Bogdan might shift production to Russia

Bogdan Motors (LUAZ UK) might close its Cherkasy plant and allocate production to Russia, the company announced yesterday in a press release. Blaming the lack of government support for the automobile industry in Ukraine and possible additional import duties in Russia, the company said it was negotiating with a large global car producer for a joint venture in Russia.

Roman Dmytrenko: Bogdan Motors generated 94% of its car sales in Russia in 5M12 (see our news of June 7) thus a potential additional Russian import duty creates substantial risk for the company’s sales. However, we see a shift in production to Russia as hard to implement – the company spent USD 330 mln (of borrowed funds) to build the Cherkasy plant and so far has been unable to repay the embedded debt. The shift will require additional CapEx, which will only increase the company’s leverage (and we doubt they can afford to find any new financing). All in, we see the company’s statement as recognition of the project’s failure in Ukraine, which is definitely discouraging for Bogdan Motors shares.