cfa institute research challenge hosted in bucharest · 2019. 5. 18. · this report was made by...

CFA Institute Research Challenge

Hosted in

BucharestFaculty of Finance, Banking, Insurance and Stock Exchange

Academy of Economic Studies Bucharest

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22

27

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1/4/2016 7/4/2016 1/4/2017 7/4/2017 1/4/2018 7/4/2018

Faculty of Finance, Insurance, Banking and Stock Exchange

This report was made by Bucharest Academy of Economic Studies students with the sole purpose of taking part in the CFA Research Challenge

The Bucharest Stock Exchange (BVB) is the only securities market operator in Romania. Itwas re-established in 1995 after the fall of the communist regime and went public on itsown Regular market in 2010.

INVESTMENT SUMMARYWe issue a SELL recommendation with a 12 month target price of RON 18.4, representing a12.4% downside from its December 31st, 2018 closing price of RON 21. Our valuation isbased on a dividend discount model which we cross-checked with a relative valuationapproach.

INVESTMENT HIGHLIGHTSUnpredictable fiscal and economic policies curb investors’ appetite. The government’sannounced decision to impose additional levies on banks and energy companies, whichrepresent roughly 60% of the stock exchange capitalization, impose heavier capitalrequirements on pension fund managers and allow for early withdrawal of contributors,led to a 11.21% drop of the main index of the stock exchange in one day. Even if suchmeasures would not be fully implemented as initially announced, such sudden fiscal policychanges create mistrust for investors in the local economy who might adopt more of a“wait-and-see” approach instead of active investing and trading which means lowerrevenues for the stock exchange.The big jump to emerging market status will come later rather than sooner. It is clear thatwithout being upgraded to emerging secondary market, the development prospects of thelocal securities exchanges are almost non-existent. The upgrade is on the other handdependent on having a solid number of significant IPOs. Although BVB estimates that thiswould happen in 2019, no major IPOs are forecasted in the current period and given therather unfriendly investor climate created by the latest fiscal and economic changes, we donot see the liquidity increase this year. Therefore, we estimate that only if the CCP projectbecomes operational and generates some revenues (i.e. in 2021) the market liquiditymight rise to a sufficient level in order for BVB to be promoted to emerging market. At thesame time, such upgrade would not bring immediate significant turnover increase from thesupply side, i.e. increasing the number of issuers should develop as well. With 6 IPOs in thelast 3 years vs. 27 on the Warsaw Stock Exchange in 2017 alone, the local capital marketoperator still needs to find the right levers for attracting new issuers.Central Counterparty project profitability will be capped by the limited development ofthe overall local capital market. Considering the lack of sophisticated investors and lowliquidity of the local market (i.e. more than 10 times lower than the Warsaw StockExchange), our analysis shows that the CCP project is not sustainable at this stage.Moreover, we estimate that the CCP implementation will be delayed as BVB needs to finda second investor in the project as they will only contribute with RON 47 mln (approx. EUR10 mln).

Valuation Date: 31.12.2018 Recommendation: SELL Stock Exchange: Bucharest

Current Price: RON 21 Target Price: RON 18.4 Sector: Finance and Insurance

Ticker: BVB Downside: -12.4% Industry: Securities and Commodities Exchange

Key Figures

Annual Dividend (RON) 1.69

52w Low (RON) 20.9

52w High (RON) 30.0

Avg. daily vol. (3

months)6,834

Number of shares (mln) 8.04

Equity Value (RON mln) 147.96

Free float (%) 100

LTM P/E 16.6x

Investors’ Structure

BVB stock price evolution (Jan 2016-Dec 2018)

Key Financials RON mln 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

Revenues 31.6 38.1 39.8 41.0 41.5 45.2 52.5 55.1EBIT (%) 19% 24% 22% 21% 19% 14% 23% 23%

EPS 1.0 1.5 1.3 1.4 0.8 1.1 2.0 2.2 Rev. g% 2.4% 20.5% 4.7% 2.9% 1.4% 8.9% 16.1% 5.0%

Valuation main inputsBeta 0.88CoE 10.50%Transactions growth rate 5.5%No IPOs (2019-2013) 10Start of derivatives market 2020Emerging market upgrade

year 2021

2

8.79%

10.39%

30.73%

50.09%

Retail Pension funds

Investment funds Non-residents


BUSINESS DESCRIPTIONBackground. Established in 1995, Bursa de Valori Bucuresti (BVB) is, since 2017, the onlysecurities exchange in Romania following its acquisition of the former derivativesexchange, SIBEX, whose activity was discontinued and subsequently merged into BVB.With a total market capitalization of listed companies of approx. EUR 32 bln, it is the thirdlargest securities exchange in the CEE region. Currently listed as a frontier market by MSCIand FTSE Russell, it has the prospect of being upgraded to an emerging market when theliquidity criterion is met. Although a moving target, due to the specificities of the activity,the needed liquidity level of 15% in market capitalization is estimated to be reached by2019.

Market features. The stock exchange offers a trading venue for asset classes such asequities, bonds, fund units, indices, certificates and warrants. BVB operates two markets,the Regular market (Premium and Standard) for mature companies and AeRO for SMEsand start-ups. BVB has several subsidiaries operating in the post-trading, registry andother services such as the management of the Investors’ Compensation Fund. Thecompany also provides data vending services and owns the Corporate GovernanceInstitute, the latter not being included in the consolidated figures.

Revenue structure. The largest revenue source for the company is from trading fees,accounting for approx. 60% of the company’s revenues, while post-trading servicesensure a stable share of 26% of revenues, with the balance completed by registry andother services. With 84% of total trading value, equities account for most of tradingrevenues which have risen with the number of IPOs and shows that continuing listings willlift volumes and thus revenues.Indices. BVB calculates 8 indices, the most significant one being the BET which currentlycomprises the 15 most traded stocks, with the exception of financial investmentcompanies (SIFs), on the Regular Market. The main index (BET) is concentrated aroundenergy and banking stocks.

Historical growth sources. BVB developed mostly through new IPOs and bond issuances.The most significant listings have been those of State-Owned Enterprises (SOEs), namelyenergy companies Electrica, Nuclearelectrica and Romgaz, which drove up volumes, thusbringing closer the prospect of an upgrade to an emerging market status. Private home-grown companies, such as telecom operator Digi, hospital operator Medlife and fast-foodfranchisee Sphera Group, have also chosen to publicly offer shares. Another source ofgrowth has been the rise in corporate bond issuances. Ten bond issuances took place inthe last 2 years, proving that BVB can be an alternative to bank financing. More recently,another reason for BVB’s attractiveness has been the high dividend yield, which in thecase of some issuers went up to 23%. This is mostly due to a Ministry of Finance policywhich demands that state majority-owned companies (SOEs) distribute at least 90% oftheir net profit to the shareholders. BVB ran various educational programs to enhance thedemand side as well. However, it might be difficult to quantify the effect of such initiativeson the short-term, given the limited prospects for new major IPOs of SOEs to boostsupply.

Strategy. With only eight local private medium-sized companies having announced theirintention to list on the AeRo market, BVB is focusing on alternative ways of increasing thesupply of products and services. Thus, they are planning to expand the business bycreating a Central Counterparty (CCP) in 2019 to enable derivatives trading in stocks, FX,indices and power, but also to provide clearing services to the energy market operator(OPCOM) for the centralized bilateral contracts, market-continuous trading, which isbasically an anonymous forward power market. The CCP project received the approval ofBVB’s shareholders, provided that an additional external equity participation of approx.EUR 6 mln is attracted while BVB will contribute with EUR 10 mln in equity. Should theCCP project be timely and properly implemented, it would become partially operational inearly 2020. Although in its early stage, the CCP in itself is not expected to be profitable, itcould bring additional revenues of up to EUR 3 mln in 2024 and EUR 5 mln by 2029.

CORPORATE GOVERNANCEBVB is headquartered in Bucharest and has been listed on its own Regulated market sincethe 8th of June 2010. The company has a share capital of RON 80,492,460 with a nominalshare value of RON 10. By law, no investor is allowed to own more than 20% of the stockmarket operator. The company has a dual management structure with a Board ofGovernors, led by a President and a Vice-President and which includes 9 non-executivedirectors, five of which are independent, appointed for a term of four years. The boardappoints the group’s CEO and Deputy CEO for a mandate of a similar length.

Figure 1: Trading value by asset (2018)

Source: BVB Group

Source: BVB Group

Shares and Units Bonds Structured Products

84%

16%2%

60%26%

13%1%

TOTAL REVENUES RON 39.82 mln

Trading Post-trading Registry FCI&other

Figure 2: Structure of revenues (2018)

Source: BVB Group Financial Statements

Board of Directors

Lucian - Claudiu Anghel Gabriel MaricaValerian Ionescu Octavian MolnarRobert-Cosmin Pana Otto NaegeliClaudia Gabriela Ionescu Dan-Viorel PaulRadu Hanga

Executive OfficersAdrian Tanase

Marius-Alin Barbu Virgil Stroia

Figure 4: Management

6500

7500

8500

9500

Figure 3: Evolution of BET INDEX in 2018

Source: Reuters

69%

12%

17%2%

Romanian Institutional InvestorsForeign Institutional InvestorsRomanian Private IndividualsForeign Private Individuals

Source: BVB Group

Figure 5: Structure of Shareholders

3


The Board of Governors is led by Lucian Anghel since 2012, nominally an independentdirector, a well-known figure in the local capital market community and former chief-economist of BCR, Romania’s largest bank in terms of assets. The CEO is Adrian Tanase,CFA, former CIO of NN Investment Partners, the manager of the country’s largest Pillar 2private pension fund. He was appointed in 2017, replacing Ludwik Sobolewski, the formerCEO of Warsaw Stock Exchange, brought with high hopes of upgrading the stock marketto an emerging market status, but which failed to materialize.Corporate social responsibility. Every year, BVB is a strategic partner in organizingInvestment School, an education program led by a local NGO designed for passionatestudents interested in how to invest in local and global financial markets or who want tobuild a career in the financial sector.

INDUSTRY OVERVIEWMacroeconomics. In November 2018, Fitch affirmed Romania's 'BBB-'/Stable sovereignrating. The main drivers were related to moderate levels of government debt and GDP percapita and human development indicators that are above ‘BBB’ category peers. Risks ofthe Romanian economy overheating have declined somewhat as the pace of GDP growthhas slowed since 2017 as the National Bank of Romania has tightened monetary policyand headline inflation has started to fall. However, in light of the emergency ordinance114/2018 and the release of 2019 budget, there could be a risk of having a reassessmentof this rating. Being just above the investment grade limit may be less attractive forinvestors as most of them would choose sound economies with higher ratings.Thus, and with the potential upgrade of the Bucharest Stock Exchange at the level ofsecondary emerging market, the number of investors should increase, which would leadto higher turnover and revenues for the company.Romania is facing a busy election calendar over the next two years, with Europeanelections in May 2019, presidential elections in November/December 2019, localelections in May/June 2020 and parliamentary elections in November/December 2020.We estimate that the periods around these dates may create more volatility in the localcapital market, which may create an unfortunate framework for investing at BVB.Households. At household level, Romania faces a passive saving behavior as most of thepopulation chooses to keep almost 39% of their financial assets in deposits and cash andonly 30% in equity, fund units and debt securities. Moreover, according to a survey weran, the general opinion (51.2% of respondents) regarding the evolution of BVB, in thelight of the latest political developments, is that it will continue to be stable, close to itscurrent position while 29.4% of respondents estimated a decrease of the stock market.

Compulsory Private Pension Funds (Pillar II). At the end of June 2018, the seven pensionfunds (Pillar II) active on the local market had stock investments of around RON 7.1 bln onthe Bucharest Stock Exchange (4.3% of the total market capitalization of the Romanianstock market) ensuring approx. 15-20% of the market turnover. However, currently thenewly adopted Emergency Ordinance 114 could negatively impact the private pensionfunds sector as it imposes new mandatory capital requirements for managers and turnsthe contribution of participants optional. It is not yet clear how the provisions of theEmergency Ordinance 114 would be implemented or if it will remain in place as there isan intense lobbying from the market to withdraw these envisaged changes.

Improvement of the BVB liquidity. Bucharest Stock Exchange has attracted in the pastyears only six local companies in IPOs. However, there has been an increase of tenderoffers, takeover bids and secondary public offers which boosted the liquidity on both theregular and AeRO markets. For 2019 it is estimated to see new local companies from theprivate sector listed on BSE (E-Infra, Doripesco, Safetech, iHunt Technology and CentrulEuropean de Despăgubiri). In addition, there are ongoing discussions regarding the listingof Hidroelectrica and Aeroporturi Bucuresti. However, it is unclear when the listing ofthese SOEs could occur as the Ministry of Economy keeps postponing the decision to listthem. BVB has also improved lately the liquidity in the fixed income market as it attractedevery year new corporate bonds issuances. For 2019, the market supply of bonds isexpected to increase with the listings of debt issued by Bittnet Systems, Idea Bank andElefant Online. We estimate an increase in the trades of bonds as the high coupon rateswill attract more investors. According to the latest press release, Bittnet Systems andElefant Online will offer an interest rate of 9% and Idea Bank 8.5% (the bond issuancebeing in EUR). However, the percentage of bonds turnover in total is not very high so theboost resulted from these issuances will not yield a substantially increase of BVBrevenues.

Foreign Currency Long-Term IDR BBB-

Short-Term IDR F3

Local CurrencyLong-Term IDR BBB-

Short-Term IDR F3

Country Ceiling BBB+

OutlooksLong-Term Foreign-Currency IDR StableLong-Term Local Currency IDR Stable

Figure 6: Romania Country Rating

Source: Fitch Report on Romania

Figure 7: Households Financial Assets in 2017

Deposit & Currency

Equity & Investment Fund Units

Others

Insurance & private pensions

Source: Eurostat

39%

26%

25%

9%1%

0 5 10 15 20

Listed shares

Fund units

Unlisted shares

Other equity

EUR

bln

EUR 207 mln

EUR 1.5 mln

EUR 2 mln

EUR 40 mln

EUR 50.5 mln

EUR 62 mln

Source: BVB Group

Figure 8: IPO Value (2016 – 2018)

8.5%

9%

9%

EUR 5 mln

RON 9.7 mln

RON 7.6 mln

Figure 9: Main bond issuance in 2019

Source: Team Assessment 4


COMPETITIVE POSITIONINGBVB has a monopoly position in Romania, as it is the only market operator, after theacquisition and subsequent absorption of SIBEX, the local derivatives exchange. However,BVB directly competes in attracting investors with all the regional stock exchanges in theCEE as well as Greece.

Regional Level

Market Capitalization. BVB is a medium-sized company compared to the other stockexchanges in the region. A significant jump in the market capitalization was due to thelisting of the Austrian financial group, Erste Group AG, on the regular market. Also, thelaunch of the alternative market was a successful step in the development of the stockexchange and well received by SMEs. The declared aim of the current BVB management isto further develop the market in order to get closer to the capitalization of the WarsawStock Exchange.

Offer and Turnover. The asset classes currently traded on the BVB are shares, rights,bonds, units and structured products. The bond market registered a relatively strongincrease in the last few years due to 10 new issues, mostly corporate, which took place in2017 and 2018 (totaling EUR 2.40 bln). Compared to the main stock exchanges from theregion, BVB lacks a derivatives and commodities market which partly explains the lowerturnover. Starting 2019, BVB shareholders approved the launch of the derivatives marketwhich is expected to roughly double the turnover but only in 2029. Currently, 85companies are listed on the regular market and 307 on the alternative AeRo. Out of thesecompanies, 13 listings on the main market represent almost 90% of total turnover. BVBfaces a concentration of the investors preference around particular companies andsectors. Even though this is similar to the situation of more developed securitiesexchanges such as the Warsaw Stock Exchange where 90% of its turnover is covered by 30companies, the concentration risk is higher in the case of BVB.

Products level

As mentioned before, BVB is the operator in the market of financial instruments. Lookingat the specifics of the traded products, we analyzed the market of substitute products forsavings/investments, in the case of households and financing in the case of companies.

Listing versus Bank Loan. Romanian companies tend to finance most of their businessthrough bank loans (33%) and supplier finance (25%). During 2017 and 2018, the newbank loans to non-financial companies summed RON 215 bln, over 15 times more thanthe amount attracted through IPOs and bond issuances. One of the main reasons for thelow incentive to become a listed company are the requirements post-IPO regarding thedisclosure of financial statements and company overview. In addition to this, the period oftime needed for a listing and all related expenses make the company managementchoose to finance through bank loans as it is easier to obtain and the requirements areless restrictive.Dividends and coupons versus deposit interest. According to the survey we have run,only 12% of the respondents have a trading account at BVB, the rest of 88% preferringother savings products, mostly deposits. Even though the dividend yield of BVB-listedcompanies has high values (7.88% DivY in 2018), the risk associated with investing inshares make people reluctant. Other reasons for the low incentive of Romanianindividuals regarding BVB are the frequent regulatory changes which create sharpchanges in the capital market as it has been seen in December 2018, the high trading fees,unaffordable starting amounts asked by brokers and the poor investment supply.

FINANCIAL ANALYSISSlightly fluctuating historical revenues. Even though BVB reported in FY18 a 4.7% YoYincrease in operating revenue to RON 39.83 mln, if we look at the 5 year CAGR of approx.0.1%, BVB showed no growth over a longer period. Moreover, the CAGR for tradingrevenues is actually negative (-2%) and the consistent 16.9% 5 year CAGR in post-tradingrevenues due to the pick-up in value of custodian agents’ portfolios, was not sufficient toallow for revenue growth, given the shrinking number of financial intermediaries andcustodian agents on the Romanian capital market. It appears that the measures taken byBVB to develop the local capital market such as the extension of the trading schedule toalign with those of European and leading global stock exchanges, fees haircuts andinvestments to develop the market and IT infrastructure, will bear fruits on a longerperiod than initially expected. We estimate revenues to continue to increase although atslower rates for the next two years while the growth rate should accelerate once BVBbecomes a secondary emerging market and the listing of one of the largest state-ownedcompanies, Hidroelectrica, takes place.

Source: Eurostat

Figure 10: Market capitalization (domestic issuers)

0

20

40

60

80

100

120

140 (PL)

(HU)

(GR)

(RO)

(CZ)

(SL)

(CR)(BG)

EQUITY42%

LOANS33%

A/P25%

Figure 11: Liabilities structure of non-financial corporations

Source: Team Assessment

Non-residents

Investment Funds

Pension Funds

Retail50% 31%

9%10%

Figure 12: Structure of investors

Team Assessment

-40%

-20%

0%

20%

40%

0

20

40

60

20

14

20

15

20

16

20

17

20

18

201…

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E

202…

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202…

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23

E

Figure 13: Total Revenues and Growth Rate

Figure 14: EBIT and Operating margin

Team Assessment

Team Assessment 5

EUR

bln


The main driver of the revenue increase are the trading revenues, which account forapprox. 60% of revenues, while the others (post-trading, registry and interest revenuesfrom the investors’ compensation fund) will have similar weights in total revenues to thehistorical averages. We estimated the trading revenues for the next five years byforecasting a growth rate for each investor category, in which we incorporated variousmacroeconomic trends and considered the current investor structure of BVB to remainstable. Besides this, we incorporated three other new milestone events which would bringadditional revenues, namely new IPOs, including Hidroelectrica, increased trading due topromotion of BVB to secondary emerging market and implementation of the CCP projectin 2020.

Stable cost structure. With a 1.7% 5 year CAGR, the cost structure of BVB has beencharacterized by stability, slight deviations being recorded in periods with legislativechanges in the labor code. The main cost category is related to labor, accounting forroughly 55% of all operating expenses. In FY18, BVB reported some one-off operatingexpenditures of RON 0.98 mln (2.4x in third party costs as compared to the previous year)related to consulting services required to set up the CCP. For the forecasted period, weestimate costs to remain relatively stable and they would increase only when BVB reachesthe emerging market status as this will require additional staffing.

Decreasing operating margins. The uneven increase between operating revenues andexpenditures has led to an operating income of RON 8.87 mln, slightly declining by 4%YoY. Historically, the operating margin started to pick up since the big drop in 2015 toreach a high of 24% in 2017 and then slightly decrease in 2018 mainly due to a one-offexpense item, as otherwise it would have been 25%. We estimate it to remain at around22% for the coming years with a small increase in 2022 when we estimate Hidroelectricawill be listed, coupled with increased trading due to the emerging market status to boosttrading revenues.

Financial result is a strong contributor to the bottom line. BVB’s financial income consistsmainly in financial placements. In FY2018, financial income has contributed in proportionof 29% to income before taxes. In FY2018 it increased by 44% to RON 3.6 mln, boostedmainly by the normalization process of interest rates, having a positive effect on grossincome. However, gross income presented a decrease on account of unusual incomerecorded in 2017 following the merger by absorption of SIBEX. Due to the normalizationprocess of monetary policy globally and the fact that the company will not have interestcharges, we are expecting an increase of financial income.

Historical consistent net profit. Although slightly volatile historically, the companyproduced consistent net profit. Due to the implementation of the CCP, it should beeroded by the losses of the first years of operations of the CCP but should pick-up oncethe top-line improves and CCP starts to produce profits.

Solid net debt position in preparation for CCP implementation. In 2018, Bucharest StockExchange had zero debt and a cash position of RON 55.47 mln, up by 17% YoY. The cashposition amounts to 33% of the market capitalization recorded at the end of FY18, mostof the cash build-up will be used for the implementation of the CCP. Furthermore, in FY18BVB’s balance sheet was in good health, with Asset/Equity ratio of 178%, in line withratios from previous years and current ratio of 1.48, a drop with 18.6% compared withprevious year. For the estimated period, we are projecting no financial debt.

Varying capital efficiency. Although the 8.5% Return on Equity ratio (as of FY18) is abovethe 7.6% peers’ average, it degraded during last year by 4.4 percentage points. Both ROEand ROA should drop in the first years of the CCP but we estimate to recover afterwards.

Erratic cash generation and low CAPEX. Although cash generation has started to pick-upin the last years, it should again decline as it will be used for the CCP. CAPEX is mainlyrelated to the IT infrastructure and it has been relatively stable with no significant changesestimated for the forecast period.

VALUATIONThe target price for BVB was set at RON 18.4 per share implying a 12.4% downsidepotential. The main valuation method used was discounted dividend model (DDM) andthe results were cross-checked for reasonability with the relative valuation results. Bothmethods yielded similar price ranges as presented in the graph on the next page. Giventhe low comparability of capital markets selected as the most appropriate peer group forBVB and the high dispersion of the relative valuation results by using different multiples(P/E, P/S and P/B), the target price was set based on DDM result.

Dividend Discount Method general assumptions. DDM valuation was based uponhistorical and projected financial and operational information from BVB reports as well asupon specific market information.

40%

72%

39%21%

35%44%

96%81%

42%

41%

Figure 15: Financial income/net income

Team Assessment

14.10 6.60 7.76 11.83 10.42 11.60 11.67 11.22 15.91 16.86

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0.410.89

(5.4) (2.7)

14%

7% 8%

10%

9%

10%

5%

6%

12% 13%

9%

4%4%

6%5% 5%

2%3% 6%

6%

ROE ROA

3.5%

-55.5%

9.1%

33.1%41.9%

33.7%

-68.9%

44.9%

19.4%

18.…

-80%

-60%

-40%

-20%

0%

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-50

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Cash generation CAPEX Cash to sales (%)

Figure 16: Net income

Net income Net income from CCP

Figure 17: Return on Asset and Return on Equity

Figure 18: Cash generation and CAPEX

Team Assessment

Team Assessment

Team Assessment

6

RO

Nm

ln


The forecast period is FY2019 - FY2023 allowing BVB to reach a stable stage of itsoperations. We have also considered a terminal year (TY) forecast for which normalizedindicators were estimated in order to reflect their sustainable level. In order to obtain arelevant historical comparison basis, we analyzed the financial statements of BVB for theperiod 2014-2018. The financial forecasts are prepared in RON in nominal terms (includinginflation), therefore the cost of equity (CoE) used in the DDM is also expressed in nominalterms. BVB equity value was estimated by discounting projected dividends/ injection ofcapital. A 16% statutory income tax rate was applied for the forecast period and wasassumed to approximate BVB effective tax rate. In estimating the discount factor weassumed that dividends/capital injections accrue over the year and we use the mid-yearconvention. For prudential reasons, given the cyclical evolution of capital markets, weassume a perpetuity growth rate of 2% p.a., lower than the inflation forecasted by EIU for2023 (3.4%).

Dividend Discount Method specific assumptions. The forecast of BVB revenues wasbased on further developments as presented by the company’s management. Amongexpected advancements in BVB operations are the launch of the CCP and derivativemarket, increased number of IPOs, emerging market status, and increase of marketvelocity and liquidity.

Our analysis indicates that the launch of CCP will not add value for BVB at the currentstage of market development (Appendix 4). The projected CAGR of transactions valuefrom existing financial instruments will be around 5.5% (Base case scenario) whichtranslates in an average daily turnover of approx. RON 75 mln (EUR 15.8 mln), a 30%increase of the current level but still aprox. 12 times lower than the EUR 194 mln dailyturnover on the Warsaw Stock Exchange. This increase in transactions value for theexisting market was based on investors’ transactions structure (i.e. retail, pension funds,investment funds and non-residents) and estimated growth rate of capital inflows fromeach category of investors. The pension funds projected transactions value and how itwas estimated are presented in Appendix 8. In case of retail investors we have consideredthe forecasted nominal growth of personal disposable income, for investment funds thetransactions value was projected in line with GDP growth rate and for non-residents,transactions’ value was projected in line with net direct investment flows growth rate.

However, a low market liquidity might not allow for an adequate penetration grade offuture derivative instruments to be issued when the CCP will be launched, thus CCPbusiness case could be unsustainable.

We opted to present separately in the DDM the net contribution of the CCP to BVB’sbottom line weighted with BVB estimated shareholding of 63% in CCP as well as theadditional synergies that are estimated to be achieved by BVB once the CCP is functional.We considered the base case presented by BVB but with one year lag (Fig. 21) in theactual implementation given that we believe finding a second investor for the CCP wouldbe a rather lengthy process considering the rather questionable feasibility of the CCP on astand-alone basis. The sustainable net income from CCP and BVB synergies estimated forterminal year of forecast (TY) were estimated based on business plan communicated bythe company adjusted for a lower degree of penetration of the derivatives market.

Given the economic turmoil caused at the end of last year by the GEO 114 which caused asevere depression of Bucharest Stock Exchange, we believe that BVB’s declaredexpectations of reaching emerging market status in 2019 is rather optimistic. Even if thecurrent fiscal changes will not actually be fully implemented, the uncertainty created inthe local economic environment will make investors weary. Therefore, in the base casescenario we considered that BVB could become an emerging market (EM) in 2021.By gaining emerging market status we expect that BVB will experience an increase ofmarket capitalization and transactions value by attracting the interest of new otherinvestments funds, by gaining access to a sizeable pool of financial resources, alongsidewith attracting new international IPOs. This increase was estimated based on informationavailable for other capital markets that became emergent like Saudi Arabia or Poland.However, given the high concentration of capital market (a large part of transactionsvalue is linked with few blue-chips intensively traded, mainly in energy and bankingsector) we do not expect a high increase of market capitalization from gaining EM status(e.g. GPW had an increase of approx. 30% of market capitalization from EM status in2008).

14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0

DDM valuation

Relative valuation

BVB Stok Price Range21 >> Current Price18.4 >> Target Price

Input Data Base Case

Growth rate transactions value on BVB

5.5%

BVB Market Velocity 9.3%

Average commission for spot market (% in transactions value)

0.16%

Number of IPOs (2019-2023) 10

Emerging market status - year 2021

Start of derivative market - year 2020

TY Net income from launching CCP 2,440TY Net income from synergies with CCP

3,293

Market Capitalisation increase from IPOs

5,400,000

Market capitalization increase from the emerging market status

3,411,374

Discount Rate Estimation (CoE)

Metric Value

βA (Beta asset) 0.88

D/E 0%

Income tax 16%

βE (Beta equity) 0.88

Rf 4.76%

MRPE 6.50%

KE, Cost of Equity 10.50%

Figure 19: Target Price Range

Figure 20: Cost of Equity

Figure 21: Main valuation inputs

7

Team Assessment

Team Assessment

Team Assessment


The expected increase of transactions value is unimportant given the insufficientnumber of significant IPOs. For the next five years, we are expecting a number of 10new listings, including Hidroelectrica, the largest state-owned power producer inRomania, whose listing has been rumored for several years but always postponed.However, with the exception of Hidroelectrica, most of the other IPOs should take placeon the alternative market which means that their impact on overall BVB liquidity andrevenues would be limited.

Given the level of operating costs BVB has to cover, its operating margin is lower thanthe peers’ median. The expected increase in revenues from gaining emerging marketstatus and new IPOs will be cancelled out by the proportional increase in salaries costs.BVB dividend capacity was estimated based on excess/deficit own funds. An importantoutflow that should be covered by BVB with capital injection is the capital requirementfor launching the CCP, representing EUR 10 mln. For the remaining part of the forecastperiod the dividend payments were estimated with a payout ratio of 90%.

Relative valuation. In order to estimate the market value of the BVB equity we appliedthe relative valuation based on a group of 6 listed comparable stock exchanges mainlyfrom the CEE region. Given the markets’ structural differences and high discrepancies interms of profitability, velocity and liquidity we opted to estimate the BVB equity valueby using three multiples: P/E, P/S, P/B (Appendix 16). The resulting value of 19.2 RON isclose to our DDM target price.

CompanyEBIT

margin ROE

Zagrebacka Burza DD -12.6% -6.0%

Bulgarska fondova

borsa Sofia 43.8% 28.3%

GPW 48.1% 22.6%

Bolsas Y Mercados

Espanoles Sociedad

Holding De Mercados

Y Sistemas Financieros

62.9% 31.6%

Hellenic Exchanges 17.9% 2.8%

Euronext 53.8% 40.6%

Median 45.9% 25.5%

Bursa de Valori

Bucuresti (BVB)22.3% 9.3%

Difference to Median -23.7% -16.2%

Figure 22: Peers’ comparison

Relative valuationSummary

P/S P/E P/B

Peer 1st quartile 4.59 10.68 1.90Estimated value of a BVB share 22.7 13.5 28.4

Weights30% 50% 20%

Market value of BVB Shares (RON) 19.2

Figure 23: Relative Valuation Summary

DDM Valuation - Base Case

RON Thousand 2019 2020 2021 2022 2023 TY

Net Income/(Net Loss) 11,597 11,673 11,225 15,905 16,855 17,192

Net income from CCP - (5,398) (2,698) 409 891 1,525

Synergies from CCP net of tax - - (1,975) (1,318) 606 3,293

Change in NWC 825 (35) (273) (537) (192) (195)

Depreciation 2,409 2,540 2,671 2,802 2,933 2,933

Capex (2,357) (2,357) (2,357) (2,357) (2,357) (2,933)

Free cash flow to equity 12,474 6,424 6,593 14,906 18,736 21,815

Outflow from required capital from CCp - (47,021) - - - -

Projected dividends/ injection of capital 11,227 (40,597) 5,934 13,415 16,863 19,634

Discount period (mid year convention) 0.5 1.5 2.5 3.5 4.5

Discount factor 0.951 0.861 0.779 0.705 0.638

Discounted Dividends 10,680 (34,950) 4,623 9,459 10,760

PV of Dividends 572

Terminal Value 230,983

PV of Terminal Value 147,390

Equity value 147,962

No. shares 8,049,250


Cost of equity (CoE) 10.50%

Growth rate in perpetuity 2.00%

Payout ratio 90%

8

Team Assessment

Team Assessment

Team Assessment


SENSITIVITY ANALYSIS & MONTE CARLO SIMULATIONSensitivity analysis was run on DDM results in order to identify the most importantfactors with impact on estimated stock price.As presented in the diagram aside among the key factors with an important impact onBVB stock price are: average commission for spot market (% in transactions value),transactions value growth rate, the contribution to the TY net income from CCP andBVB Synergies with CCP.Based on the inputs we have used for each scenario and by considering the mostrelevant factors for BVB future evolution we have run a Monte Carlo simulation inorder to identify the risk profile of the investment in BVB stock prices.We simulated the level of the following factors: average commission (% in transactionsvalue), market velocity, transactions value annual growth rate, increase of marketcapitalization from gaining EM status, increase of TY net income from CCP launch andsynergies.For each key factor to be simulated we have estimated the average and standarddeviation of the distribution function. Thus, the estimation was based on the data usedfor each scenario and the probabilities associated with the considered scenarios (25%for Best Case and Worst Case scenarios, respectively 50% for Base Case scenario).The resulting cumulative distribution function indicates that simulated BVB stock pricesare falling with more than 80% cumulative probability below the current spot price at31st December 2018. This is in line with the Sell overlook yielded by our analysis.Furthermore, the simulated prices are distributed with a higher frequency in theinterval RON 15.5 and RON 21 with a cumulative probability of 80%, leading as well to asell recommendation

INVESTMENT RISKS

Political and regulatory

Adverse changes in tax policies. Politically-driven changes in the tax policies cannegatively impact both listed companies and investors, as well as the overall economicenvironment. For instance, the publication at the end of 2018 of some informationabout an emergency government ordinance (e.g. Emergency Ordinance 114) whichwould impose additional levies on banks and energy companies, some of the mainissuers on BVB, caused the BET index to fall by about 11.21%, thus destroying all thevalue created by BVB over the year. Another example is the provision of the fiscal codethat came into force in 2018, which obliges investors to pay additional social duties forrevenues exceeding a certain annual limit, in addition to the payment of tax fordividends and capital gains.

Risk of nationalization of private pension funds. Private pension funds are among themost important market players, accounting for approximately 15% of the tradedvolumes. Any change in the level of contribution for Pillar II, the compulsory privatepension fund, limits and/or any prudential regulations regarding the trading activity ofthe pension funds may have a significant impact on BVB revenues. One example is thefact that, starting in 2019, the contribution for Pillar II might become optional, meaningthat participants could possibly make an early withdrawal of their funds, whileadditional capital requirements and lower management fees would be imposed to fundmanagers. Should all changes become effective, it could translate into lower volumesand fall of returns as fund managers would need to liquidate all or part of their assets.

Macroeconomic and financial

Economic cycle risk. The stock exchange is usually regarded as the bellwether of thenational economy. Since Romania has a small and open economy, it depends to asubstantial extent on the economic conditions in the European Union and world-wide,but also on other states with which it is commercially linked. Considering that some ofthe EU's developed countries and the US are starting to show declining economicgrowth lately, it is likely that these events will also be reflected in Romania's economyin the near future, which would impact the trading activity of BVB. This will be reflectedin a growth of unemployment rate together with a decrease of level of salaries. Thenegative effect of these factors may impact investments of both retail sector, as thedisposable income for savings may decrease and of pension funds as contributionsreceived are related to the level of wages.

Risk of market volatility. The Romanian capital market is less developed than otherstock exchanges, thus being very sensitive to the events that influence the capitalmarkets in the major financial centers of the world. Thus, a shift in the investmentappetite of international investors may contaminate the Romanian stock market aswell (e.g. Brexit).

Figure 26: Risk Matrix

Team Assessment

More than 80% cumulative probability ofprices below the current price 21 RON asat 31 Dec. 2018 are in line with the Selloutlook.

Simulated stock prices are falling in theinterval 15.4 and 21 RON with a 80%cumulative probability, which encompassthe DDM and relative valuation results.

9

Figure 24: Risk Profile

Figure 25: Monte Carlo Simulation

Team Assessment

Team Assessment


Exchange rate risk. This risk is due to the fact that in the portfolio of BVB's financial assetsthere is also a significant amount of shares and bonds of the companies that operate andare listed on other stock exchanges outside Romania. Consequently, any depreciation ofthe currency as a result of monetary policy or other macroeconomic factors could result ina decrease in the available capital held by the BVB. At the same time, this risk is alsoimportant for foreign investors who buy shares on BVB, so any depreciation of thenational currency could mean for them a decrease in the real yield denominated in hardcurrency.

Risk of rising inflation. Real yields earned by investors by trading on BVB dependsignificantly on the level of inflation. It is known that foreign investors choose to trade atBVB compared to more developed markets because of higher expected returns. But evenif these returns are achieved, in an economic context of rising inflation rate, the real yieldmay be relatively much lower. An increase in the inflation rate would also increaseinterest rates, meaning that alternative investment opportunities may become moreattractive. Bearing this in mind, the liquidity on the BVB could decrease, together with adecrease in the level of registered revenues.

Structural Risks

Demographic risk. The decreasing birth rate coupled with continuing and growingimmigration could mean in the long run, on one hand, a lower number of retail investorsand on the other hand, less contributors to the private pension funds. Both effects couldtranslate into lower trading volumes for BVB.Lack of financial education. Investing in shares, bonds or other financial instruments onBVB requires a certain level of financial education. Currently, Romania is consistentlyranked among the EU countries with the lowest level of financial education. In order toimprove this situation, BVB is running various educational programs for retail investorssuch as Fluent in Finance.

Business Risks

Sector concentration of listed companies. Companies listed on BVB come largely from afairly limited range of sectors, namely financial intermediation, extractive industry, oilprocessing as well as the production and supply of electricity and energy, most of thembeing also highly regulated industries. Thus, any structural or regulatory change in thesesectors can reduce the profitability of listed companies. For example, an announcedadditional levy for energy companies meant that the BET-NG composite index of energycompanies fell 9.93% in a single day.

Operational and cybernetic risks. The BVB activity is carried out with the help of acomputer platform, where all the sales and purchase orders are centralized. Thus, anytechnological issue or human error with the platform's software could disrupt the tradingactivity of the market participants, reducing both the operational revenues and theconfidence level of the investors in the activity of BVB. Besides the risk of a technicalmalfunction there may be the risk of a cyber-attack on the BVB platform. Such a risk islikely to be fairly low, but its effects may have a very strong impact on the activity,profitability and credibility of the BVB.

Innovative competitive products. With the advancement of technology and globalization,other high risk-high return products such peer-to-peer lending platforms, micro-loans,crowd-funding platforms and not the least cryptocurrencies are starting to appear.Although they are currently in an incipient stage, they could start to attract investors,especially from the millennial generation.

Source: National Bank of Romania

Figure 27: Inflation Rate (2016 – 2018)

-4

-2

0

2

4

6

Jan

'16

Ap

r '1

6

Jul '

16

Oct

'16

Jan

'17

Ap

r '1

7

Jul '

17

Oct

'17

Jan

'18

Ap

r '1

8

Jul '

18

Oct

'18

Inflation rate in Romania

Inflation rate in European Union

3.6

3.7

3.8

3.9

4.0

4.1

4.2

4.3

4.5

4.6

4.6

4.7

4.7

4.8

4.8

Jan'18

Mar'18

May'18

Jul'18

Sep'18

Nov'18

Jan'19

EUR/RON USD/RON

Figure 28: Exchange rate (2018 – 2019)

10

Source: National Bank of Romania


V

V

V

MAIN MARKET (2009 – 2018)

bln

0

2

4

6

8

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

bln

0

20

40

60

80

100

'11 '12 '13 '14 '15 '16 '17 '18

1

1.5

2

2.5

3

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

0

10

20

30

40

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

0369

121518

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

0

0.2

0.4

0.6

0.8

1

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Market Capitalization

Trading value Volume

Shares

Bonds

0

200

400

600

800

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

Units

Structured Products

EUR

bln

EUR

bln

EUR

mln

EUR

mln

tho

usa

nd

s

0

2

4

6

'09 '10 '11 '12 '13 '14 '15 '16 '17 '18

40

80

120

160

'11 '12 '13 '14 '15 '16 '17 '18

mln

APPENDIX 1 CAPITAL MARKET OVERVIEW (1)

11


PERFORMANCE BY SECTOR

Financial & InsuranceMining &

quarrying

Manufacturing

Transportation & Storage

Professional, scientific &

technical activities

Electricity, gas, steam & air conditioning supply

Other

54%18%

10%

6%

5%4%

Financial & Insurance

Mining & quarrying

Manufacturing

Transportation & Storage

Professional, scientific &

technical activities

Electricity, gas, steam & air conditioning supply

Other

62%

19%

7%

3%3%

3%

APPENDIX 2 CAPITAL MARKET OVERVIEW (2)

MK CAPEUR 30.5 bln

TurnoverEUR 2.4 bln

12


10000

11000

12000

13000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

BET-FI

32000

36000

40000

44000

Jan FebMar Apr May Jun Jul Aug Sep Oct Nov Dec

BET-TR

600

700

800

900


BET-XT

1000

1100

1200

1300

1400

Jan FebMar AprMay Jun Jul Aug Sep Oct Nov Dec

BET-PLUS

500

600

700

800


BET-NG

900

1000

1100

1200


BET-XT-T

1300

1500

1700

1900


BET-BK

14000

15500

17000

18500

20000


ROTX

6500

7500

8500

9500


BET

APPENDIX 3 CAPITAL MARKET OVERVIEW (3)INDEX EVOLUTION 2018

13


The project for the establishment of a central counterparty (CCP) was approved by the company’s shareholders inJanuary 2019. The investment necessary to set-up the CCP, which should function as a distinct legal entity, is of EUR 16mln out of which EUR 10 mln would be contributed by the BVB group while the balance of EUR 6 mln by third partyinvestors, most likely by OPCOM, the operator of the Romanian power and gas exchange. This means that BVB shouldown 63% of this newly created entity.

It is estimated that the CCP will become operational in 2020 providing, in a first stage, clearing services for a segmentof the OPCOM power contracts forward market while in a second stage it should provide services enabling the set-upof power futures, stock futures and FX futures.Besides the revenues of CCP, BVB estimates some synergies with the existing activity, as trading in derivatives shouldalso boost the market of the supporting assets.

Although BVB presented 2 digits IRRs in business of the CCP, we have run a simulating starting from their 5 year baseassumptions, after which we estimated a terminal value using the Gordon-Shapiro method and, for simplicity, thesame Cost of Equity and terminal value that we used in the discounted dividend model for the valuation of BVB itself.

The conclusion of our analysis was that, even if the synergies, the CCP project does not seem to createvalue for investors in the base case presented by BVB.

CCP IRR calculation without synergies (RON th) 2020 2021 2022 2023 2024 2025Terminal

Value

Operating Revenues CCP - 4,617 10,372 11,723 13,375 14,901

Net income (8,637) (4,317) 655 1,425 2,279 3,320

BVB Investment (47,021)

FCFEE @ 63% of net income (BVB's share) (52,419) (2,698) 409 891 1,424 2,075 24,901

IRR -10.3%

CoE 10.5%

Premium/ Discount over CoE -20.8%

CCP IRR calculation with synergies (RON th) 2020 2021 2022 2023 2024 2025Terminal

ValueAdditional revenues for BVB generated by the CCP net of tax

(2,351) (1,569) 606 1,960 3,430

FCFEE @ 63% of net income (BVB's share) (52,419) (2,698) 409 891 1,424 2,075

FCFEE including synergies (52,419) (5,049) (1,159) 1,496 3,385 5,506 66,067

IRR 4.8%

CoE 10.5%

Premium/ Discount over CoE -5.7%

APPENDIX 4 BUSINESS STRATEGYBVB GROUP STRUCTURE

CENTRAL COUNTERPARTY PROJECT

14


Commitment to Corporate GovernanceScore

3/4Does the company have a corporate governance code, polities or procedures?

Does the company have a code of ethics?

Does the company have a designated officer responsible for ensuring compliance with the corporate governance and ethics

code?

Does the Board of Directors approve the annual calendar of corporate events?

Structure and Functioning of the Board of DirectorsScore

3/4

Are there a majority of independent members in the Board of Directors?

Does the company have Boards Committees, are this transparent with this type of data?

Directors are appointed on the basis of a clear job description, which identifies the required directors background and

expertise?

Does the Board of Directors conduct self-evaluations or other reviews of its effectiveness, are this information transparent for

the shareholders and public?

Control of processesScore

4/4

Does the company have an Internal Audit Committee?

The representative of this committee is independent?

Does the company have a risk management system?

Is the company’s external audit in line with International Standards on Auditing?

Transparency and disclosureScore

3/3

Are the financial statements prepared in keeping with internationally recognized accounting standards?

Does the company disclose major transactions, related party transactions, off-balance sheet activities and other events?

Does the company have a written information disclosure policy that seeks to make all material information fully, timely and

equally available to all stakeholders?

Rights of minority shareholdersScore

2/3

Do minority shareholders have any mechanisms to nominate members of the Board of Directors (cumulative voting, block

voting)?

The company never been subject to investigation into its treatment of shareholders.

Are there any minority shareholders protection mechanisms in place?

83.3% ACHIEVEMENT – VERY GOOD 15/18

Source: Team analysis using the DFI’s Working Group on Corporate Governance from the IFC Corporate Governance Methodology

Achievement score Verdict

100%-90% Excellent

90%-80% Very Good

80%-70% Good

70%-60% Satisfactory

Corporate Governance Items Points Max Point %

Commitment to Corporate Governance 3 4 75%

Structure and Functioning of the Board of Directors 3 4 75%

Control of processes 4 4 100%

Transparency and disclosure 3 3 100%

Rights of minority shareholders 2 3 66.60%

Total score 15 18 83.3%

APPENDIX 5 GOVERNANCE ASSESSMENT

15


• Launch of central counterparty (CCP) in2019 to enable the trade of derivatives

• Partnership with the national energymarket operator in setting up the CCP in forproviding clearing services to OPCOM

• Monopolistic position on the Romanianmarket

• Attractive alternative for companies fromthe region looking to list from countrieswith very small capital markets (e.g.Moldova)

• Link to one of the fastest-growing EUeconomies, that has a high growthpotential due to the need to catch up withWestern Europe

• Some of the highest dividend yields in theworld that attract investor interest

• Lack of diverse investment opportunities inboth shares and bonds, with mostcompanies being exposed to the financialand energy sectors

• Low market liquidity with some less activeshares trading only on a monthly basis

• Poor financial education of Romanians andmistrust of the stockmarket that preventsthe creation of a strong retail community

• Entrepreneurs reluctant on listing theirbusinesses on the stock exchange.

• Upgrade to an Emerging Market status byMSCI and FTSE Russell

• Continued privatisation of government-owned enterprises which will improveinvestment offerings and increase marketliquidity

• Development of bonds market which leadto diversifying the offer for investors andincreasing the operators’ revenues

• The closing of the macroeconomic cyclemakes it more attractive for companies toswitch from bank loans to the bond market.

• Continued market reforms, including thelegalisation of short-selling that couldincrease market volume.

• New regulations affecting Pillar 2 pensionfunds that threatens the disappearance ofan investor that holds 10% of listed shareson the Bucharest market.

• New taxes imposed on banks and energyfirms that deplete their cash reserves andlimit their ability to pay dividends, a driverfor market demand.

• Continued anti-business rhetoric by thegovernment that makes investors lesswilling to invest in Romania.

• Government dependence on dividendsfrom unlisted state companies that couldslow down the privatisation process

S W

O T

APPENDIX 6 SWOT ANALYSIS

16


For retail the growth rate is a result of the increase of disposable income, due to favorable trend of average grosswages and a stable evolution of consumer prices.As regards investments funds, given that a significant portion of investment funds’ accounts are owned by retailinvestors and not by legal persons, we considered that the growth is driven by the positive evolution ofdisposable income.As for non-resident investors, we directly linked their interest in investing and transacting on BVB to theeconomic growth of Romania which remains one of the highest of the European Union as well to the level offoreign direct investments in Romania.

Indicators used in the growth rate estimation (retail, non-resident, funds) 2018 2019E 2020E 2021E 2022E 2023E

GDP (% real change pa) 4.3% 3.8% 3.7% 3.8% 3.6% 3.2%

Real personal disposable income (% change pa) 3.1% 2.3% 2.1% 3.5% 3.3% 3.4%

Consumer prices (% change pa; end-period) 3.9% 3.0% 3.3% 3.5% 3.4% 3.4%

Net direct investment flows (bln USD) 5.6 6.2 5.9 6.2 6.8 6.8

For pension funds, the resulting growth rate is function of the current age structure of privatepension funds’ taxpayers, the age structure of potential contributors that will enter into laborforce and thus into the private pension system as well the migration’s effect on active populationand future increases of in gross average wage.

2019 2020 2021 2022 2023

Resulting

weighted

average

growth rate

8.7% 1.0% 6.1% 8.4% 3.5%

We then applied the resulting weighted average growth rate to the 2018 total transaction value on BVB of approx. RON 14 bln, considering the additional transaction value from new IPOs and gaining the emerging market status to which we applied the an average commission value.

in RON th 2018 2019 E 2020 E 2021 E 2022 E 2023 E

Total Transaction Value on BVB (w/o extra IPOs, emerging, derivative market) 13,996,671 15,214,381 15,366,525 16,303,883 17,673,409 18,291,979

Transaction value from IPOs 0 100,440 100,440 100,440 1,402,440 1,402,440

Transaction value increase from emerging market status 0 0 0 628,055 1,080,003 1,542,429

Average commission on spot market 0.171% 0.161% 0.161% 0.161% 0.161% 0.161%

Percentage of revenues from Post trading services in Trading services 42% 42% 42% 42% 42% 42%

Percentage of revenues from registry services in Trading services 22% 19% 19% 19% 19% 19%

Growth rate of state bonds yields used in estimating FCI revenues 0% 19% 14% 0% 5% 3%

Increase of no. employees with emerging status 0 0 0 20 0 0

Average monthly salary (including taxes) 0 14 14 15 15 16

No. existing employees 0 101 101 121 121 121

Turnover per employee 0 150,637 152,144 134,743 146,061 151,173

Revenues from trading services 23,932 24,657 24,902 27,422 32,451 34,191

Revenues from post-trading services 10,113 10,322 10,425 11,480 13,585 14,313

Revenues from registry service 5,257 5,378 5,499 5,620 5,740 5,861

Revenues from FCI 523 622 709 709 741 763

Total operating revenues 39,825 40,978 41,534 45,230 52,518 55,129

7.1%

5.4% 5.5% 7.1% 6.8%

6.9%

-2.3%

2.9%7.8%

7.3% 6.8%6.8%

10.2%

8.3%6.9% 7.1% 7.4%

7.1%0.6%

10.7%

-4.8%

5.1%9.7%

0.0%

2018 2019 E 2020E 2021 E 2022E 2023 E

Retail Pension funds Investment funds Non-residents

APPENDIX 7 REVENUE ASSUMPTIONS

Source: The Economist

17


In order to estimate the value of future trading made by pension funds on BVB, we assessed the age structure ofpension funds participants as well as the current age structure of the population with the purpose of estimatingfuture net inflows generated by contributions received from participants as per the following methodology:

• Using historical contributors’ age structure of Private Pension Funds, we divided all contributors into agegroups.

• We assumed that the Romanian labor market has structural gaps, even if the unemployment rate is athistorical lows, this performance comes due to an intensified emigration flow registered in the last few yearsand is not an effect of economic performance. Therefore, we assumed that Romania had the capacity toprovide jobs for 45% of total population.

• We analyzed the actual age structure of Romanian population in order to estimate the number of people thatwill join into the labor market.

• Using the assumption of a constant contribution fee of 3.75% (the current level), constant increase in wagesthanks to expansionary policy implemented by Romanian Government, exemption of construction employeesfrom paying private pension contribution for the next 10 years and assuming that emigration flow willcontinue in the next period, we estimated net inflows which will be collected by pension funds using anaverage weight of participants with paid contributions in all participants of 55% of the net inflows which willbe collected by pension funds. Meanwhile, in 2017, the difference between potential contributors to pensionfunds and the number of contributors reported by Financial Supervisory Authority (FSA) was of roughly950,000 people, in other words almost 80% from potential contributors are already contributors.

• We have eliminated the cash outflows resulting from the opportunity to take early retirement, using aconstant value of RON 50 mln.

• Finally, to estimate pension funds’ trading value on each asset class traded on BVB, we used the privatepension funds investments portfolio structure from first half of 2018, as reported to the FSA.

STEP 1: Estimate population age structure

0

1000

2000

3000

4000

5000

6000

7000

8000

15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60 61 62 63 64 Over 65

2018 2019 E 2020 E 2021 E 2022 E 2023 E

APPENDIX 8 PENSION FUNDS ESTIMATION (1)

18


STEP 2: Compute net inflows

All Participants in the Private Pension Fund (th people)7,226 7,243 7,260 7,276 7,293 7,310

Participants with paid contributions (th people)3,974 3,633 3,592 3,551 3,510 3,469

Participants with paid contributions - emigration effect (th

people) 3,933 3,592 3,551 3,510 3,469 3,428

Employees in construction sector 300 - - - - -

(excluded according to EO 114/2018) (th people) - - - - - -

Average weight of participant with contributions in all

participants55% - - - - -

Average gross salary estimated4,352 4,900 5,341 5,795 6,259 6,760

Contribution Fee 3.8% 3.8% 3.8% 3.8% 3.8% 3.8%

Contribution received by Pension Funds (th RON)7,702,642 7,921,033 8,535,179 9,153,528 9,770,099 10,426,737

Early retirees (th people)50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00

Net inflows (RON th)7,652,642 7,871,033 8,485,179 9,103,528 9,720,099 10,376,737

STEP 3: Weight net inflows with asset allocation

Equity Corporate bonds

Governmental bonds Municipal bonds

Other (non BVB instruments)

STEP 3: Compute traded value

0

2,000

4,000

6,000

8,000

10,000

2018 2019 E 2020 E 2021 E 2022 E 2023 E

Shares Corporate Bonds Governmental Bonds Municipal Bonds

APPENDIX 9 PENSION FUNDS ESTIMATION (2)

ASSET ALLOCATION OF PENSION FUNDS

Source: Team Assessment

TRADED VALUE BY PENSION FUNDS

Source: Financial Supervision Authority

60%

20% 16%

2%1%

19


Market Cap (domestic) EUR 134.74 blnMarket Cap (total) EUR 262.63 blnMain Market 356 companiesParallel Market 106 companies

Market Cap (domestic) EUR 43.18 blnMarket Cap (total) EUR 54.28 blnRegulated Market 185 companiesAlternative Market 12 companies

Market Cap (domestic) EUR 23.63 blnMarket Cap (total) EUR 826.54 blnPrime Market 11 companiesParallel Market 6 companiesFree Market 32 companiesStart Market

Market Cap (domestic) EUR 25.23 blnMarket Cap (total) EUR 25.23 blnPrompt Market: 32 companies

Market Cap (domestic) EUR 19.82 blnMarket Cap (total) EUR 32.25 blnMain Market 85 companiesAeRO Market 307 companies

Market Cap (domestic) EUR 17.91 blnMarket Cap (total) EUR 19.91 blnPrime Market 4 companiesOfficial Market 13 companiesRegular Market 26 companies

Market Cap (domestic) EUR 13.12 blnMarket Cap (total) EUR 13.12 blnMain Market 66 companiesAlternative Market 154 companies

Market Cap (domestic) EUR 6.35 blnMarket Cap (total): EUR 6.35 blnPrime Market 9 companiesStandard Market 20 companies

APPENDIX 10 REGIONAL COMPETITION (1)

20


APPENDIX 11 REGIONAL COMPETITION (2)

Equity EUR 49.714,45 mlnStructured certificates EUR 207,12 mlnETF EUR 35,28 mlnInvestment certificates EUR 17.28 mlnRights to shares EUR 5,42 mlnPre-emptive rights EUR 41,25 KStructured bonds EUR 12,19 K

Equity EUR 14,612.93 mlnETF EUR 9.46 mlnBonds EUR 138.41 mlnWarrants EUR 0.94 mln

Equity EUR 8,773.08 mlnUCITs EUR 17.02 mlnCertificates and warrants EUR 297.09 mlnMortgage bonds EUR 189.36 mlnETF EUR 2.42 mlnCorporate bonds EUR 0.58 mlnCompensation notes EUR 0.25 mln

Equity EUR 5.541,52 mlnCorporate bonds EUR 360.36 mlnStructured products EUR 5.15 mlnInvestment Funds Units EUR 1.67 mln

Equity EUR 213.04 mlnBonds EUR 92.61 mln

Equity EUR 197.43 mlnSPV EUR 28.57 mlnBonds EUR 26.41 mlnGovernment Securities EUR 24.80 mlnCompensatory Instruments EUR 2.87 mlnETF EUR 1.02 mlnSubscription Rights EUR 0.14 mln

Equity EUR 337.32 mln

Cash Market Trading value Derivatives Market

Equity EUR 2.502,95 mlnBonds EUR 473.32 mlnStructured products EUR 71.94 mlnFund Units EUR 2.04 mln

21


As part of our analysis, we developed a survey to obtain the opinion of retail investorsregarding the risks, the opportunities and their perspective of Bucharest Stock Exchangeactivity to understand the factors behind their decisions.

12.2% have a tradingaccount on BVB DEPOSITS

CASH & CURRENCY

INVESTMENT UNITS

REAL ESTATE87.8%prefer to keep theirsavings in otherinstruments

HIGH VOLATILITY AND RISKS

FREQUENT REGULATORY CHANGES

HIGH STARTING AMOUNTS

FEW INVESTMENT OPTIONS

HIGH TRADING FEES

LOW FINANCIAL CONSULTING

51% 29.4%stable

evolutiondecrease of

the stock market

The most frequent reasons for not investing on BVB are:

Sample of survey: 245 respondentsAge range: 18 – 50Income range: 2.000 – 10.000 RON

OULOOK OF BVB

APPENDIX 12 INDEPENDENT SURVEY

22


APPENDIX 13 FINANCIAL STATEMENTS

Income Statement (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Revenues form trading services 26,539 17,409 19,433 23,345 23,932 24,657 24,902 27,422 32,451 34,191

Revenues form post-trading services 4,628 8,330 8,119 9,700 10,113 10,322 10,425 11,480 13,585 14,313

Revenues from registry service 8,478 4,579 3,591 3,991 5,257 5,378 5,499 5,620 5,740 5,861

Revenues from FCI 0 516 435 1,019 523 622 709 709 741 763

Total operating revenues 39,645 30,834 31,578 38,055 39,825 40,978 41,534 45,230 52,518 55,129

Total operating expenses (28,515) (27,614) (25,533) (28,818) (30,954) (32,282) (33,700) (38,775) (40,503) (42,304)

EBIT (Operating profit) 11,130 3,220 6,045 9,237 8,872 8,696 7,834 6,455 12,015 12,826

Financial income (excl.dividends) 5,632 4,742 3,039 2,502 3,607 5,079 6,031 6,877 6,877 7,195

Earning before tax 16,762 7,962 9,084 11,739 12,479 13,775 13,865 13,332 18,892 20,020

Income tax (2,660) (1,360) (1,322) 95 (2,055) (2,178) (2,192) (2,108) (2,987) (3,165)

Net income 14,102 6,602 7,762 11,834 10,424 11,597 11,673 11,225 15,905 16,855

Net income from CCP @ 63% - (5,398) (2,698) 409 891

Balance Sheet (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Current Assets 85,456 98,343 89,870 142,156 139,277 160,607 135,447 151,302 164,584 175,289

Non-current assets 68,794 81,260 83,136 60,750 75,338 75,286 122,123 121,809 121,363 120,787

PPE 5,500 6,478 6,281 8,050 7,900 7,879 7,806 7,680 7,502 7,271

LT Financial Assets (net) 61,770 73,419 74,996 49,398 64,081 64,081 111,102 111,102 111,102 111,102

Intangible Assets (net) 1,524 1,363 1,859 3,302 3,357 3,326 3,215 3,027 2,760 2,414

Total assets 154,250 179,603 173,006 203,236 214,615 235,892 257,569 273,109 285,946 296,075

Total current liabilities 40,642 70,289 64,971 78,236 94,177 103,883 114,331 124,452 134,736 144,957

Total non-current liabilities 12,989 12,530 10,373 10,696 - 11,200 10,756 10,884 10,947 10,862

Total liabilities 53,631 82,819 75,344 88,932 94,177 115,083 125,087 135,336 145,683 155,819

Total Equity 100,620 96,784 97,662 114,304 120,439 120,809 132,482 137,773 140,263 140,256

Total Equity and liabilities 154,251 179,603 173,006 203,236 214,615 235,892 257,569 273,109 285,946 296,075

Cash-Flow Statement (th RON) 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Net Income 14,083 6,601 7,761 14,686 10,196 11,597 11,673 11,225 15,905 16,855

Depreciation & other adjustments 1,035 1,486 1,742 1,760 2,278 2,409 2,540 2,671 2,802 2,933

Deferred Taxes 0 0 0 (330) 0

Other Non-Cash Items (1,529) (1,325) (2,668) (2,554) (848)

Changes in Working Capital (5,264) 32,258 (2,077) (324) (2,953) 825 (35) (273) (537) (192)

Cash from Operating Activities 8,325 39,020 4,758 9,085 8,673 14,831 14,179 13,622 18,171 19,596

Capital Expenditures (2,292) (2,302) (2,040) (3,442) (1,881) (2,357) (2,357) (2,357) (2,357) (2,357)

Other Investing Cash Flow Items 4,271 (41,989) 7,873 15,857 24,907 12,564 (40,450) 14,997 7,812 9,793

Cash from Investing Activities 1,979 (44,291) 5,833 12,415 23,026 10,208 (42,806) 12,640 5,455 7,437

Share capital release to minority shareholders(8,928) (11,239) (7,330) (863) (440) 0 0 0 0 0

Dividends Paid 0 (588) (385) (7,032) (13,593) (11,227) 0 (5,934) (13,415) (16,863)

Issuance (Retirement) of Stock, Net 0 0 0 (1,008) (998) 0 0 0 0 0

Cash from Financing Activities (8,928) (11,827) (7,715) (8,903) (15,031) (11,227) 0 (5,934) (13,415) (16,863)

Net Change in Cash 1,376 (17,098) 2,876 12,597 16,668 13,812 (28,628) 20,329 10,211 10,170

Net Cash - Beginning Balance 18,875 20,251 3,153 6,029 18,626 35,294 49,106 20,478 40,806 51,017

Net Cash - Ending Balance 20,251 3,153 6,029 18,626 35,294 49,106 20,478 40,806 51,017 61,187

23


APPENDIX 14 RATIOS ANALYSIS

Income Statement 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Revenues form trading services 67% 56% 62% 61% 60% 60% 60% 61% 62% 62%

Revenues form post-trading services 12% 27% 26% 25% 25% 25% 25% 25% 26% 26%

Revenues from registry service 21% 15% 11% 10% 13% 13% 13% 12% 11% 11%

Revenues from FCI 0% 2% 1% 3% 1% 2% 2% 2% 1% 1%

Total operating revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Total operating expenses -72% -90% -81% -76% -78% -79% -81% -86% -77% -77%

EBIT (Operating profit) 28% 10% 19% 24% 22% 21% 19% 14% 23% 23%

Financial income (excl.dividends) 14% 15% 10% 7% 9% 12% 15% 15% 13% 13%

Net income 36% 21% 25% 31% 26% 28% 28% 25% 30% 31%

Balance Sheet 2014 2015 2016 2017 2018 2019 E 2020E 2021 E 2022E 2023 E

Current Assets 55% 55% 52% 70% 65% 68% 53% 55% 58% 59%

Non-current assets 45% 45% 48% 30% 35% 32% 47% 45% 42% 41%

PPE 4% 4% 4% 4% 4% 3% 3% 3% 3% 2%

LT Financial Assets (net) 40% 41% 43% 24% 30% 27% 43% 41% 39% 38%

Intangible Assets (net) 1% 1% 1% 2% 2% 1% 1% 1% 1% 1%

Accrued&Deffered Items 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

Total assets 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Total current liabilities 26% 39% 38% 38% 44% 44% 44% 46% 47% 49%

Total non-current liabilities 8% 7% 6% 5% 0% 5% 4% 4% 4% 4%

Total liabilities 35% 46% 44% 44% 44% 49% 49% 50% 51% 53%

Total Equity 65% 54% 56% 56% 56% 51% 51% 50% 49% 47%

Total Equity and liabilities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

24


APPENDIX 15 VALUATION MODEL

DISCOUNT DIVIDEND MODEL VALUATION

Cost of equity (CoE) was estimated in nominal terms (including inflation) based on the “Capital Asset Pricing Model”(CAPM)In the estimation of the CAPM model parameters we have taken into consideration a comparable peer group (CEE listedcapital markets). Beta equity and D/E was retrieved form the all-peer group, as displayed in the table below. Beta assetwas estimated by using Hamada formula: Beta asset = Beta equity / (1+ (1 - Effective tax rate) * D/E). Market riskpremium of 6.5% is estimated for Romanian capital market by using data from Damodaran data base. The risk-free rateis estimated based on ECB long-term interest rate statistics as published as at 31 December 2018 for Romanian bondsdenominated in Lei.

D/E, βE, βA for peers (5y monthly data)

Company Net

Debt/Equity

Beta equity Effective

tax rate

Beta asset

Bursa De Valori Bucharest 0.0% 69% 14% 0.69

Zagrebacka Burza DD 0.0% 0.82 12% 0.82

Bulgarska fondova borsa Sofia 0.0% 1.07 4% 1.07

GPW 0.0% 0.90 17% 0.90

Bolsas Y Mercados Espanoles Sociedad

Holding De Mercados Y Sistemas

Financieros

0.0% 0.78 27% 0.78

Hellenic Exchanges 0.0% 1.11 41% 1.11

Euronext 2.7% 0.90 28% 0.88

Median 0% 0.90 17% 0.88

Average 0% 0.89 20% 0.89

25

DDM Valuation - Base Case

RON Thousand 2019 2020 2021 2022 2023 TY

Net Income/(Net Loss) 11,597 11,673 11,225 15,905 16,855 17,192

Net income from CCP - (5,398) (2,698) 409 891 1,525

Synergies from CCP net of tax - - (1,975) (1,318) 606 3,293

Change in NWC 825 (35) (273) (537) (192) (195)

Depreciation 2,409 2,540 2,671 2,802 2,933 2,933

Capex (2,357) (2,357) (2,357) (2,357) (2,357) (2,933)

Free cash flow to equity 12,474 6,424 6,593 14,906 18,736 21,815

Outflow from required capital from CCp - (47,021) - - - -

Projected dividends/ injection of capital 11,227 (40,597) 5,934 13,415 16,863 19,634

Discount period (mid year convention) 0.5 1.5 2.5 3.5 4.5

Discount factor 0.951 0.861 0.779 0.705 0.638

Discounted Dividends 10,680 (34,950) 4,623 9,459 10,760

PV of Dividends 572

Terminal Value 230,983

PV of Terminal Value 147,390

Equity value 147,962



Cost of equity (CoE) 10.50%

Growth rate in perpetuity 2.00%

Payout ratio 90%


APPENDIX 16 RELATIVE VALUATION

Relative valuation as at 31 December 2018

RON Thousand Price to

Sales (P/S)

Price to

Earnings

(P/E)

Price to

Book (P/B)

Multiples

Selected multiple 1st quartile 4.59 10.68 1.90

BVB financials LTM 31 December 2018

Lei million

BV of equity 120,440

Net Sales 39,830

Net Income 10,196

Equity estimation

EUR mn

EV

(Net debt)/ Net cash as at Valuation Date

Equity value 182,625 108,879 228,963


Estimated value of a BVB share 22.7 13.5 28.4

Weights 30% 50% 20%


Estimated upper value (RON) 21.4

Estimated lower value (RON) 17.2

In order to estimate the market value of the BVB equity we applied the relative valuation based on a group of 6 listedcomparable stock exchanges from CEE. Given the markets’ structural differences and high discrepancies in terms ofprofitability, velocity and liquidity we opted to estimate the BVB equity value by using three multiples: P/E, P/S, P/B. Theresults were weighted by considering the importance of multiples’ underlying financials in substantiating the investmentdecision.In applying relative valuation we assumed a direct correlation between the company’s profitability and equity value.BVB has its profitability margins at the level of 1st quartile compared to its peers, with the prospect of maintaining themat this level over the next years based on recent financial results and further evolution of the market. Based on theseparameters, the multiples applicable to BVB are estimated at the peer group’s 1st quartile values.In order to determine a range for each multiple, we considered the 1st quartile plus/minus 0.10 * standard deviationwhich results in a reasonable narrow interval for each multiple.The multiples were applied to BVB financials at 31 December 2018. The estimated value of BVB equity and stock priceare presented in the table below.

26


APPENDIX 17 PEER GROUP ANALYSIS

27


APPENDIX 18 – SENSITIVITY ANALYSIS

28

TY NI and Synergies from CCP >>

Payout ratio >>

TY g >>

CoE >>

Transactions growth from EM >>

Transactions growth from IPOs >>

Market Velocity >>

Transactions growth rate >>

Avg. commission >> 15.3

17.5

18.1

17.6

17.7

17

17

17.1

17.4

21.5

19.3

18.7

19.1

19.1

19.9

19.6

19.6

19.4

BVB Stock Price - Senzitivity Analysis18.4 >> DDM Base

Key Factors Scenarios

Key factors

variability (%)

Market value of

BVB Shares

Base Case 0.00% 18.4

Worst Case -0.01% 15.3

Best Case 0.01% 21.5








Worst Case -25.00% 17.6

Best Case 25.00% 19.1


Worst Case -25.00% 17.7

Best Case 25.00% 19.1


Worst Case 0.50% 17.0

Best Case -0.50% 19.9








Worst Case -25.00% 17.4

Best Case 25.00% 19.4

Perpetuity growth rate

Dividend payout ratio

TY Net Income and

Synergies from CCP

Average commission for

spot market (% in

transactions value)

Purcentage of annual

transactions value in total

market capitalization

Annual transactions value

increase from emerging

market status

Annual transactions value

increase from IPOs

Cost of Equity

Transactions value

growth rate


APPENDIX 19 RISK MATRIX

29


APPENDIX 20 ENDNOTES

Data sources

www.aaf.ro/, Fund Managers Association www.apapr.ro/, Romania’s Private Pension Funds Association www.asfromania.ro/, Financial Supervisory Authority www.bnro.ro, National Bank of Romania www.bse.hu/, Budapest Stock Exchange https://bse-sofia.bg/, Bulgarian Stock Exchange www.bvb.ro, Bucharest Stock Exchange www.corporatefinanceinstitute.com/, Corporate Finance Institute www.ec.europa.eu/eurostat, Eurostat www.ecb.europa.eu, European Central Bank www.efama.org, European Fund and Asset Management Association www.eiu.com, Economist Intelligence Unit www.fitchratings.com, Fitch Rating www.fond-fci.ro/, The Investors Compensation Fund www.gpw.pl/, Warsaw Stock Exchange www.gss.unicreditgroup.eu/markets/, http://www.helex.gr/, Athens Stock Exchange www.ifc.org, International Finance Corporation, World Bank Group www.insse.ro, National Institute of Statistics www.pages.stern.nyu.edu/~adamodar/, Damodaran online – data base https://www.pse.cz/, Prague Stock Exchange www.roclear.ro/, Central Depository www.schroders.com, www.thomsonreuters.com, Thompson Reuters Database www.zf.ro/, https://www.zse.hr/, Zagreb Stock Exchange

Articles and Publications

Capital markets in 2025 The future of equity capital markets, www.pwc.com Country Report Romania 2018, European Commission, https://ec.europa.eu/ IPO Watch Europe Q3 2018, www.pwc.com Kamal A. El-Wassal, 2013, The Development of Stock Markets: In Search of a Theory,

International Journal of Economics and Financial Issues Vol. 3, No. 3

30

http://www.aaf.ro/

http://www.apapr.ro/

http://www.asfromania.ro/

http://www.bnro.ro/

http://www.bse.hu/

https://bse-sofia.bg/

http://www.bvb.ro/

http://www.corporatefinanceinstitute.com/

http://www.ec.europa.eu/eurostat

http://www.ecb.europa.eu/

http://www.efama.org/

http://www.eiu.comx/

http://www.fitchratings.com,/

http://www.fond-fci.ro/

http://www.gpw.pl/

http://www.gss.unicreditgroup.eu/markets/

http://www.helex.gr/

http://www.ifc.org/

http://www.insse.ro/

http://pages.stern.nyu.edu/~adamodar/

https://www.pse.cz/

http://www.roclear.ro/

http://www.schroders.com/

http://www.thomsonreuters.com/

http://www.zf.ro/

https://www.zse.hr/

http://www.pwc.com/

https://ec.europa.eu/

http://www.pwc.com/


BVB, BSE – Bucharest Stock ExchangeCAGR – Compound Annual Growth RateCEE – Central and Eastern EuropeCoE – Cost of equityDDM – Dividend discount modelEM – Emerging MarketETF – Exchange Traded FundEU – European UnionFCI – Investors Compensation FundFX – Foreign ExchangeIPO – Initial Public OfferingOPCOM – Romanian gas and electricity market operator.P/B – Price to Book RatioP/E – Price to Earnings RatioP/S – Price to Sales RatioROA – Return on AssetsROE – Return on EquitySME – Small and Medium EnterprisesSOE – State Owned Company

Aero – It is the market segment primarily intended for small and medium-sized enterprises that can’t meet therequirements of the regulated market, for these companies the capital and liquidity levels are lower

BET – Bucharest Exchange Trading is the first index created by BVB, which is a reference of the national capitalmarket evolution. It is composed of the most traded 15 companies on the regulated market.

In addition to BET at BVB there are another 8 indices including:BET-BK (Benchmark Index)BET-TR (Total Return)BET-FI (Investment Fund)BET-NG (Energy and related)BET-XT (Extended Index)BET-XT-TR (Extended Total Return)BET-Plus; ROTX

CCP – Central Counterparty represents the forerunner project that BVB has to do for thepurpose of trading derivative instruments on the Romanian capital market.

Regular Market – It is the market segment of BVB intended for companies with a minimum capital of EUR 1 mln,with a minimum free float of 25%.

SIBEX – Sibiu Stock Exchange, represents the first Romanian derivatives exchange. The most important tradedproducts on this exchange was: Stock Futures, Index Futures, Commodities Futures and Currency Futures.

SIF – Financial Investment Company, this is a closed-end investment fund with a diversified investment policy thatis traded on the BVB. There are 5 Financial Investment Companies in Romania, termed conditionally by thefive regions of the country: SIF Banat-Crisana; SIF Moldova; SIF Transilvania; SIF Muntenia si SIF Oltenia.

APPENDIX 21 GLOSSARY OF TERMS

31

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