Kazakhstan Temir Joly NSE (Kazakhstan): Comments of KASE Listing commission

/IRBIS, July 11, 01/ - Following are the comments of Kazakhstan Stock Exchange (KASE) Listing commission - a special section of the commission's conclusion, which is included due to the admittance of second issue inscribed coupon bonds of Kazakhstan Temir Joly NSE (Astana; KZ2EUY03A368, $100, $30m, July 10.01 - July 10.04, semiannual coupon at 8.0% APR) to the official list of the KASE securities under category "A". The goal of the comments is to draw the attention of the KASE Exchange council, which is to make a decision on admitting the bonds into official list of the Exchange under category "A", to certain aspects of the issuer's activities, which deserve the attention. They should be considered by potential investors. STATE REGULATION Kazakhstan Temir Joly NSE is a monopoly in railroad transportation services sector in Kazakhstan. The company's tariff policy is regulated by authorized state bodies. The risk of a sharp devaluation of the national currency may lead to significant decrease in the revenues of Kazakhstan Temir Joly NSE in terms of dollars. The management believes that the company has insured itself against such risks. First, 47.9% of the transportation is transit and export-import transportation, where tariffs are set in foreign currency (Swiss francs). Second, Kazakhstan Temir Joly NSE has a sufficient safety margin: with liabilities of $262.5m as of January 1, 01, the volume of services offered in 2000 equaled $866m. TECHNICAL FACTORS Technical risks originate as a result of significant wearout of vehicles fleet, railroad capacity, engine flee and etc. In late 2000 wearout of man-made constructions equaled 37%, average wearout of the railroad pavement - 42%, average wearout of track vehicles reached 53%. In early 2001 wearout of passenger fleet is 12.8%, central power supply facilities - 56%, autoblocking units on the tracks out of the lines - 93%. RISKS RELATED TO NON-PAYMENTS Growth of accounts receivable in 1998-1999 provoked the deficit of free working capital. As a result, Kazakhstan Temir Joly NSE had to resort to short-term bank credits to restore its working capital to the normal levels. The measures taken by Kazakhstan Temir Joly NSE in reducing the accounts receivable include consecutive reduction of mutual settlements, refusal to transport and transit the cargo for the debtor. In 1999 the company refused to transport cargo for coal mines and transit of interstate trains of Uzbek and Kyrgyz railroads, which had significant debts to Kazakhstan Temir Joly NSE. These debts were settled partially by paying out the debt and supplying engines and power. Accounts receivable as of December 31, 1998 was $73.5m, as of December 31, 1999 - $63.1m, as of December 31, 2000 - $44.2m. Kazakhstan Temir Joly NSE has developed a currency risk hedging strategy. Active work is done to analyze currency and credit risks of the enterprise and introduce financial schemes and other measures to reduce those risks. In late 2000 the major debtors of Kazakhstan Temir Joly NSE were Razrez Severnyi LLP - KZT1,820.3m (18.3% of total receivables); Maikuben-West - KZT576.4m (5.8%) and Sverdlovenergo JSC - KZT209.7m (2.1%). ENVIRONMENTAL RISKS Lately Kazakhstan Temir Joly NSE has not been fined for any environmental damage, and did not have remarks from the governmental bodies regarding the use, storage, transportation of toxic materials and waste. In 1998 the company developed a 7-year plan (till 2005) on environment protection. It means the reduction of air pollution by installing dust collectors onto trains and replacement of diesel trains that use hard fuel to electricity powered trains. Besides, new water purification systems are to be installed. From 1998 Kazakhstan Temir Joly NSE has already spent about $1.8m and plans to spend another $2.2m till 2005. RESTRUCTURING RESULTS Kazakhstan Temir Joly NSE plans to conduct following activities in coming 5 years - full-scale restructuring the railroad industry. However, the company did not give a financial model of the duty division among the structural divisions it has now, which are to be separated into individual enterprises based on approved restructuring plan. Therefore, it is hard to determine possible consequences of the restructuring for potential buyers of Kazakhstan Temir Joly NSE securities.