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HUNGARY

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REPUBLICAN REFERENCE

Area (sq.km)
93,030

Population 
10,045,407

Capital 
Budapest

Currency 
Forint 

President 
Ferenc Madl

Private sector 
% of GDP 
60%

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Update No: 089 - (30/09/04)

Gyurcsány becomes Hungary's new prime minister
An extraordinary congress of Hungary's ruling socialist party decided to nominate Ferenc Gyurcsány, a 43 year-old millionaire, as new prime minister.
This was decided at a Hungarian Socialist Party congress on 25 August, convened to find a replacement for Péter Medgyessy. Gyurcsány secured 453 out of 623 votes cast by the delegates. The national parliament then approved the nomination on 6 September.
In an unprecedented move in Hungary's post-communist history, Medgyessy announced on 19 August that he would resign halfway through his term. Medgyessy had lost the support of the party's coalition partner, the liberal Alliance of Free Democrats (SZDSZ), following the latest government reshuffle. 
The new candidate, Ferenc Gyurcsány, has often been compared to the British Prime Minister Tony Blair for his charisma and casual style. Gyurcsány, an economist by training, became an advisor to Medgyessy in 2002 after building a business empire which made him one of the 100 richest Hungarians. He was appointed sports minister in 2003. 
Having secured a victory over Péter Kiss, the Deputy Prime Minister, Gyurcsány said he would win the next elections in 2006 to secure two consecutive terms for the Hungarian Socialist Party - something which no Hungarian government has managed to achieve since 1989. 
The SZDSZ has said that it fully supports Gyurcsány's candidature. The 20 SZDSZ votes in Hungary's legislature are crucial as they would help the new premier preserve a narrow majority. 

Economy bears up
The economy is faring reasonably well. It grew by 2.9% in 2003 and is expected to notch a 4.0% growth rate this year. 
The role of foreign investment has been important, now amounting to over $20bn. The government has introduced a new law establishing an investment subsidy regime that tops up any foreign investment by 10%. The first such occasion took place in the summer when Bosche, the Swiss pharmaceuticals giant, was accorded a subsidy on a $150mn investment. 
There is one grave problem, a huge public deficit of 5.8% of GDP. The government needs to address it as its number one priority.

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AVIATION

Loan for Wizz Air

Low-cost Hungarian airline Wizz Air is to receive a €3m loan convertible to shares from Indigo Partners, a private equity firm that invests in airline ventures, and the airline's owners, a group of Hungarian and foreign investors, the airline announced recently, Budapest Business Journal reported. 
The cash will secure the airline's operation and further growth until a €40m capital raise - half of which will also come from Indigo Partners - is completed.
Wizz Air CEO Jozsef Varadi said recently that the airline had met all requirements for the planned €40m capital injection at the end of the summer. Indigo Partners announced in the middle of May that it intended to provide €40m of the capital injection. Varadi declined to name the other parties involved.
The move will make Wizz Air the richest budget airline in Europe, Varadi said at the time, adding that capital was key to survival on the market for low-cost carriers. Wizz Air currently has registered capital of more than €7m.
The airline launched its first flights from Katowice, Poland, in May 2004, and its first from Budapest in June. The company, which has five Airbus A320s, has carried 100,000 passengers so far.

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CREDIT RATINGS

Takarekszovetkezeti Bank gains BB+/B ratings

Standard & Poor's Ratings Services said on August 5th that it assigned its BB+/B counterparty credit ratings to the Hungary-based Magyar Takarekszovetkezeti Bank Rt (Bank of Hungarian Savings Cooperatives Ltd; Takarekbank). The outlook is stable.
The ratings on Takarekbank are based on the bank's relatively humble position in an increasingly competitive market; concentration risks on the savings cooperatives and the municipalities sectors; poor, albeit improving, profitability; and vulnerability to market risk in a volatile economic environment, New Europe reported recently. 
The ratings also reflect the potential for tighter cohesion with the 159 savings cooperatives that are members of the National Association of Savings Cooperatives, which gained a majority stake in Takarekbank in April 2004, could benefit Takarekbank's net revenues and efficiency, and the sector's product offering and sales volumes.
Takarekbank is considered by Standard & Poor's to be a strategically important component within the cooperative banking sector.
"The ratings are supported by Takarekbank's robust liquidity and sound capital management, strengthened risk management, and the completion of its restructuring, which should allow the bank to maximise business opportunities in a soundly growing economy," said Standard & Poor's credit analyst Alwin Greder.
"The market position and financial strength of the savings cooperatives, which are underpinned by an integration contract signed with Takarekbank and fortified by the sector's own protective factors for the ratings on Takarekbank," she added.

Land Credit and Mortgage Bank rating upgraded

Moody's Investors Service has upgraded the financial strength rating (FSR) of Land Credit and Mortgage Bank (FHB) to D from D-, the agency announced on August 4th, New Europe reported recently. 
The rating outlook is positive. The A2/P-1 deposit ratings of FHB remain unchanged, underpinned by the support provided by the Hungarian state (rated A1/P-1), its majority owner with a 53.2% share, Moody's said. According to the agency, the upgrade reflects the facts that FHB's franchise as a refinancing vehicle of the Hungarian mortgage market is strengthening.

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ENERGY

MOL posts large Q2 profit, plans major transactions

Oil and gas company MOL Rt posted net profits of Ft 27.9bn (€113m) in the second quarter of the year, compared to losses of Ft 10.9bn in Q2 2003, the company announced recently. The results came after speculation about MOL's expansion in Romania and confirmation of its desire to sell Panrusgaz Rt, Budapest Business Journal reported.
Tamas Pletser, oil and gas analyst for the CEE region at Erste Bank Investment Rt, said that, with the exception of lower than expected profit on upstream activities, the results were in line with his forecasts.
"There was especially good profit owing to the high margins on MOL's refining business in the period," he said, although adding that this will probably not be repeated in the second half, as oil prices are declining from first-half highs. Even so, he predicted H2 profit would be strong, pin-pointing upstream activity and petrochemical performance as likely stars.
According to MOL's earnings report, H1 operating profit was Ft 108.1bn, drastically up from Ft 28.4bn a year earlier. This was due to the consolidation of Ft 29.1bn in revenues from Slovak subsidiary Slovnaft SA, the rising volume of sales of refined product, and the adoption of EU regulations in the gas business.
Chairman-CEO Zsolt Hernadi said the outstanding H1 results are a product of a strategy that started in 1999 and extended in 2002. Hernadi said MOL's regional strategic partners, Slovnaft and Hungarian petrochemical concern TVK Rt, accounted for more than 25% of first-half operating profit, not including earnings resulting from synergy between the companies.
Part of that strategy is continued expansion in the region.
According to Erste's Pletser, Southern Europe and the Balkans constitute the main direction of investment. Reports in the Romanian financial press in past weeks have claimed that MOL is set to purchase 58 filling stations in Romania from their current operator, Royal Dutch/Shell Group.
Although the company has so far refused to comment on the purchase rumours, Budapest analysts see the move as highly likely, noting that MOL purchased 23 filling stations from Shell last summer.
Peter Tordai, who covers MOL as head of research at K&H Equities Rt, said the deal makes sense, even if investing in a loss-making business might worry MOL shareholders in the short term. Tordai said that in Romania, margins on fuel retain are very low compared to Western Europe. This, he argued, might explain why Shell is looking to exit the market.
"MOL is probably willing to continue to make a loss as it sees the network as strategically important in the longer term, believing that, through a larger network, economies of scale will contribute to breaking even or making a profit," he said.
Romanian business daily Ziarul Financiar estimated MOL's buyout of Shell's Romanian network to be worth $70m, saying it could be completed by the end of the year.
Following its strict communications policy, MOL declined to connect.
In other news, it was confirmed in early August that MOL is planning to sell its 50% share in Panrusgaz, the import/export company it co-owns with Russia's OAO Gazprom.
On Panrusgaz, MOL confirmed that it had issued a closed tender to sell its 50% stake in the company, set up in 1994 to import Russian natural gas from Gazprom. Details of the closed tender are not being disclosed.
Panrusgaz had after-tax profit of Ft 2.77bn on sales of Ft 367.5bn in 2003. 
Market rumours suggest that Gazprom is likely to buy out MOL's stake, a view shared by both Pletser and Tordai. Pletser said it seems logical for MOL to sell its stake in the company if it is intent on exiting the gas business.
MOL said in July that it expects bids to arrive from companies which carried out due diligence on its three gas subsidiaries - MOL Natural Gas Storage Rt, MOL Natural Gas Transport Rt, and MOL Natural Gas supply Rt. MOL is bound by law to hold on to 25% plus one share in all of all subsidiaries transporting gas, but is free to decide what to do with the rest.
This spring, internet portal portfolio.hu put the value of MOL's entire gas division at about Ft 268bn, excluding the Panrusgaz stake.

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FOOD & DRINK

Monarchia merges with New York fine wine distributor

Monarchia International, a Delaware-registered trader of Hungarian wine, recently merged with New York-based wine importer and distributor Matt Brothers, Budapest Business Journal reported recently.
The move will raise Monarchia's profile and boost its international wine sales, according to Nimrod Kovacs, the Monarchia executive who has now become chairman of the new company, Monarchia Matt International (MMI).
"Hooking up with a company like this is the best way to tackle the huge market. We'll use their existing relationships to reach a wider clientele," said Kovacs.
MMI will import and distribute fine wines in the US and the EU - areas where, according to Kovacs, Matt Brothers has traditionally had strong marketing and sales channels.
Monarchia International was set up by Monarchia Holding, which is also the parent company of Budapest-based Monarchia Boraszati Kft, a wine production and distribution entity. Monarchia Holding now holds 62% of MMI.
"It's good that were the controlling shareholder and not the other way around," said Kovacs, whose personal share of Monarchia Holding is 55%.
Annual revenues for the new company for 2004 are expected to be around $3m, said Kovacs.
He noted that Monarchia's wines now have access to several hundred more outlets, including wine stores, restaurants and bars.
Around Ft 600m (€2.43m) has so far been invested into Monarchia Holding. Kovacs said a capital raise of around $2m, with $1m going into the parent company and $1m going into production, is necessary for Monarchia Holding to break even.
With Hungary now part of the EU, there is less duty and tax placed on exporting its wine, noted Kovacs.
"[Exporting] is much easier now because Hungary is in the EU. There are greater margins for our partners," he said.
The merger will bring a distinctively new and exciting model for the wine industry, according to MMI's CEO, Joern Tittel.
"With MMI, we will attain a high level of vertical integration, as well as the ability to keep costs down while maintaining benchmark quality," he said.
Tittel also claimed that the company now boasts a management team possessing extremely high business acumen on both sides of the Atlantic.
Tittel was formerly president and CEO of Monarchia's earlier distributor, Pelloneda Wines LLC. Kovacs doubles up as chairman of the UPC Central Europe Group, a cable TV operator. The management team is completed by Chief Marketing Officer Monika Elling, and partners Barry and Peter Matt.
Elling said selling beverages in America can be surprisingly complicated.
"From a wine sales standpoint, the US functions as 50 different countries, with unique legal frameworks," said Elling. She explained that permits and licenses are applied for on a state-by-state basis, which is far more complicated than getting permits to trade in the EU.
"It means you need an importer and distributor for each and every state, or you need to be licensed yourself. These are both quite difficult feats, since the entire winemaking world is lobbying distributors with their products," she said.
MMI's current portfolio of wines includes the Monarchia Estate Selection of Hungary; Kartauserhof and Schmelz of Austria; Geografico, Rocca Bernarda and Malgra of Italy; Cune of Spain; and Yamhill of Oregon. MMI will have additional brands from the US, Germany, Austria, New Zealand, Spain and France arriving in early fall.
Monarchia's 22 wines on sale in the US sell in the range of $13-$200 for the Tokaj aszu dessert wines of famed vintner Zoltan Demeter.
While Monarchia is a distributor for an assortment of Hungarian winemakers in Hungary, it only sells its own brand-name wines outside Hungary. These, including "Rhapsody in Red," "Regnum Cuvee" and "Olivier," have either been bottled exclusively for Monarchia, or have been produced at Monarchia's own winery in Eger, which produced 250,000 bottles last year.
"Our wines are distributed in 19 states in the US," said Elling. "Of these, about eight are 'direct' with MMI sales representation, and the rest are through other wholesale partners and via brokers."
Elling added that MMI will increase its direct representation over the next three years. With its vertically integrated framework, MMI stands to have margins well above the industry norms, she said.
Before the merger, Monarchia boosted its direct distribution channels by opening regional sales centres in Washington, DC, and Massachusetts, to add to two it already had in and near New York.

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MINERALS & METALS

Dunaferr buyers, creditors reach deal

The Ukrainian-Swiss buyers of steel firm Dunaferr, a consortium of Donbass-Duferco, have reached an agreement with the creditor banks of Dunaferr, privatisation agency APV reported recently. 
Although APV did not reveal details of the agreement with the creditors, it said it will lower Dunaferr's HUF 60bn debt significantly. The HUF 60bn is owed to Dunaferr's four major creditors, K&H Bank, OTP Bank, Raiffeisen Bank and CIB, and guaranteed by state banks Eximbank and the Hungarian Development Bank (MFB). APV extended the original August 24th deadline for the completion of the privatisation of steel works Dunaferr recently, as the completion required about another month, APV said. 

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PHARMACEUTICALS

Egis predicts net income gains in Q3

Hungarian pharmaceutical producer Egis forecasts it will post a net income of HUF 1.935bn in the third quarter of its fiscal year, period ended on June 30th 2004, according to an Interfax survey of analysts. This would represent an increase of 12.3% over the same quarter of the previous year. Like its sector peer Richter, Egis is seen to have benefited from the restoration of producer prices of drugs as of July 1st to their levels prior to a 15% price cut enacted by the government in April. While the price cut boosted sales volumes at the beginning of the quarter, pharmacies and wholesalers also likely built up inventories in late June in anticipation of the price increase. Egis's total sales are projected to rise 18.1% in the period.

Top local pharmas make foreign investments

Hungary's leading pharmaceutical manufacturers, Richter Gedeon Rt and Egis Rt, are investing in expanding production capacities abroad, the companies announced separately, Budapest Business Journal reported recently.
Richter said it will invest $20m in an Indian venture with Themis Medicare Ltd, based in Mumbai, India, to expand production capacity. Egis said it has acquired an 87.5% stake in Russian drug company Serdix.
Richter will own 51% of the Indian joint venture, which is scheduled to start producing synthetic active ingredients for drugs in 2006, the company said in a stock exchange statement. Richter will finance the project with a long-term loan to the venture.
Richter, the world's fifth largest supplier of birth control products and hormone substitutes, has agreements to develop generic treatments for the US market for companies such as Barr Laboratories Inc and Ivax Corp. It is looking to reduce costs through the new venture, analysts said.
"This makes perfectly good sense," said Bram Buring, an analyst at the Prague unit of Raiffeisen Zentralbank Osterreich AG. "It's primarily a question of the most efficient way of producing bulk."
Richter will set up the facility in Vapi, Gujarat, adjacent to a Themis facility, using existing infrastructure, spokeswoman Zsuzsa Beke said. In the first phase, the plant will produce solely for Richter, which will turn the bulk into finished products in Budapest, she added.
"We can't expand in Budapest and we want to concentrate on steroids at our Dorog plant," Beke said, referring to the town north of Budapest where Richter has a large production facility. "This should be considered as nothing more than expanding capacity."
Richter's sales to the US, its second largest market, rose 12.1% in the first half to $40.8m, helped by higher revenue from steroid sales to other companies, such as Barr and Johnson & Johnson. Richter sells steroid ingredients for nine of Barr's oral contraceptives.
Bulk sales in the US and Western Europe accounted for 74% of Richter's revenue of $172.9m there last year, the company said in its annual report.
The Hungarian company owns an 8.2% stake in Themis.
For its part, Egis acquired an 87.5% stake in Serdix for $3.5m, the company announced on the website of the Budapest Stock Exchange Rt (BET). The purchase price included a capital raise.
Egis will set up a Russian production facility in cooperation with its majority owner, Servier of France, as a strategic partner, according to the announcement, which revealed no further details.
Egis announced in January 2002 that it was planning to set up a production facility in Russia to cater to increasing demand for exports. The company said at the time that it was considering both acquisitions and greenfield investments, and that the project would be completed in two or three years.
In the first nine months of its business year, which begins in October, Egis had export sales of $34.5m in Russia, up 40% from a year before.
Egis had overall exports of $135.5m in its Q1-Q3, up 22% from a year before.

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TELECOMMUNICATIONS

Matav profits up 14% in Q2

Telecom Matav Rt reported a 14% increase in second-quarter profit, and said it plans to reduce costs, including cutting jobs, to counter increased competition, raise profit and make acquisitions to spur sales through 2006, Budapest Business Journal reported recently. Second-quarter net income rose to Ft 16.21bn (€65.6m), from Ft 14.23bn a year earlier. The figures were calculated by subtracting first-quarter profit from six-month numbers. Q2 sales fell 0.1% to Ft 151.78bn.
In the first half, profit fell 9% as sales of Matav's fixed-line business declined. Net income in the first six months fell to Ft 30.29bn, from Ft 33.25bn a year earlier, the company said in a stock exchange statement. Total sales rose 0.4% to Ft 297.92bn.
Shareholders in April approved a proposal to almost quadruple the 2003 dividend to Ft 70 forint. Matav said it will stick to the dividend policy outlined earlier this year.
The company said it will cut an unspecified number of jobs across all units, taking a charge of Ft 22.7bn this year to pay for the measures. It expects to save Ft 19.5bn by the end of 2006.
Matav aims to increase the number of fixed lines per employee to 500 over the next two years, closer to West European industry levels, from the current 350 lines per employee.
At the same time, it is seeking to more than double its asymmetric digital subscriber lines (ASDL), for faster internet access to 400,000 customers in the next two years. These subscriptions more than doubled to 142,430 in the first half, it said.
With 14,798 workers, Matav, which is owned by Deutsche Telekom AG, is the country's third largest employer.

3 mobile providers are SMPs

New Europe reported recently that the National Telecommunications Authority (NHH) has determined in its first analysis of the mobile market that all three GSM providers in Hungary - T-Mobile, Pannon GSM, and Vodafone - have significant market power (SMP) in the area of call termination, NHH President Daniel Pataki announced on August 4th. In line with EU regulatory practice, the NHH has begun a series of market analyses affecting the fixed-line and mobile telephony markets, with EU practice identifying 18 separate market areas, as opposed to the previous four acknowledged in Hungary. The first two have now been completed, Pataki said. The NHH Council determined during its study that all three mobile providers had a 100% market share in terms of traffic terminated in their own networks, and therefore declared all three firms SMPs. Thus far, only T-Mobile and Pannon, a subsidiary of Norway's Telenor, were regarded as SMPs by the law. The new classification will bring new requirements for Vodafone starting January 1st, 2005.

Cisco Systems sees higher revenues

Telecom equipment maker Cisco System Hungary recorded a 20% increase in US$-based revenues in its 2004 financial year, period ended July 31st, Managing Director Robert Budafoki told reporters on August 12th. Budafoki did not reveal any additional details regarding the firm's financial results, citing company policy. He noted, however, that Cisco sold 10,000 Internet protocol-based (IP) telephones in the past year. This is double the amount sold altogether in Hungary by July 2003, and Cisco expects sales to double in each of the following few years as well. Cisco is a leader on the Hungarian IP telephone market, with other equipment makers having sold just 3,000-5,000 IP phones so far, Budafoki said in April. Cisco's largest IP telephony clients are OTP Bank, Hungary's largest Internet service provider Axelero, power utility Demasz and the Central Statistical Office, New Europe reported recently.

Matav Q2 net income result at high end of expectations

Matav Rt, Hungary's dominant telecom provider, reported net income of HUF 16.213bn in the second quarter of 2004, rising 14% on the year and coming in near the top end of analyst expectations polled by Interfax recently. For the first six months, net income was HUF 30.29bn, down 8.9% from the same period last year.
Total revenues were flat both in the first half and second quarter, with high growth in mobile and data transmission revenues offsetting the decline in domestic fixed-line and international revenues. With operating costs rising 4.7%, operating income fell 14.4% to HUF 57.6bn, while EBITDA (earnings before interest, tax, depreciation and amortisation) decreased by 2.3% to HUF 126.1bn, for an EBITDA rate of 42.3% in the first half.
In the fixed-line segment, call traffic revenues declined 13%, due to lower traffic as well as discounts granted to customers - in all, 55% of telephone lines were used under some kind of discount subscription package. Lower interconnection fees also contributed to the decline.
Meanwhile, leased line and data revenues were up 23%. The EBITDA rate in the fixed-line segment was 36.3%. The mobile division produced an EBITDA rate of 41.6% in the first half. Average customer acquisition costs declined 20% to HUF 10,284, but average revenues per user (ARPU) also fell, to HUF 4923 per month.
Post-paid customers on average brought six times more revenues than pre-paid clients. The ratio of post-paid customers within the total rose one point to 26.5% in the first half. While new tariff packages boosted mobile traffic, ARPU was negatively affected by tariff regulations, Matav said.
Meanwhile, revenues from value added services such as SMS continued to increase at a rate above the average. In the international segment - comprising Macedonian subsidiary MakTel - the EBITDA rate remained high at 51.7%. However, revenues only increased by a modest 4%, and even this was driven mostly by exchange rate movements. Higher revenues in the fast-growing mobile segment were offset by lower revenues from international calls.
MakTel's mobile clientele expanded by over 50%, while the number of Internet subscribers increased by over one third. Among group expenditure items, appreciation was up 10.8% due to write-off charges related to the re-branding of Westel to T-Mobile, incurred in the first quarter. Personnel costs increased by 7.4%, with a near 3% group headcount reduction insufficient to offset the effect of wage increases. Other costs - such as marketing, maintenance and equipment purchases - showed a slight decline on average.
In the first half, net financial losses were reduced by HUF 3bn - the result of a HUF 6bn decline in exchange rate losses against a smaller increase in interest expenses on HUF-denominated loans.

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