PwC

B&R country - Kazakhstan

Konstantin YeliseyevPartner, PwC Eurasia Deals Leader

PwC

Highlights:

• 25 k USD per capita

• 18 million people

• 70 million people in Central Asia

Overview of Kazakhstan

2

PwC

ForecastForecast

Real GDP per capita PPP is expected to stay about 25k USD per capita

3

16 17 17 17 17 18 18 18 18 18 19 19 19 19 19 19

’12 ’18 ’25’20 ’23’15’14 ’22’11’10 ’13 ’17 ’24’19’16 ’21

Population of Kazakhstan

million

Source: stat.gov.kz, University of Denver

GDP of Kazakhstan

Billion USD 2011 prices, PPP

342 366384 407 424 429 420 423 429 434 445 461 469 480 491 503

2122 23 24 24 24 24 23 23 24 24 24 25 25 25 26

’14 ’15’12 ’21 ’22’19 ’23’20’18’16 ’17’13 ’25’24’11’10

GDP per Capita

Thousand USD 2011 price, PPP

÷

PwC

The key growth driver of eCommerce spend is Oil revenues

• Oil prices recovered from early 2016 lows and have stabilized around $50/barrel

• Future Growth Project and other large-scale projects were announced in 2016

• State-owned downstream and petrochemprojects lagged due to mismanagement

4

Performance

78

17

(22%)

85

17

(20%)

6168

Due to its smaller size, Kazakhstan cannot influence prices, but its Government is taking steps to improve the production levels and value-add processing

Crude Oil Production and Refining

mt

Policy Outlook

Helpful

• Energy Ministry announced its plans to max up crude production before fossil fuels become obsolete

• Effort on behalf of both Gov’t and SK to reduce oil losses

• Small-scale refineries have received the permission to operate and scale up

• Retail petroleum-product prices were deregulated

• Discussions of sovereign guarantee to investors into petrochem projects

• Digitalization

But:

• Privatization of the Big 3 refineries was announced in early 2016 and then postponed

• Privatization of KMG mulled to be delayed by another year into 2020

• Key focus: Tengizchevroil, Kashagan, KPO

• Similar-scale oil projects likely if:

- Discovery of new oil reserves

- Cooperation among large players in North Caspian

• Demand for smaller-size technologies:

- Oil transportation

- Refineries

- Add-on petrochemical solutions

• Large-scale ‘simple’ solutions to reduce losses and pilferage

• Limited modernization efforts at refineries

Source: TCO, KPO, NCOC, Ministry of Energy of Kazakhstan

PwC

By 2050 Kazakhstan strives to become one of the 30 most developed countries

Within region (182.7 mln people)

• Free movement of labour

• No custom duties, free customs declaration, customs control

• Free movement of goods, services, capital

5

World Trade Organization (WTO)

• Advices in public governance, fiscal affairs

• Increase of competitiveness and business climate

• Projects in education, health, employment and social inclusion

• Increased transparency

• Decreased customs tariffs (from 10.6% to 6.1%)

• Increased trade quality standards

• Liberalisation of financial and communication services

• Increase of KZ export

Membership in following organisations will result in:

Source: Ministry of Economy, Ministry of Finance

PwC

Kyrgyzstan

Kazakhstan

Tajikistan

The Central Asia

UZ

33 mln people

447 thd km2

TM

6 mln people

448 thd km2

KZ

18 mln people

2,725 thd km2

KG

6 mln people

200 thd km2

TJ

9 mln people143 thd km2

6

Source: World Bank

PwC

18

6

6

9

25

21

7

4

10

10

15

2

2

Real GDP in the greater Central Asia is growing, internet penetration is uneven

TJK

TKM

KGZ

UZB

KAZ

Internet Users (mln)

Mobile Subscriptions (mln)

Population (mln)

• Multiple mobile subscriptions per person causes larger number of number of mobile

subscriptions than population

• Thus, we assume full coverage of mobile users in KAZ, KGZ, TJK

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

UZB

TKM

KAZ

KGZ

TJK

CAGR

%

10.0

8.4

6.8

4.7

4.5

10,0%

8,4%

6,8%

4,7%

4,5%

Real GDP growth in 2006-2016

billion USD in 2010 prices

Population, mobile and internet penetration, 2016

Million people

31

Source: internetworldstats.com, wearesocial.com

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PwC

Highlights:

• 1 billion USD in 2016

• 2 billion USD by 2020

Size of eCommerceMarket in Kazakhstan

8

PwC

Inferred from comparison of:

• Official stats

• Survey of Entrepreneurs by the National Chamber

• Tax filings

• Analytical reports

Current eCommerce market is around 1 billion USD

9

68

58

54

49

43

MusicNewsFilmsSearchEmail

28

20

14

13

13

7

6Others/

unemployed

Students

Specialists

Managers

Housewifes

Civil servants

Workers

1 bln USD KZ e-Commerce market in 2016

Most popular uses

% of users

Occupation profile

% of users

Source: National Chamber of Entrepreneurs, Satu.kz, Forbes.kz

PwC

Top e-Commerce retail and service companies

10

66

30

29

16

14

12

63

27

17

Sulpak.kz

Wildberries

Otto-trade.kz, Quelle-kz.ru, Bonprix.kz

Lamoda

Epay.railways.kz

Aviata.kz

Airastana.com

Shop.kz (Bely Weter)

Technodom.kz

TicketsElectric goodsClothing

47

7

5

7

4

3

28

11

3Blizzard.kz

BeSmart.kz, Shop.besmart.kz

Сhocofamily

hh.kz (headhunter)

Olx.kz

Kolesa.kz, Krisha.kz, Market.kz

AdNet.kz

Olimp.kz

Egov.kz (state penalties)

Electric goods TicketsClothing

Online retail — Revenue 2015

Million USD

Online services — Revenue 2015

Million USD

Source: Forbes.kz

PwC

’17’16

10.3 10.9

’12

9.2 11.2

’19’15 ’20

10.0

’13

+3%

’14

9.59.0 9.8 10.6

’18

+20%

8.1

’19’18

5.6

’17

1.9

’13

2.4

’12 ’14 ’16

2.4

’15

4.72.3

3.9

’20

6.7

6.0

2025

4.6

2016

77 79 77 90

"18"17 "20"16

Source: tradingeconomics.com, wef.com, worldbank.com

KZ eCommerce market is expected to grow due to following factors

Internet penetration is expected to grow Consumer sentiment is expected to stay stable

Network Readiness Index

7 - max

Consumer Confidence Index

100 - max

Number of internet users will grow by 3% Internet payments will grow by 20 %

Internet Users

Million people

Internet payments

Billion USD

11

PwC

Mail is becoming replaced by parcels as key source of revenue for Kazpost

• Since 2009, parcel business has grown with reliable stability; mail business has declined before recovering

• Growth in parcels due to E-commerce;

• Physical volumes grow (CAGR 6%) but average revenue per parcel has declined;

• Electronic payments outplace traditional payment business

12

312 295 288 275 270 266

315 320

20162013201220112010 201520142009

2013

17.6

2012

16.9

2016

20.419.5

2014 2015

18.5

2009

13.7

2011

16.0

2010

14.7

Kazpost estimates growth of E-Commerce

to exceed 2 bln USD by 2020

Mail volume, 2009-2016

In millions

Comments

Parcel volume, 2009-2016

In millions

+49%

Source: Forbes.kz

PwC

Highlights:

• Only Almaty and Astana are well connected

• Roads are poor, railways ok

• No broadband yet in rural areas

Network readiness

13

PwC

Retail Trade 2016 above 20 billion USD, but concentrated in two largest cities

14

Source: stat.gov.kz

10.4

(46%)

Corporations12.1

(54%)

22.5

Sole Proprietors Food

Non food

22.5

8.0

(36%)

14.5

(64%)

The Old and New capital cities make 40% of all trade

11

9

9

East Kz

Karagandy

Astana

Almaty 28

By type of traders

Billion USD

By type of goods

Billion USD

Largest retail regions

%

PwC

The rest of the country is not entirely ready for eCommerce

Public

Institutions

4.1

3.8

Roads

4.2

3.6

Internet

4.1

3.92013 2017

• ChinaTelecom is partnering with KazakTelecom to extend broadband in villages

• 4G coverage is being extended to smaller cities

Global Competitiveness Index

7- max

Comment

• There is development in railroad infrastructure, it is at par with global peers

• Automotive roads are poor. KZ roads rank 108th out of 138 states

• ADB, EBRD and WB are sponsoring major road renovation

• There are significant improvements in online identification and proof of purchase, and electronic signature

• Astana International Finance Center is also covering the legal infrastructure for eCommerce

Source: World Bank, internetworldstats.com, wearesocial.com

15

PwC

Logistics developing, but weak relative to maximum achievable

2.6

2.1

Customs Infrastructure

2.8

International

Shipment

1.9

Logistics

quality and

competence

2.8 2.9

Tracking and

tracing

2.1

3.1

Timeliness

2.2

5.0

Max

achievable

2.7

5.0

2.5

1.9

Kazakhstan (2016)Kazakhstan (2007)

Current logistics system consists of 88,400 km of roadways; 14,205 km of railways; 3,900 km of waterways; and up to 61,000 km of air routes.

Road and rail systems carry nearly 90% of its total cargo load.

There are certain developments of roads, but slow and weak relative to benchmark

30%Increase of Logistic Performance Index

in 10 yearsLPI

2.8

2.1

Logistics Performance Index

5- max

16

Source: World Bank

PwC

• Create unified electronic platform, on basis of Chinese cross-border e-commerce platform “Jumore” (Zhejiang «Jumore» E-Commerce Co. Ltd)

- Integrated transport infrastructure, customs and postal services

- Support in finances, logistics, Big Data, Technology, Consultancy and certification

• Practice of English Law, international arbitrage, taxation exemptions, simplified visa and control regimes

Channels Actions Agencies

Logistics Reduce delivery times of goods Kazpost

Ecommerce Creation of e-commerce and

Fulfillment centers

Kazpost, Ministry of

Energy, Ministry of Finance,

NPP

Review regulation of ecommerce

(including indirect budget financing)

Ministry of Energy,

Chamber of Entrepreneurs

Eco-system Remote ID and verification National Bank, Ministry for

IT, Ministry of Justice, MIA,

Ministry of Finance, AFK,

banks

Online sale of insurance National bank

… and the Government is addressing it through investment and institutional reform

Government initiative “Digital Kazakhstan” Astana International Financial Centre (extrajudicial body)

17

Source: Government of Kazakhstan

PwC

China’s big players already demonstrate interest in the sectors relevant to eCommerce in Kazakhstan

The interest

18

PwC

Recent interest by Chinese companies in Kazakhsta: Kerry logistics

• Kerry Logistics is a large Chinese transportation and logistics company

• In 2017, Kerry Logistics completed acquisition of one of the largest logistics company in Kazakhstan and neighbouring countries

• The opportunity was enhanced as the Target had gone through a turmoil caused by devaluation and hostile economic environment, and that allowed attractive valuations

• PwC Conducted a robust analysis of the company and helped the client to build solid negotiation position:

- valuation;

- secure protection against risks

• Our client was able to renegotiate terms substantially to own benefit and proceed to deal closing

19

“We are very excited about this joint venture, part of our strategy to take advantage of the Belt and Road Initiative. The new partnership will provide new options and cost-efficient multimodal solutions to access to the strongest network in Asia.”William Ma, Group Managing Director of Kerry LogisticsSource: Kerry Logistics

PwC

Case Agreement Results

20

Recent interest by Chinese companies in Kazakhsta: China Telecom

• Currently, the broadband penetration is very low in rural areas

• Speed of internet in rural areas is 30 times slower than in cities

• 6700 villages

• Almost a million households

• A new partnership between China Telecom and Kazakhstan's largest telecoms firm JSC Kazakhtelecom

• Helping high-capacity route from Hong Kong to Europe

• Fiber optics connections

• Increased connectivity of rural areas

• New options for setting eCommercelinks between producers and consumers in remote areas and trade centers

Source: Kazaktelecom, China telecom

Contact

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

© 2017 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to

the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

Kostya YeliseyevPartner, PwC Eurasia Deals Leader

konstantin.yeliseyev@kz.pwc.com