development of its activity.

Sale of bad debts to securitisation fund finalised The bank sold its bad debts to a securitisation fund, S-Collect, managed by TFI PKO/Credit Suisse. The value of these debts amounted to PLN 660 m. According to Rzeczpospolita daily, the bank received PLN 100 m. The bank can deduct the difference from the tax. Earlier, when securitisation funds were not present on the Polish market and banks could sell their bad debts to debt collecting agencies, such a tax relief was not available. Other banks are also consider-ing selling non-performing loans (according to press news, BGŻ, Kredyt Bank, BRE and BZ WBK). Loans totalling some PLN 3 bn are currently for sale, and according to debt collecting agencies such sales could reach PLN 6 bn this year. Old loans, in which the chances to regain the money are marginal, are usually sold. This gives several benefits for a bank: disposing of accounts receivable from the balance sheet that are virtually impossible to recover, tax benefits, and in addition the positive influence of the transac-tion on the quality of assets ratio. During the presentation of 2Q results, Pekao representatives said that the bank would be trying to identity loans that could be sold to a fund. PKO BP had announced in July that it intends to sell some PLN 1 bn of bad loans this year. At that time S-Collect was interested in loans valued at PLN 660 m. Therefore, the investors already had some prior knowledge about the transaction.

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Good results of e-banking The bank announced that 1.1 m of its clients use online banking services. Jacek Obłękowski, a member of PKO BP’s management board, recently stated that he would like this figure to total at least 2 m by the end of 2006. Some 30 – 40% are to be new clients. In this year’s plans the bank assumed 1 m clients using online banking services. The bank manager to fulfil the plan with a surplus two and a half months before the end of the year. If this increase in clients con-tinues the bank has a good chance to obtain 2 m online clients by the end of 2006. This is good news for the bank, which is trying to obtain the leading position on the market before the merger of Pekao and BPH. This places the bank in a better position with respect to competing with such a large bank.

Greater control over PKO Credit Suisse TFI According to Parkiet daily, the bank wants to increase its holdings in PKO/Credit Suisse TFI by the end of the year. PKO BP and Credit Suisse Asset Management each owned half of TFI shater so far. Currently, 25% of the shares are on the table. The reason may be the poor qual-ity of fund management. It currently has a 7.3% market share, while it had almost 20% in 2003. According to the press, 25% of the holdings could be worth some PLN 40 m. If the bank in-creases its stake in TFI, it could have a positive influence on the management of the fund. Premium shares – payoff for patience The bank presented a plan to award premium shares to individual investors that bought the bank’s shares during the public offering and held them exactly one year from the date of the first listing, 10 November 2004. A contract was signed with the BGŻ brokerage house to organ-ise the issue. BGŻ will sign contracts with other brokerage houses in which the details of the operation will be included. Each of them will review the accounts of their clients on 10 Novem-ber and transfer the relevant information to BGŻ. The shares will be transferred to investors, without any fees, on 23 November and be admitted to trading one day later. Only those indi-viduals who had transferred their securities to a different account during the year must provide a confirmation certificate from the brokerage house that assisted them in purchasing the shares during the public offering. Investors will receive 1 share for each 20 shares purchased during the public offering. The pool includes 8 m shares. During the public offering individual investors bought 160 m of the bank’s shares. Good results on mortgage loan sales In 3Q 2005, the bank granted mortgage loans of PLN 1.97 bn. This result is up 46% over the corresponding period of the previous year. Since the beginning of the year the bank has sold PLN 5.47 bn of mortgage loans (up 44% than last year), and the bank’s portfolio of housing loans at the end of September totalled PLN 15.75 bn. The bank is developing its lending activity decidedly faster than analysts predicted—35% growth of sales of mortgage loans sector. If the average growth in the volume of housing loan sales in the entire banking sector actually amounts to some 35%, this will mean that PKO BP acquired market share at the expense of other players. We do not have other data concerning the bank’s entire loan portfolio, but within the scope of other products, the bank is developing sales at least in line with the market average, which means that the PKO BP portfolio will be larger than the market expectations. This could have a positive impact on the bank’s net inter-est income, and the growth in volumes will more than compensate for the falling interest mar-gins.

Kredyt Bank

Cooperation with financial intermadiary Cooperation has been established between Open Finance, a financial intermediary, Kredyt Bank and Internetowy Dom Maklerski. The intermediary will sell Kredyt Bank’s mortgage loans and services connected with IDM’s asset management. This is good news for Kredyt Bank. Financial mediators are very effective in selling banking products. Clients are attracted to their services because the mediators assist them in comparing several products and in taking ad-vantage of various promotions.

KBC continues to increase its share in Central and Eastern Europe According to Rzeczpospolita daily, KBC, the strategic investor of Kredyt Bank and Grupa Warta, wants to strengthen its position in Central Europe. Therefore, it may purchase a 7.5% stake in the Czech firm CSOB from EBRD. According to analysts, this stake is worth approxi-mately USD 300 m. KBC also stated that it is interested in purchasing shares in companies from minority shareholders in which it is already an owner. KBC already owns CSOB shares,

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which gives it a 21% share in the Czech market. The bank ranks second in the Czech Republic and KBC owns a 90% stake in it. We do not know what KBC plans in regard to Polish inves-tors. The Belgian group currently owns an 86% stake in Kredyt Bank.

Other The shareholders’ capital of Kredyt Lease, a subsidiary entity of Kredyt Bank, was increased by PLN 15 m, to PLN 27.5 m.

ING BSK

Pre-paid cards ING wants to sell 50 thous pre-paid cards in the next 3 years. These are Visa eCards. This is the first Polish, transparent, cutout card for making payments online and in commercial outlets. It cannot be used to withdraw money from ATMs (due to the unusual size). ING currently offers 9 types of such cards. The bank has sold 120 thous pre-paid cards so far. Cards of this type increasingly more frequently appear in the offers of banks. They provide the possibility of mak-ing purchases online, thereby limiting the risk of loosing only the amount of funds on the card. For banks, they provide an opportunity to make additional income on commissions, as they usually carry higher fees than payment cards, added to accounts.

Results of mortgage loan sales In 3Q 2005, the bank sold PLN 84.5 m of mortgage loans (PLN 19.5 m in 3Q 2004). From January to the end of September sales totalled PLN 207.9 m (PLN 104.2 m in 1-3Q 2004). The total value of the bank’s mortgage loans amounts to PLN 896.9 m. ING is showing increasingly better results from mortgage loan sales. The bank was behind its competitors earlier as it not offered mortgage loans in foreign currencies. Therefore, there is a chance that banks, the loan volumes of which have fallen so far, will manage to end the year with a growth in their loan portfolios.

Getin Holding

Open Finance in Getin Holding Getin will buy 70% of the holdings in Open Finance for PLN 6.5 m. The payment is scheduled to be made by 3 July 2006. The seller is LC Corp, also controlled by Leszek Czarnecki. The transaction comes as no surprise. In August, a letter of intent was signed regarding this issue. The decision was expected by the investors, which has already been considered in the com-pany’s stock price.

WBC purchase finalised Shareholders of WBC agreed to sell the bank’s shares to Getin Holding. These shareholders are the 12 largest Polish banks. In 2003, they contributed a total of PLN 200 m for capitalising the bank, saving it from bankruptcy. Getin will pay PLN 210 m for the shares. In September, we already knew the effect of Getin’s negotiations with shareholders regarding the sale and a con-ditional contract to purchase the bank was concluded at that time. We are currently waiting for Getin holding to meet all the formalities. The banking supervisory bodies have to issue a per-mission for the transaction yet. Bond issue In November Getin will issue the first tranche of Eurobonds for EUR 150 – 200 m. In May 2005, Getin signed a letter of intent with Barclays Capital regarding a total issue of PLN 1 bn. Getin signed issue and dealer contracts with BRE Bank for a period of 5 years. Getin wants to issue debt securities. The issue will amount to a maximum of PLN 500 m and will be conducted in several tranches. This information is also known to investors closely interested in Getin. The company will issue bonds in order to finance the very aggressive lending activity of Getin Bank.

Good sales results Fiolet, a subsidiary entity of Getin Holding, sold PLN 311 m of mortgage and cash loans during the first three quarters of 2005. In September, sales totalled PLN 45 m. Getin purchased 60% stake in Fiolet in August. This is more good news about good performance of subsidiary enti-ties of Getin Holding, primarily engaged as intermediaries in selling the products offered by

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Getin Bank. Dom Bank, the mortgage arm of Getin Bank, sold mortgage loans worth PLN 384.5 m during the third quarter. From the beginning of the year to the end of September, the value of sales reached PLN 858 m. However, the average loan value fell from PLN 220 thous in 2004 to PLN 148.5 thous in 2005. Since being established (August 2004), Dom Bank has sold PLN 1.073 bn of mortgage loans. Getin informs about the sale of products in its branches and by its intermediaries each month. This fits well into the bank’s aggressive policy, taking advantage of the favourable situation on the market. It is precisely due to the strong lending activity that Getin decided, among others, to purchase WBC and issue debt securities.

Other Changes have occurred in the supervisory board of Getin Bank. The new members are Arkadi-usz Stolarski (head of the sales department so far) and Tomasz Starzyński (previously associ-ated with Citibank), replacing the departed Tomasz Wróbel and Jan Czeremcha. In Getin, one of the most important factors of to the bank’s success is intellectual capital. Therefore, changes in the management could have a significant impact on the activity of the bank. However, we believe that these changes will not have a negative impact. Getin Bank, a subsidiary of Getin Holding, was evaluated by Moodys. The rating for short and long-term deposits is BA2/Non, while the bank’s financial strength was given a D rating.

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IT According to an IDC report, the value of the Polish IT outsourcing market amounts to USD 176 m and could increase to as much as USD 500 m in 2009. According to IDC, Poland has the best prospects among countries of Central and Eastern Europe. Among Polish firms, Com-puterland has the largest exposure on this segment of the market. According to a Computer-land TOP 200 report, Computerland’s revenues from outsourcing totalled PLN 63 m in 2004. GK Prokom ranked second with revenues of PLN 59 m. According to Parkiet daily, Computerland, Prokom Software and HP are short-listed to install the production management system for KGHM. The value of the contract could total PLN 60-100 m. KGHM wants to conclude the tender by the end of November. At this stage it is difficult to predict the winner of the tender. Each firm has the resources necessary to install the above system. The consortium comprising Computerland, ABG Ster-Projekt, Comarch and Emax signed a contract with the Ministry of Education to equip computer labs for schools. The consortium will earn from PLN 54 to PLN 64 m. The tender for the delivery, installation and integration of the hardware was organised in four regions of Poland. According to Puls Biznesu daily, the Ministry of Education plans to conduct tenders this year for the delivery of hardware and software for computer labs in schools with a total value of approxi-mately PLN 300 m. The entire school IT program is valued at PLN 1.5 bn, of which tenders at the value of PLN 0.5 bn are either ongoing or have been conducted. The program, 75% of which is financed with EU funds, is to be completed in 2006. Please note the compromises of firms participating in the tenders. Protests and appeals have undoubtedly lengthened the entire process and threatened the loss of funds from the EU. We expect subsequent tenders within the framework of the above-mentioned program to proceed in a similar way.

Comarch

New contracts Comarch signed a contract with a global leader in the power sector to build, install, integrate and maintain a global loyalty system based on Comarch’s proprietary AURUM Loyalty Care solution. The contract could total EUR 20 m. As part of the framework agreement, the company signed a EUR 4.126 m contract to install the system in the subsidiary companies in one of the countries of Western Europe. The company will install the same system (AURUM) for a client in Russia. The value of that contract amounted to PLN 3.3 m. Comarch signed a contract for the delivery and installation of a data warehouse in Zakłady En-ergetyczne ENION SA. The contract is valued at PLN 7.3 m. We announced the company had won this tender in September. In accordance with earlier information, approximately PLN 2.1 m of the above contract will be distributed among subcontractors. In the energy sector, Zakłady Energetyczne’s Radomsko-Kieleckie District has also installed Comarch’s control system based on a data warehouse. The clients of this type of system in other sectors include, among others, the Ministry of Finance, BP Polska, Ambra, Atlantic and Sokołów. Good 3Q for Comarch and Interia According to the president of Comarch, 3Q results will be better than the results from the corre-sponding quarter of the 2004, when sales totalled PLN 90 m and net profit PLN 2.6 m. This year’s targets of a 20% growth in revenues and net profit were also maintained. While we agree with the president regarding revenues, growing dynamically in previous quarters, in our opinion high costs will have a negative impact on Comarch’s profitability. The company re-ported a net profit last year of PLN 14 m, which would translate into PLN 16.8 m in 2005. Fol-lowing the first half of this year, net profit totalled PLN 3.6 m (excluding PLN 5.74 m from an one-off deferred income tax asset recognition). According to Interia’s president, the results for 3Q05 are better than 3Q04. This month the company will launch a major project in the Internet communications sector. In 3Q04 Interia gen-erated revenues of PLN 5.5 m as well as an operating loss and net loss of approximately PLN 1 m. In the first half of this year the company noted a net profit of about PLN 1.2 m. Following the success of Skype in cooperation with Onet.pl, a VoIP telephone project, becoming increas-ingly more popular, comes as no surprise.

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Expansion continues The company registered the subsidiary UAB „Comarch” in Lithuania. This firm will engage in selling and supporting IT systems. Comarch’s foreign expansion continues. This is the third subsidiary in Eastern Europe following firms in Russia and Ukraine, which confirms that one of Comarch’s priorities is the further development of exports.

Computerland New forecast The company’s management board presented a new forecast of 2005 results for the Capital Group. Revenues are to total more than PLN 800 m, and net profit more than PLN 20 m. The earlier forecast called for doubling 2004’s net profit (i.e., about PLN 27 m). Computerland planned a new forecast (with a possible adjustment) with the publication of 2Q results. Despite a prospective growth in both revenues and net profit in relation to 2004, in our opinion, the cur-rent forecast of net profit „of more than PLN 20 m” means a clearly lower result than the earlier expected doubling of profit. At the same time, the company confirmed delays in the public and utilities sectors. New contracts The company signed a PLN 55.9 m contract with BIW Koncept sp. z o.o. involving the sale of equipment for computer labs. The end-user of the labs will be the Ministry of Education. The above information is the result of a contract (worth PLN 61.6 m) signed on 11 October of this year between Computerland and the Ministry of Education for equipping schools with hardware. The company signed a 5-year contract with the Municipal Board of Local Resources (ZKZL) in Poznan worth PLN 7.5 m. The contract involves outsourcing and the development of ZKZL’s IT system. This is the first contract of its type on the local government market. As a result of this contract Computerland can obtain references for similar contracts in other cities. Computer has been cooperating with the city of Poznan for several years. Among others in Poznan, the com-pany earlier participated in the installation of a geographic information system.

Emax

Contract with the Ministry of Education The consortium comprising Emax and Incom signed a contract with the Ministry of Education worth more than PLN 61 m to equip computer labs in schools. Emax’s revenues from this con-tract amount to PLN 20.5 m. The Emax consortium was the last to sign a contract with the min-istry (Computerland, Comarch and ABG signed similar contracts earlier). The hardware will be supplied by Incom, therefore the company has higher share in the contract.

Prokom Changes in ABG Statutes The company announced the registration of changes in its Statutes. The changes concern ex-panding the supervisory board (from 5 to 7 members) as well as broadening the right of Pro-kom Software to appoint members of the supervisory board (Prokom had the right to appoint 3 members and now has the right to appoint 4). Moreover, ABG announced the nomination of Witold Szymański to the supervisory board. The changes in the statutes and rights of Prokom take into account Prokom’s increased stake in the new company (34% of shares and votes). ABG sells head office building... The company sold its head office building for PLN 21 m to Ronson Development. The transac-tion is to be finalised by March 2006. According to the company’s vice president, ABG will va-cate the premises in the second quarter of 2006. Plans assume renting space in a yet unspeci-fied property. ...and a subsidiary company The company signed a contract with NTI MBO SA to purchase 100% of NTI a subsidiary com-pany for PLN 6 m. The book value of NTI on 30.06.2005 amounted to PLN 5.2 m. NTI creates telecommunications and skeleton networks as well as structural cables (i.e., activity different-from the core business of ABG).

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Situation with Prokom Investments shares clarified ABG announced that it treats its 1.6% stake of Prokom Investments shares (purchased for PLN 16 m) as a loan, as it signed an agreement to sell these shares. The purchase of the stake in Prokom Investments (yet by the Ster-Projekt company) was not well received by the market. Therefore, the explanation of the future of these shares could contribute to a further improve-ment in the sentiment surrounding the entire Prokom Software Group. ABG contract with Optimus SA The company signed a contract with Optimus SA worth PLN 51.6 m for the delivery of hard-ware and software. This transaction is connected with the recently signed contract between ABG and MEN for equipping computer labs in schools. On the basis of the contract, the hard-ware will be supplied by Optimus SA. Spin – forecast adjusted The company management board adjusted the forecast of results for 2005. Sales revenues are to total PLN 132.5 m (down from PLN 165 m) and net profit PLN 10 m (down from PLN 21 m). According to the company, the adjustment of the forecast is due to changes in the project schedules with several key clients as well as to the longer than expected reorganisation of Grupa SPIN. Information appeared in August about a possible adjustment of results and change in the strategy, assuming fewer acquisitions. Following the unsuccessful issue of shares worth about PLN 60 m the company had to finance the purchase of Optix and minority holdings in subsidiary companies from its own funds and loans, which additionally increased financial costs. This year, Spin plans to acquire one more firm, Neokart GIS, operating on the prospective market of geographic information systems. Comp acquisition plans Comp wants to acquire two IT firms, with annual turnover exceeding PLN 10 m. Funds for the purchase will originate from recently conducted issues of shares and external funds. At the same time, Comp wants to sell its holdings in the subsidiary company Radcomp, operating on the market of IT solutions for the health sector. Comp collected about PLN 40 m from the two share issues (December 04 and June 05), of which approximately half is designated for acqui-sitions. The company has already acquired Enigma Systemy Informatyczne for PLN 6 m. The sale of Radcomp, in which Comp owns a 67% stake, is in accordance with the strategy of con-centrating on the market of IT security. For 2005 the company forecasts revenues of PLN 95 m and a net profit of PLN 10 m, not including the possible takeovers. Comp – 3Q report The company published non-consolidated 3Q report. Following the first nine months of 2005, Comp generated revenues of PLN 55.6 m and a net profit of PLN 5.1 m (in 1-3Q04 revenues totalled PLN 32,6 m and net profit PLN 3.3 m). In 3Q alone, sales totalled PLN 22.4 m and net profit PLN 0.6 m (in 3Q04, PLN 9.2 m and PLN -0.4 m, respectively). The significant growth in sales in comparison to 3Q04 is due to the settlement of a major long-term contract (more than PLN 8 m with a profitability of 5%). According to the company the fourth quarter will be the best of the year. Forecasts of the management board concerning year-end consolidated results for 2005 are revenues of PLN 95 m and a net profit of PLN 10 m.

Softbank Acquisition of Gladstone... The company signed a contract to purchase 51% staje in Gladstone Consulting. The contract is valued at USD 8.3 m. On the basis of the contract, Softbank has a buy option (until 31 March 2005), and the seller a sales option for the remaining Gladstone holdings. The price for the remaining holdings will be dependent on, among others, results and the date the option is exe-cuted. The final purchase price is lower than earlier indicated. According to yesterday’s NBP exchange rate (3.26 PLN/USD), the purchase price is about PLN 27 m (Softbank earlier men-tioned not more than PLN 31 m). We continue to believe that purchasing Gladstone will in-crease the value of Grupa Softbank. ...and Incenti The company purchased 100% of Incenti’s shares from Prokom Software in exchange for 1.367 m of its own shares. As a result of the transaction Prokom owns 33% of the shares and votes at Softbank’s GMS. The acquisition of Incenti is the final transaction connected with this year’s issue of shares. Softbank previously acquired 100% of Koma and 51% of Gladstone Consulting.

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Comp Rzeszów the change of name The company changed its name to Asseco Poland SA. The name change is connected with building an international capital group in the region of Central and Eastern Europe. Comp Rzeszów issue passed On Friday, the Extraordinary General Meeting of Shareholders adopted the resolution to raise the company’s capital by not more than 400 thous of C series shares. The shares will be of-fered with a rights issue (8.625 rights issue for 1 C series share). The rights issue day is 18 November 2005. In accordance with the expectations, the new issue of shares was approved by the shareholders. Comp wants to buy four IT firms in Poland and Slovakia with the funds for the issue. Stake increased in Comp Rzeszów Softbank signed a contract with the president of Comp Rzeszów, Adam Góral, on the basis of which he will sell his rights issue associated with the new issue of shares. Including the rights issue Softbank has, the company will increase its stake in Comp Rzeszów 238 thous shares, from 17.54% to 21.92%. Moreover, Adam Góral submitted an offer to Softbank to sell 268 thous shares of Comp Rzeszów. The offer is valid for 6 months, beginning on 27 September 2006. Softbank’s plans to increase its stake in Comp Rzeszów have been known to investors for some time. As a result of this investment Softbank will be able to consolidate the results of Comp, which forecasts a net profit of PLN 20-23 m this year and an approximate PLN 30 m net profit next year. The purchase of an additional 268 thous shares (in September 2006 at the earliest) will allow Softbank to increase its stake to about 28%. Comp Rzeszów’s major contract Comp announced it had concluded a contract with Sun Microsystems Poland for the delivery of hardware. The value of the contract accounts for 13% of Comp Rzeszów’s equity. On 30 June 2005, the company’s shareholders’ equity (including minorities) amounted to PLN 93 m, which values the contract in the area of PLN 12 m, with a rather low profitability.

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Will PiS revolutionise the media? PiS wants revolutionary changes in the public media. This is to consist in centralising authority (i.e., the liquidation of the current boards and appointing individual persons responsible for su-pervising public television and radio). PiS also wants to reduce the number of National Radio and Television Council (KRRiT) members from the current seven to three. The proposed changes rather concern a desire to strengthen control over the media by the new government (which could also be dangerous). For the private media, the most important would be declara-tions with respect to limiting the activity of TVP on the advertising market. However, such decla-rations have not been made. Influence of election campaign on the sector According to Expert Monitor, the advertising expenditures of all the political parties during the presidential campaign totalled PLN 76 m gross and were the highest in history. PiS spent PLN 25.8 m on the parliamentary campaign and PLN 11.3 m on the presidential elections. PO spent PLN 23 m and PLN 13.5 m, respectively. This is very promising data prior to the publication of the results for media firms in 3Q and 4Q (extra revenues in comparison with last year). We do not know the precise allocation of funds among individual media. The main beneficiaries will certainly be TVN and AMS. Starlink on television advertising According to Starlink, the value of commercials broadcast on television in the first three quar-ters of the year totalled PLN 1.68 bn (i.e., a 9.7% growth in the relation to the corresponding period of last year). Television stations earned PLN 22 m on the parliamentary and presidential campaigns. Data from the media house are in line with expectations and should have no signifi-cant impact on the share prices of sector companies.

Agora

3Q results Prior to results for 3Q Agora issued a warning about a probable increase of costs resulting from the preparation of new projects, which lowered investor expectations concerning 3Q results. In this light, the published results were a pleasant surprise, mainly due to maintaining the EBITDA margin above 20% (we assumed a decline to 14%). The decidedly lower growth in revenues (3.4% in relation to accumulated 20.6%) than in previ-ous quarters is in line with the expectations and results from the decline of revenues from book publishing to PLN 15 m (PLN 28 m one year ago, a more significant drop than we expected). While the result of Gazeta Wyborcza is inline with our forecast (7.8% growth in revenues from advertising), pleasant surprises include AMS, which benefited from the election campaign and increased the EBITDA margin to 18% as well as magazines, in which with disappointing reve-nues and due to a reduction in promotional costs, EBITDA grew to PLN 3.4 m, from PLN -0.4 m the previous year. Despite a 21% growth in revenues, EBITDA of the radio stations fell to PLN 2.2 m. 4Q will be encumbered with the costs of promoting the new daily newspaper and will have a negative impact on the consolidated result. Nevertheless, we expect the results of individual segments of activity in 4Q to be substantially better than last year (this includes book publish-ing), which will be well received by the investors. We believe Agora’s new daily newspaper pro-ject will be successful. Advertising market According to company estimates, in 3Q the advertising market grew as much as 16%. Advertis-ing expenditures in segments that benefited the most from the election campaign grew the fast-est (the company estimates its cost at PLN 50 m), that is outdoor advertising (+31%) and televi-sion (+17%), which attracted half of the expenditures of the election committees. Advertising expenditures in daily newspapers grew in this period 13%, and 12% in radio stations. Daily newspapers In 3Q Gazeta and Metropol noted a 7.8% growth in revenues from advertising, which means that, as in previous quarters, Gazeta is losing its market share (market +13%), mainly on behalf of Fakt. In our opinion, this situation should continue another 2-3 quarters, which means until Fakt achieves a position on the advertising market corresponding to its actual readership. The growth in advertising expenditures on the Warsaw market (+7%), which is smaller than in the case of the entire segment, also does not favour Gazeta Wyborcza. In terms of readership, Gazeta, as one of few titles, and the only title with such a wide range, is

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increasing the sold print run. In 3Q, the average daily circulation amounted to 439 thous copies (i.e., 5.8% more). Please note that the daily’s very interesting conception of advertising in me-dia, primarily on television. Agora advertises the supplements to Gazeta (e.g., guidebooks to restaurants), the sponsor of which are other entities (breweries in the case of the guidebooks). The strategy of adding supplements has a positive influence on Gazeta’s volume of sales, which translates into advertising income. The sponsor covers the cost of the supplement, and Agora the cost of advertising. Books Revenues from the sale of books in the past quarter are PLN 7 m lower than our expectations and PLN 13 m lower than last year. We believe the reason is the weaker sales of the classics of literature series. However, we expect that beginning in 4Q, the company will again show a high dynamics of revenue growth in this area, which is connected with the fact that: - the 4Q comparative base is low, amounting to PLN 20 m. - at the end of 3Q the company brought a number of new projects to market (tourist guide-books, fairy tales for children, two series concerning John Paul II, a music series), while the mentioned classics of literature mainly accounted for 3Q sales. For the first time, the company reported the operating margin of the segment, which given the revenues of PLN 14.7 m amounted to 11.2%. In our opinion, this is a value inadequate to the previous quarters due to: - 3Q being encumbered with additional costs of launching two new publishing series, in which the first copy (with a large print run) is free (the costs the company mentioned in its warning prior to 3Q results are included in this margin). - Most of the revenues were generated by the 19th century literature series, which was coming to an end. The end of a series usually has a small print run, which also lowers the profitability of the project (unsold copies, higher unit cost of printing a short series). AMS The Group’s biggest beneficiary of the election campaign is of course AMS, which in compari-son with 3Q 2004 increased revenues by 26%. This is a clear recovery following 2Q, weak in this regard, when the dynamics in annual terms fell to 6.2%. Due to high operating leverage, characteristic for outdoor advertising, the company’s EBITDA was PLN 6.1 m in relation to PLN 0.7 m in the corresponding period of the previous year. At the end of 3Q , the number of media increased 0.5% in relation to the same period the previous year, and amounted to 23.7 thous. For the first time in 4 quarters the unit costs per medium increased (+6%). Magazines We have mixed feelings in the case of the magazine segment’s results. Revenues were up only 1.8%. In comparison with 3Q 2004, average circulation declined by 13.4% and is not only the effect of a smaller number of published titles, but mainly problems with selling titles already present on the market for some time. The company explains that this is a phenomenon charac-teristic for the entire segment of magazines in Poland. Observing the sales of weeklies, it is difficult not to agree with this explanation. Despite the disappointing sales, and due to lowering costs of wages and salaries and promotions, the segment’s EBITDA result increased to PLN 3.4 m, from PLN -0.4 m last year. Radio Despite the dynamic growth in revenues (+21%), radio stations increased the EBITDA loss to PLN 2.2 m. It was caused by the growth in costs connected with advertising (according to our estimates PLN +2.5-3 m). Despite the conducted restructuring, we still see no progress in this segment and are sceptical with respect to its prospects. Other The company estimates that expenditures on advertising this year could be 2-3 percentage points higher than current forecasts. Such estimates cover our forecast concerning a 12.7% growth in advertising expenditures for this year. The Group’s advertising costs in quarterly terms amounted to PLN 29.8 m and are inline with the average from previous quarters. New daily On 14 November Agora will introduce the new daily newspaper to the market, the target read-ership group is between the influential Gazeta Wyborcza and the tabloid Fakt. In 4Q the com-pany will bear additional costs connected with launching the new title, which will encumber 4Q net profit. The company did not release details of the project (costs of launching it). Despite the fact that the company’s profit fell in 2H of this year, in our opinion, the project itself is a good idea. Based on the current production of content (Gazeta Wyborcza, Metro, magazines) Agora

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could create a new title relatively cheaply, as well as promote it, which gives it a significant ad-vantage over the competition. Moreover, such moves should seriously limit the endeavours of other media groups wanting to bring new titles to market. In 4Q, we estimate the costs con-nected with the promotion of the new daily newspaper at approximately PLN 25-35 m. AMS Based on prepared projects, AMS intends to further develop in large cities. One such project was launched in October and involves large-format (50-100 m2) advertising space on buildings. The company currently has 40 such spaces and wants to increase this number to 240 by the end of 2006. AMS also intends to increase its share in the market of advertising displayed on means of public transport. The company currently estimates its share in this market at 35%. We are view positively AMS’s development plans. As opposed to its main competitor – Stroer – the company has always tried to focus on more expensive, but better quality media (Stroer mainly focuses on billboards).

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PTC expansion into 3G PTC intends to broaden UMTS access to Poland’s 10 largest cities. The 3G network currently operates only in Warsaw, but in the near future is to be launched in Wroclaw and Lodz and subsequently in Bydgoszcz, Krakow, Lublin, Poznan, Szczecin, Torun and the three-cities. As a result of the realisation of investments, the range will cover 7 m people, which will almost meet the requirements specified in the UMTS license (20% coverage by the end of 2006, 7 m people corresponds to coverage of 18%). The investments are in line with earlier plans, forced by the terms of the license, and therefore should come as no surprise. However, they show the exist-ing operators have an advantage over Netia, which as results from recent declarations of presi-dent Madralski, will launch UMTS at the end of 2006. … Crowley into VoIP … Crowley Data Poland – an operator mainly rendering services for corporate clients – is develop-ing a VoIP platform, which is to increase VoIP revenues to 30% of total sales, from the 13%. Crowley is a small operator with revenues of some PLN 60 m, which means that increasing the share of VoIP in the company’s sales to 30% (estimated growth in VoIP revenues is approxi-mately PLN 12 m) will not constitute a threat for infrastructure operators (TPSA, Netia). How-ever, if we consider the 50 or 100 operators of this type (cable networks, portals, other smaller operators) the pressure on the margin in fixed-line connections will continue for some time. …. and GTS in new acquisitions GTS Polska is interested in further acquisitions in Poland. After finalising the takeover of Ener-gis (consolidated revenues of PLN 376 m this year and by 10-20% higher next year), Energis is considering acquisitions of smaller operators, such as: Crowley and Pro Futuro. Controlled by Russian capital, GTS is also interested in the largest alternative operators (e.g., Exatel and Dialog). Due to its differing business model, the latter is not a priority target. GTS has again confirmed that it is a serious competitor for Netia in the field of acquisitions. PTC – how much it is worth to Elektrim PTC generated a net profit of PLN 623.9 m in the first half of the year, in relation to PLN 477 m in the analogous period of 2004. EBITDA was by 5.7% higher than in 1H2004 and closed at PLN 1.38 bn. The dynamics of revenue growth amounted to 8.2% (PLN 3.265 bn). The man-agement board announced that the operator will surpass the threshold of 10 m subscribers (active SIM cards) in the next several weeks. The company has repaid all loans. Despite the PTC’s dynamics of new connections falling (the dynamics is half that of Centertel’s in the analogous period), the operator remains the market leader. At the end of 1H it had 600 thous more subscribers than Orange. Revenues, EBITDA and net profit were higher 8%, 17% and 35%, respectively. PTC’s higher EBITDA margin (42%), in comparison with Centertel (39%), can be the result of higher costs of obtaining new subscribers with a higher dynamics of growth in the subscriber base. PTC could easily pay a dividend (even this year’s entire net profit, about PLN 1.1 bn), but this is blocked by the ownership conflict. Assuming that PTC reports an EBITDA of PLN 2.6 bn PLN this year, and the market value of the operator is 6-times EBITDA, the company would be valuated at PLN 15.6 bn. Any risk con-nected with the ownership conflict has been disregarded in the analysis below. Assuming that Elektrim owns 24% of the capital (the company claims to own up to 48%, which in our opinion is not justified, at present we do not know if Elektrim has the right to any of the company’s shares due to the legal risk and Polsat possibly taking over control) and taking taxes into ac-count, the value of the Elektrim stake amounts to approximately EUR 800 m, or significantly more than the debt resulting from bonds (approximately EUR 500 m). Assuming that the com-pany has no other assets and liabilities, the difference between the market value of the stake and the bonds is PLN 13 per company share. Unfortunately, this is only a theoretic value. Telefonica acquires O2 – takeover terms Telefonica submitted an offer to buy all shares of O2, the largest mobile network in Great Brit-ain. The company is offering GBP 17.7 bn for the entire stake (i.e., 22% more than Friday's valuation of the operator on the LSE). The transaction could be a determinant for other M&As in the sector. The main valuation parameters, which could also have an impact on the valuation of Polkomtel, should Polish shareholders leave the company, are presented below. Vodafone confirmed that it is interested in purchasing the remaining shares of Polkomtel, both from Polish shareholders and TDC. Goldman Sachs is advising Vodafone in negotiations. Vodafone justi-fies its position by the uncertain situation in the government and the PiS electoral victory, which could result in blocking further progress in regard to the Polish shareholders withdrawing from Polkomtel. Everything indicates that Vodafone has begun a race against time, which theoreti-cally could accelerate the transaction. However, for the British, losing the race could mean that the process will be halted if such is the political decision of PiS. In our opinion, both scenarios are equally likely.

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According to our estimates, O2’s EV/EBITDA ratio for 2005 (year ends in March 2006) implied by the Telefonica offer amounts to 8.7. The average 2005 EV/EBITDA ratio for mobile opera-tors is 7.3; which means that the Spanish are inclined to offer a 20% premium to the average. Vodafone’s previous offer (according to unofficial information), submitted to Polish shareholders of Polkomtel, implied a 2005 EV/EBITDA ratio of 8.1 (including the premium, total value of PLN 18.95 bn). Assuming a ratio equal to that in the Telefonica’s offer, Polkomtel’s valuation in-creases to PLN 20.4 bn. In our opinion, the price offered by Telefonica for O2, includes a premium for entering (by ac-quiring the leader) the profitable British market, which cannot really be applied to other transac-tions. In our valuations of KGHM and PKN, we accept the valuation of Polkomtel, implied by the unofficial proposal of Vodafone. Polkomtel – will it begin a revolution on the market? According to press speculation, Polkomtel will establish cooperation with an MVNO. Among the potential partners mentioned are Empik Media & Fashion – controlled by the investment fund Eastbridge, the Gadu-Gadu communicator and PKO BP. As we have written previously, an MVNO should appear on the market with a penetration level of 70-75%. This level should be reached at the turn of the year. In our opinion, the introduction of the first MVNO by one of the operators will result in a flood of subsequent operators. The network operators will compete among themselves as wholesalers. An MVNO will intensify competition primarily in the pre-paid segment. We believe that the three mentioned entities are extremely interesting as potential MVNOs (differentiated activity, not competing with the competition). In our opinion, none of the operators will be inclined to offer favourable terms to Netia’s MVNO, which will become their “network” competitor in a year. Vodafone still interested in Polkomtel Vodafone confirmed that it is still interested in purchasing the remaining shares of Polkomtel, both from Polish shareholders and TDC. Goldman Sachs is advising Vodafone in negotiations. Vodafone justices its position by the uncertain situation in the government and the PiS electoral victory, which could result in blocking further progress in regard to the Polish shareholders exit-ing Polkomtel. In connection with this, the process could accelerate in the near future or come to be halted, if this is the political decision of PiS. No fines for mobile telephony operators After operators had begun to launch pilot programmes in accordance with the designated dead-line, the Regulatory Office of the Telecommunications Industry and Post Office (URTiP) ex-tended the period for introducing transferability of numbers in mobile telephony to 16 December 2005. URTiP’s actions eliminate the risk that operators will be fined. Whether the transferability of numbers, which is becoming an increasingly more realistic possibility, initiates an additional competition between the operators, will largely depend on the amount of fees for the service. In the Western Europe, the service is not that popular precisely because of high fees.

TPSA

TPSA – better, weaker, in line with expectations Dividend. TPSA will pay a dividend next year from profit for 2005 of PLN 1 per share, which given the current price implies a gross yield of 4.5%. This is significantly more than this year’s dividend (PLN 0.33 per share), but in our opinion less than the market expected. In a recent report with a “buy” recommendation by one of the largest foreign investment banks, the ana-lysts expect a dividend of PLN 2.5 per share. With the currently “difficult” political situation this could be an additional reason for foreign investors to close their positions. Centertel. In accordance with earlier statements, the company announced that it will purchase the minority stake of Centertel shares from France Telecom. The negotiated price equals PLN 4.88 bn and is in line with the expectations of investors and analysts. We positively view this transaction as the entire CF of the mobile operator will be acquired. However, we do not be-lieve that the acquisition will have a significant impact on the operating activity of either of the entities (i.e., greater possibilities of selling convergent services than prior to the transaction, as the management board believes). Beginning next year, the company will increase net profit approximately PLN 400 m by eliminating the minority shareholder. Taking into account the higher interest costs connected with a higher net debt, this will account for ca. PLN 300 m, or PLN 2.15 per share. It is important to note that beginning next year Centertel will bear the addi-

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tional cost of fees, about PLN 100 m, for using the name Orange. Forecast. The management board also announced that it will lower the forecast of this year’s dynamics of revenues. The board expects sales to fall 1.0-1.5% and the EBITDA margin to remain at around 43%. For additional information on the company’s results and revenues see our analytical report. However, we would like to point out that: - the decline in fixed line revenues from telephone calls remains strong and shows no sign of slowing, TP still faces the problem of VoIP and the erosion of revenues in local calls, - revenues from broadband Internet access are not increasing, despite the growth in the num-ber of subscribers (however, the dynamics here has also clearly fallen), strong competition for TP will appear in this area next year in the form of the WiMax network, - mobile telephony continues to show a high dynamics of revenue growth, which saves the con-solidated sales, next year the dynamics in this area will also fall due to increasingly closer mar-ket saturation. TPSA announced that next year’s investments will close with an amount corresponding to 16-18% of consolidated revenues. The company also intends to further develop the Wirtualna Pol-ska portal. Therefore, the investments will amount to PLN 2.9-3.3 bn. We estimate that invest-ments will total PLN 3.38 bn this year, or 18% of revenues. Another conflict with UOKiK TPSA lost another conflict with the antimonopoly office, which blocked an increase in calling charges for the 0-708-1 prefix numbers proposed by the operator. TPSA stated that it will abide by the office’s recommendations. The effort to block cheap international calls was not success-ful, which will result in a further decline in the margins and revenues of TPSA in ILD. Despite being negative, the information is not so important as to have an impact on the stock price. Moreover, the Competition and Consumer Protection Office (UOKiK) initialled proceedings against TPSA, which may have violated the telecommunications law, by demanding additional fees from subscribers for the early termination of agreements for rendering broadband access to the Internet. In the short-term, this information has no influence on the stock price. The scale of the potential fine is unimportant in terms of valuation. First effects of introducing the Orange brand Centertel plans to introduce new roaming rates in foreign connections with carriers operating under the Orange name in 17 countries. According to company representatives, in the initial period of changing the brand, sales of new sim cards fell drastically, but are now by 20% higher than in the pre-rebranding period. In our opinion, the introduction of new roaming rates is not determined by the brand, but by affiliation with a specific telecommunications group. Currently, the increased sales of new telephones also does not result from the new brand, but from the increased expenditures on advertising and lower calling rates, which could have been achieved just as well under the Idea brand. We continue to believe that for TP rebranding primarily means additional costs, which does not change the fact that, with the ownership dispute in PTC, Centertel will become the market leader next year … but not due to the new brand as TP indicates. TPSA prepares for the role of wholesaler TPSA is conducting tests of technical solutions, due to which outside entities will be able to render the service of fixed access to the Internet to TPSA clients. Alternative operators will be-gin rendering this service at the beginning of 2006. GTS Energis will probably be the first to launch the service. This could be an announcement of a real revolution, leading to TP becom-ing a wholesaler. The scale of the phenomenon will be determined by the attractiveness of the price offer. As usual, the key role here will be played by URTiP, which this time could find itself under pressure from the new government, which has repeatedly declared its desire to limit the role of TP. Will PiS accelerate market liberalisation? PiS says that it will accelerate the liberalisation of the telecommunications market. Activities planned by the newly governing party will lead to changes in the telecommunications law, which would, among others, strengthen the role of the URTiP president, and free up the local loop. PiS also plans to appoint a new URTiP president. TPSA still does not function on a liberal market, which must change. Changes introduced so far have been slow, which allowed the operator to adapt its cost structure to falling revenues. A revolution in the telecommunications law, and primarily in its execution, would shake up the company’s EBITDA margin. We believe that such a scenario is very probable. The first effects will be evident not before 2H 2006.

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Netia When will investments in 3G be launched? According to the company’s president, Netia intends to sign an agreement by the end of this year to purchase UMTS infrastructure. In our opinion, the negotiations which lasted half a year will be extended and it cannot be ruled out that, in the case of Netia’s green field project, the inclination of the hardware providers to accept vendor financing is very limited.

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Construction

Newly completed dwellings According to CSO data, 10.7 thous dwellings were completed in September, which is by 50.1% more than in the corresponding period of the previous year and by 10% more than in August. From the beginning of the year to September, 17.3 thous dwellings were completed (19% more than in the analogous period of the previous year). The developer branch’s share in overall construction has increased significantly in the last 15 or so years to 30%. During this same time the number of new cooperative dwellings has declined. Poland still has a shortage of some 1.5-2 m dwellings. Warsaw remains the most attractive market for developers, of which firms such as Echo Investments and GTC are taking advantage.

Budimex Construction of new terminal at Okęcie airport Puls Biznesu writes that it obtained information concerning the advancement of works on the new terminal at Okęcie – allegedly it is less than 30%. Construction works are to be completed by April 2006, and not meting the deadline could result in the necessity of the Budimex, Ferrovial, Estudio Lamela consortium paying contractual fines. According to unconfirmed press information, the fine could be as high as USD 20 m. Budimex states that this is in regard to the advancement of financing, and not the percentage of work completed and that everything will be completed by the deadline. It is difficult interpret the possibilities to pay fines by the consortium. The limited transparency of the situation makes it difficult to evaluate the financial results of the investment. New contracts obtained by Budimex-Dromex Budimex Dromex, a Budimex subsidiary company, signed a contract involving a turn key pro-ject to build the 6-story district court building in Katowice for PLN 49.2 m. The work is to be completed within the course of 36 months. Budimex Dromex won the tender for expanding the border crossing at Hrebenne, valued at PLN 10.1 m. The project is to be financed from Phare funds. Several days later the company announced it had won the tender for modernising voivodship road no. 985, valued at PLN 30.3 m. Representative of financial investors leaves SC Ryszard Jach, the representative of financial investors in the company, was dismissed from his position on the supervisory board. The dismissal is probably connected with contentious con-tract for building the new terminal at Okęcie. Despite this dismissal, other changes occurred in the company’s supervisory and management boards. The information confirms earlier specula-tion concerning the dismissal of Ryszard Jach.

Elektrobudowa Construction of switchgear factory in Russia The company decided to launch the construction of a switchgear factory in Russia. For this purpose, a Russian subsidiary company is to receive a USD 1 m capital injection. Elektrobu-dowa has invested USD 200 thous in the enterprise so far. The company estimates that the investment will generate revenues of approximately PLN 30 m next year. Moreover, the reve-nues of the company are to increase at least 50% annually in the several years. In the opinion of the management board, this year’s forecast of results is not threatened, and the portfolio for next year is slowly filling up.

Polimex-Mostostal Siedlce

New Naftobudowa issue Naftobudowa, of which Polimex-MS owns 50% stake, will conduct an issue of 3 m new shares. The company hopes to obtain PLN 15 m for investments in production machinery and equip-ment. Half of the issue is to be taken up by the current majority shareholder Polimex-MS.

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Modernisation of Carbon-based Products Department The management board of Polimex-MS announced that its consortium with Piecexport, Kokso-projekt and Naftoremont won the tender for the "Modernisation of the Carbon-based Production Department" in Koksownia Przyjaźń, valued at PLN 405 m. The company did not provide infor-mation what part of the contract it is directly responsible for. The contract is to be signed in No-vember. We forecast that the consortium might win the tender. Winning the tender confirms a very good trend in the company and should be very well received by investors. Entry into segment of road and railway construction Following the unsuccessful attempt to acquire PRInż, Polimex-MS is still interested in buying a company engaged in the construction and modernisation of roads and rail lines. The establish-ment of Zakład Budowy Dróg i Kolei with a branch in Katowice is to develop this segment in the company. The company wants to make acquisitions, develop the road building structure and obtain the initial contracts before the end of the year. Contract with Koksownia Przyjaźń Parkiet quotes the company’s president that 80% of PLN 405 m from the last contract with Kok-sownia Przyjaźń will go to Polimex Group companies and that shareholders will be satisfied with 3Q results. The information about willingness to conduct further acquisitions confirms the intentions of Polimex to enter a new, very competitive segment of the market, where pressure on margins is strong. On the other hand, this is a segment with very good prospects, both within the context of expressway construction and the modernisation of the railway network. Waste treatment plant The consortium comprising Polimex and Sutco-Polska won the tender for building a waste treatment plant for EUR 20.2 m. Further problems for PRInż Parkiet writes about the financial liquidity problems of PRInż, controlled by the individual inves-tor, Zbigniew Opach. The company’s creditors have filed several applications for bankruptcy against it. According to the company’s president, a rapid capital injection is necessary. He be-lieves Polimex-MS becoming a shareholder of the company is a sensible move. According to Parkiet, Zbigniew Opach is in turn interested in returning to negotiations with Polimex regarding the sale of his shares. Polimex-MS has was interested to become a PRInż shareholder earlier. This is in line with its strategy of entering the segment of road and railway construction.

Prochem Risk of higher financial costs According to Parkiet, Prochem that in a consortium with Megagaz is building the Adamowo-Baza Surowcowa Plebanka pipeline for PERN Przyjaźń, cannot reach agreement with the in-vestor in regard to the annex to the contract from 2002. Moreover, there is no agreement con-cerning the payment of PLN 88.6 m for the delivered pipes for building the pipeline. Lack of paying off accounts could force the consortium to take out additional loans. The management board of Prochem confirms that it is difficult to estimate the possible negative consequences of not reaching an agreement with the investor. However, it did assure that net profit forecasts for this year are not threatened.

Mostostal Warszawa

New contracts The company’s management board announced that the company concluded a contract with Dom Development S.A. for building a housing complex in Warsaw together with installations as well as landscaping the grounds around the buildings. The value of the contract amounts to PLN 83 m. The work is to be completed by June 2007. Increase in working capital Nesco, a sister company of Mostostal Warszawa, owned by the Spanish group Acciona, will lend the Polish company another PLN 10 m. Parkiet writes that the total value of the loans from Nesco, about which Mostostal released information in the last three months, amounts to PLN

Construction

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28 m. According to data cited by the newspaper, in 2H05, the value of the company’s contract portfolio amounts to PLN 250 m. Next year’s target is PLN 400 m. Increasingly more positive information about the company has occurred recently. It can be seen that it is also benefiting from the recovery on the construction market. Financing from the sister company ensures the company the financial liquidity necessary for realising its contracts. Esti-mating the need for capital at 10% of the value of a contract and considering the company’s plans, it can be concluded that the company’s capital requirements could increase even more. These needs may also partly be covered by the sale of Mostostal Invest (developer activity) to the Spanish company. In the books of Mostostal Warszawa, the holdings in the subsidiary com-pany are valued at PLN 24 m. Sale of Mostostal-Invest Mostostal Warszawa finalised the sales transaction of the 81.36% majority stake of Mostostal Invest shares to the company of the Acciona capital group – Acciona Inmobilaria. The transac-tion is valued at PLN 30 m, while the value of the company in the books amounts to PLN 24 m. Therefore, the company will show a gross profit of PLN 6 m on the entire transaction. New contracts for Wrobis Wrobis, a subsidiary of Mostostal Warszawa, obtained a construction contract in Norway val-ued at NOK 105 m (about PLN 52 m) for Elkem Aluminium ANS and Alcoa Inc. The works are to be completed during 12 months. Moreover, the company will receive PLN 8.82 m for building an industrial plant in Żarów. The contract is to be realised by the end of next February.

PBG

Forecast of results updated PBG published an update of its forecast of results for 2005. Sales revenues are to total almost PLN 422 m and net profit PLN 33.3 m. These figures are by 11% and 26% higher, respectively, than the figures from the previous forecast. The new forecasts are mainly the result of including new entities, Hydrobudowa Włocławek and KRI, into the PBG group. Moreover, the company will receive almost PLN 20 m for managing the Wilga gas deposit for FX Energy Poland - a company with US capital. Contract in Latvia PBG, in a consortium with Pall Poland, will modernise the collection station at an underground gas warehouse in Latvia (PBG’s part is PLN 20 m). This is the first foreign contract for PBG. According to information presented by the company’s spokesman, PBG is currently participat-ing as a member of consortia in foreign tenders with a total value of more than PLN 600 m. The results of the tenders should be known in the near future.

GTC

Greater commitment in the Balkans The company will increase its commitment in the Balkans. It purchased holdings in the compa-nies GTC Romania, GTC Hungary and GTC Serbia from Adri International for USD 19.4 m. Following the transaction, the holdings in these companies will increase to 95-97%. According to the management board, increasing the stakes in the subsidiary companies will have a posi-tive influence on the financial results of GTC as early as this year. Developer investments in the Balkans bring a higher rate of return as, in the opinion of the management board, GTC is one of the few foreign developers on these markets.

Construction

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Grupa Kęty

New production capacity from Hydro Hydro Aluminium will launch a new press for aluminium profiles in Chanów. The investment is slightly behind schedule (1 month) in relation to earlier plans. The new press will double the annual production capacity of Hydro in Poland, which currently amounts to 26 thous tonnes. SAPA is also to have a new press by the end of the year (an increase in annual production ca-pacity from 12 to 24 thous tonnes). We are not certain whether the production from the new presses will be sold on the domestic market or be exported. The management board of Kęty expects the latter possibility, which would not cause a decline in margins. In the case of the for-mer scenario, a price war would ensue (imports from Germany are already competing), as oc-curred in 1999-2000. We will continue to monitor the development of the situation.

KGHM Quarterly results The quarterly results of KGHM for 3Q are better than we expected. Following a weak 1H in terms of volumes, the company sold more copper (137 thous tonnes, +6.3%), and primarily more silver (345.7 tonnes, +10.3%) than we assumed in our forecast (changes in relation to 3Q2004), which translated into higher sales revenues (PLN 2.039 bn) and as a consequence net profit (PLN 691 m). The unit cost of production amounted to 7 643 PLN/t, which was by 8.2% higher than in the corresponding period of the previous year and 1.8% lower than in 2Q2005. The revaluation of tangible and financial assets increased net profit by PLN 92 m. As a result of the valuation and settlement of transactions hedging future cash flow, shareholders’ capital was reduced by PLN 367 m. Since the beginning of the year the revaluation portion of shareholders’ equity declined by PLN 578 m. Following the first three quarters of the year the company’s net profit amounts to PLN 1.709 bn. Considering the fact that prices of the metal are still high, this means that the forecast of the management board (PLN 2.04 bn) will probably be exceeded by approximately PLN 200 m. The big unknown remains the size of the losses on hedging that will be transferred from capital to the income statement in 4Q (the company hedged 28% of the volume of sold copper). The company Bipromet delivered a new technical study of the copper ore processing installa-tion in the Congo to the management board, from which it results that the project requires in-vestment expenditures higher than originally expected. In connection with the above, the man-agement board has not decided whether to continue with the project. New budget for 2005 The company’s supervisory council approved the annex to this year’s budget from which it re-sults that following the new macroeconomic assumptions and the payment of additional em-ployee bonuses, the company will earn PLN 2.078 bn this year instead of the PLN 1.92 bn fore-cast earlier. The above forecast was approved with the following macroeconomic data (data from previous budget in parenthesis): USD/PLN exchange rate – 3.22 (3.3); annual average price of copper – 3.55 USD/t (3.2 USD/t); annual average price of silver – 226 USD/kg (222 USD/kg). Selection of general contractor for energy project KGHM selected a contractor for the gas-fired thermal electric power plant project, the cost of which was established at PLN 860 m. SNC Lavalin will be responsible for the construction. In our opinion, this is very good news for the company. There was a risk that with prolonging proc-ess of selecting a contractor, KGHM would not keep to the deadline for completing the project. This would mean that the company could have been forced to buy gas from PGNiG, which it would not be able to use. The value of annual deliveries is approximately PLN 300 m. Forecast of increase in production capacity lowered ICSG (International Copper Study Group) lowered its forecast of growth in global production capacity in the mining and milling areas for 2006, respectively by 2% and 2.3%. Forecasts for 2007 were lowered by 3.4% and 2% respectively and by 0.5% for 2008. The revision of ICSG’s forecasts is a consequence of the current situation on the copper market: with weak demand and high prices of the metal producers are increasing their production capacity much slower than originally planned. It appears that this information is already included in the prices of the raw material.

Metals

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Metals

Copper inventories on the COMEX, LME, Shanghai exchanges vs. spot price of copper on LME

2005F 2006F 2007F 2008F Mine production (tons m) Previous forecast 16.8 17.4 18.3 19.0 New forecast 16.7 17.0 17.7 18.9 change -0.7% -2.0% -3.4% -0.5% Refined production (tons m) Previous forecast 20.5 21.5 21.9 22.2 New forecast 20.4 21.0 21.5 22.1 change -0.7% -2.3% -2.0% -0.6%

New ICSG forecasts

Source: ICSG

Source: LME, COMEX, SME

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

04-12-30 05-02-25 05-04-23 05-06-19 05-08-15 05-10-11

ty s. ton Shanghay Comex LME

60

80

100

120

140

160

180

2004-12-30 2005-03-03 2005-05-13 2005-07-15 2005-09-16

ty s. ton

2800

3000

3200

3400

3600

3800

4000

4200USD/t

Zapasy łacznieCena (spot)

Tons ‘000 Tons ‘000

Total inventories Spot price

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Chemicals Refining Sector

We have observed a quite significant drop in petroleum prices last month. Last week a barrel of Brent cost just over USD 57, i.e. more than USD 5 less than at the end of September. This was also reflected on the market of oil-based products. Prices of petrol fell more than 20%, while prices of diesel fuel and heating oil fell by 11% and 13% respectively.

Retail fuel market

According to POPiHN, the number petrol stations in Poland increased from 6729 in 2Q05 to 6786 in 3Q05. Although all the largest chains on the market increased the number of their own petrol stations, the greatest dynamics in the past quarter was shown by Grupa Lotos (GL), which added 30 new facilities. However, comparing the number stations from the level from the end of the first quarter, the stagnation is evident (data do not include acquisitions of Esso and Slovnaft chains). In the past half-year Shell and PKN Orlen noted the largest growth in retail market.

Prices of petroleum (USD/bbl) and refining products (USD/ton)

25303540455055606570

04-04-01 04-07-01 04-10-01 05-01-01 05-04-01 05-07-01 05-10-01

URAL NWE BRENT

Number of petrol stations in Poland 1Q05 2Q05 3Q05 3Q05 - 2Q05 3Q05 - 1Q05 PKN Orlen 1906 1911 1917 6 11 Grupa Lotos* 349 317 347 30 -2 BP 288 293 294 1 6 Shell 225 231 237 6 12 Statoil 224 219 223 4 -1 Others 3750 3758 3768 10 18 * excluding purchased Esso and Slovnaft chains

Source: Bloomberg

200

300

400

500

600

700

800

900

04-04-01 04-07-01 04-10-01 05-01-01 05-04-01 05-07-01 05-10-01

ON BENZYNA OLEJ OPAŁOWYPETROL HEATING OIL

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Chemicals PKN Orlen

Tender for Aral stations lost The company lost the tender for 69 Aral stations in the Czech Republic. OMV won, which according to Euro Online, paid USD 210 m. The average price per station (PLN 10 m) that OMV probably paid, despite their high quality (good locations and high sales) appears to be high. Due t the trans-action, OMV became the leader on the Czech retail market. The fuel will be supplied by the German refinery Schwechat. Shadow of a chance for Możejki The Lithuanian government stated that further negotiations regarding the privatisation of the Może-jki refinery will be conducted with TNK-BP. Although this declaration formally does not yet eliminate PKN from the tender, in accordance with the expectations, Orlen’s chances are now minimal. New member of supervisory council Krzysztof Obłój, a professor at Warsaw University, was appointed a member of the supervisory council. We believe the nomination is a good one. Professor Obłój is an authority in the field of stra-tegic management. His participation in the supervisory council increases the chance the current composition of the management board will remain unchanged.

New strategy for Unipetrol Grupa Unipetrol presented a new strategy for 2005-2008. The planned effects of realising the “Partnership” programme will increase EBITDA EUR 138 m to EUR 442 m in 2008, from EUR 304 m in 2004 (assuming stability of external conditions: refining margins, differential, and currency rate). Moreover, PKN Orlen expects effects of synergy to total at least EUR 24 m. The total cost of implementing the strategy is estimated at EUR 19 m for Unipetrol and EUR 12 m for PKN Orlen.

Dispute continues According to the spokesman of Agrofert, if PKN Orlen does not pay the contractual fine for failing the sell a portion of the chemical assets (EUR 77 m) within the next month, the company will file suit with the court of arbitration in Prague. PLN Orlen created a reserve for this amount in 2Q05. Higher dividend possible The president has not ruled out a higher dividend (higher in relation to the 30% of net profit planned) for 2005. If no major acquisitions are made this year, PKN Orlen will have surplus cash from operating activity for 2005 . Orlen Deutschland The vice president of the management board announced that the company does not intend to sell Orlen Deutschland assets. In accordance with earlier statements, the profitability of the retail seg-ment in Germany could be improved due to a growth in the volume of sales. However, the recently lost tender for the Q1 petrol station network and lack of information about the possible acquisition of another network of petrol stations, places the propriety of a continued presence on the German market into question.

Grupa LOTOS

Program PKRT According to the president of the company, the realisation of the PKRT programme is on schedule. However, the composition of the consortium financing 60% of the PLN 3.2 bn investment is still not known. According to the president, negotiations will end by the end of 2006 at the latest. Realisation of Rafineria Czechowice strategy The new terminal for tank trailers was opened in the Czechowice refinery. The investment cost PLN 16 m. Construction of the new terminal (with an annual transhipping capacity of 750 thous tonnes) is in line with the strategy presented for this refinery. Due to lack of State Treasury subsidies begin-ning in 2007, the company decided to stop refining petroleum in the second quarter of next year. Among others, the company’s restructuring calls for opening a transhipping terminal to supply the retail chain in the southern portion of the country (primarily the recently purchased chain of Slovnaft petrol stations) as well as manufacturing candles (previously only paraffin was produced) and bio-fuels (a planed installation with a production capacity of 100 thous tonnes of esters annually).

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Chemicals Further privatisation in two or three years According to the president of Grupa Lotos, further privatisation (strategic investor) will take place no earlier than in two or three years. The company must first finally determine its model of activity. We believe the participation of a sector investor would benefit the company and expect a further reduc-tion in the participation of the State Treasury.

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Pharmaceutical Manufacturers and Distributors Pharmaceutical sales in September according to PharmaExpert According to PharmaExpert, pharmaceutical sales increased by 7.2% in September in relation to the same period last year (6.1% in August). According to the representatives of PharmaEx-pert, this is due to the beginning of the school year and falling temperatures. Expenditures on refundable drugs grew by 12% (and budget subsidies by 5.1%). Each pharmacy had an aver-age of 3.9 thous patients and therefore 15% more than in the corresponding period of 2004. According to PharmaExpert, drug sales will increase 6% this year. The result is in line with the expectations and shows the post-holiday recovery on the pharma-ceutical market. This is largely conditioned by the change of weather. The September result indicates an improvement in the sector’s situation in the final quarter of this year. Pharmaceutical sales in September according to IMS According to IMS Heath, pharmaceutical sales increased by 8.4% from January to September, in relation to the same period last year. Moreover, the increased purchases from hospitals con-tributed to maintaining the dynamics. In the discussed period pharmaceutical sales on the hos-pital market grew by 11.8%, and by 8% on the pharmacy market. IMS Health estimates that sales of vaccines against the flu to the end of September grew by 60% in relation to the corre-sponding period of 2004. The information is in line with our expectations. The dynamics of the market growth maintains stabile, despite the fact that the third quarter is usually weak. Therefore, we see no threats to our full-year forecasts of results for pharmaceutical distributors. Cheaper pharmaceuticals? Rzeczpospolita daily, reported on the proposed changes of the outgoing Minister of Health, Marek Balicki, in the system of refundable medicines. The most important change is the intro-duction of officially fixed medicine prices. Currently, these prices are maximum ones. This in-duces pharmacists to lower prices of some refundable medicines and sell them below the price established by the government, frequently causing an unjustified demand for these medicines. However, pharmacists are inclined to take up more radical steps. The Supreme Chamber of Pharmacies suggests pharmacists completely resign from margins and instead collect only a fee of PLN 1-2 for selling refundable medicines. Such fees are applied in Germany, the US and South Africa. Pharmaceuticals would be sold at wholesale prices and could be 14-15% cheaper. According to Andrzej Wróbel, the president of the Supreme Chamber of Pharmacies, such activities would contribute to improving the way the market is organised. PiS MP, Bole-sław Piecha, nominated for the position of Minister of Health, stated that he likes the idea of fixed margins, but mainly in regard to pharmaceutical purchases by hospitals. The introduction of fixed prices could lower the dynamics of pharmaceutical sales growth, but on such a competitive market as pharmaceutical distribution, it appears that ways to get around this regulation will be found. In turn, the proposals of the Supreme Chamber of Pharmacists seem irrational from an economic point of view. Adopting them would worsen the financial situation of pharmacies and lower the margin realised by them. Pharmaceutical distribution – new competitor for traditional pharmacies Gazeta Wyborcza cited AC Nielsen data concerning pharmaceutical sales outside of pharma-cies. According to the data, the share of grocery stores and other retail distributors (petrol sta-tions, kiosks, hypermarkets) that also sell pharmaceuticals is growing dynamically. From the beginning of July 2004 to August 2005, purchases in these outlets totalled PLN 350 m, which corresponds to a share of less than 2% of the entire market and a growth of 19.6% in relation to the same period in 2004. Apart from pharmacies, Poles mainly buy vitamins and analgesics outside of pharmacies. According to these data, the share of hypermarkets and supermarkets in this portion of the market is still small, amounting to 8.8%. We assume that this is the group of distributors that could be directly supplied by the manufacturers. Therefore, at present, the threat to pharmaceutical distributors is limited. Pharmaceuticals over the Internet The NCI investment fund is investing in the development of pharmaceutical sales via the Inter-net. It acquired a 25% stake in the company Mito for PLN 515 thous, which is owner of the online pharmacy Domzdrowia.pl. At present, the pharmacy sells OTC medicines, cosmetics and diet supplements. Plans for this year assume generating revenues of PLN 3 m and noting a loss. In 2007, the company should break even and at this time MCI wants to increase the commitment in the company to more than 50%. In the context of the traditional form of pharma-ceutical distribution, the development of pharmaceutical sales over the Internet, as in the case of distribution in hypermarkets and other non-pharmacy retail sales outlets, it will not have a significant influence on the market in the next several years, due to the limited scale of the phe-nomenon.

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Pharmaceutical Manufacturers and Distributors Farmacol

Dividend payment possible According to information obtained by Parkiet daily, the company intends to pay a dividend next year, if no acquisitions are made by the end of 2Q 2006. Moreover, the newspaper states that following the first three quarters of this year, sales increased by almost 10% in relation to last year. We have not yet confirmed the information concerning Farmacol’s 3Q results. In our opinion, both pieces of information, about a possible dividend and results, is a positive news. Consider-ing the weakness of the market in July and August, maintaining the dynamics of growth in the first three quarters gives a positive view on the company. In our forecasts we conservatively assume a net profit this year amounting to PLN 63 m. With these forecasts, the payment of half of profit to shareholders corresponds to a dividend of PLN 1.35 per share, or a dividend yield of almost 4%. Good 3Q expected According to information obtained by Parkiet daily, company sales in 3Q will be similar to the 2Q result. This also means maintaining the dynamics of growth of results in relation to the analogous month of the previous year. Moreover, the company confirmed that it is considering the payment of a dividend, if no acquisitions are made by the end of 2Q 2006. Data concerning pharmaceutical market growth in 3Q showed a slight worsening in the sector’s climate. In this context, we view positively the company’s statements on maintaining sales on the level noted in 2Q. Assuming that the profitability will be lower in this quarter, our forecasts should not be threatened (revenues of PLN 3.06 bn and net profit of PLN 63 m).

Bioton

Investment loan The company announced it concluded an investment loan agreement with Bank BPH S.A. The PLN 25 m investment loan will be designated for covering the costs of realising the "Establishment of a Manufacturing Base for the Production of Pharmaceuticals based on Bio-technology" project in connection with the contract concluded with the Ministry of Economy and Labour on 14.09.2005 for granting financial support for the investment. This information is in line with the market expectations and should have a neutral influence on the company’s stock price. SciGenu gets new major contract SciGen announced a major contract was concluded for the delivery of Sci-B-Vac, vaccines against viral hepatitis type B to the Chinese market. The contract includes the delivery of pre-pared forms with a minimum value of USD 210 m as well as an active substance with a value of USD 145 m over the course of seven years. Following the publication of the information, the price of SciGen’s shares on the stock exchange increased by almost 100%. Bioton currently owns a 24% stake in the Singapore-based company and recently announced that it intends to purchase an additional 18.6%. The information is quite surprising. In our forecasts concerning Asian markets, we only as-sumed the sale of insulin. At present, it is difficult to evaluate the profitability of the contract and its influence on Bioton’s finances. On the other hand, the price that Bioton will have to pay for the subsequent stake of SciGen’s shares will probably be higher. Initially, it was expected to amount to PLN 3.8 m in cash plus Bioton shares.

Additional information concerning the Chinese contract SciGen announced that it expects initial revenues from the contract signed recently in 1Q 2008, after the pharmaceutical is registered. Winning this contract bodes well for the future, The entity that the company concluded the con-tract with is engaged, among others, in the distribution of imported medicines of such firms as Hoechst, Eli Lilly and Bayer in China. It owns a network of 200 distributors and supplies 500 hospitals. The only remaining problem is earning revenues and profits in the more distant fu-ture. Parkiet reported that Scitech Genetics reduced its stake in the associated company SciGen Ltd. by 0.37%, selling its shares at the session on 10 October, when the new contract in China was announced. Three days later, SciGen provided additional information about the contract, among others, that it expects initial revenues at the beginning of 2008. It is difficult to unambiguosly interpret this information.

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Pharmaceutical Manufacturers and Distributors Broadening the product offer and changes in SC The company will introduce diet supplements to its product offer, among others, Lakcillus, which strengthens immunological system. As a result, the company’s profile of activity was broadened during the recent EGMS. In addition, changes were made to the Bioton’s supervi-sory board and two new faces appeared: Wiesław Walendziak and Paweł Gricuk. We view positively the broadening of the product offer. Mr. Walendziak’s joining the supervisory board was to be expected after he became the vice president of Prokom Investments. In both cases, the above information has no impact on the company’s stock price. Commitment in SciGen increased Bioton and SciGen came to an agreement in regard to the former purchasing shares of the Singapore-based company. The contract assumes the purchase of 18,2% of SciGen’s share-holders’ capital for the equivalent of AUD 7.55 m (PLN 18.7 m). This amount includes cash (PLN 3.7 m) as well as a new issue of 2.02 m Bioton shares (PLN 14.95 m). In addition, Bioton will announce a call for shares of SciGen in order to obtain a 51% stake in the company. Ac-cording to information from SciGen, Bioton is obligated to invest an additional AUD 30 m (PLN 75 m) in the company, but these obligations are not yet binding. Therefore, a subsequent issue of shares could be conducted to finance this investment. Moreover, the company announced that, in connection with the acquisitions, it is cancelling earlier forecasts and that it will publish 3Q results on 4 November (earlier than initially planned). The expenditures connected with the investment in SciGen are increasingly higher. According to the information obtained from SciGen, the company will require further investment expendi-tures (PLN 75 m). However, the acquisition of this company creates good prospects for building a position on the Asian market. The cancellation of forecasts is due to several factors, and the investment in SciGen is probably only one of them. Another important factor is the fact that plans to enter the Russian market (the registration of finished forms and obtaining the first con-tract on this market) have not been successful yet.

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Polmos Lublin Forecasts of results lowered In accordance with earlier statements, the company lowered the forecast of financial results for 2005. The new forecasts assumes revenues of PLN 327 m, an operating profit of PLN 9.5 m and a net profit of PLN 1.9 m. According to previous forecasts, the company was to report re-sults of PLN 458 m, PLN 25 m and PLN 18 m respectively. In addition, the management board stated that sales revenues in 4Q are to increase by as much as 16% in relation to the analo-gous quarter of the previous year (i.e., to PLN 116 m). The new forecast of the management board is in line with our expectations. Wódka Żołądkowa Gorzka has lost a part of its market share, and the new vodka in the economy segment, Bal-sam Kresowy, has a lower profitability. This also explains the expectations of a dynamics growth in sales in 4Q, despite the final quarter of last year being very good and accounting for a high base. Initial results for 3Q According to initial estimates published by Polmos Lublin, in 3Q the company generated reve-nues of PLN 90.9 m and a net profit of PLN 1 m. This information is in accordance with our expectations with the company’s communiqué pre-sented earlier.

Foodstuff Sector

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Mondi

3Q results The company’s results fell short of our expectations, which is due to our underestimating the amount of the company’s operating leverage. The 15% drop in paper prices, with higher costs connected with the increase in prices of wood (about 9%) resulting in the company’s EBITDA margin falling to 13%. However, we see a real chance for a reversal of these negative trends for the company, both in regard to the price of the raw material and products sold, which with a 10% growth in volume should significantly improve operating results in subsequent quarters. Results for 3Q are much lower than those reported in the same period of 2004, which is largely due to their incomparability. In 3Q 2004, the company generated profits on the sale of assets and profits from exchange differences. Together, both items increased pre-tax profit more than PLN 40 m.

Quarterly results of Mondi PP

Prices of wood and paper Costs of wood and scrap paper account for approximately 25% of the company’s costs by type, therefore an increase or decrease in them have a fundamental influence on the unit cost of production and EBITDA margin. In 2005, due to the shortage of wood and aggressive price policy of the National Forest Service, prices of the raw material increased significantly (7-10%). The company notes that with the 10% increase in the volume of sales, the total cost of wood purchases in 3Q, in relation to 3Q 2004, increased by 18%. According to the Central Statisti-cal Office, the average price of wood sold by the forestry service in the period of the first three quarters of the year was PLN 131 per m3, or 9.2% more than the previous year. Therefore, the price of the raw material returned to the level prior to the price declines, which were a conse-quence of the increased supply of wood following the hurricane damage of the Piska Forest. We expect prices of wood to stabilise next year on the current level . The company has already concluded negotiations with the National Forestry Service for wood deliveries next year. We do not know the details concerning the negotiations, but we do know that the primary consumers of wood in Poland are benefiting to a greater extent than ever from imports, which weakens the negotiating position of the monopolist in regard to the issue of volume sales. This does not change the fact that the price of imported wood is still higher than domestic wood and therefore the inclination of the monopolist to lower prices is marginal. The recent downward wave is not so negative given paper prices expressed in Euro. Consid-ering the uncertain political situation and zloty weakening, denominated in PLN, in October the price of kraftliner increased by 3.3%, fluting by 5.1% and testliner by 4.9%. Volume sales and revenues Despite the difficult situation on the paper market in Europe, the company is able to place in-creasingly greater volumes of production on the market. In 3Q, the volume of sales increased by 10% in comparison with the analogous period of the previous year. In relation to 2Q, this is a 2% growth, which considering the over production should be considered a success. Accord-ing to our estimates, the company will not acquire market share by lowering prices more than the competition but rather by competing in terms of product quality (the decline in prices of products sold compared with the decline in prices monitored by FOEX). Operating result The higher volume of sales largely offsets the decline in prices of paper products, which re-sults in the company’s consolidated revenues being only 3% lower in comparison with 3Q 2004. However, on the level of the operating result, the company is influenced by the growth in the unit cost of production resulting from the increase in wood prices, which together with the decline in prices significantly lowers the margin on sales. Currently, high operating leverage

Other Sectors

(PLN m) IIIQ2005 IIIQ2004 change I-III2005 I-III2004 change 2005 2004 change Revenues 301.3 310.8 -3.0% 943.9 982.6 -3.9% 1 245.5 1 306.5 -4.7% EBITDA 40.0 94.4 -57.6% 196.0 303.1 -35.3% 247.0 391.8 -37.0% margin 13.3% 30.4% -56.3% 20.8% 30.8% -32.7% 19.8% 30.0% -33.9% EBIT 13.0 63.5 -79.6% 116.1 219.8 -47.2% 140.7 272.3 -48.3% Gross profit 15.7 91.5 -82.8% 118.3 280.3 -57.8% 144.6 377.9 -61.7% Net profit 12.5 73.9 -83.0% 96.2 227.2 -57.7% 117.1 310.1 -62.2%

Source: Mondi PPS

BRE Bank Securities

7 November 2005 51


substantially lowers the company’s results, but we see a real chance of a reversal in the nega-tive macroeconomic trends, which with the significantly higher volume of sales than last year would result in a dynamic growth of EBITDA. Operating flows and net debt Despite the weak operating results, in 3Q the company repaid a significant portion of its debt, which declined from PLN 94 m (net debt) at the end of June 2005 to PLN 24 m. In the past quarter investments totalled only PLN 13.8 m, which including the first half of the year gives a accumulated amount of PLN 39.4 m. Everything indicates that this year’s CAPEX will be lower than our estimates (PLN 70 m). Assets for sale The company is conducting negotiations regarding the sale of two subsidiaries: Trans-Rem Sp. z o.o. and Kemira Świecie Sp. z o.o. So far, the negotiations have not led to the prices expected by the management board, therefore it is difficult to say whether the negotiations will be finalised before the end of this year.

Other Sectors

Kraf tliner

400

410

420

430

440

450

460

470

07.01.2004 25.05.2004 26.10.2004 22.03.2005 16.08.2005

Euro/t

1500

1600

1700

1800

1900

2000

2100

PLN/t

Fluting

270

285

300

315

330

345

07.01.2004 25.05.2004 26.10.2004 22.03.2005 16.08.2005

Euro/t

1000

1100

1200

1300

1400

1500

1600

PLN/t

Prices of Kraftliner and Fluting

Source: FOEX

ING BSK The date of last recommendation's change SUSPENDEDPrice [PLN] 500.00 Market cap [PLN mn] 6 505 Valuation -

Book Value [PLN mn] 3 249 Free float [%] 20%

Year Interest incomeProfit on bank.

oper. Gross profit Net profit No of sh. P/E P/PBO* P/BV[PLN mn] [PLN mn] [PLN mn] [PLN mn] [mn]

2003 869 1 530 146 29 13 226.38 4.25 2.412004 822 1 584 353 366 13 17.76 4.11 2.07

2005P 840 1 714 572 463 13 14.04 3.80 1.952006P

*price/profit on banking operationsdynamics

[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 202 399 200PBO 401 775 447 842 11.4%Gross profit 71 129 177 326 151.2%Net profit 91 135 145 263 59.1%Assets 30 154 37 734 25.1%Sharehold. equity 2 839 3 249 14.4%Deposits 22 116Credits 11 612

BETA (XI '04 - X '05) 0.45 Price change: 1 month -1%Max. 52 weeks 511.0 6 months 17%Min. 52 weeks 375.0 12 months 30%

GRUPA KREDYT BANKU The date of last recommendation's change SUSPENDEDPrice [PLN] 11.40 Market cap [PLN mn] 3 097 Valuation -




2003 723 1 393 -1 382 -1 567 211 -1.98 2.22 4.702004 635 1 321 194 185 272 16.72 2.35 2.12

2005P 662 1 195 357 363 272 8.54 2.59 1.702006P 683 1 267 278 262 272 11.83 2.44 1.48


[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 176 344 174PBO 343 653 286 568 -16.6%Gross profit 40 64 99 197 143.6%Net profit 38 58 139 233 266.1%Assets 24 065 20 932 -13.0%Sharehold. equity 1 296 1 516 17.0%Deposits 14 988Credits 13 733

BETA (XI '04 - X '05) 0.70 Price change: 1 month 1%Max. 52 weeks 11.7 6 months 34%Min. 52 weeks 8.4 12 months 30%

BPH PBK The date of last recommendation's change SUSPENDEDPrice [PLN] 644.00 Market cap [PLN mn] 18 493 Valuation -




2003 1 105 2 356 543 333 29 55.47 7.85 3.502004 1 278 2 842 980 792 29 23.34 6.51 3.12

2005P 1 405 2 977 1 178 942 29 19.62 6.21 2.972006P


[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 307 622 962PBO 769 1 311 1 514Gross profit 310 487 578Net profit 278 415 455Assets 49 572 58 959Sharehold. equity 5 442 6 521Deposits 29 811 36 120Credits 25 035 32 451


325

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425

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525

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LN]

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-24

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GRUPA PEKAO The date of last recommendation's change SUSPENDEDPrice [PLN] 167.00 Market cap [PLN mn] 27 829 Valuation -




2003 2 375 4 073 1 276 920 166 30.26 6.83 3.892004 2 260 4 135 1 513 1 343 167 20.72 6.73 3.52

2005P 2 185 4 231 1 624 1 376 167 20.22 6.58 3.392006P 2 213 4 447 1 761 1 490 167 18.67 6.26 3.21

*price/profit on banking operations

dynamics[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 556 1 081 515PBO 1 012 1 970 950Gross profit 365 705 470 904 29.0%Net profit 369 638 396 755 7.2%Assets 63 937 60 526 -5.3%Sharehold. equity 6 990 7 708 10.3%Deposits 45 194Credits 27 344


GRUPA Banku Millennium The date of last recommendation's change SUSPENDEDPrice [PLN] 4.73 Market cap [PLN mn] 4 017 Valuation -




2003 558 953 -41 52 849 76.94 4.22 2.322004 588 1 464 352 241 849 16.70 2.74 2.01

2005P 649 1 190 291 237 849 16.94 3.38 2.012006P 702 1 125 189 155 849 25.95 3.57 2.09


[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 148 303 162PBO 368 611 408 669 10.6%Gross profit 117 144 117 176Net profit 92 112 92 137Assets 20 454 20 454Sharehold. equity 1 844 1 844Deposits 12 102Credits 7 530


GRUPA BZ WBK The date of last recommendation's change 26.09.2005 HOLDPrice [PLN] 117.00 Market cap [PLN mn] 8 536 Valuation 119.00




2003 829 1 632 260 129 73 66.24 5.23 3.362004 870 1 762 570 444 73 19.21 4.84 2.83

2005P 893 1 758 627 498 73 17.15 4.86 2.552006P 947 1 857 696 554 73 15.42 4.60 2.31


[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 208 429 218PBO 489 963 437Gross profit 148 299 195 351 31.5%Net profit 123 248 169 288 37.3%Assets 26 067 29 301 12.4%Sharehold. equity 2 742 3 167 15.5%Deposits 17 865Credits 13 936


100

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-24

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Volume BZ WBK WIG

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BANK HANDLOWY The date of last recommendation's change SUSPENDEDPrice [PLN] 59.70 Market cap [PLN mn] 7 800 Valuation -




2003 745 1 891 392 243 131 32.17 4.12 1.312004 899 1 918 477 416 131 18.73 4.07 1.27

2005P 840 1 973 527 479 131 16.30 3.95 1.542006P 759 2 020 541 489 131 15.95 3.86 1.47


[PLN mn] II Q'04 I-II Q'04 II Q'05 I-II Q'05 II Q'05/04Interest inc. 229 437 251PBO 468 953 579 1 097 23.7%Gross profit 166 271 211 357 27.0%Net profit 158 239 159 278 0.7%Assets 35 261 34 707 -1.6%Sharehold. equity 5 832 4 927 -15.5%Deposits 18 426Credits 12 496

BETA (XI '04 - X '05) 0.28 Price change: 1 month 4%Max. 52 weeks 78.0 6 months -12%Min. 52 weeks 56.9 12 months -5%

45

55

65

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40

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-24

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Volume Bank Handlowy WIG

Pr

AGORA The date of last recommendation's change 05.08.2005 ACCUMULATEPrice [PLN] 62.80 Market cap [PLN mn] 3 564 Valuation 74.00

EV [PLN mn] 3607.8 Book Value [PLN mn] 1 049 Free float [%] 37%

Year Sales EBIT Gross profit Net profit Deprec. No of sh. P/E P/CE P/BV MC/S EV/EBDIT EBIT/EV[PLN mn] [PLN mn] [PLN mn] [PLN mn] [PLN mn] [mn]

2003 853.5 17.3 -5.0 7.2 123.2 56.8 495.05 27.33 3.35 4.18 25.68 0.002004 1001.1 95.7 78.3 71.3 110.9 56.8 49.99 19.56 3.17 3.56 17.46 0.03

2005P 1186.7 134.9 143.9 117.8 93.9 56.8 30.26 16.84 3.07 3.00 15.77 0.042006P 1215.8 241.9 242.8 197.7 89.8 56.8 18.03 12.40 3.05 2.93 10.88 0.07

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 264.80 325.39 474.95 615.95 22.9%EBIT 28.74 55.95 22.10 107.93 94.7% 17.5%Gross profit 22.64 58.12 13.99 111.15 156.7% 18.0%Net profit 21.09 48.18 11.78 91.18 128.5% 14.8%Assets 1 380.32 1 561.07Equity 1 070.16 1 189.12

BETA (XI '04 - X '05) 0.83 Price change: month -8%Max. 52 weeks 73.90 6 months 8%Min. 52 weeks 48.10 12 months 33%

BUDIMEX The date of last recommendation's change 20.09.2005 REDUCEPrice [PLN] 38.50 Market cap [PLN mn] 983 Valuation 38,1

EV [PLN mn] 734.9 Book Value [PLN mn] 512 Free float [%] 28%


2003 2146.9 -15.3 -10.5 -38.3 30.5 25.5 1.92 0.46 48.092004 2160.6 -119.5 2.9 0.8 24.5 25.5 1228.64 38.85 1.98 0.45

2005P 2500.0 10.0 17.0 9.2 23.0 25.5 106.84 30.53 1.92 0.39 22.27 0.012006P 2800.0 25.6 30.8 16.6 23.0 25.5 59.21 24.82 1.86 0.35 15.12 0.03

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 479.54 663.29 790.23 1 066.89 38.3%EBIT -9.76 -5.56 -13.41 -11.58 -1.1%Gross profit 10.37 1.62 7.49 2.44 -84.4% 0.2%Net profit 8.14 0.52 3.19 0.68 -93.6% 0.1%Assets 1 468.98 1 966.36Equity 511.58 519.98

BETA (XI '04 - X '05) 0.25 Price change: month -4%Max. 52 weeks 54.00 6 months -18%Min. 52 weeks 38.50 12 months -17%

COMARCH The date of last recommendation's change Price [PLN] 60.00 Market cap [PLN mn] 404 Valuation -



2003 258.0 15.1 12.1 11.0 10.6 6.7 36.86 18.73 3.90 1.56 15.35 0.042004 330.0 18.2 15.0 16.1 8.0 6.7 25.07 16.75 3.43 1.22 15.64 0.04

2005P2006P

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 69.05 101.87 135.43 175.90 47.5%EBIT 3.39 2.93 7.84 4.46 -13.4% 2.5%Gross profit 1.52 2.47 5.43 3.55 62.3% 2.0%Net profit 2.13 8.07 5.75 9.33 279.7% 5.3%Assets 239.50 312.51Equity 108.94 141.40

BETA (XI '04 - X '05) 0.66 Price change: month -4%Max. 52 weeks 71.70 6 months 10%Min. 52 weeks 51.80 12 months -9%

30

35

40

45

50

55

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65

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

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Volume Budimex WIG

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

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Volume Agora WIG

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

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Pri ce [PL N]

COMPUTERLAND The date of last recommendation's change Price [PLN] 89.00 Market cap [PLN mn] 619 Valuation -



2003 582.4 31.1 18.1 8.6 23.1 6.8 70.10 19.02 3.33 1.04 10.12 0.062004 739.8 49.7 21.6 13.7 25.0 7.0 45.21 16.01 3.12 0.84 8.12 0.08

2005P2006P

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 177.32 129.34 310.42 248.31 -27.1%EBIT 8.44 7.20 16.50 15.54 -14.7% 6.3%Gross profit 7.41 7.50 12.84 13.51 1.3% 5.4%Net profit 6.46 6.29 10.54 10.95 -2.6% 4.4%Assets 442.39 438.36Equity 201.97 218.97


ECHO INVESTMENT The date of last recommendation's change Price [PLN] 133.50 Market cap [PLN mn] 1 402 Valuation -



2003 312.4 78.6 42.6 28.7 20.9 10.5 48.77 28.24 4.12 4.49 22.37 0.042004 320.0 80.0 50.0 39.0 25.0 10.5 35.94 21.90 3.70 4.38 21.06 0.04

2005P 320.0 80.0 53.0 41.3 26.0 10.5 33.94 20.83 3.33 4.38 20.77 0.042006P

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 80.58 0.00 153.44 57.18 0.0%EBIT 23.29 0.00 86.51 93.40 0.0% 163.3%Gross profit 10.07 45.27 57.51 120.39 349.6% 210.6%Net profit 7.53 37.58 45.12 96.59 398.9% 168.9%Assets 1 521.65 1 957.34Equity 355.38 821.69

BETA (XI '04 - X '05) 0.02 Price change: month 0%Max. 52 weeks 139.00 6 months 56%Min. 52 weeks 70.80 12 months 62%

ELEKTROBUDOWA The date of last recommendation's change 19.09.2005 HOLDPrice [PLN] 33.20 Market cap [PLN mn] 132 Valuation 35.00



2003 228.8 8.0 5.0 3.1 7.0 4.0 42.53 13.05 2.00 0.58 10.06 0.052004 278.1 9.7 6.9 4.5 6.2 4.0 29.30 12.32 1.91 0.47 9.28 0.07

2005P 300.0 11.0 10.4 7.5 7.0 4.2 18.59 9.62 1.80 0.46 8.32 0.072006P 340.0 13.4 12.9 9.5 7.0 4.2 14.68 8.45 1.76 0.41 7.23 0.09

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 64.36 80.25 102.85 125.22 24.7%EBIT 3.48 2.85 2.45 0.62 -18.1% 0.5%Gross profit 2.94 3.44 1.70 1.41 16.9% 1.1%Net profit 2.97 2.83 1.09 1.24 -4.8% 1.0%Assets 152.26 164.43Equity 59.96 61.80


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Volume Echo Investment WIG

P

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21

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25

27

29

31

33

35

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39

2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

100

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Volume Elektrobudowa WIG

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Volume Computerland WIG

Pri ce

EMAX The date of last recommendation's change Price [PLN] 91.10 Market cap [PLN mn] 309 Valuation -



2003 222.8 24.5 17.1 10.5 5.1 3.4 29.37 19.78 4.24 1.39 10.77 0.082004 310.7 28.0 23.9 18.5 8.5 3.4 16.69 11.44 3.38 0.99 8.32 0.09

2005P2006P

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 89.44 79.96 133.48 149.05 -10.6%EBIT 5.66 0.60 1.70 1.55 -89.4% 1.0%Gross profit 3.32 2.77 -0.49 3.28 -16.5% 2.2%Net profit 3.27 2.23 -1.15 2.44 -31.8% 1.6%Assets 196.29 200.08Equity 71.78 74.15


FARMACOL The date of last recommendation's change 06.09.2005 ACCUMULATEPrice [PLN] 36.00 Market cap [PLN mn] 842 Valuation 39.60



2003 2718.8 58.5 60.7 39.0 13.6 23.4 21.58 15.99 3.27 0.31 11.60 0.072004 2784.3 68.4 77.0 57.8 13.8 23.4 14.58 11.77 2.65 0.30 10.14 0.08

2005P 3059.4 77.2 81.5 62.9 14.9 23.4 13.39 10.82 2.47 0.28 8.88 0.092006P 3301.6 87.9 91.4 70.8 16.8 23.4 11.89 9.61 2.29 0.26 7.80 0.11

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 675.51 735.91 1 365.83 1 500.57 8.9%EBIT 16.23 17.13 32.82 36.20 5.6% 2.4%Gross profit 17.92 20.72 35.20 41.31 15.6% 2.8%Net profit 13.56 16.81 25.56 32.00 24.0% 2.1%Assets 829.68 937.54Equity 287.48 348.41


FORTE The date of last recommendation's change 18.03.2005 BUYPrice [PLN] 11.75 Market cap [PLN mn] 284 Valuation 13.80



2003 348.4 25.3 19.4 12.6 13.2 17.3 16.20 7.90 1.76 0.58 5.97 0.112004 403.9 24.5 32.1 25.7 17.0 24.2 11.06 6.66 1.38 0.70 7.06 0.08

2005P 459.4 33.3 33.2 26.9 18.9 24.2 10.58 6.22 1.22 0.62 5.54 0.122006P 590.8 40.6 38.2 30.9 21.8 24.2 9.19 5.39 1.08 0.48 4.63 0.14

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 86.55 81.90 175.48 181.15 -5.4%EBIT 4.44 1.57 14.15 7.30 -64.7% 4.0%Gross profit 7.42 2.57 17.69 8.45 -65.3% 4.7%Net profit 6.91 2.29 14.42 6.43 -66.9% 3.5%Assets 371.44 377.00Equity 212.09 228.36


25

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43

2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

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Volume Farmacol WIG

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Volume Emax WIG

Pric e

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2004-10-27 2005-01-25 2005-04-26 2005-07-26 2005-10-240

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Volume Forte WIG

Pri ce [P LN

HOOP The date of last recommendation's change 18.03.2005 ACCUMULATEPrice [PLN] 11.75 Market cap [PLN mn] 152 Valuation 14.50



2003 351.6 20.0 10.6 5.0 22.9 13.0 30.50 5.47 1.44 0.43 5.42 0.092004 501.1 -1.2 -14.1 -10.3 40.0 13.0 5.13 1.73 0.30 5.05

2005P 528.9 16.3 6.9 5.6 35.4 13.0 27.10 3.72 1.62 0.29 5.41 0.062006P 554.9 19.0 10.6 8.6 35.8 13.0 17.71 3.44 1.51 0.27 4.54 0.08

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 161.47 177.15 262.78 269.96 9.7%EBIT 4.38 15.26 5.00 14.26 248.3% 5.3%Gross profit 1.90 12.18 -0.13 8.77 541.1% 3.2%Net profit 1.30 8.30 1.32 4.81 540.3% 1.8%Assets 449.60 444.23Equity 108.89 95.95


INDYKPOL The date of last recommendation's change SUSPENDEDPrice [PLN] 55.50 Market cap [PLN mn] 173 Valuation -



2003 555.4 29.5 17.2 11.7 16.2 3.1 14.88 6.22 2.71 0.31 5.89 0.112004 626.0 13.1 18.7 14.3 16.6 3.1 12.15 5.61 2.15 0.28 9.29 0.05

2005P 644.5 26.2 18.0 13.8 21.0 3.1 12.54 4.98 1.92 0.27 5.76 0.102006P 688.3 27.9 20.3 15.9 21.8 3.1 10.88 4.59 1.81 0.25 5.33 0.11

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 157.92 175.26 289.15 325.62 11.0%EBIT 6.38 13.23 11.76 18.12 107.4% 5.6%Gross profit 5.44 12.79 9.25 17.94 135.0% 5.5%Net profit 3.36 9.66 6.17 13.23 187.6% 4.1%Assets 288.98 316.27Equity 102.77 123.44

BETA (XI '04 - X '05) -0.17 Price change: month -19%Max. 52 weeks 87.50 6 months 19%Min. 52 weeks 42.30 12 months -37%

JELFA The date of last recommendation's change 25.02.2005 BUYPrice [PLN] 78.00 Market cap [PLN mn] 530 Valuation 70.00



2003 253.6 30.2 29.5 21.7 29.5 6.8 24.50 10.38 1.53 2.09 8.53 0.062004 274.1 15.3 12.5 9.6 27.9 6.8 55.25 14.14 1.57 1.94 12.63 0.03

2005P 277.9 20.8 19.4 15.7 31.5 6.8 33.78 11.24 1.48 1.91 10.36 0.042006P 291.5 28.5 27.4 22.2 30.7 6.8 23.94 10.04 1.39 1.82 8.63 0.06

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 64.65 80.70 111.99 130.15 24.8%EBIT 5.68 12.02 7.26 3.03 111.6% 2.3%Gross profit 5.82 12.84 8.24 4.65 120.5% 3.6%Net profit 4.69 12.73 6.57 3.83 171.3% 2.9%Assets 423.04 435.78Equity 335.68 337.89

BETA (XI '04 - X '05) 0.22 Price change: month 6%Max. 52 weeks 79.40 6 months 41%Min. 52 weeks 50.70 12 months 43%45

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GRUPA KĘTY The date of last recommendation's change 04.08.2005 HOLDPrice [PLN] 131.50 Market cap [PLN mn] 1 213 Valuation 129.50



2003 740.2 85.5 84.6 69.7 36.0 9.2 17.40 11.48 3.28 1.64 10.36 0.072004 729.0 114.0 108.0 92.0 38.0 9.2 13.19 9.33 2.81 1.66 8.51 0.09

2005P 713.8 99.3 106.3 89.8 37.0 9.2 13.51 9.57 1.93 1.70 9.70 0.082006P 807.0 125.0 121.0 97.0 42.0 9.2 12.51 8.73 1.75 1.50 7.86 0.10

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 188.68 176.69 387.97 342.84 -6.4%EBIT 32.34 28.64 59.84 48.19 -11.5% 14.1%Gross profit 30.60 32.59 59.00 53.21 6.5% 15.5%Net profit 26.62 27.95 50.28 45.33 5.0% 13.2%Assets 599.03 797.55Equity 393.34 555.30


KGHM The date of last recommendation's change 08.08.2005 REDUCEPrice [PLN] 46.50 Market cap [PLN mn] 9 300 Valuation 34.70



2003 4740.8 357.9 569.3 411.6 295.8 200.0 22.60 13.15 2.32 1.96 16.39 0.032004 6158.0 1371.0 1447.0 1398.1 281.3 200.0 6.65 5.54 1.66 1.51 5.74 0.14

2005P 7492.3 2184.4 2252.5 2045.0 275.0 200.0 4.55 4.01 1.34 1.24 3.39 0.262006P 5404.0 520.0 629.0 697.0 332.0 200.0 13.34 9.04 1.20 1.72 9.07 0.07

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 1 718.90 1 849.71 3 280.94 3 521.17 7.6%EBIT 523.50 510.16 1 001.30 1 007.17 -2.5% 28.6%Gross profit 608.41 541.62 1 070.06 1 095.57 -11.0% 31.1%Net profit 537.57 495.57 949.37 1 018.58 -7.8% 28.9%Assets 8 573.10 9 484.94Equity 4 433.90 5 764.04


KROSNO The date of last recommendation's change Price [PLN] 8.15 Market cap [PLN mn] 206 Valuation -



2003 342.6 20.7 14.7 10.4 12.0 25.3 19.81 9.19 1.73 0.60 9.50 0.072004 397.0 40.0 24.5 18.6 13.0 25.3 11.09 6.52 1.53 0.52 6.02 0.13

2005P 445.6 35.9 28.1 22.1 24.2 25.3 9.31 4.45 1.28 0.46 6.27 0.102006P 502.7 59.6 48.5 38.7 28.0 25.3 5.33 3.09 1.04 0.41 4.19 0.16

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 98.55 86.38 197.04 175.52 -12.3%EBIT 9.44 2.35 17.96 7.53 -75.1% 4.3%Gross profit 7.19 1.92 13.61 5.40 -73.3% 3.1%Net profit 5.94 1.82 11.25 4.72 -69.3% 2.7%Assets 318.03 425.22Equity 121.58 185.95


2325272931333537394143454749

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LOTOS The date of last recommendation's change 05.09.2005 HOLDPrice [PLN] 40.50 Market cap [PLN mn] 4 605 Valuation 35.50



2003 8658.3 407.5 372.4 289.5 132.6 113.7 15.91 10.91 3.02 0.53 8.76 0.092004 11193.6 641.5 718.6 572.0 139.5 113.7 8.05 6.47 2.21 0.41 6.06 0.14

2005P 8558.2 528.1 554.2 401.6 253.5 113.7 11.47 7.03 1.16 0.54 5.25 0.132006P 8553.5 476.4 498.4 373.4 307.4 113.7 12.33 6.76 1.06 0.54 6.08 0.10

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 2 146.04 3 631.88EBIT 114.17 198.36 5.5%Gross profit 111.81 196.11 5.4%Net profit 88.59 141.35 3.9%Assets 6 123.50Equity 3 778.50

BETA (XI '04 - X '05) Price change: month -5%Max. 52 weeks 6 monthsMin. 52 weeks 12 months

MONDI The date of last recommendation's change 02.11.2005 ACCUMULATEPrice [PLN] 44.20 Market cap [PLN mn] 2 210 Valuation 49.00



2003 1280.4 260.3 190.6 147.6 136.0 50.0 14.97 7.79 3.25 1.73 6.03 0.112004 1306.5 272.3 377.9 310.1 119.5 50.0 7.13 5.14 2.98 1.69 5.48 0.13

2005P 1245.5 140.7 144.6 117.1 110.5 50.0 18.87 9.71 3.18 1.77 8.75 0.062006P 1359.4 202.7 204.8 168.0 106.0 50.0 13.15 8.07 3.05 1.63 7.37 0.09

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 335.48 316.13 670.93 642.26 -5.8%EBIT 93.05 60.17 156.01 102.52 -35.3% 16.0%Gross profit 130.66 48.55 188.51 102.69 -62.8% 16.0%Net profit 108.39 39.12 153.17 83.80 -63.9% 13.0%Assets 1 437.47 1 282.89Equity 897.72 917.73

BETA (XI '04 - X '05) 0.37 Price change: month 0%Max. 52 weeks 63.00 6 months 8%Min. 52 weeks 39.20 12 months -7%

NETIA The date of last recommendation's change Price [PLN] 4.60 Market cap [PLN mn] 1 960 Valuation 4.50



2003 701.1 -840.1 -728.8 -729.1 268.4 345.0 0.77 2.262004 897.2 85.8 113.7 159.2 238.8 426.0 12.31 4.92 0.86 2.18 4.98 0.05

2005P 900.4 98.8 113.0 96.1 245.1 426.0 20.39 5.74 0.89 2.18 5.15 0.062006P 994.2 135.7 148.3 108.3 236.9 426.0 18.09 5.68 0.88 1.97 4.13 0.09

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 222.14 215.88 429.32 432.26 -2.8%EBIT 22.24 28.19 50.42 52.98 26.8% 12.3%Gross profit 37.07 32.16 73.98 60.01 -13.2% 13.9%Net profit 36.69 31.78 73.37 54.89 -13.4% 12.7%Assets 2 826.88 2 610.41Equity 2 181.28 2 400.55

BETA (XI '04 - X '05) 0.72 Price change: month 1%Max. 52 weeks 4.86 6 months 14%Min. 52 weeks 3.78 12 months 11%3

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ORBIS The date of last recommendation's change Price [PLN] 30.00 Market cap [PLN mn] 1 382 Valuation -



2003 811.0 55.0 68.0 47.0 87.5 46.1 29.41 10.28 1.14 1.70 11.64 0.032004 919.0 79.0 87.0 65.0 91.0 46.1 21.27 8.86 1.10 1.50 9.56 0.05

2005P 973.0 101.0 96.0 66.0 92.0 46.1 20.94 8.75 1.05 1.42 8.17 0.062006P 1038.0 113.0 96.0 79.0 91.0 46.1 17.50 8.13 1.02 1.33 6.78 0.08

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 269.06 286.37 442.58 471.17 6.4%EBIT 41.66 47.48 26.59 30.63 14.0% 6.5%Gross profit 44.26 44.71 31.98 25.65 1.0% 5.4%Net profit 33.62 36.79 22.03 17.28 9.4% 3.7%Assets 1 822.41 2 236.34Equity 1 222.37 1 586.18


PGF The date of last recommendation's change 06.09.2005 HOLDPrice [PLN] 52.00 Market cap [PLN mn] 636 Valuation 58.10



2003 3568.7 73.4 64.7 36.8 16.6 12.2 17.29 11.90 3.87 0.18 8.73 0.092004 3643.2 63.3 58.6 42.4 19.8 12.4 15.20 10.36 3.38 0.18 9.71 0.08

2005P 3931.9 63.5 63.0 50.7 20.1 12.5 12.81 9.17 2.86 0.17 11.36 0.072006P 4165.9 70.7 70.3 56.6 21.6 12.6 11.60 8.40 2.48 0.16 10.37 0.07

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 886.38 960.90 1 817.64 1 958.38 8.4%EBIT 19.10 11.49 40.80 33.26 -39.8% 1.7%Gross profit 18.04 12.59 39.86 33.02 -30.2% 1.7%Net profit 13.38 9.40 30.70 25.38 -29.7% 1.3%Assets 1 262.36 1 327.96Equity 169.79 187.13

BETA (XI '04 - X '05) 0.02 Price change: month -1%Max. 52 weeks 63.00 6 months 4%Min. 52 weeks 49.50 12 months -14%

PKN ORLEN* The date of last recommendation's change 05.09.2005 HOLDPrice [PLN] 58.70 Market cap [PLN mn] 25 107 Valuation 58.90



2003 24412.0 1267.0 1219.0 987.0 1207.0 427.7 25.44 11.44 2.64 1.03 11.09 0.052004 30565.0 2750.0 3016.0 2396.0 1219.0 427.7 10.48 6.95 2.15 0.82 6.93 0.10

2005P 35031.6 2983.6 2885.0 2305.8 1226.0 427.7 10.89 7.11 1.92 0.72 6.00 0.122006P 29369.1 2500.5 2528.0 2016.7 1275.2 427.7 12.45 7.63 1.80 0.85 6.68 0.10

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 9 993.28 6 805.91 16 333.50 13 611.82 -31.9%EBIT 749.99 791.33 1 277.44 1 598.86 5.5% 11.7%Gross profit 872.85 769.86 1 365.48 1 555.94 -11.8% 11.4%Net profit 716.80 628.21 1 100.05 1 268.96 -12.4% 9.3%Assets 18 018.92 23 623.57Equity 9 964.16 12 957.05

BETA (XI '04 - X '05) 1.46 Price change: month -13%Max. 52 weeks 69.00 6 months 34%Min. 52 weeks 34.40 12 months 65%20

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POLIMEX-MOSTOSTAL SIEDLCE The date of last recommendation's change 19.09.2005 HOLDPrice [PLN] 51.00 Market cap [PLN mn] 750 Valuation 43.80



2003 1238.7 63.5 52.1 28.0 35.6 14.7 26.82 11.81 5.36 0.61 8.76 0.072004 1706.2 72.6 63.7 45.7 32.2 14.7 16.43 9.64 3.48 0.44 7.69 0.09

2005P 1805.9 67.4 59.7 41.9 32.2 14.7 17.92 10.13 3.07 0.42 8.08 0.082006P 1986.5 75.7 68.4 49.9 32.2 14.7 15.05 9.15 2.74 0.38 7.41 0.09

Unconsolidated data, 2003 - data not considering loss on internet assets

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 184.53 435.40 320.35 814.65 136.0%EBIT 18.91 22.89 25.88 39.72 21.0% 4.9%Gross profit 14.69 24.29 20.71 37.75 65.4% 4.6%Net profit 11.09 16.67 14.47 25.50 50.3% 3.1%Assets 433.29 1 034.98Equity 123.88 272.19


POLMOS LUBLIN The date of last recommendation's change 22.08.2005 ACCUMULATEPrice [PLN] 33.00 Market cap [PLN mn] 150 Valuation 35.00



2003 304.8 10.9 8.7 6.4 2.0 3.0 15.58 11.89 2.70 0.33 6.09 0.142004 338.6 20.1 17.1 12.5 6.1 3.0 7.97 5.37 2.02 0.30 2.58 0.30

2005P 317.8 7.4 2.2 1.8 2.7 4.5 85.24 33.28 1.08 0.47 15.57 0.052006P 393.8 19.3 17.4 13.7 4.7 4.5 10.87 8.10 0.99 0.38 6.71 0.12


dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 78.27 76.07 157.60 145.95 -2.8%EBIT 6.38 7.57 7.82 8.81 18.7% 6.0%Gross profit 5.55 6.74 6.62 7.47 21.5% 5.1%Net profit 4.03 4.99 4.81 5.07 23.9% 3.5%Assets 109.37 126.38Equity 41.81 55.89

BETA (XI '04 - X '05) Price change: month -7%Max. 52 weeks 54.20 6 months -27%Min. 52 weeks 30.80 12 months

PROKOM SOFTWARE The date of last recommendation's change 25.10.2005 BUYPrice [PLN] 121.00 Market cap [PLN mn] 1 681 Valuation 145.00



2003 874.0 106.3 20.6 4.2 21.2 13.8 397.32 65.57 2.34 1.91 12.96 0.062004 900.0 71.8 31.3 25.4 25.0 13.9 66.17 33.35 2.27 1.87 18.92 0.04

2005P 1664.5 141.5 120.3 73.8 82.4 13.9 22.77 10.76 2.12 1.01 9.11 0.072006P 1922.2 201.8 186.9 114.7 84.9 13.9 14.65 8.42 1.91 0.87 6.69 0.11


dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 183.69 171.45 365.66 283.36 -6.7%EBIT 7.26 7.97 38.79 17.34 9.8% 6.1%Gross profit 3.23 1.12 27.76 4.17 -65.2% 1.5%Net profit 1.11 1.61 20.98 3.50 45.7% 1.2%Assets 1 351.68 1 374.90Equity 750.32 766.25

BETA (XI '04 - X '05) 1.10 Price change: month 7%Max. 52 weeks 147.00 6 months 35%Min. 52 weeks 87.10 12 months -3%50

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SOFTBANK The date of last recommendation's change 02.09.2005 ACCUMULATEPrice [PLN] 34.50 Market cap [PLN mn] 723 Valuation 36.70



2003 344.7 5.6 -0.3 2.2 12.2 21.0 327.35 50.30 5.64 2.10 37.90 0.012004 488.0 46.4 24.8 30.5 10.8 21.0 23.70 17.50 4.56 1.48 12.99 0.06

2005P 517.0 48.7 48.7 47.6 12.0 25.2 18.25 14.57 2.76 1.68 13.99 0.062006P 693.3 72.7 75.5 70.0 16.1 25.2 12.41 10.09 2.57 1.25 8.74 0.09

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 87.72 79.53 162.60 176.16 -9.3%EBIT 3.06 17.49 3.22 21.95 470.8% 12.5%Gross profit -5.55 15.98 -2.14 21.62 12.3%Net profit -4.85 15.42 -1.82 20.13 11.4%Assets 254.43 429.69Equity 126.24 160.27


TORFARM The date of last recommendation's change 06.09.2005 ACCUMULATEPrice [PLN] 40.60 Market cap [PLN mn] 110 Valuation 45.90



2003 1099.5 8.4 10.4 7.5 1.8 2.0 10.83 8.77 2.98 0.07 11.37 0.072004 1309.1 6.8 11.9 9.2 2.5 2.7 12.05 9.48 1.61 0.08 15.61 0.05

2005P 1471.3 8.8 12.6 10.2 3.6 2.7 10.79 7.99 1.40 0.08 10.43 0.072006P 1612.9 13.6 13.5 10.9 3.5 2.7 10.12 7.67 1.22 0.07 7.60 0.10

dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 294.26 346.63 607.31 702.26 17.8%EBIT 1.15 1.69 3.76 2.75 46.4% 0.4%Gross profit 1.98 3.72 5.15 5.35 88.1% 0.8%Net profit 1.58 2.89 4.12 4.19 83.2% 0.6%Assets 262.94 320.01Equity 31.33 68.92

BETA (XI '04 - X '05) Price change: month -1%Max. 52 weeks 46.00 6 months 0%Min. 52 weeks 32.30 12 months

TPSA The date of last recommendation's change 08.02.2005 HOLDPrice [PLN] 23.80 Market cap [PLN mn] 33 320 Valuation 19.50



2003 18309.0 2994.0 1443.0 925.0 4360.0 1400.0 36.02 6.30 2.40 1.82 6.40 0.062004 18564.0 3494.0 3065.0 2209.0 4195.0 1400.0 15.08 5.20 2.07 1.79 5.68 0.08

2005P 18676.0 3618.0 2448.0 1780.0 4058.0 1400.0 18.72 5.71 2.02 1.78 5.57 0.082006P 18486.0 3295.0 2372.0 1725.0 4052.0 1400.0 19.32 5.77 2.01 1.80 5.83 0.08

Consolidated

Consolidated dynamics marginPLN mn' II Q'04 II Q'05 I-II Q'04 I-II Q'05 II Q'05/04 I-II Q'05Net sales 4 600.30 4 601.00 9 188.30 9 042.00 0.0%EBIT 911.44 1 070.00 1 920.44 2 034.00 17.4% 22.5%Gross profit 813.69 734.00 1 649.69 1 391.00 -9.8% 15.4%Net profit 585.98 534.00 1 168.98 946.00 -8.9% 10.5%Assets 35 234.81 34 446.00Equity 14 555.48 17 381.00


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Volume TPSA WIG

Pric e

[PL

Company Price NP 2004

Forecast ZN 2005

Forecast ZN 2006 P/E EV /

EBITDA P/E EV / EBITDA P/E EV /

EBITDA P/E EV / EBITDA PEG

IndustryAmica 19.60 40008 22190 13640 4.28 3.55 7.72 5.50 12.56 4.87 6.94 4.54 -0.10Apator 145.00 34958 28000 13.98 8.49 16.62 9.50 8.31Boryszew 18.00 80299 70600 70700 2.52 1.77 3.04 1.68 3.04 1.57 4.37 2.39 -0.28Cersanit 125.00 104272 118202 133000 15.94 9.86 14.06 9.12 12.49 7.91 15.80 9.71 1.23Dębica 63.20 94017 150000 9.28 5.52 5.82 4.59 14.30 7.11Duda 9.95 12940 39100 2.52 2.28 1.10 0.76 2.57 1.95Ekodrob 4.55 -3903 11.39 11.03Elzab 16.10 743 4559 27.12 2.89 5.70 2.92 9.94 2.55Forte 12.45 25042 26881 30932 8.61 6.82 10.97 5.38 9.53 4.50 13.43 6.71 -1.73Groclin 90.00 42722 43200 57200 11.59 8.12 11.46 7.61 8.65 5.85 13.86 8.17 0.74Hoop 11.75 -10324 5626 8608 7.93 27.34 4.94 17.87 4.66 5.95Hydrotor 22.50 4035 13.96 7.98 12.17 7.10Indykpol 54.00 13321 13830 15936 12.67 9.08 12.20 3.57 10.59 3.39 15.27 12.18 1.35Jelfa 78.00 9388 15700 22159 56.50 12.50 33.78 10.31 23.94 9.11 77.10 14.30 1.05Jutrzenka 75.70 8161 12042 19800 25.67 10.66 17.40 6.78 10.58 4.33 13.31 6.91 0.46Kęty 134.00 90750 89800 97000 15.51 9.30 15.67 10.32 14.51 8.43 16.26 10.07 4.58Krosno 8.00 18484 22140 38651 1.09 2.02 0.91 1.78 0.52 1.22 1.68 2.65 0.02Mennica 72.70 37936 12.59 7.57 9.79 6.89Mieszko 2.73 167 3900 6000 111.34 9.60 28.61 8.28 18.59 7.47 10.31 0.77Relpol 52.80 6066 9765 7.44 4.17 4.62 3.27 10.21 5.43Ropczyce 21.00 10067 3846 9.61 5.32 25.15 7.87 11.55 6.18Sanok* 122.50 43455 9.57 5.76 12.27 6.32Sokołów 4.81 41033 38245 48257 11.75 7.73 12.60 5.39 9.99 4.94 21.93 11.06 1.39Wawel 134.00 18715 13700 17100 10.74 8.28 14.67 7.80 11.75 4.88 9.49 8.37 -2.44Wilbo 2.11 -1620 5000 8.34 6.84 3.17 5.79Wólczanka 29.60 2111 25.21 8.10 15.75 6.09Żywiec 480.00 276854 19.65 10.10 19.10 9.34

Wholesale & RetailEldorado 31.80 14581 18600 22000 14.47 6.13 11.34 5.16 9.59 4.07 15.38 5.65 0.63Farmacol 35.70 57794 62932 70834 4.82 10.16 13.27 9.07 11.79 7.97 12.86 10.37 -0.13Alma Market 24.00 19085 9532 4.05 3.60 10.62 5.24 5.94 4.58LPP 860.00 45592 64500 94800 32.13 20.77 22.71 13.79 15.45 9.21 26.28 16.31 0.73PGF 52.90 42434 50735 56595 15.25 8.27 12.76 7.74 11.44 7.02 18.15 9.91 0.98

Construction / Real EstateBudimex 39.00 770 9200 16600 1293.08 108.23 30.17 59.98 20.49 3.55Echo 135.00 34686 41300 40.87 11.45 34.32 13.37 12.29 9.40Orbis 30.00 49715 66000 79000 27.80 8.48 20.94 7.16 17.50 6.78 29.56 7.75 1.07Polimex 51.50 40494 41900 49900 12.21 11.49 22.80 9.59 19.14 8.85 18.15 10.00 -0.61

ITComarch 59.50 14026 14000 18800 28.54 14.76 29.12 13.82 21.69 12.39 22.59 20.20 1.94Computerland 89.50 13807 77800 43.92 8.17 7.87 5.79 42.98 9.00Emax 91.90 9255 20350 33.66 8.59 15.31 6.54 24.13 9.46Softbank 35.50 29369 47597 70008 25.32 13.13 15.63 12.25 10.62 8.37 14.13 9.66 0.47

TelcoNetia 4.77 159802 96100 108300 10.28 5.70 17.97 5.02 15.95 4.64 11.58 5.51 -0.52

BRE Securities forecastsIf BRE Securities forecasts are not available, an average of market forecasts is used

* data concerning year 2003 come from the period 07'2002-06'2003, and respectively for the year 2004

Selected Midcaps listed on WSE2004 2005 2006 last 4 quarters

BRE Bank Securities

7 November 2005 52


Institutional Sales and Research: Tomasz Mazurczak tel. (+48 22) 697 47 35 DISA Director [email protected] Strategic Analysis Michał Marczak tel. (+48 22) 697 47 38 DISA Deputy Director [email protected] Telekomunikacja, surowce, metale, media, hotele Grzegorz Domagała tel. (+48 22) 697 48 03 DISA Deputy Director [email protected]

Sales:

Michał Skowroński tel. (+48 22) 697 49 68 [email protected] Emil Onyszczuk tel. (+48 22) 697 49 63 [email protected] Marzena Łempicka tel. (+48 22) 697 48 95 [email protected] Grzegorz Stępień tel. (+48 22) 697 48 62 [email protected] Joanna Niedziela tel. (+48 22) 697 48 54 [email protected] Aleksander Mazur tel. (+48 22) 697 48 69 [email protected]

Analysts: Jacek Borawski tel. (+48 22) 697 48 88 Senior Analyst [email protected] Technical Analysis Marta Jeżewska tel. (+48 22) 697 47 37 Analyst Marta.Jeż[email protected]

Andrzej Lis tel. (+48 22) 697 47 42 Analyst [email protected] IT Krzysztof Radojewski tel. (+48 22) 697 47 01 Analyst [email protected] Pharmaceuticals, others Sławomir Sklinda tel. (+48 22) 697 47 41 Analyst [email protected] Chemicals Przemysław Smoliński tel. (+48 22) 697 49 64 Analyst [email protected] Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa skr. pocztowa 21 www.dibre.com.pl

BRE Bank Securities

7 November 2005 53


List of abbreviations and ratios contained in the report. EV – net debt + market value (EV – economic value) EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation PBA – Profit on Banking Activity P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities S.A. A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The present report was prepared observing principles of methodological correctness and objectivity, on the basis of sources avail-able to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report nor for any dam-ages incurred as a result of investment decisions taken on the basis of the present report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. The present Monthly Report exclusively contains information previously published by BRE Bank Securities S.A. and only comprises a comprehensive presentation of unaltered data. The information, including recommendations, contained in the Monthly Report has been published in separate reports, the publication dates of which are located on page 4 of the Monthly Report. In connection with the above, BRE Bank Securities S.A. does not consider the Monthly Report to be a recommendation as under-stood in the Order of the Council of Ministers, dated 21 April 2004, in regard to information comprising recommendations concerning financial instruments or their issuers. Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendations. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Multiple – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the cur-rent state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

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