HSBC Report 2012

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations

In it to

win

it

By Bulent Yurdagul, Cenk Orcan and

the HSBC Turkey Research Team

The Turkish government and the central bank have opted to cope with slowing global growth

and a high current account deficit by adopting a policy that combines low interest rates

and a weaker Turkish lira. In our view this establishes a new operating environment

for Turkish industries and corporates

A company’s competitive position is among the key factors underlying long-term investment

views in equity markets. The competitive landscape is not only influenced by macro conditions,

but also by micro factors such as the individual companies’ market share, growth and

profitability. To assess how different sectors and corporates in Turkey are positioned to cope

with changes in the competitive environment, we have designed a scorecard system and

analysed the sectors and companies under HSBC coverage

The winners based on the scorecard introduced in this report include Trakya Cam,

Emlak REIT, Bizim, Halkbank and Tupras (all rated Overweight); all of them also

offer attractive potential returns in the next 12 months

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Tu

rkey/E

qu

ity

Octo

ber 2

011

In it to win it Turkish equities: Facing a new competitive landscape

Turkey/Equity

October 2011

Cenk Orcan*

Analyst, Co-Head of Turkey Research

HSBC Yatirim Menkul Degerler A.S.

+90 212 376 4614

[email protected]

Cenk joined the HSBC Turkey Research Team in 2000, focusing on the automotive, durable goods, conglomerates, airlines and airports

sectors. He has 13 years of experience as an equity research analyst and, before joining HSBC, worked in the research departments

of some leading investment houses in Istanbul. Since 2005, he has been co-head of HSBC’s Turkey Research Team, making it one of

the top three in the Extel Survey (in both 2007 and 2008). Cenk holds an MBA degree from the University of San Francisco.

Bulent Yurdagul*



+90 212 376 4612

[email protected]

Bulent is an Oil & Gas, Steel and Media sector analyst for HSBC’s Turkey coverage. He joined the HSBC Turkey Research Team in 2001.

Since 2005, he has been co-head of the team, making it one of the top three in the Extel Surveys (2007 and 2008). Before joining HSBC,

he worked in the research departments of some of Turkey’s leading financial institutions. Bulent holds an MBA degree from the

University of California Irvine.

Tamer Sengun*

Analyst


+90 212 376 4615

[email protected]

Tamer is the banking analyst for HSBC in Turkey. He joined the HSBC Turkey Research Team in 2007. Prior to joining HSBC, Tamer has

worked in the research departments of several leading financial institutions in Turkey.

Levent Bayar*

Analyst


+90 212 376 4617

[email protected]

Levent joined the HSBC Turkey Research Team in 2006, focusing on the cement, glass, real estate and energy sectors. Before joining

HSBC, he worked as a credit analysis officer for a number of domestic banks.

Erol Hullu*

Analyst


+90 212 376 4616

[email protected]

Erol joined the HSBC Turkey Research Team in 2007, focusing on the consumer staples, retail and fertiliser sectors. He is also

responsible for the coverage of Russian retailers. Before joining HSBC, he worked as a senior auditor for a leading global audit firm.

111004_28253_Turkish top picks_F:Normal Cover 2011 10/5/2011 12:38 AM

1

Equities Turkish Equities 5 October 2011

abc

New macro settings: Low interest rate and weak Turkish lira The Turkish government and the central bank have opted to cope with slowing global growth and a high

current account deficit using a policy that combines low interest rates and a weaker Turkish lira.

Policymakers would like Turkey to grow more symmetrically (with both domestic and foreign demand

contributing to headline growth), without creating destabilising imbalances. A weaker currency would

make Turkish exports more competitive and slow import growth, narrowing the country’s large trade and

current account deficits. At the same time, lower interest rates would discourage short-term inflows and

ensure that Turkey attracts higher-quality and longer-term external financing. This will also support

investments in the long term, while safeguarding domestic demand in the short term. In our view, this

establishes a new operating environment for Turkish industries and corporates.

Implications for sectors We believe the new macro environment brings numerous challenges for Turkish industries. Although low

interest rates principally favour largely domestic-driven economies such as Turkey through domestic

consumption, Turkey and Turkish industries have a relatively limited track record of operating under

sustainably low interest rates. If a combination of low rates and a moderately weak TRY become the

norm in Turkey over the next few years, competition will have to adjust accordingly to cope with the

resulting challenges. We believe these range from pricing flexibility, debt management and use of excess

capital to cost control, use of domestic resources (localisation rate) and M&A positioning. For instance,

industries and corporates with excess capital will need to optimise it to avoid value destruction (low

ROEs) in a low-rate environment but must, at the same time, position themselves to seize any M&A

Summary

The Turkish government and the Central Bank have adopted a policy that combines low interest rates and a weaker Turkish lira to cope with slowing global growth and a high current account deficit. We believe this establishes a new operating environment for Turkish industries and corporates. A company’s competitive position is among the key factors underlying long-term investment views in equity markets. But the competitive landscape is also dependent on some micro factors, such as the individual companies’ market share, growth and profitability. Based on the scorecard we introduce in this report, the winners are Trakya Cam, Emlak REIT, Bizim, Halkbank and Tupras (all rated Overweight); all of these also offer attractive potential returns in the next 12 months

2


abc

opportunities that arise. On the other hand, a weak Turkish lira may prompt many industries and

companies to cut their FX-based funding and operational costs, while low rates could increase their

appetite for gearing up their balance sheets to achieve higher returns – implying a switch from FX to lira-

based funding).

Winners: airports, retail, oil & gas, autos

In this report we analyse 14 industries, seeking to identify those that stand out from the crowd for their

competitive position – in other words, the ones we think are more capable of adapting to deal with the

potential challenges we mentioned above. The qualities we are looking for are: vertical integration (the

higher it is, the greater the value added and competitive capacity); market structure (fragmented versus

consolidated); regulatory environment (clear and transparent) and track record for numerical competitive

metrics such as asset turnover, profitability, relative growth and ROE. In a later section, we combine

these quantitative and qualitative factors to analyse the different sectors. Our finding is that retail,

airports, oil & gas and the automotive industries appear better positioned than other industries to operate

successfully under the new macro environment. Insurance, utilities and airlines, on the other hand, look

weaker to us.

Airports rank highly owing to the supportive regulatory framework, which combines simplicity and

visibility, and is concession-based, removing new-entrant risks until the expiry of the concessions.

Moreover, market fragmentation is low (the market leader has a 45% share), revenue streams are FX-

based but a large share of the costs are in Turkish lira, the sector’s interest rate sensitivity is low and its

growth profile is high (driven by growth in airline capacity and the tourism sector).

Retail may, at first glance, seem a controversial sector to include in the winners list given the prevalence of

negative working capital and a highly fragmented market in which the top five players account for a mere 20%

of the total food retail market in Turkey. That said, strong consumption growth and improving operational scale

have enabled Turkish retailers to achieve asset turnover well above the global peer average, and they also

generate higher profitability (although sector ROE is largely driven by BIM). The sector has already adapted to

low rates faster than most other industries, focusing on operational profitability, and we are not concerned

about the market’s high fragmentation as organised retail market penetration is still very low, at 45% of the

total retail market versus a developed markets average of more than 70%.

Oil & gas benefits from low domestic market competition, supply/demand imbalance (undersupplied)

and high barriers to entry owing to high capex requirement. All these factors are reflected in its

quantitative key competitive metrics, in the form of high asset turnover and high ROE (although the lack

of vertical integration means operating margins are relatively weak compared to the global industry

average).

Automotive is one of the most competitive sectors in Turkey, as 60 global brands operate in the market,

and the resultant fragmentation has an unfavourable impact on overall scores. However, automakers in

Turkey – and light commercial manufacturers in particular – benefit from tax advantages, which support

demand, scale in production, a high-quality labour force and a well-developed parts industry which serves

as a supply chain, helping generate high sales (over assets) and profitability. The sector’s success has also

been underpinned to date by its ability to attract new models owing to the qualities mentioned above – a

3


abc

situation we expect to persist in the next few years. Low interest rates support demand while a weak

Turkish lira benefits manufacturers’ export revenues.

Insurance, utilities, airlines the least attractive

On the other hand, insurance, utilities and airlines rank relatively poorly in our analysis. Insurance

(non-life) suffers from intense competition via irrational pricing in a market that is still very small, and

where low penetration is accompanied by slow growth. The sector is fully liberalised, and foreign

companies have a strong foothold, but the regulatory framework is neither stable nor transparent. Returns

are very low, and much further consolidation is needed if companies are to achieve scale. The Utilities sector is attracting interest from many private sector players and big groups, owing to the combination of

strong power demand and scarce supply. Large-scale investments have already begun in the private sector

and much more privatisation activity is set to take place in the coming years. But scale and returns are

still low, the benefits of vertical integration are absent and visibility regarding potential changes in the

long-term regulatory environment is low despite strong regulatory control over the industry. Finally,

airlines in Turkey (dominated by Turkish Airlines) are growing rapidly via fleet expansion, capitalising

on strong demand for air travel in Turkey (whose geographical advantage also pushes up transit passenger

numbers). The sector has a more favourable growth profile than European airlines but owing to the lack

of scale in operations its returns are still low. We believe sector is on the right track to claiming a bigger

share of regional and global passenger traffic but it may take a couple more years before the expanded

fleet starts generating higher returns.

Companies: the leaders of the pack We believe a company’s competitive position is among the key factors underlying long-term investment views

in equity markets. The competitive outlook is not only influenced by macro and sector conditions, but also

depends on some micro factors such as a company’s performance in terms of market share, growth and

profitability. To reach a general view about the ways competition may vary across sectors in Turkey, we have

designed a scorecard system and used it to analyse companies under HSBC coverage. Below we detail the six

factors we identified to gain a broad picture of the current competitive outlook for companies from different

sectors. This enabled us to analyse which companies in Turkey are weakly or well positioned to face struggles

and/or seize opportunities in their markets in the next one to five years.

Scorecard FACTORS

1. Profitable market share (High=5, Low=1)

We believe higher return on equity (ROE) and higher market share in the market indicate that a company is very well positioned in a profitable sector (a score of “5” is assigned). Lower market share can be justified for shareholders by above-average ROE. We have assigned the lowest score of “1” to companies which have posted the lowest ROEs and also have a low market share in their markets.

2. Market share momentum (Strong=5, Weak=1)

Industry growth is a key variable in determining the intensity of rivalry in an industry, and sets the pace of expansion required to maintain share. We have ranked Turkish companies in this analysis based on industry and company growth rates for the past five years.

3. Sustainable growth (DuPont formula) (Strong=5, Weak=1)

The DuPont formula suggests that a higher asset turnover ratio (sales revenues over assets – excluding cash) and gross profit margin (excluding own costs such as depreciation and labour) lead to a higher return on asset, which implies strong potential for sustainable growth. We ranked the stocks under our coverage according to asset turnover and gross profit margin performance, and assigned scores from 1 (weak) to 5 (strong) to each stock on the scorecard system.

4. Impact of industry fragmentation (High=5, Low=1)

Various factors may lead to fragmentation in the market and in many cases this lowers the profitability and growth prospects of the sector. Analysts have scored the impact of industry fragmentation depending on sector- and company-specific conditions.

5. Impact of low interest rates (Positive=5, Highly Negative=1)

We believe low interest rates have been the most important element used by Turkish policy makers over the past couple of years. We assume that this will be sustained in the upcoming years and that the impact of low real interest rates will also be a key factor in shaping the competitive outlook. Based on our analysis of how falling rates have affected each company’s financial income (losses) and operational profitability in low rate environments in the past few years, we rated companies from 1 to 5.

6. Impact of weak Turkish lira (Positive=5, Highly Negative=1)

We assume that the Turkish central bank and government will maintain their policy of keeping the Turkish lira weak as a means of combating the rising current account deficit. This mainly looks positive for export companies and negative for importers.

Source: HSBC estimates

4


abc

Scorecard results As the table below details, industrial names tend to lead the ranking, and the banking sector is relatively more

competitive than the others. We highlight 5 of the top 10 players on this list as winners, as the target prices we

have calculated for them imply a higher-than-average potential return. These are: Trakya Cam, Emlak REIT,

Halkbank, Bizim and Tupras. While the remaining 5 names in top 10 also show up as having high quality

under our themes, our target prices for them suggest that the market is already valuing them appropriately.

These theme winners with limited potential return are BIM, Tofas, Sisecam, Garanti and Petkim.

Scorecard analysis ranking for Turkish universe excluding conglomerates (winners with the highest potential return to our TPs are highlighted in grey)

Score 1 Score 2 Score 3 Score 4 Score 5 Score 6

Profitable Market Share

Market Share Momentum

Sustainable Growth (Dupont)

Impact of Industry Fragmentation

Low interest rate impact on P&L

Weak TRY impact on P&L

Total Score Company (High=5, Low=1) (Strong=5, Weak=1) (Strong=5, Weak=(High=5, Low=1)(Positive=5, Highly Negative=1)

(Positive=5, Highly Negative=1)

TRKCM 28 Trakya Cam 5 5 5 5 4 4BIMAS 25 BIM 5 5 5 4 3 3EKGYO 25 Emlak Konut REIT 4 5 5 3 5 3HALKB 24 Halkbank 5 4 4 4 4 3SISE 23 Sisecam Holding 5 3 5 4 4 3GARAN 23 Garanti Bankasi 5 5 3 4 4 3TUPRS 23 Tupras 5 1 5 5 5 2PETKM 23 Petkim 4 1 5 4 5 4BIZIM 23 Bizim Toptan Satis 3 5 5 4 3 3TOASO 22 Tofas 4 5 5 2 4 2TAVHL 22 TAV 4 4 4 5 3 2GUBRF 22 Gubretas 5 5 5 3 2 2FROTO 22 Ford Otosan 5 4 5 2 3 3CCOLA 22 Coca-Cola Icecek 5 4 5 4 4 1AEFES 22 Anadolu Efes 5 3 5 4 3 2AYGAZ 21 Aygaz 5 1 5 4 3 3ARCLK 21 Arcelik 3 5 3 4 4 3CIMSA 21 Cimsa 3 5 4 2 4 3MGROS 21 Migros 2 5 5 3 5 1DOAS 21 Dogus Otomotiv 5 4 5 2 5 1ANHYT 21 Anadolu Hayat 5 3 4 4 2 3YKBNK 20 Yapi Kredi Bankasi 4 2 3 4 4 3TRCAS 20 Turcas 5 3 3 4 4 2KILER 20 Kiler Alisveris 2 5 5 2 5 1HURGZ 20 Hurriyet 4 1 5 4 4 2EREGL 19 Erdemir 4 1 5 3 4 2TTKOM 19 Turk Telekom 5 1 5 4 3 1TATKS 19 Tat Konserve 4 3 5 2 4 1AKSEN 19 Aksa Enerji 3 5 4 3 4 1VAKBN 19 Vakifbank 2 3 3 4 4 3TKC.N 19 Turkcell 5 1 5 4 2 2BAGFS 19 Bagfas 3 1 5 2 3 5AKCNS 19 Akcansa 3 4 4 2 4 3AKBNK 19 Akbank 2 3 3 4 4 3ISCTR 18 Isbank 3 2 2 4 4 3ZOREN 18 Zorlu Enerji 1 5 4 3 4 1SNGYO 18 Sinpas REIC 2 5 4 1 3 3KRDMD 18 Kardemir 2 1 5 4 4 2THYAO 17 Turkish Airlines 2 5 4 2 3 1TRGYO 17 Torunlar REIC 2 4 2 2 4 3ISGYO 17 Is Reit 2 1 4 2 4 4ANACM 17 Anadolu Cam 2 1 3 4 4 3ALBRK 17 Albaraka 2 5 3 2 2 3ASYAB 16 Bank Asya 2 5 2 2 2 3AKENR 15 Akenerji 3 1 3 3 4 2ADANA 15 Adana Cimento 3 1 4 2 3 3ANSGR 15 Anadolu Sigorta 3 5 1 1 2 3AKGRT 12 Aksigorta 2 3 1 1 2 3

SCORECARD


5


abc

Theme winners with attractive potential returns Winner 1: Trakya Cam is Turkey’s leading flat glass producer with a 90% market share. Its monopolistic

status is secured by two factors: (i) high entry costs owing to the sector’s capital-intensive investment

requirements; and (ii) the flat glass import tariffs imposed on cheap glass manufacturers (Iran, China and

Ukraine). We therefore expect the company to retain its large market share for the foreseeable future. We also

believe that the proximity of Trakya Cam’s plants to industrial sites gives the company an edge via the resultant

logistics cost advantage. Although it is susceptible to fuel cost increases (such as natural gas, which Turkey

imports) the firm’s efficient production facilities and pricing lead us to expect that it will be able to maintain its

RoE in the years ahead. Trakya Cam also has operational and planned investments outside Turkey alongside its

partner, Saint Gobain, and this strengthens its presence in the region. This combination of a sustainable

competitive advantage and high profitability along with a strong balance sheet and geographically diversified

operations makes the company the winner in our analysis.

Winner 2: Although real estate is one of the most fragmented sectors in Turkey owing to sizeable

unregistered construction activity and a bleak regulatory framework, Emlak Konut REIT has key

advantages such as: (i) easy access to treasury land by virtue of its position as a state-run company; (ii)

limited risk and operational workload thanks to a revenue-sharing mechanism; and (iii) a recognised

brand name. Easy access to the treasury land bank bolsters the company’s profitability as, unlike peers, it

does not have to pay high costs for the land; it buys the land at preferential rates from its parent TOKI

(state mass housing agency). The revenue-sharing methodology not only limits risks and workload but

also means that Emlak’s direct peers work for it, which essentially eliminates direct competition. Emlak

Konut REIT was established in the 1950s and has had time to establish itself as one of the most trusted

brands in Turkey. We believe these advantages will persist in the long term, making Emlak Konut REIT

one of the winners of our competitive power analysis.

Winner 3: Among the Turkish banks, Halkbank scores the best in our competition analysis, having been one

of Turkey’s most profitable banks for several years. When we analyse the sources of its superior profitability,

we find that the key reasons are better product pricing than peers, a lower cost to revenue ratio, and higher

leverage. We believe Halkbank will sustain its relatively more profitable structure, giving it the means to

achieve sustainable growth. The bank scores better than all banking sector peers in our competitive outlook

analysis owing to its stronger profitability, its size – sufficient to achieve economies of scale – and its strong

market share gain in loans over the past few years.

Winner 4: Like discount retail market leader, BIM, we believe Bizim can also sustain its market share gains

and high RoE level. Unlike BIM, Bizim is not yet the largest player in its sector, but we believe it is using the

right model to increase its reach in Turkey and gain market share from small and regional competitors. The

mass cash & carry and wholesale business is still in its initial growth stage in Turkey. We believe Bizim, with

its ambitious expansion plans for both itself and the market, has high potential to grow at a faster pace than the

retail sector as a whole. By expanding through its smaller-sized stores, we believe the company will continue to

post high RoEs, and we expect the pace of store expansion to support market share gains going forward. These

qualities make Bizim one of the winners under the theme of this report.

Winner 5: Tupras enjoys a monopolistic position in the domestic market via its dominance of the oil

infrastructure, resulting in strong pricing power. The main benefit of Tupras’ sole refiner status is that it

6


abc

gives the company strong refining product pricing power in its dealings with fuel distributors/retailers,

enabling it to charge above international prices. We think this results from the natural benefit of serving

hinterland markets, as well as the firm’s strong storage and pipeline infrastructure, which gives it deeper

reach at lower cost. In its core refining business, Tupras does not face any threat until end-2015 when the

Socar and Turcas refinery is scheduled to come on stream.

Theme winners with limited potential returns

Some of the winners on the scorecard appear as less attractively priced than those five companies

mentioned above according to our valuations (see company sections for details). These are: BIM, Tofas,

Sisecam, Garanti Bank and Petkim.

BIM is the market leader among the organised retailers and is by far the largest player among the discounters.

We think it will continue to be a strong player in the retail industry as it is one of the most efficient players;

moreover, still low penetration in the retail sector (45%) should support market share gains from traditional

outlets. Growth by the other discounters in the market will almost certainly erode BIM’s market share within

the discounter segment, where it is by far the largest player in terms of net sales. Nonetheless, we expect the

company to make market share in the overall retail sector is in question, by eroding the share of unorganised

retailers. We therefore view BIM’s current trend of high RoE and rising market share as sustainable.

Tofas has made substantial progress in improving its market position in recent years. Tofas increased its

sales at a rate well above the average in the geographies where it sells its products thanks to its success in

attracting new products and the substantial resultant boost in capacity, output and scale benefits. In the

past five years, Tofas has become a light commercial vehicle hub for Fiat, and the commissioning of new

models (Doblo, Minicargo) has led to a turnaround in this business. The company has now become an

LCV OEM for multiple brands (Fiat, PSA, Opel) and leads the LCV segment in Turkey with a c38%

market share, giving it a high profile in a very competitive industry.

Sisecam is the market leader in the flat glass (via Trakya Cam), packaging and glassware markets, with

market shares ranging from 70-90% depending on the type of the product. The conglomerate’s market

position is secured by high entry costs and tariffs in the flat glass segment and a strong brand name in the

glassware segment. For the packaging segment, we expect a market share decrease with the entry of a

new competitor, but we do not expect to see market fragmentation given the lower margins and scaled

production requirements in this segment. Sisecam is also active in Egypt, Bulgaria and Russia via its

subsidiaries. The group is not a market leader in these geographies but is a prominent player with market

shares of 20%-40%. We believe its profitability and market share are sustainable in the longer term,

thanks to the company’s well-established relationships, its incumbent position in the segments and its

geographical diversification. These merits make the company one of the winners according to the analysis

we have carried out in this report.

Garanti Bank scores strongly among the Turkish banks in our competition analysis. Although the

Turkish Banking sector cannot be defined as fragmented, since the top five players account for 63% of

the sector by asset size, the level of competition has always been quite high relative to other sectors.

Garanti has differentiated itself within this highly competitive sector, gaining a significant amount of

market share since 2004 (up by 4.3pp), while managing to keep profitability levels superior to those of

most of its large peers. Size – and the resultant economies of scale – is very important in the banking

7


abc

sector, allowing players to bring down cost to income ratios and achieve higher ROAA. Most of the

smaller banks have higher cost to income ratios, which prevents them from achieving sustainably high

ROAE levels. In the past few years, Garanti has moved up to its current ranking a top three bank in

several different categories – loans, deposits, assets; this gives the bank the strength it needs to protect the

above-sector-average profitability of its operations.

Petkim is the only naphtha-based petrochemical producer in Turkey and faces no major competitive

pressure other than from imported products, where it is defended by import tariffs. The current structure

works in Petkim’s favour, given its close relationship with the customers and its ability to deliver small

quantities of products in timely fashion. A further positive is the potential integration benefits arising

from its shareholders’ refining investment. Given our expectation of sector recovery in the next few years

we believe the company’s competitive muscle will strengthen further.

Thematic versus valuation: The winners with attractive valuation are Trakya Cam, Emlak REIT, Bizim, Tupras and Halkbank

Torunlar REIT

Zorlu Enerji

YKB

Vak ifbank

Turkish Ai rlines

Turkcell

Turk Telekom

Turcas

Tupras

Trakya Cam

Tofas

Albaraka

TAV

Tat Konserve

Sisecam

Sinpas REIC

Petkim

Migros

Kiler

Kardemir

Is Reit

IS Bankasi

Hurr iyet

Halkbank

Gubretas Gar anti Bankasi

Ford Otosan

Er demir

Emlak REIT

Dogus Otomotiv

CCI

Cimsa

Biz im

BIM

Bank Asya

Bagfas

Aygaz

Arcel ik

Anadolu Sigorta

Anadolu Hayat

Anadolu Efes

Anadolu Cam

Aksigor ta

Aksa Enerji

Akenerji

AkcansaAkbank

Adana Cimento

0.0

1.0

2.0

3.0

4.0

5.0

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Thematic relative

Val

uatio

n re

lativ

e

Torunlar REIT

Zorlu Enerji

YKB

Vak ifbank

Turkish Ai rlines

Turkcell

Turk Telekom

Turcas

Tupras

Trakya Cam

Tofas

Albaraka

TAV

Tat Konserve

Sisecam

Sinpas REIC

Petkim

Migros

Kiler

Kardemir

Is Reit

IS Bankasi

Hurr iyet

Halkbank

Gubretas Gar anti Bankasi

Ford Otosan

Er demir

Emlak REIT

Dogus Otomotiv

CCI

Cimsa

Biz im

BIM

Bank Asya

Bagfas

Aygaz

Arcel ik

Anadolu Sigorta

Anadolu Hayat

Anadolu Efes

Anadolu Cam

Aksigor ta

Aksa Enerji

Akenerji

AkcansaAkbank

Adana Cimento

0.0

1.0

2.0

3.0

4.0

5.0

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Thematic relative

Val

uatio

n re

lativ

e

Source: HSBC * sizes of bubbles represent market capitalisation

8


abc

Forecast and target price changes in this report In this report, we adjust our estimates in response to weaker Turkish lira rates, lower growth assumptions

for H2 2011 and 2012 and lower peer valuations. We are changing the target prices of 34 stocks in this

report (by an average of 13%), upgrading Adana and Anadolu Cam to Overweight (from Neutral), and

downgrading Bagfas and Coca Cola Icecek to Underweight (from Neutral).

Target price and rating changes summary (TRY)

Stock RIC Current price Old target price New target price Old rating New rating

Adana Cimento (A) ADANA.IS 4.11 6.50 5.75 Neutral Overweight Anadolu Efes AEFES.IS 21.00 23.40 21.80 Underweight Underweight Akbank AKBNK.IS 6.88 7.60 7.60 Underweight Underweight Akçansa AKCNS.IS 6.66 9.70 8.50 Overweight Overweight Akenerji AKENR.IS 2.97 5.00 4.60 Overweight Overweight Aksa Enerji AKSEN.IS 2.82 7.00 5.80 Overweight (V) Overweight Aksigorta AKGRT.IS 1.32 1.94 1.30 Underweight Underweight Albaraka Turk ALBRK.IS 1.87 2.80 2.80 Overweight Overweight Anadolu Cam ANACM.IS 3.15 4.10 4.50 Neutral Overweight Anadolu Hayat ANHYT.IS 2.96 5.33 4.50 Overweight Overweight Anadolu Sigorta ANSGR.IS 0.90 1.32 1.05 Neutral Neutral Arçelik ARCLK.IS 6.86 10.00 9.00 Overweight (V) Overweight Bank Asya ASYAB.IS 1.95 2.75 2.75 Overweight Overweight Aygaz AYGAZ.IS 9.98 11.90 10.80 Underweight Underweight Bagfaş BAGFS.IS 165.50 164.00 170.50 Neutral Underweight Bizim BIZIM.IS 22.00 39.60 37.30 Overweight (V) Overweight (V) Bim BIMAS.IS 54.75 59.00 59.00 Neutral Neutral Coca-Cola İçecek CCOLA.IS 23.20 24.30 21.80 Neutral Underweight Çimsa CIMSA.IS 7.50 12.80 11.00 Overweight Overweight Dogus Otomotiv DOAS.IS 4.13 5.40 5.00 Neutral Neutral (V)l Doğan Holding DOHOL.IS 0.65 1.07 0.78 Neutral (V) Neutral (V) Doğan Yay.Holding DYHOL.IS 0.66 1.15 0.77 Neutral (V) Neutral (V) Emlak Konut REIT EKGYO.IS 2.31 3.70 3.70 Overweight (V) Overweight (V) Enka Insaat ENKAI.IS 4.10 6.42 5.60 Overweight Overweight Erdemir EREGL.IS 3.24 5.25 4.95 Overweight Overweight Ford Otosan FROTO.IS 13.60 16.00 15.50 Neutral Neutral Garanti Bankası GARAN.IS 7.06 8.10 8.10 Neutral Neutral Gübretaş GUBRF.IS 12.25 15.40 15.40 Overweight (V) Overweight (V) Halkbank HALKB.IS 12.25 17.40 17.40 Overweight Overweight Hürriyet HURGZ.IS 0.94 2.00 1.50 Overweight (V) Overweight (V) İş Bankası ISCTR.IS 4.64 5.85 5.85 Overweight Overweight İş GYO ISGYO.IS 1.18 1.75 1.75 Overweight Overweight Kardemir (D) KRDMD.IS 0.83 1.25 1.25 Overweight Overweight Kiler KILER.IS 3.44 6.50 3.10 Underweight (V) Underweight (V) Koç Holding KCHOL.IS 6.82 8.15 8.15 Neutral Neutral Migros MGROS.IS 15.20 26.80 22.80 Overweight (V) Overweight (V) Petkim PETKM.IS 2.37 3.30 3.00 Overweight Overweight Sabancı Holding SAHOL.IS 6.26 10.00 10.00 Overweight Overweight Şişecam SISE.IS 3.31 3.52 3.85 Neutral Neutral Sinpaş GMYO SNGYO.IS 1.75 2.50 2.50 Overweight Overweight Tat Konserve TATKS.IS 2.85 4.00 3.10 Neutral Neutral TAV Havalimanları TAVHL.IS 7.10 9.50 9.50 Overweight Overweight Turkcell (USD) TKC.N 12.60 12.60 8.80 Neutral Neutral Türk Havayolları THYAO.IS 2.65 4.17 3.20 Neutral Neutral Tekfen Holding TKFEN.IS 5.46 8.10 8.10 Overweight Overweight Tofaş TOASO.IS 6.62 10.00 9.00 Overweight Overweight Turcas TRCAS.IS 2.61 5.10 4.50 Overweight Overweight Torunlar REIC TRGYO.IS 5.12 7.40 7.40 Overweight (V) Overweight (V) Trakya Cam TRKCM.IS 2.94 4.60 4.30 Overweight Overweight Türk Telekom TTKOM.IS 7.98 6.80 6.80 Underweight Underweight Tüpraş TUPRS.IS 36.10 47.00 47.00 Overweight Overweight Vakıfbank VAKBN.IS 3.66 4.75 4.75 Overweight Overweight Yapı Kredi Bankası YKBNK.IS 3.78 5.40 5.40 Overweight Overweight Zorlu Enerji ZOREN.IS 1.79 3.00 2.10 Neutral Neutral

Source: HSBC estimates, ISE * Prices as of 27 Sep 11

9


abc

Sector review 10

Sector profiles – competition analysis 15

Which corporates are competitive? 31

Winners and losers 40

Financials 45 Akbank 46 Aksigorta 49 Albaraka Turk 52 Anadolu Hayat 56 Anadolu Sigorta 59 Bank Asya 62 Garanti Bank 65 Halkbank 68 Isbank 71 Vakifbank 74 Yapi Kredi Bank 77

Industrials 81 Adana Cimento 82 Akcansa 85 Akenerji 89 Aksa Enerji 93 Anadolu Cam 97 Anadolu Efes 101 Arcelik 104 Aygaz 107 Bagfas 110 BIM 113 Bizim 116 Cimsa 119 Coca-Cola Icecek 123 Dogan Holding 127 Dogan Yayin Holding 130 Dogus Otomotiv 133 Emlak Konut REIT 136 Enka Insaat 140

Erdemir 143 Ford Otosan 146 Gubretas 149 Hurriyet 152 Is REIT 155 Kardemir 158 Kiler 162 Koc Holding 166 Migros 169 Petkim 172 Sabanci Holding 175 Sinpas REIC 178 Sisecam 181 Tat Konserve 185 TAV Airports 188 Tekfen Holding 191 Tofas 194 Torunlar REIT 197 Trakya Cam 200 Tupras 203 Turcas 207 Turkcell 210 Turkish Airlines 213 Turk Telekom 217 Zorlu Enerji 220

Disclosure appendix 225

Disclaimer 228

Contents

10


abc

Assessing the competitive position of Turkish industries

Measuring a sector’s competitive position is a

very complicated process. It involves many angles

and parameters that are difficult to measure, and

has been the subject of much research and

academic work. Despite the complexities, though,

we view it as vital, from an investment

perspective, to identify the most competitive

sectors, as these would have the potential for

sustainable and above-average growth and thereby

create value. In this report, we attempt to illustrate

the competitive landscape for the 15 Turkish

industries under our coverage using two

approaches: quantitative and qualitative.

Quantitative approach: Our quantitative

approach uses three metrics: (1) the DuPont

formula (asset turnover versus gross profit

margin), profitability (ROE) and the level of

industry fragmentation. We construct data for

each sector using data for the individual stocks

under coverage to obtain information about each

sector’s performance over the past six years

(2005-11e). The DuPont matrix is defined as asset

turnover versus gross margin for a particular

business or industry. It shows how efficiently

assets are used to generate business (ie sales)

versus how much “core” profit is made. Two

crucial factors come into play in order to make the

different sectors comparable: (1) adjustment of

assets: when calculating asset turnover (ie the

sales to assets ratio) only non-cash assets are

taken into account – in other words, cash and

securities are excluded; and (2) adjustment of

costs in gross profit calculations: only the

“outsourced” costs of a business are considered,

but all “own” costs are excluded. Examples of

outsourced costs include raw materials,

consumables and supplies, purchased merchandise

and services. “Own” costs include labour,

depreciation and amortisation.

Qualitative approach: In this approach, we use

six factors that we identify as critical to a sector’s

competitive ranking. These are:

Sector review

Based on our quantitative analysis (DuPont, ROE), retail, autos,

and oil & gas stand out as having the higher asset turnover and

ROE, while airlines, insurance and utilities have lower scores

Airports, banks and durable goods emerge as strongly positioned

under a qualitative view that considers vertical integration, scale,

regulatory framework, brand, technology and liberalisation levels

Overall, considering the sectors’ competitive metrics relative to

regional/global peer averages, we rank airports, retail, oil & gas

and autos as the top four industries

11


abc

Vertical integration: full, partial or very

limited access to the value chain?

Scale: big enough to provide economies of

scale in purchasing, production, network

distribution?)

Regulatory framework: regulated or free

pricing tariffs? Protection against imports via

duties/quotas?

Brand: does the sector operate with strong

brand(s) or function entirely as an OEM?

Technology: latest or outdated?

Liberalisation level: state controlled or fully

private?

We feed these six factors into our analysis based

on the analyst’s judgment of how a particular

industry scores in each. We do not attach

numerical scores but assign a “tick” to denote a

positive score, a “cross” for a negative position

and “N/A” if the metric is not applicable (see

table on page 13).

A further dimension: Regional/global peer

comparisons We also provide comparisons for

Turkish industries operating in regional/global

sectors on the “quantitative” metrics. Similarly,

we construct the global (or regional) industry

averages using the individual companies that are

the most relevant peers for Turkish counterparts

(or for which data are most widely available). In

this way, we try to assess whether a Turkish

sector is competitive on a global scale or not.

Quantitative approach results

Retail, autos and oil & gas stand out among

others

Based on our analysis, these three sectors have

high asset turnover and generate above-average

returns on equity by comparison with other

Turkish industries. They also rank favourably on

global comparisons.

Sales revenues in the retail sector (which, as we

have noted, is strongly driven by BIM) are 4.3x

total adjusted assets and well above global sector

average of 2.2x. Although the sector’s adjusted

gross margin was below that of the global

industry, ROE was a solid 41% versus the global

average of 22%. The retail market is highly

fragmented with the top 5 players accounting for

only 20% but we do not deem this to be a risk for

the current players for now. The penetration of

organised retailers is still low at around 45% in

Turkey. We would be more concerned if

penetration levels approach the DM average of

over 70%.

The automotive sector is highly competitive, with 60

global brands operating. However, light commercial

Asset turnover comparison (global peer average versus Turkey, x)

Adjusted gross margin comparison (global peer avg vs Turkey)

0.00.5

1.01.5

2.02.5

3.0

3.54.0

4.55.0

Reta

il

Oil &

Gas

H. D

urab

les

Auto

mot

ive

Airli

nes

Iron

& St

eel

Ferti

liser

s

B. M

ater

ials

Beve

rage

s

Airp

orts

Utili

ties

Real

Est

ate

Sector Turkey

0%

10%

20%

30%

40%

50%

60%

70%

80%

Airp

orts

Ferti

liser

s

Beve

rage

s

Bank

s

Utilit

ies

B. M

ater

ials

Airli

nes

Iron

& St

eel

H. D

urab

les

Auto

mot

ive

Reta

il

Oil &

Gas

Sector Turkey

Source: Company data Source: Company data

12


abc

manufacturers in particular benefit from tax

advantages, scale in production, a well-educated

work force, and a developed parts industry, all of

which helps it generate high sales (over assets) and

profitability. The ability to attract new models as a

result of the qualities mentioned above is one of the

keys to success in this sector, and we expect it to

persist in the next few years.

Competition in the oil & gas market is relatively

low in Turkey, owing to a supply/demand

imbalance and high entry barriers that result from

high capex requirements. The sector’s quantitative

competitive metrics are favourable, with high asset

turnover and high ROE (despite a lack of vertical

integration, which pushes operating margins below

the global industry average).

Airlines, insurance and utilities score lower

Airlines (basically Turkish Airlines) still have low

asset turnover ratios that are below the European

sector average. ROE is also lower than the peer

average although the adjusted gross margin is in line.

We attribute the low sales to asset and ROE metrics

largely to Turkish Airlines’ rapid capacity growth,

and believe they should gradually improve towards

sector averages as new aircraft are used more

efficiently and the “ramp-up” stage is passed.

The challenges to the insurance sector seem much

stronger and more persistent as the market is

overcrowded while insurance penetration in Turkey

is low and irrational pricing is hurting profitability.

The Turkish utility market has become an

attractive investment area for the private sector in

recent years. Its attraction lies in the strong

pricing potential as demand growth is outstripping

capacity growth. Large-scale investments have

already been launched by the private sector and

much more privatisation activity is scheduled for

the next few years. However, scale and returns are

still low, there is little vertical integration and

there is little clarity over potential changes in the

long-term regulatory environment although this is

a heavily regulated industry.

Qualitative approach results

Airports, banks and durable goods: strong

After analysing the sectors on qualitative

competition criteria we found airports, banks and

durable goods to be strongly positioned.

Airports (basically TAV Airports) offer good

vertical integration, providing terminal services that

include all related activities (ground handling, duty

free and f&b), a clear and transparent regulatory

framework – despite fixed passenger fees – a

regionally strong brand name that makes it eligible

to participate in all new concessions globally and a

strong local market share.

Sector ROE comparison (global peer avg vs Turkey) Sector fragmentation (aggregate market share of top 5 players)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Ferti

liser

s

Bank

s

Ret

ail

Auto

mot

ive

H. D

urab

les

Beve

rage

s

Oil &

Gas

Airli

nes

B. M

ater

ials

Utili

ties

Airp

orts

Iron

& St

eel

Real

Est

ate

Insu

ranc

e

Sector Turkey

0% 20% 40% 60% 80% 100%

BeveragesAirports

H. DurablesOil & Gas

FertilisersUtilities

Iron & Steel

AirlinesBanks

AutomotiveB. Materials

InsuranceReal Estate

Retail


13


abc

Similarly, Turkish banks operate on a scale

commensurate with most EM peers, enabling them

to operate branches efficiently and keep cost to

income ratios low, at around 40%. The sound

regulatory framework (designed after the 2001

crisis) is a big positive for the sector, ensuring

compliance with international standards, the brands

are strong and the technology is up-to-date.

The durable goods sector ranks favourably in our

qualitative analysis; the industry, led by Arcelik, has

high production capacity, providing scale and

efficiency in production, and a relatively low tax

burden (6.7% consumer tax rate versus 37% to 84%

for cars). It also benefits from a strong Turkish brand

regionally (Beko), one of the most advanced

technologies in the industry in energy-efficient

products, and a fully liberalised industry that has

been open to competition since 1996 (when Turkey

became a member of EU Customs Union).

Utilities, fertilisers and insurance: weak

Utilities score weakly in our qualitative analysis

because they are still in the ramp-up stage, lack

the size to achieve economies of scale in

production and sales, operate in a regulatory

environment where long-term changes in

particular are not evident and where liberalisation

is still low, given the state’s heavy involvement in

the generation segment (although this will

diminish with the planned privatisations of power

generation assets).

Fertiliser companies lack vertical integration, and

their need to import basic fertiliser nutrients reduces

their added value. Moreover, their production is on a

lesser scale than some EM peers owing to limited

consumption in Turkey (a question of farmer

economics), and they do not have access to the same

technology as fully integrated fertiliser producers,

which leads to a simper production process but

lower value creation.

As we mentioned earlier insurance gets a

technical “tick” on the “liberalisation” factor in

our table below (the market in Turkey is fully

liberalised with insignificant state involvement);

however, it still suffers from intense competition,

curbing sector profitability. It also lacks scale, the

regulatory environment is more subject to change

than in most other sectors and insurance need

awareness (among consumers) is significantly

lower than in developed geographies.

Overall assessment

Top four sectors: airports, retail, oil & gas and

autos

By combining the two approaches, we identify the

four sectors we consider offer a stronger overall

competitive position than others: retail, airports,

oil & gas and autos.

Insurance, utilities and airlines, on the other hand,

emerge as the least attractive on the combination

of the two approaches.

14


abc

A qualitative look at competitiveness – Turkish industries relative to global/regional industries

Vertical integration Scale Regulatory framework Brand Technology Liberalisation level

Airlines (4) N/A X Airports (4) N/A X Automotive (2) X X X X Banks (5) N/A Beverages (2) N/A N/A X N/A B. Materials (3) X X X Fertilisers (2) X X N/A X H. Durables (5) N/A Insurance (2) N/A X X X Oil & Gas (3) X X X Real Estate (3) N/A X X Retail (3) N/A X X Iron & Steel (3) X X X Telecoms (4) N/A X Utilities (1) X X X X X


15


abc

Sector profiles – competition analysis

Airlines

Airports

Automotive

Banks

Beverages

Building Materials

Fertilisers

Household Durables

Insurance

Iron & Steel

Oil, Gas & Consumable Fuels

Real Estate

Retail

Telecoms

Utilities

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

16

ab

c

Competition analysis – Airlines The DuPont profitability matrix (ROA

equation, asset turnover versus net profit margin) for European airlines suggests that legacy (network) carriers, including Turkish Airlines, are in a relatively better competitive position than low-cost carriers (LCC). Despite having a higher cost structure than LCCs, the legacy carriers seem to generate incremental value added via more differentiated product/service (long-haul and business flights). Turkish Airlines offers the potential to move in a favourable direction as it expands the portion of long-haul of flights with new aircraft

Strategy analysis: THY still scores poorly among major European airlines on market share and profitability. Lufthansa benefits from its scale, which allows it to deliver above-industry-average profits. As THY continues to grow aggressively, its market share should climb, as should profitability once the new aircraft and routes it is operating mature.

Turkish Airlines has captured major market share in last five years: THY’s market share within the Association of European Airlines (AEA) group, measured by RPK, rose from 2.9% in 2005 to 6.4% as at H1 2011 thanks to its ongoing aggressive growth strategy, as well as Istanbul’s emerging status as a regional hub for air passenger traffic between East and West. We expect THY to maintain its far-right position in this diagram in the years to come.

Is the market fragmented? The top five airlines in Europe account for 70% of total traffic (RPK), which means the market is not very fragmented. There are still too many players accounting for the remaining 30% market share, but the industry has undergone a substantial process of mergers and alliances in the past decade, creating big groups such as the Lufthansa Group, IAG (the International Airline Group, led by BA) and the AF-KLM Group. More consolidation activity lies ahead, in our view, with THY potentially taking a “consolidator “ role.

DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) – 2010

Strategy analysis: ROE vs market share (2010)

THY

Lufthansa

AF-KLMEasy Jet

Ryanair

IAG

0.3

0.6

0.9

1.2

1.5

30% 35% 40% 45% 50%

Adj. Gross profit margin

Ass

et T

urno

ver

THY

Lufthansa

AF-KLMEasy Jet

Ryanair

IAG

5%

7%

9%

11%

13%

15%

17%

19%

0% 5% 10% 15% 20% 25%

Market Share

RO

E

Source: Company data * Size of bubbles represents gross profit Source: Company * Sizes of bubbles represent net profit

Turkish Airlines a clear market share gainer in 2005-11e Turkish airline market is highly consolidated: Top 3 players claim 90% market share

THY

Lufthansa

AF-KLM

Ryanair

IAG

Easyjet

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Historical Growth of Sales Volume

His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e

Losing Share

Gaining Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8

Today 5 yrs ago

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

17

ab

c

Competition analysis – Airports The DuPont profitability matrix places TAV in a

favourable position in relation to European airports; TAV generates high profits on the assets it operates. When conducting like-for-like comparisons, we exclude TAV’s rent expenses from the gross profit calculations while including “air operation rights” in the asset base. TAV’s integrated structure (including ground handling, duty free and f&b) provide it with an efficient structure in our view. As its foreign airport operations mature, we expect TAV to improve its asset turnover and profit margins further through improved scale and operational leverage.

Strategy analysis: TAV has a c46% market share (passengers) in Turkey, although this is based on concession agreements won via tenders. Opportunities for entry by other players are virtually non-existent until the renewal of operating rights tenders, and competition arises instead from competition between regional airports for passenger and aircraft traffic (eg Istanbul’s second airport, Sabiha Gokcen, creates competition for TAV’s Ataturk to some extent). TAV’s growth strategy to date has relied heavily on external financing, requiring minimum equity. This business model offers improvement in the ROE in upcoming years in line with growing passenger volumes.

TAV Airports benefits from operating in a high growth market. Turkey’s airport passenger traffic posted 13% CAGR in 2005-11e and TAV’s passenger traffic in Turkish airports grew by 11.4% CAGR in the same period. These are remarkable growth figures compared to European airports. If capacity constraints at TAV’s main operation, Istanbul Ataturk, are solved, the company may continue to post strong growth.

Is the market fragmented? No: the top three players (all private) constitute +80% of the airport market (passengers) in Turkey. While there are 46 airports in total in the country, and 38 are operated by the state, scope for further privatisations is limited given the low commercial profile of these “inland” airports. That said, tenders for operating rights renewals (such as for TAV’s Izmir airport) create opportunity for potential newcomers.

DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) - 2010


TAV

ADP

Fraport Flughafen Wien

Flughafen

Zurich

0.0

0.2

0.4

0.6

65.0% 67.0% 69.0% 71.0% 73.0% 75.0%


Ass

et T

urno

ver

TAV

ADP

Fraport

Flughafen

Wien

Flughafen

Zurich

5%

6%

7%

8%

9%

10%

11%

12%

13%

25% 30% 35% 40% 45% 50% 55% 60%

Market Share

RO

E

Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit

TAV Airports operates in a high-growth market (2005-11e) Turkish airport market is highly consolidated: Top 3 players claim 90% market share

TAV

ADPFraport

Flughafen

ZurichFlughafen Wien

0%

3%

6%

9%

12%

15%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e

Losing Share

Gaining Share

40%

50%

60%

70%

80%

90%

100%

110%

Top 1 Top 2 Top 3 Top 4 Top 5 Top 6

Today 3 y rs ago


Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

18

ab

c

Competition analysis – Automotive The DuPont profitability matrix puts Turkish

vehicle manufacturers in a relatively weaker competitive position than most European mainstream OEMs. The Turkish car industry has a high sales to asset ratio but low gross profits. This could be the result of Turkey’s being a production hub for the lower-value-added LCVs rather than more sophisticated passenger cars. Moreover, the Turkish industry operates almost fully under licence to produce global brands and still relies heavily on imports of key parts for production (engines, gear boxes, chips and transmission parts).

Strategy analysis: On the market share versus ROE metric, the picture changes in favour of Turkish vehicle industry. Both Ford Otosan and Tofas generate strong returns on their solid market positions, in particular their dominance of the LCV segment in Turkey. They export on a cost-plus-fee basis, where all marketing and selling expenses are assumed by their global counterparts, minimising their opex. We presume that labour union issues and related burdens are also lower in Turkey than in Europe.

A market share comparison suggests that Tofas has made substantial progress towards improving its market position in recent years. Tofas’ sales grew at a rate above the weighted average growth in the geographies where it sells its products, owing to its success in attracting new products and the large resultant turnaround in capacity, output and scale benefits. Ford Otosan and DOAS also did well compared with their relevant sales geographies, while PSA Group appears to have been the only one with meaningful market share loss during the period analysed.

Is the market fragmented? Although the top 3 brands control c45% of the Turkish light vehicle market and the top 5 control 60%, the market is more fragmented than consolidated in our view. There is tough competition, with c60 global brands operating in the market (either as manufacturers and/or importers). We expect no major changes in market fragmentation from the levels seen in the last 10-15 years.



Ford Otosan

Tofas

Dogus

Otomotiv

BMW

DaimlerFiat

PSA

Renault

VW Group

0.0

0.5

1.0

1.5

2.0

2.5

3.0

10% 15% 20% 25% 30% 35% 40%


Ass

et T

urno

ver

PSA

Ford Otosan

TofasDogus

OtomotivBMW

Daimler

Fiat Auto

Renault VW Group

Porsche

-1%

4%

9%

14%

19%

24%

29%

34%

0% 5% 10% 15% 20%

Market Share

RO

E


Tofas clear market share gainer in 2005-11e Turkish vehicle market is not fragmented: Top 5 players have a 60% market share

Ford OtosanTofas

Dogus Oto

BMWDaimler

Fiat Auto

PSA

VW Group

Renault

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-1% 2% 5% 8% 11% 14%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e Losing Share

Gaining Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Today 5 yrs ago 15 yrs ago


Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

19

ab

c

Competition analysis – Banks The DuPont profitability matrix puts

Halkbank in a favourable position: Large banks score better under this analysis, owing to their better scale advantages and well-established franchises. Halkbank and Yapi Kredi score much better than the rest with higher-yielding products.

Strategy analysis: Entry barriers are high: As shown by the ROE versus market share matrix, the banks with higher market share achieve higher ROAE than peers. This means that the entry barriers are quite high for new entrants, so it makes more sense to achieve size through acquisitions and mergers and this is highly likely to occur as sector profitability continues to fall. For H1 2011, Ziraat did not score as well as it did in 2010 on ROAE, but Halkbank is still the best player in terms of a blend of market share and ROAE.

Private banks have captured major market share in the last six years: A comparison of the market share performance of the different Turkish banks clearly shows that private banks have gained on this measure at the expense of state-owned bank. Garanti has made the most substantial market share gain (4.3pp) while Ziraat (the largest state-owned bank) lost the most market share (2.9pp).

Is the market fragmented? No: The top 5 players accounted for 63% of market share as at end-2010, and the top 10 for 87%. This means that the remaining banks (around 30) constitute only 13% of the sector. From that perspective, the Turkish banking sector is not very fragmented. In addition, the sector’s fragmentation has diminished since 2001. In terms of asset size, the top 5 banks have market shares of 83%, 67% and 42% in the UK, France and Germany. This suggests that the fragmentation of the Turkish banking sector is not high by global standards, either.

DuPont profitability matrix (asset turnover versus gross profit margin) – 2010 Strategy analysis: ROE vs market share (2010)

TEB

DenizbankFinans

Halkbank

Vakifbank

Yapi

Akbank

GarantiIsbank

Ziraat

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

35% 40% 45% 50% 55% 60% 65% 70% 75%

Gross profit (1-cost/income)

Ass

et tu

rnov

er (r

even

ues/

asse

ts)

Ziraat

Isbank

Garanti

Akbank

Yapi

Vakifbank

Halkbank

Finans

DenizbankTEB

10%

15%

20%

25%

30%

35%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Market share

RoE


Garanti a clear market share gainer (in terms of asset size) between 2004 and 2010

Top 5 players have a 63% market share; sector less fragmented since 2001

Finans

Ziraat

Isbank

Garanti

Akbank

Yapi

Vakif

Halk

Deniz

TEB0%

5%

10%

15%

20%

0.0% 5.0% 10.0% 15.0% 20.0%

2010 market share

2004

mar

ket s

hare

Losing

share

Gaining market

share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8 Top 9 Top 10

2010 2007 2004 2001

Source: Company, HSBC estimates * Size of bubbles represents average sales volumes ] Source: Company data

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

20

ab

c

Competition analysis – Beverages The DuPont profitability matrix shows that

both Anadolu Efes and CCI rank highly, comparing very well with global peers. In our view, both companies’ monopolistic power in Turkey has helped them achieve strong RoA.

Strategy analysis: Anadolu Efes stand out for market power and RoE: Anadolu Efes looks like an outlier compared to the peer universe given the lack of serious competition and a strong business model in its core market Turkey. CCI faces higher competitive pressures and therefore operates with lower RoE than Anadolu Efes.

Anadolu Efes and CCI are among the few to have gained market share: Strong business models, high-quality management and the efficient use of marketing tools allowed Anadolu Efes and CCI to gain higher market share in their core market. Anadolu Efes has a c90% market share in the Turkish beer market and CCI has c70% share of soft drinks. We believe companies are comfortable with their current market shares and doubt that they will make efforts to increase them.

Is the market fragmented? No, single players dominate the markets: The beer and sparkling beverages markets are not at all fragmented. The top 2 companies have nearly all beer sales and the top 3 in sparkling beverages dominated 96% of the market in Turkey in 2010. We do not think the market leaders – Anadolu Efes in beer and CCI in sparkling beverages – will lose significant market share. However, given their currently high levels, slight losses on this measure would not surprise us.



Modelo

KOFCCE

CCH

Anadolu Efes

ThaiBev

CCI

Hite0.3

0.6

0.9

1.2

1.5

1.8

2.1

20% 30% 40% 50% 60% 70%

Adj. gross profit margin

Ass

et tu

rnov

er

Modelo KOF

CCE

CCH

Anadolu EfesThaiBev

CCI

Hite5%

10%

15%

20%

25%

30%

35%

25% 35% 45% 55% 65% 75%

Market share

RoE

Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents represent net profit

Anadolu Efes and CCI have seen strong market share gains in Turkey in 2005-11e Turkish beer and soft drinks markets are not at all fragmented: Top 3 players account for 99% of beer market and 96% of soft drinks market

Modelo

Hite

CCI

Anadolu Efes

CCH

CCE KOF

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e Losing Share

Gaining Share

Beer

Soft drink

40%

50%

60%

70%

80%

90%

100%

110%



Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

21

ab

c

Competition analysis – Building materials On the DuPont profitability matrix, Sisecam

and Trakya Cam are the best performers in Turkish building materials, as both operate with higher gross profit margins than peers owing to their monopolistic or oligopolistic status in the market; both also have a high turnover rate. Turkish cements have lower gross profit margins than international peers owing to their lower price power and higher manufacturing costs.

Strategy analysis: Trakya Cam is the only company in the Turkish building materials sector with high ROE and high market share. Although this indicates that flat glass is an attractive sector, the entry barriers are also high, given substantial set-up costs and import duties on flat glass. While Turkish cement companies have higher ROEs than developed peers owing to their better demand and price environment, they are hampered by low market share, which, unless remedied, implies limited growth in ROE.

Cimsa and Akcansa gained significant market share in the last five years: Cimsa has gained substantial market share in the last five years via both organic and inorganic expansion that increased capacity by 70% from 2005 to 2010. Akcansa has also raised its market share via a 75% capacity increase in the last five years. However, ongoing overcapacity in the cement market leads us to expect limited market share growth without consolidation. Since the Competition Board supervises the sector closely, consolidation efforts may also be challenged.

Is the cement market fragmented? Yes: the top 8 players constitute only half of the industry: The market has 20 mid-sized players with vast regional diversification. Although this suggests that consolidation action by Turkish cements is plausible, it could in fact prove difficult owing to the Competition Board’s close supervision of the sector – particularly for the existing players in the market.


Strategy analysis: ROE vs market share – 2010

Titan Cement

Saudi CementCemex

Heidelberg

Saint Gobain

Trakya Cam

Sisecam

Adana Cimento

CimsaAkcansa

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0% 10% 20% 30% 40% 50% 60% 70% 80%

Adj. Gross profit

Ass

et T

urno

ver

Titan Cement

Saudi Cement

Cemex

Heidelberg

Saint Gobain

Traky a Cam

Sisecam

Adana CimentoCimsa

Akcansa

-20%

0%

20%

40%

60%

80%

100%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

RoE

Mar

ket s

hare


Cimsa and Akcansa gained significant market share with acquisitions and organic growth

Top 8 players claim 50% of the very fragmented market – 2010

Titan Cement

Saudi Cement

Cemex

HeidelbergSaint Gobain

Traky a CamSisecam

Adana CimentoCimsa

Akcansa

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Sales volume growth of the company (2005-2011e)

Sale

s vo

lum

e gr

owth

of t

he s

ecto

r (2

005-

2011

e)

Losing

Share

Gaining

Share

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Top 1 Top 2 Top 3 Top 4 Top 5 T op 6 Top 7 Top 8Turk is h Cement - market share breakdow n by brands

Turk is h Cement - market share breakdow n (2005)


Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

22

ab

c

Competition analysis – Fertilisers The DuPont profitability matrix shows

Bagfas in a favourable position: Turkish companies with limited access to raw materials rank lower than fully integrated companies like Uralkali. Among the Turks, Bagfas looks better, on a high asset turnover ratio. Unless the Turkish companies expand abroad and acquire factories in countries where raw materials are abundant, they will remain less profitable.

Strategy analysis: Gubretas stands out thanks to its Iranian operations. In Turkey, Bagfas and Tekfen demonstrate the trade-off between market share and RoE, although the two have different strategies. Gubretas looks to be the winner but only on a consolidated basis since over 90% of the EBITDA is driven by Iranian rather than Turkish operations. It is clear that Gubretas moved up a league when it acquired fully integrated production facilities in Iran in 2008.

Gubretas and Tekfen further strengthened their market shares in the past six years: The trend in market share gains shows that Gubretas and Tekfen have been gaining market share over recent years. One important factor here is that, because global fertiliser demand was also soaring during this period, the share of exports in Bagfas’ total sales increased. It is the most profitable domestic company and it would be no surprise to see it gain market share when demand from the export markets slows.

Is the market fragmented? No: the two main players dominate the market: Gubretas and Tekfen have similar market share, followed by a handful of regional players and various individual importers. We see little chance of market consolidation or any threat to the leaders, nor do we expect any change in the duopoly.

DuPont profitability matrix (ROA equation, asset turnover versus profit margin) - 2010

Strategy analysis: ROE vs market share in Turkey (2010)

Yara Uralkali

Ege Gubre

Tekfen

Gubretas

Bagfas

Arab Potash

0.0

0.4

0.8

1.2

1.6

2.0

0% 20% 40% 60% 80% 100%


Ass

et tu

rnov

er

BagfasGubretas

TekfenEge Gubre

0%

5%

10%

15%

20%

25%

30%

35%

40%

0% 10% 20% 30% 40%

Market share

RoE


Gubretas and Tekfen saw market share gains in Turkey in 2005-11e Turkish fertiliser market has a duopolistic structure: Tekfen and Gubretas combined command 60% of the market

GubretasTekfenBagfas Ege Gubre

0.0%

0.0%

0.1%

0.1%

0.1%

0.1%

0.1%

-12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e Losing Share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

23

ab

c

Competition analysis – Household durables The DuPont profitability matrix shows a mixed

picture for Turkish (listed) white goods manufacturers: Arcelik ranks at around the European sector average, while Vestel ranks poorly. Other than scale, we think the difference lies in Vestel’s predominantly OEM nature: Arcelik, by contrast, operates with its own brands.

Strategy analysis: The same situation applies here as in the DuPont analysis: Arcelik is in the mid-range of ROE rankings in Europe while Vestel is at the bottom. In our view, Arcelik makes up for its scale disadvantage compared with bigger European competitors via its highly efficient plants which house large capacities under a single roof. BSH and Electrolux emerge as the two dominant players in the European white goods market.

Turkish white goods companies have shown strong growth since 2005. Both Arcelik and Vestel White Goods posted notably higher growth than their relevant sales markets (for which we calculate weighted average growth). In the case of Arcelik, we view its successful penetration of European markets and new sales channels – especially during the 2008-09 crisis – as the driving factor. For Vestel, the vital factors were increased production for European brands and some market share gains in Turkey.

Is the market fragmented? No: the top 3 players account for almost 90% of the market. The picture has not changed much since 1996 when Turkey became a member of Customs Union and opened its protected industries to competition from European companies. Arcelik’s market share fell only slightly from around 60% then to around 50% today. A unique distribution system operates in Turkey, whereby products are sold through manufacturer-owned retail stores; this sets a high barrier to entry and keeps the share of imports low. Consequently, we expect no great change in the existing rankings (Arcelik-BSH-Vestel-Indesit) in at least the next five years, despite the shift towards mass retail stores in big cities.



Arcelik

Vestel WG

Electrolux

WhirlpoolSEB SA

De Longhi

BSH

Indesit

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

15% 20% 25% 30% 35% 40% 45% 50% 55%


Asse

t Tur

nove

r

Arcelik

Vestel WG

Electrolux

Whirlpool

Indesit

SEB SA

De Longhi

BSH

4%

8%

12%

16%

20%

24%

0% 5% 10% 15% 20% 25% 30%

Market Share

RO

E


Arcelik the clear market share gainer in 2005-11e Turkish white goods market is highly consolidated: Top 3 players have a 90% market share

Arcelik

Vestel WG

Electrolux

Whirlpool

Indesit

SEB SA

De LonghiBSH

-1%

-1%

0%

1%

1%

2%

2%

-4% -1% 2% 5% 8% 11%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e Losing Share

Gaining Share

40%

50%

60%

70%

80%

90%

100%


Today 5 yrs ago 15 yrs ago

Source: Company, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data * Size of bubbles represents average sales volumes

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

24

ab

c

Competition analysis – Insurance The DuPont profitability matrix is not

applicable for the insurance sector (we use net technical profits to premiums ratio instead of gross margin). Profitability in the Turkish non-life insurance sector is low, hit by high fragmentation, and competition is too strong. Of all the sectors listed in the ISE, we view insurance as the one hardest hit by high fragmentation and resultant weak profitability. As at end-2010, 57 insurers were sharing annual total premium generation of TRY14bn (1.26% of GDP). Shareholders’ equity held by the banks totals TRY5bn; given the low penetration of insurance products ROE must be very high to exceed CoE. We therefore believe the sector is a potential candidate for consolidation and a recovery in profit via increased penetration over the long term. If fragmentation does not diminish, we believe the profitability levels will continue to be lower than most other sectors in Turkey.

Strategy analysis: Entry barriers are high: As shown in the ROE versus market share matrix, the insurers with higher market share are more profitable. Anadolu Hayat seems to be the most profitable player, but this is more related to its pension business exposure than directly to its life exposure.

Shifts have occurred in the ranking of the large insurers since 2004: Substantial acquisitions and ownership changes have caused the names in the Turkish insurance market top ten to change quite rapidly over the past few years. The two clear winners of the past six years in terms of market share are Axa and Eureko Insurance.

Is the market fragmented? Highly: The top 5 players account for only 40% of market share, and the top 10 for only 63%. We view consolidation as a must given these figures.

Sector historical profitability (non-life) Strategy analysis: ROE vs market share (2010)

0.4%

2.5%

4.2%

1.2%

0.0%

4.6%

8.6%

10.5%

2.8%

-3.0%-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2006 2007 2008 2009 2010

Net technical profit / Premiums (non-life) ROAE

Aksigorta

Anadolu Hayat

Anadolu Sigorta

Aviva

Ray Sigorta

Yapi Kredi Sigorta

Gunes Sigorta

-65%

-45%

-25%

-5%

15%

35%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Market share

RO

AE

Source: Association of Insurance and Reinsurance companies * Size of bubbles represents premiums Source: Company data, Association of Insurance and Reinsurance companies

Axa is a clear market share gainer (in terms of asset size) between 2004 and 2010 Top 5 players have a 40% market share; sector fragmented has always been fragmented

Axa Anadolu

AllianzAksigorta

Yapı KrediGunes

Groupam a

Eureko

Ergo

Ziraat Hayat ve

Em eklilik0%

2%

4%

6%

8%

10%

12%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

2010 market share

2004

mar

ket s

hare

Losing share

Gaining m arket share

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8 Top 9 Top 10

2010 2007 2004

Source: Association of Insurance and Reinsurance companies , HSBC estimates * Size of bubbles represents average sales volumes

Source: Association of Insurance and Reinsurance companies

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

25

ab

c

Competition analysis – Iron & steel The DuPont profitability matrix rates Erdemir

and Kardemir below the sector averages as at FY 2010. Although both Turkish steel companies have strong margins, their asset turnover ratios remain below average owing to insufficient integration, which implies relatively lower sustainable growth potential. However, we believe that the increase in high-value-added rail steel sales at Kardemir and the higher utilisation of new capacities at Erdemir should push both into the upper-right of the chart in the next one to five years.

Strategy analysis: Erdemir is well positioned, with a strong margin in a profitable segment: Although the entry of new players into the Turkish flat steel sector has reduced Erdemir’s dominance in the market, it still has an above-average return and a strong market share. Kardemir, on the other hand, posted weak profits in 2010; however, this should change significantly in 2011 and 2012 given the high share of value-added products.

Market share momentum chart: None of the listed companies are winners: Capacity constraints have caused both Erdemir and Kardemir to lose market share in Turkey at a time when the market was growing fast. With recent additions in capacity, we expect them to regain market share in 2012.

Is the market fragmented? No: the top players constitute major part of the industry: Despite a rise in the number of players, Erdemir still has room for manoeuvre in the flat steel segment as it does not foresee major competition in some value-added products. For Kardemir, growth in rail steel is something of a safeguard as there are no other manufacturers producing this Turkey and the company’s production facility is also one of the few in the surrounding region. Kardemir has offset threats from tough competition in the long steel segment by expanding its business into the less competitive profile and rail steel segments.

DuPont profitability matrix (ROA equation, asset turnover versus adjusted gross profit margin) – 2010


Angang

Kardemir

Maanshan

Salzgitter

ArcelorMittalChina St

CSNErdemir

Jsw

Tata

Thy ssenKrupp

0.4

0.6

0.8

1.0

1.2

1.4

15.0% 25.0% 35.0% 45.0% 55.0% 65.0% 75.0%


Ass

et T

urno

ver

Jsw

Angang

ArcelorMittal

China St

CSN

Erdemir

KardemirMaanshan

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 10% 20% 30% 40% 50%

Relevant Market Share

RO

E


Erdemir has lost share in market despite decent growth in its sales volume 2005-2011e

Turkish steel market is not fragmented: Top 5 players claim 71% market share

SalzgitterArcelorMittal

China StCSN

Erdemir

Kardemir

Posco

-5%

0%

5%

10%

15%

-5% -2% 1% 4% 7% 10%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e

Losing Share

Gaining Share

0%

20%

40%

60%

80%

100%

Top 1 Top 2 Top 3 Top 4 Top 5

2011 2011 5 years earlier

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Petder (data based on diesel market shares)

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

26

ab

c

Competition analysis – Oil, Gas and Consumable Fuels DuPont profitability matrix puts Tupras and

Aygaz in a favourable competitive position: Tupras’ and Aygaz’ ROA ratios of 0.26 and 0.27 are much higher than the peer average of 0.18 for FY 2010, thanks to strong market positions in the refining and LPG sectors, respectively. Petkim and Petrol Ofisi remain slightly below this level owing to low margins specific to the time period analysed. Recovery in their sectors should push both companies into the upper-right section of the chart in the coming years.

Strategy analysis: Tupras has a strong position in a profitable segment: Tupras has substantial market share (as high as c75% for refining, c40% for diesel refining) and strong ROE at 19%, helped by lack of intense competition in the market. Although Aygaz has a relatively favourable position, other sector companies score poorly in this analysis.

Market share momentum chart: None of the listed companies are winners: Tupras has lost market share in refining to imports in the past six years despite a significant share increase in its retail fuel operations. Turcas almost maintained its share in fuel retail while Petrol Ofisi lost share. Petkim lost market share in petrochemicals to imports owing to its capacity constraints, although its plans to grow in tandem with a refining investment may help it regain the lost share.

Is the market fragmented? No: the top players constitute a major part of the industry: Tupras and Petkim are the only local players in refining and petrochemicals, respectively. Tupras will continue to dominate the refining industry as the only player for the next four years until Turcas’ refinery is built on Petkim land.

DuPont profitability matrix (ROA equation, asset turnover versus adjusted gross profit margin) – 2010


Tupras

Aldrees

MOLLotos

PKN OrlenERG

NesteORL

Ay gazPetrol Ofisi

Petkim

Hellenic Pet

MOH

0.0

0.51.01.52.0

2.53.03.54.0

0% 5% 10% 15% 20% 25% 30%


Ass

et T

urno

ver

Petkim

Tupras

Neste Oil

Oil Refineries

Ayga z

Turcas

Aldrees

Petroleum

MOL

-6%

-1%

4%

9%

14%

19%

24%

29%

34%

0% 20% 4 0% 60% 80% 100%

Rel evant Mar ket Share

ROE

Petkim

Tupras

Neste Oil

Oil Refineries

Ayga z

Turcas

Aldrees

Petroleum

MOL

-6%

-1%

4%

9%

14%

19%

24%

29%

34%

0% 20% 4 0% 60% 80% 100%

Rel evant Mar ket Share

ROE


Tupras' fuel distribution subsidiary Opet is the market share winner in last 6 years Turkish fuel distribution market is not fragmented: Top 5 players have 81% market share

BP TurkeyPetrol Ofisi

Shell/Turcas

Opet

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

-1% 2% 5% 8% 11% 14% 17% 20%


His

tori

cal G

row

th o

f Ind

ustr

y Vo

lum

e

Losing Share

Gaining Share

0%10%

20%

30%

40%50%

60%70%

80%90%

100%

Top 1 Top 2 Top 3 Top 4 Top 5

2011 5 y ears earlier

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Petder (data based on diesel market shares)

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

27

ab

c

Competition analysis – Real Estate DuPont profitability matrix (ROA equation,

asset turnover versus net profit margin): Although Emlak Konut REIT is a property developer, it manages to outperform its property operator peers thanks to strong average returns and higher yields. Torunlar REIT is the second-best performer on a yield comparison owing to its high-yielding retail centres.

Strategy analysis: As mentioned above, Emlak Konut REIT has superior profitability, which makes it the market leader in Turkey in terms of ROE. Thanks to high ROEs in property development Sinpas REIC follows Emlak REIT on this metric, while property operators Is REIT and Torunlar REIC trail the property developers with a gap as returns are low relative to their assets. All players have very limited market share owing to the very fragmented structure of the real estate market in Turkey, in both the property development and operations segments.

Emlak Konut REIT has gained substantial market share in the past five years: Following its recovery in 2002 Emlak Konut REIT began to gain market share from the high-end market thanks to its vast land bank and strong brand name. In the past five years the company has managed to outpace peers and the market average with on growth thanks to its revenue-sharing mechanism. We expect Emlak Konut REIT to lead the market in future. We may also see some consolidation if the regulator starts to apply development law effectively.

Is the real estate market fragmented? Yes: the top 8 players account for only 20% of the industry: The real estate market in Turkey is very fragmented owing to a poor regulatory framework for supervising construction, which results in many unregistered developers. We expect consolidation to come with the tighter application of regulations.


Strategy analysis: ROE vs market share – 2010

Mabanee

Klepierre

Emaar

Capitaland

The Link REIT Torunlar REIT

Sinpas REIC

Is Reit

Emlak REIT

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

- 2% 0% 2% 4% 6% 8% 10% 12%

Capit al Yield

Ass

et T

urno

ver

Mabanee

Klepierre

Emaar

Capitaland

The Link REIT Torunlar REIT

Sinpas REIC

Is Reit

Emlak REIT

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

- 2% 0% 2% 4% 6% 8% 10% 12%

Capit al Yield

Ass

et T

urno

ver

MabaneeKlepierre

Emaar

Capitaland

The Link REIT

Torunlar REIT

Sinpas REIC

Is Reit Emlak REIT

-20%

0%

20%

40%

60%

80%

100%

-2% 3% 8% 13% 18%

RoE

Mar

ket s

hare

MabaneeKlepierre

Emaar

Capitaland

The Link REIT

Torunlar REIT

Sinpas REIC

Is Reit Emlak REIT

-20%

0%

20%

40%

60%

80%

100%

-2% 3% 8% 13% 18%

RoE

Mar

ket s

hare


Emlak Konut REIT gained significant market share in the last five years Is the market fragmented? No, top players constitute a major part of the industry

Torunlar REIT Sinpas REICIs Reit Emlak REIT

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Losing Share

Gaining Share

Torunlar REIT Sinpas REICIs Reit Emlak REIT

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Losing Share

Gaining Share

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Top 1 Top 2 Top 3 Top 4 T op 5 Top 6 Top 7 Top 8

Turkish premium house s ector - market share breakdow n


Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

28

ab

c

Competition analysis – Retail On the DuPont profitability matrix, BIM

leads the way: Players with low capex intensity, headed by BIM, look much better placed than peers on this analysis. Bizim is another player that stands out for its high asset turnover. We expect BIM’s to maintain its leading position in the sector and believe Bizim’s asset turnover will gradually improve in the following years with higher gains in scale. Supermarket operators Migros and Kiler have similar asset turnover levels to the peer group but much lower than those of BIM or Bizim.

Strategy analysis: BIM’s high RoE is protected by its business model, and in the short term we see no risks at this level. However, the entry barriers are low in the retail sector, especially in the discount segment, and BIM’s market share may come under pressure from new entrants, possibly threatening its RoE level in the longer term. Bizim, on the other hand, operates in a much more benign competitive environment and there is some potential for higher RoE in our view. We expect Migros’ RoE to improve in the short term, parallel to lower indebtedness.

BIM is the leader in market share gains: All players in the retail sector have been eroding the unorganised share of the sector. BIM has been instrumental in capturing market share via its small stores located on secondary streets, which are replacing traditional-sized outlets.

Is the market fragmented? Yes: the top five players have a 20% market share in the overall food retail sector. We do not see the fragmented nature of the retail space as a risk to the current players for now. The penetration of organised retailers is still low, at around 45%, in Turkey. We will be more concerned if market share remains this low when penetration levels come closer to the DM average of over 70%.



Bizim

Kiler

BIM

Migros

MagnitWumart

X5Soriana

Jeronimo

Wal-Mex

0.0

1.3

2.5

3.8

5.0

6.3

5% 10% 15% 20% 25% 30%


Ass

et tu

rnov

er

Bizim

Kiler

BIM

Migros

MagnitWumart X5

Soriana

Jeronimo

Wal-Mex

0%

10%

20%

30%

40%

50%

60%

0% 3% 6% 9% 12% 15% 18%

Market share

RoE


BIM leads the Turkish retailers in terms of market share gains in 2005-11e Turkish retail market is still very fragmented: Top 5 players have only 20% market share

BIMBizim

Jeronimo

Kiler

Magnit

Migros

Soriana Wal-Mex

Wumart

X5

0%

5%

10%

15%

20%

-5% 5% 15% 25% 35% 45% 55% 65%

Historical Growth of Net Sales

His

tori

cal G

row

th o

f Ind

ustr

y

Losing Share

Gaining Share

2005

20062007

2008

20092010

0%

5%

10%

15%

20%

25%



Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

29

ab

c

Competition analysis – Telecoms DuPont Profitability Matrix puts Turkcell

above average of peer group: Turkcell has above-average asset turnover (0.92) and adjusted profit margin (57%) based on FY10 data, making it one of the best positioned telecoms names according to DuPont analysis. Turk Telekom, on the other hand, is slightly above the average of the sample universe. We believe both companies may improve this ratio in the coming years if competition rationalises in the sector.

Strategy analysis: Turk Telekom is very well positioned: Turk Telekom's monopoly in fixed line and dominance in ADSL business together with a high overall ROE of 36% (FY10) places the company at the top of the universe. Even though it is leading the mobile market in Turkey, Turkcell has a lower overall market share and lower profitability compared to Turk Telekom. But Turkcell remains in the mid-range of sample universe.

Market share momentum chart: Share loss has been inevitable: As both Turk Telekom and Turkcell dominate their own segments, upside in terms of market share has been limited in the last six years. We see high single-digit growth being posted by both companies during this period, slightly below the market growth in Turkey.

Is the market fragmented? It is a consolidated market already: While fixed line and ADSL markets are almost under a Turk Telekom monopoly, mobile market is also consolidated with only three licences available. Entry barriers (lack of licence and high level of capex) prevent a further destruction in competition in the market. However, market leader Turkcell have lost 9 points of market share in last two years to its competitors, Vodafone Turkey and Turk Telekom's Avea, after an intense competition based on mainly price. We think rationalisation of the market may be possible in the coming one to three years.

DuPont Profitability Matrix (ROA equation, asset turnover versus adjusted gross profit margin) – 2010


Tata

Vodafone

Vodacom

SK Telecom Mobinil

Mobistar

MTN

Qatar Telecom

Turkcell

Turk Telekom

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

30.0% 40.0% 50.0% 60.0% 70.0% 80.0%


Ass

et T

urno

ver

Qatar Tel.Turkcell

Turk TelekomSK Telecom

Mobinil

Mobistar

MTN

Tata Tel. Vodacom

Vodafone0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 20% 40% 60% 80% 1 00%Relevant Market Share

ROE

Qatar Tel.Turkcell

Turk TelekomSK Telecom

Mobinil

Mobistar

MTN

Tata Tel. Vodacom

Vodafone0%

10%

20%

30%

40%

50%

60%

70%

80%

0% 20% 40% 60% 80% 1 00%Relevant Market Share

ROE


Neither Turkcell nor Turk Telekom have gained shares in Turkish market since 2006

Turkish mobile market is dominated by 3 players and market leader lost 9% in last 6 years

Mobinil

Mobistar

Tata

Vodafone

VodacomTurkcell

Turk Telekom

0%

5%

10%

15%

20%

25%

0% 3% 6% 9% 12% 15% 18% 21% 24%


Hist

oric

al G

row

th o

f Ind

ustr

y V

olum

e Losing Share

Gaining Share

-1%

Mobinil

Mobistar

Tata

Vodafone

VodacomTurkcell

Turk Telekom

0%

5%

10%

15%

20%

25%

0% 3% 6% 9% 12% 15% 18% 21% 24%


Hist

oric

al G

row

th o

f Ind

ustr

y V

olum

e Losing Share

Gaining Share

-1%

40%

50%

60%

70%

80%

90%

100%

Top 1 Top 2 Top 3

2011 5 y ears earlier

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Turkcell

Eq

uities

Tu

rkish E

qu

ity 5 O

ctob

er 2011

30

ab

c

Competition analysis – Utilities The DuPont Profitability Matrix (ROA

equation, asset turnover versus net profit margin) shows Aksa Enerji to have higher asset turnover than peers owing to its newer technology. Turkish power generators posted lower gross profit than both developed and emerging peers in 2010 owing to high gas prices and a weak power price environment. Looking forward we expect power prices in Turkey to rise based on strong demand and potential gas price hikes.

Strategy analysis: Given the weak operational environment in 2010, Turkish utilities have shown weak ROEs. Companies that operate with a well-established price mechanism (forward and futures) in a liberalised market usually have higher ROEs than Turkish companies (eg Verbund, NTPC, CEZ) whereas companies that operate with fixed tariffs or are operated by state have lower ROEs (eg SEC). As a result, the relationship between ROE and market share does not necessarily indicate any correlation for the utilities in terms of profitability, as the regulatory structure is also important. Looking forward, we expect the ROE of Turkish utilities to increase as the market becomes more liberal – such as with the expected initiation of power futures market in Q4 2011.

Utilities gain market share with organic growth and privatisations: Turkish utilities are gaining market share at a rate above the pace of growth in the Turkish market owing to the ongoing investment phase and privatisation programme. We expect this to continue, as 70% of all state-owned generation assets are up for privatisation. State assets overall currently comprise 50% of Turkey’s total power generation capacity.

Is the market fragmented? No: The state-run power generator accounts for 50% of the market, which is another key factor to consider when analysing Turkey. We expect the market to become much more fragmented once the government’s privatisation programme is complete.

DuPont profitability matrix (asset turnover versus gross profit margin) – 2010 Strategy analysis: ROE vs market share (2010)

Verbund

NTPC

SEC

CEZ

CESP

Zorlu Enerji

Aksa Enerji

Akenerji

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Adj. Gross profit

Ass

et T

urno

ver

Verbund

NTPC

SEC

CEZ

CESP

Zorlu Enerji

Aksa Enerji

Akenerji

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Adj. Gross profit

Ass

et T

urno

ver

Verbund

NTPC

SECCEZ

CESPZorlu Enerji

Aksa EnerjiAkenerji

-20%

0%

20%

40%

60%

80%

100%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

RoE

Mar

ket s

hare

Verbund

NTPC

SECCEZ

CESPZorlu Enerji

Aksa EnerjiAkenerji

-20%

0%

20%

40%

60%

80%

100%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

RoE

Mar

ket s

hare


Aksa Enerji has captured major market share in last five years Top 5 players claim 80% market share – sector will become fragmented via privatisation

Verbund

NTPC

SEC

CEZ

CESP

Zorlu Enerji Aksa Enerj iAkenerji

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Losing Share

Gaining Share

Verbund

NTPC

SEC

CEZ

CESP

Zorlu Enerji Aksa Enerj iAkenerji

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Losing Share

Gaining Share

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%


Turkish Utilities - market share breakdow n

Turkish Utilities - market share breakdow n (2005)

Source: Company data Source: EMRA

31


abc

Competition analysis We believe a company’s competitive position is

one of the key factors underlying long-term

investment views in equity markets. Competitive

outlook is dependent on some micro factors such

– as the market share, growth and profitability

performance of individual companies – as well as

sector and macro conditions. In order to reach a

general view of how competition may vary across

the different sectors in Turkey, we have designed

a scorecard system and used it to analyse the

companies under HSBC coverage.

Which corporates are competitive?

We have analysed the competitive strength of Turkish corporates

using a scorecard system which ranks them by their growth,

market share, fragmentation, profitability and resilience to macro

Our analysis enables us to make comparisons across sectors for

our Turkish coverage universe

Most of the best-positioned companies are industrials rather than

financials, showing that competition has intensified in the banking

sector

Scorecard Factors

1. Profitable market share (High=5, Low=1):

We believe higher return on equity (ROE) and higher market share in the market indicate that a company is very well positioned in a profitable sector (a score of “5” is assigned). Lower market share can be justified for shareholders by above-average ROE. We have assigned the lowest score of “1” to companies which have posted the lowest ROEs and also have a low market share in their markets.

2. Market share momentum (Strong=5, Weak=1):

Industry growth is a key variable in determining the intensity of rivalry in an industry, and sets the pace of expansion required to maintain share. We have ranked Turkish companies in this analysis based on industry and company growth rates for the past five years.

3. Sustainable Growth (DuPont Formula) (Strong=5, Weak=1):

The DuPont formula suggests that a higher asset turnover ratio (sales revenues over assets – excluding cash) and gross profit margin (excluding own costs such as depreciation and labour) lead to a higher return on asset, which implies strong potential for sustainable growth. We ranked the stocks under our coverage according to asset turnover and gross profit margin performance, and assigned scores from 1 (weak) to 5 (strong) to each stock on the scorecard system.

4. Impact of industry fragmentation (High=5, Low=1):

Various factors may lead to fragmentation in the market and in many cases this lowers the profitability and growth prospects of the sector. Analysts have scored the impact of industry fragmentation depending on sector- and company-specific conditions.

5. Impact of low interest rates (Positive=5, Highly Negative=1):

We believe low interest rates have been the most important element used by Turkish policy makers over the past couple of years. We assume that this will be sustained in the upcoming years and that the impact of low real interest rates will also be a key factor in shaping the competitive outlook. Based on our analysis of how falling rates have affected each company’s financial income (losses) and operational profitability in low rate environments in the past few years, we rated companies from 1 to 5.

6- Impact of weak Turkish lira (Positive=5, Highly Negative=1):

assume that the Turkish central bank and government will maintain their policy of keeping the Turkish lira weak as a means of combating the rising current account deficit. This mainly looks positive for export companies and negative for importers.


32


abc

Scorecard introduction

Below we identify six factors to help us gain a

broader view of the current competitive outlook

for companies from different sectors, and used it

to analyse which companies in Turkey are poorly

or well positioned to face problems and/or seize

opportunities in their relevant markets in the next

one to five years.

Scorecard details 1. Profitable market share

We believe a higher return on equity (ROE) and

higher market share indicate that a company is

very well positioned in a profitable sector (a score

of “5” is assigned). Lower market share can be

justified to shareholders by above-average ROE

while lower ROE can be supported by high

market share. We have assigned the lowest score

of “1” to companies that have posted the lowest

ROEs and low market share in their markets. As

shown in the graph below, the following names

emerge as winners based on this factor, appearing

in the (desirable) upper-right-hand corner.

Turk Telekom ( 36% ROE and 90% market

share): Strong market share in its fixed-line and

ADSL businesses and the lack of competition in

these segments lead to an unbeatable market

position for Turk Telekom, despite weakness in

its mobile business arm.

Trakya Cam (15% ROE and 85% market

share): Trakya Cam controls over 90% of the flat

glass market in Turkey, which is protected from

imports via customs tariffs. The company is well

positioned to benefit from Turkey’s strong

industrial growth in the real estate and automotive

sectors. Given the substantial capex needed to

build new capacity in Turkey we see few

prospects of a competitor investing in the

country’s flat glass segment.

Sisecam Holding (13% ROE and 66% market

share): Sisecam controls 90% of the glass market

in Turkey and 50% of the glass packaging market

in Russia, as well as having less significant

market shares in Egypt, Georgia and Bulgaria.

Given heavy capex requirement and Sisecam

Group’s global partnerships in strategic markets

with global peers, we see little probability of

increasing competition.

Profitable market share matrix (2010 ROE versus relevant market share): Upper-right-hand corner of the chart indicates better-positioned companies

TRCAS

TRGYO

ZOREN

TOASO

VAKBN

YKBNKTUPRS TCELL

TRKCM

TTKOM

ALBRK

TAVHLTATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

ISCTR

HURGZ

HALKBGUBRF

GARAN

FROTO

EREGLEKGYO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

ASYAB

BAGFS

AYGAZARCLK

ANSGR

ANHYTAEFES

ANACM

AKGRT

AKSENAKENR

AKCNS

AKBNK

ADANA

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0% 20% 40% 60% 80% 100%

Market Share

ROE

TRCAS

TRGYO

ZOREN

TOASO

VAKBN

YKBNKTUPRS TCELL

TRKCM

TTKOM

ALBRK

TAVHLTATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

ISCTR

HURGZ

HALKBGUBRF

GARAN

FROTO

EREGLEKGYO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

ASYAB

BAGFS

AYGAZARCLK

ANSGR

ANHYTAEFES

ANACM

AKGRT

AKSENAKENR

AKCNS

AKBNK

ADANA

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0% 20% 40% 60% 80% 100%

Market Share

ROE


33


abc

Tupras (19% ROE, 46% market share):

Tupras meets more than 75% of Turkey’s refinery

product needs. Its share in diesel supply is c40%

while its retail arm has an 18% share. Its

dominant position in refining business and the

absence of competition make the company

strongly profitable.

Turkcell (12% ROE, 53% market share):

Despite a loss of market share in the past few

years, Turkcell still commands a share of more

than 50% in the Turkish mobile market. We see

limited downside risks of further loss in share or a

sharp increase in competition.

Ford Otosan (31% ROE, 16% market share): Ford Otosan is the leader in the Turkish vehicle

market and dominates the MCV (medium

commercial vehicle) segment in particular, with a

c36% market share. It operates one of the most

efficient Ford plants worldwide, benefiting from a

strong local market position, economies of scale

in production, a strong supply chain in Turkey and

a cost-plus-fee scheme in exports to Europe

2. Market share momentum

Industry growth is a key variable in determining

the intensity of rivalry in the industry, and sets the

pace of expansion required to maintain share. This

also influences the supply and demand balance

and the incentive offered to new entrants. A

company increasing its market share in a fast-

growing industry is a winner (scored at “5”) as is

a company maintaining/increasing its share in a

low growth market, as it will be a cash cow.

Based on industry and company growth rates for

the past five years we have ranked Turkish

companies under this analysis. As demonstrated in

the graph below, the following names appear as

winners based on this factor.

Aksa Enerji (5% market growth vs 31%

company growth in the past five years): Aksa

Enerji’s market share has increased significantly

in the past five years, owing to its aggressive

investment programme, which has increased its

installed capacity from 250 MW in 2006 to 2,000

MW in Q3 2011. This growth rate is well above

the 5% CAGR for the industry in the same period.

Bank Asya (19% market growth vs 37%

company growth in the past five years):

Operating in a niche segment of participation

banking, Bank Asya has achieved rapid asset

growth since 2004, outperforming the banking

Market share momentum matrix (2005-2011e market growth vs company growth in volumes): Right part indicates companies gaining share

TRGYO

ZOREN

YKBNK

VAKBN

THYAO

TKC.N

TTKO M TRCAS

TUPRS

TRKCM

TOASO

ALBRK

TAVHL

TATKSSISE

SNGYO

PETKM

MGROS

KILER

KRDMD

ISGYO

ISCTR

HURGZ

HALKB

G UBRF

GARAN

FROTO

EREGL

EKGYODO AS

CCOLA

CIMSA

BIZIM

BIMAS

ASYAB

BAGFS

AYG AZ

ARCLK

ANSGRANHYT

AEFES

ANACMAKGRT

AKSENAKENR

AKCNS

AKBNK

ADANA

-5%

0%

5%

10%

15%

20%

25%

-20% -10% 0% 10% 20% 30% 40%

Company Growth Rate

Mar

ket G

row

th R

ate

TRGYO

ZOREN

YKBNK

VAKBN

THYAO

TKC.N

TTKO M TRCAS

TUPRS

TRKCM

TOASO

ALBRK

TAVHL

TATKSSISE

SNGYO

PETKM

MGROS

KILER

KRDMD

ISGYO

ISCTR

HURGZ

HALKB

G UBRF

GARAN

FROTO

EREGL

EKGYODO AS

CCOLA

CIMSA

BIZIM

BIMAS

ASYAB

BAGFS

AYG AZ

ARCLK

ANSGRANHYT

AEFES

ANACMAKGRT

AKSENAKENR

AKCNS

AKBNK

ADANA

-5%

0%

5%

10%

15%

20%

25%

-20% -10% 0% 10% 20% 30% 40%

Company Growth Rate

Mar

ket G

row

th R

ate


34


abc

sector. Given the bank’s size, its rapid branch

openings have also helped it reach a wider

customer base.

BIM (1% market growth versus 30% company

growth in the past five years): BIM has

achieved the fastest market share gains from the

unorganised part of the sector. It has steadily

increased its market share, eventually becoming

the market leader.

Bizim (1% market growth versus 14% company

growth in the past five years): Bizim Toptan is

operating in a niche and severely under-penetrated

part of the retail sector. This has resulted in faster

growth than for the overall market.

Cimsa (5% market growth versus 17%

company growth in the past five years): The

acquisition of the Eskisehir and Nigde plants and

capacity investments in Eskisehir plant increased

overall capacity by 70% from 2005 to 2011.

While some peers have also increased their

capacity in the same period, Cimsa’s strategy to

expand in Central Anatolia has given it greater

momentum, allowing it to obtain better market

share at the end of investment period.

Emlak Konut REIT (1% market growth versus

14% company growth in the past five years):

Emlak Konut REIT’s operational activity has

increased significantly in the past five years

thanks to its new revenue methodology, which

enabled it to undertake several projects

simultaneously. Peers have lower growth rates.

Migros (1% market growth versus 13%

company growth in the past years): Like most

of the food retailers, Migros has been capturing

market share from the unorganised retailers and

has also used acquisitions to support its growth.

Tofas (0% market growth versus 13%

company growth in the past five years): During

the past five years, Tofas has become an LCV hub

for Fiat, and the commissioning of new models

(Doblo, Minicargo) has led to a turnaround in its

production, capacity usage and sales. The

company is becoming an LCV OEM for multiple

brands (Fiat, PSA, Opel), and leads the LCV

segment in Turkey with a c38% market share.

Turkish Airlines (7% market growth versus

18% company growth in the past five years):

Turkish Airlines has pursued an aggressive

growth strategy in the past five years, capitalising

on Istanbul’s growing hub status and the solid

Turkish tourism sector. As a result it has far

outperformed major European competitors on

traffic growth during this period.

3. Sustainable growth (DuPont)

The DuPont formula offers an integrated approach

for defining a company’s sustainable growth

potential. A higher asset turnover ratio (sales

revenues over asset – excluding cash –) and gross

profit margin (excluding own costs such as

depreciation and labour) leads to a higher return

on assets, which implies strong potential for

sustainable growth. Lower profit margins point

towards a lower market position, weak demand or

poor cost control. Lower asset turnover implies

weak operational management of working capital,

lower sales or high capital asset intensity.

Certainly, higher leverage should increase this

ratio for a company assuming that risk limits are

not exceeded. Based on asset turnover and gross

profit margin performances, we ranked the stocks

under coverage and assigned scores ranging from

1 (weak) to 5 (strong) to each stock on the

scorecard system. As demonstrated in the graph

below, the following names appear as winners in

the desirable upper-right-hand section, based on

this factor.

35


abc

Bagfas (asset turnover: 1.85; adjusted gross

profit margins: 36%): Bagfas is a regional

fertiliser company that focuses on profitability. It

achieves high asset turnover and profit margins

during up-cycles in fertiliser prices, such as 2010.

Ford Otosan (asset turnover: 2.72; adjusted

gross profit margins: 22%): With highly

efficient commercial vehicle plants and a strong

LCV market position in Turkey, Ford Otosan

generates above-industry asset turnover and good

margins as an OEM.

Hurriyet (asset turnover: 0.5; adjusted gross

profit margins: 76%): Hurriyet, with a c40%

share in the Turkish newspaper ad business, offers

sustainable growth potential with solid asset

turnover and a high gross profit margin. The lack

of intense competition in the market is a plus

although the falling share of newspapers in total

ad spending is a concern.

Turkish Airlines (asset turnover: 0.86; adjusted

gross profit margins: 43%): Turkish Airlines

capitalised on a strong recovery in global airline

industry in 2010 on top of solid airline passenger

traffic trends in Turkey driven by fleet expansion,

new routes, tourism and Turkey’s foreign policy

initiatives (eg visa removal agreements). As a

result the company posted solid asset turnover

with high margins.

Sisecam Holding (asset turnover: 0.8; adjusted

gross profit margins: 31%): A significant

recovery in capacity utilisation in H2 2009 and

2010 caused Sisecam Group’s asset turnover to

increase substantially in 2010. This, combined

with low fuel costs (natural gas prices were flat)

and strong price growth (c10%) in 2010 allowed

the gross profit margin to improve substantially

and made Sisecam one of our winners in the

DuPont scoring.

Sustainable growth – DuPont matrix (asset turnover versus adjusted gross profit margin 2010): Upper-right corner indicates better positioned companies

TRGYO ZOREN

THYAOTKC.N

TTKOM

TRCAS

TUPRS

TRKCM

TOASO

TAVHL

TATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

HURGZGUBRF

FROTO

EREGLENKAI

EKG YO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

BAGFSAYGAZ

ARCLKAEFES

ANACM AKSEN

AKENR

AKCNS

ADANA

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Adjusted Gross Profit

Ass

et T

urno

ver

TRGYO ZOREN

THYAOTKC.N

TTKOM

TRCAS

TUPRS

TRKCM

TOASO

TAVHL

TATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

HURGZGUBRF

FROTO

EREGLENKAI

EKG YO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

BAGFSAYGAZ

ARCLKAEFES

ANACM AKSEN

AKENR

AKCNS

ADANA

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Ass

et T

urno

ver

TRGYO ZOREN

THYAOTKC.N

TTKOM

TRCAS

TUPRS

TRKCM

TOASO

TAVHL

TATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

HURGZGUBRF

FROTO

EREGLENKAI

EKG YO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

BAGFSAYGAZ

ARCLKAEFES

ANACM AKSEN

AKENR

AKCNS

ADANA

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Ass

et T

urno

ver

TRGYO ZOREN

THYAOTKC.N

TTKOM

TRCAS

TUPRS

TRKCM

TOASO

TAVHL

TATKS

SISE

SNGYO

PETKM

MGROS

KILER

KRDMDISGYO

HURGZGUBRF

FROTO

EREGLENKAI

EKG YO

DOAS

CCOLA

CIMSA

BIZIM

BIMAS

BAGFSAYGAZ

ARCLKAEFES

ANACM AKSEN

AKENR

AKCNS

ADANA

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Ass

et T

urno

ver


36


abc

TAV (asset turnover: 0.48; adjusted gross

profit margins: 71%): TAV generates high

margins on its concession-based airport

operations, offering an integrated product (ground

handling, duty free and f&b), which creates a

business model that is highly efficient and low-

cost compared with major European peers.

Dogus Otomotiv (asset turnover: 1.33; adjusted

gross profit margins: 14%): DOAS has been

one of the main beneficiaries of robust vehicle

demand in Turkey throughout 2010 (and y-t-d

2011) with high asset turnover and high margins

as an importer.

Trakya Cam (asset turnover: 0.66; adjusted

gross profit margins: 48%): Trakya Cam’s gross

profit was strong in 2010, with substantial

demand growth coming from strong construction

demand and record-breaking automotive

manufacturing numbers. The government kept

natural gas prices flat in 2010, which boosted its

gross profit margin. Given Trakya Cam’s market-

leading position in Turkey we expect this

profitability to be maintained – so its DuPont

scoring should remain high in the longer term.

Tofas (asset turnover: 1.55; adjusted gross

profit margins: 19%): Tofas has benefited from

continued upward momentum in the Turkish

vehicle market as well as the strong export

performance of its LCV models in 2010, which

enabled it to achieve high sales and margins.

DuPont profitability matrix for banks (asset

turnover versus cost to income):

Large banks score better than players in other

sectors under DuPont Profitability Matrix analysis

(as shown in the below chart), thanks to their

greater scale advantages and well established

franchises. Halkbank and Yapi Kredi score much

better than the rest as they have higher-yielding

products.

4. Impact of industry fragmentation

It is a well-known theory that industries tend to

consolidate over time – but this is often untrue of

many sectors in many countries, owing to their

specific dynamics. The likelihood or otherwise of

industry consolidation is among the most

important elements of industry structure when

considering competition. Various factors may lead

to fragmentation in the market, and in many cases

Sustainable growth – DuPont Matrix for banks (asset turnover vs gross profit margin 2010): Upper-right corner indicates better-positioned banks

Ziraat

IsbankGaranti

Akbank

Yapi

Vakifbank

Halkbank

Finans Denizbank

0.04

0.045

0.05

0.055

0.06

0.065

0.07

0.075

0.08

0.45 0.5 0.55 0.6 0.65 0.7 0.75

Gross profit (1-cost/income)

Ass

et tu

rnov

er (r

even

ues/

asse

ts)


37


abc

this is considered as an end to growth story in this

sector. These may include low barriers to entry,

the absence of economies of scale, lack of

experience, high transport costs, high inventory

costs, erratic sales fluctuations, diverse market

needs, high product differentiation and strong exit

barriers. Moreover, lower fragmentation – ie a

more consolidated market – does not necessarily

bring higher profitability for every company,

especially if government entities control a major

stake. Analysts have scored the impact of industry

fragmentation depending on sector and company-

specific conditions. The winners according to this

analysis are detailed below.

Anadolu Efes (Industry fragmentation score:

5): Anadolu Efes has a dominant c90% share in

the Turkey beer market with no immediate or

long-term risks from competition.

Coca-Cola Icecek (Industry fragmentation

score: 5): CCI has a c70% market share in the

Turkey sparkling beverages market, where it

generates the majority of its EBITDA. We see the

chances of competition arising from

fragmentation as very unlikely.

Petkim (Industry fragmentation score: 5):

Petkim is the only naphtha-based petrochemical

producer in Turkey, and there are no major

competitive risks other than from imports. The

current structure works in favour of Petkim as,

being the only local player, it has close

relationships with the customers. Potential

integration benefits from its shareholders’ refining

investment are another plus.

TAV (Industry fragmentation score: 5): The

top three airport operators in Turkey (TAV, IC-

Fraport, Limak-GMR-MA) control more than

80% of total airport passenger traffic and TAV is

the clear market leader with a c45% share through

the three main airports it operates.

Trakya Cam (Industry fragmentation score:

5): Trakya Cam controls over 90% of the flat

glass market in Turkey, which is protected from

cheap imports from Russia, Iran and China via a

special customs tariff. Given, in addition, the

substantial capex required to build new capacity

in Turkey, we see limited possibility for a

competitor to invest in Turkey’s flat glass

segment. We expect the monopolistic structure of

the flat glass market to persist in the long term,

making Trakya Cam a winner under our Industry

fragmentation analysis.

Tupras (Industry fragmentation score: 5):

Tupras is the only refiner in Turkey with a c75%

market share, and faces limited competition from

imports. This is likely to change after 2015 when

a second refiner comes on to the scene.

Market fragmentation in the banking sector:

The top five banking players in Turkey had a 63%

market share as at 2010, and the top 10, 87%. The

remaining banks – around 30 – account for only

13% of the sector. The Turkish banking sector is,

therefore, not very fragmented and has become

less so since 2001. By asset size, the top 5 banks

in the UK, France and Germany have market

shares of 83%, 67% and 42%, respectively,

indicating to us that fragmentation in the Turkish

banking sector can be deemed “not high” by

global standards, as well.

5. Impact of low interest rates

We believe low interest rates have been the most

important tool Turkish policy makers have used in

the past couple of years. We assume that this will

continue to be the case in the years ahead and also

believe the impact of low real interest rates will be

a key factor in shaping the competitive outlook.

We rated companies from 1 to 5 based on our

analysis of how falling rates affected their

financial income (losses) and operational

profitability in low rate environments in the past

38


abc

few years. The winners according to this score

are listed below.

Aksa Enerji: Aksa Enerji has a sizeable net debt

position of TRY1.4bn, which distorts the

company’s operational profit in a high interest

rate environment. We think the company would

benefit from low interest rates, which would

enable it to roll over its debt position and incur

lower interest expenses.

Dogus Otomotiv: As Turkey’s number one

vehicle importer, DOAS benefits from a low

interest rates environment, which triggers loan

demand and thereby supports vehicle sales.

Migros: The rise in consumer confidence and

economic activity supported by a low interest

environment positively affects top-line growth. As of

Q2 2011, Migros had gross debt of TRY2.7bn. We

believe that a low interest rate environment will

certainly help Migros in reducing its interest cost

burden and should be a positive for the company.

Low interest rates positive for Turkish banks in

the short term but negative in the long term

Turkish banks initially benefit from diminishing

interest rates owing to the maturity mismatch

between their assets and liabilities (liabilities

reprice faster than assets). Hence, periods of

declining interest rates have historically resulted

in widening margins for Turkish banks. However,

once the interest rates stabilise at lower levels, the

income on free funds (such as free equity and

demand deposits) declines, resulting in a lower

NIM but stronger loan growth.

It is widely known that Turkish banking sector

margins are sensitive to the CBRT’s policy rate

decisions. Historically, in periods of interest rate cuts

(hikes), the sector loan to time deposit spread has

increased (decreased) owing to the maturity

mismatch between the assets and liabilities, which

has caused the NIM to increase (decrease). For

Turkish banks, the negative correlation between the

change in sector NIM and the change in policy rates

was at its highest (0.95) in H1 2009, when the CBRT

was cutting rates very rapidly and the banks were

passing the lower interest rates directly to the deposit

rates that they offer. Historically, the correlation

between the change in NIM and the change in TRY

deposit rates since the beginning of 2005 has been

much higher (-0.38) than the correlation between

NIM and the change in central bank policy rates

(-0.13). The analysis supports our view that CBRT’s

policy rate actions are important for the banking

sector’s NIM profile, as long as the central bank

actions are reflected in deposit costs – or, in other

words, as long as competition allows the banks to

reflect the change in the policy rates. For example,

since the beginning of 2010, Turkish banking sector

loan to time deposit spreads have declined owing to

competitive pressures, resulting in a declining NIM.

(regulatory pressures are also hurting the NIM in

addition to declining loan-to-deposit spreads).

6. Impact of weak Turkish lira

We assume that the Turkish Central Bank and

government will maintain their policy of keeping the

Turkish lira weak as a means of combating the rising

current account deficit. This mainly looks positive

for export companies and negative for importers.

Enka: Enka’s revenues are almost fully generated

in FX or pegged to FX (as in energy operations)

and the company is sitting on a solid net cash

position of USD2.43bn (end-H1 2011), most of

which is invested in FX-denominated assets (euro

and US dollars).

Sisecam: Sisecam would benefit from a weaker

Turkish lira owing to the sizeable share of exports

denominated in euro and US dollars (30-40% of

revenues). In addition, the company has a long FX

position worth TRY230m which shields its

earnings against FX-related losses in a scenario

where the Turkish lira is weak.

39


abc

Trakya Cam: Trakya Cam exports 20% of its

output directly to the Eurozone and 30% of the

remainder is also indirectly exported through the

automotive sector. This makes the company a

beneficiary of a weak TRY environment. In

addition the company has a TRY200m long FX

position.

Is REIT: 70% of Is REIT’s revenues are

denominated in US dollars and euro while 95% of

costs are in Turkish lira, which creates an

advantage in a weak lira environment.

Weak environment for Turkish lira should be

neutral to negative for Turkish banks

A weak Turkish currency environment has almost

no direct impact on the Turkish banks as they do

not carry any significant FX positions. However,

there are two main indirect effects. The first one is

an increase in asset quality risks as the SMEs or

commercial companies that the banks lend to may

have difficulty paying their FX debts if they do

not have sustainable FX revenue streams. The

second one relates to the bank’s capital adequacy

ratio: almost one-third of the risk weighted assets

are denominated in FX, so any weakness in the

Turkish lira causes inflation of the FX risk-

weighted assets, and results in a lower capital

adequacy ratio.

40


abc

Winners and losers

Among the Turkish banks, Halkbank scores the best despite tough

competition in the banking sector as a whole

Among the industrials; Trakya Cam and Tupras seem well

positioned

Retail company Bizim and real estate giant Emlak REIT are also

among the winners, with attractive potential returns

Scorecard analysis ranking for Turkish universe excluding conglomerates (the winners with highest potential return to our TPs are highlighted in grey) Score 1 Score 2 Score 3 Score 4 Score 5 Score 6

Profitable Market Share

Market Share Momentum

Sustainable Growth (Dupont)

Impact of Industry Fragmentation

Low interest rate impact on P&L

Weak TRY impact on P&L

Total Score Company (High=5, Low=1) (Strong=5, Weak=1) (Strong=5, Weak=(High=5, Low=1)(Positive=5, Highly Negative=1)

(Positive=5, Highly Negative=1)

TRKCM 28 Trakya Cam 5 5 5 5 4 4BIMAS 25 BIM 5 5 5 4 3 3EKGYO 25 Emlak Konut REIT 4 5 5 3 5 3HALKB 24 Halkbank 5 4 4 4 4 3SISE 23 Sisecam Holding 5 3 5 4 4 3GARAN 23 Garanti Bankasi 5 5 3 4 4 3TUPRS 23 Tupras 5 1 5 5 5 2PETKM 23 Petkim 4 1 5 4 5 4BIZIM 23 Bizim Toptan Satis 3 5 5 4 3 3TOASO 22 Tofas 4 5 5 2 4 2TAVHL 22 TAV 4 4 4 5 3 2GUBRF 22 Gubretas 5 5 5 3 2 2FROTO 22 Ford Otosan 5 4 5 2 3 3CCOLA 22 Coca-Cola Icecek 5 4 5 4 4 1AEFES 22 Anadolu Efes 5 3 5 4 3 2AYGAZ 21 Aygaz 5 1 5 4 3 3ARCLK 21 Arcelik 3 5 3 4 4 3CIMSA 21 Cimsa 3 5 4 2 4 3MGROS 21 Migros 2 5 5 3 5 1DOAS 21 Dogus Otomotiv 5 4 5 2 5 1ANHYT 21 Anadolu Hayat 5 3 4 4 2 3YKBNK 20 Yapi Kredi Bankasi 4 2 3 4 4 3TRCAS 20 Turcas 5 3 3 4 4 2KILER 20 Kiler Alisveris 2 5 5 2 5 1HURGZ 20 Hurriyet 4 1 5 4 4 2EREGL 19 Erdemir 4 1 5 3 4 2TTKOM 19 Turk Telekom 5 1 5 4 3 1TATKS 19 Tat Konserve 4 3 5 2 4 1AKSEN 19 Aksa Enerji 3 5 4 3 4 1VAKBN 19 Vakifbank 2 3 3 4 4 3TKC.N 19 Turkcell 5 1 5 4 2 2BAGFS 19 Bagfas 3 1 5 2 3 5AKCNS 19 Akcansa 3 4 4 2 4 3AKBNK 19 Akbank 2 3 3 4 4 3ISCTR 18 Isbank 3 2 2 4 4 3ZOREN 18 Zorlu Enerji 1 5 4 3 4 1SNGYO 18 Sinpas REIC 2 5 4 1 3 3KRDMD 18 Kardemir 2 1 5 4 4 2THYAO 17 Turkish Airlines 2 5 4 2 3 1TRGYO 17 Torunlar REIC 2 4 2 2 4 3ISGYO 17 Is Reit 2 1 4 2 4 4ANACM 17 Anadolu Cam 2 1 3 4 4 3ALBRK 17 Albaraka 2 5 3 2 2 3ASYAB 16 Bank Asya 2 5 2 2 2 3AKENR 15 Akenerji 3 1 3 3 4 2ADANA 15 Adana Cimento 3 1 4 2 3 3ANSGR 15 Anadolu Sigorta 3 5 1 1 2 3AKGRT 12 Aksigorta 2 3 1 1 2 3

SCORECARD


41


abc

Scorecard results As the table above details, industrial names

dominate the upper ranks under our theme,

showing that the banking sector is relatively more

competitive. Of the top 10 in this list, we identify

5 as winning names, because they also offer

higher-than-average potential return according our

target prices. These are: Trakya Cam, Emlak

REIT, Halkbank, Bizim and Tupras. The other 5

names in top 10 of this list show up as offering

high quality according to our theme but,

according to our target prices, the market is

already valuing them appropriately. The theme

winners with limited potential returns are BIM,

Tofas, Sisecam, Garanti and Petkim.

Theme winners with attractive potential returns

Winner 1: Trakya Cam is the dominant flat

glass producer in Turkey with a 90% market

share. Its monopolistic status is secured by

two factors: (i) high entry costs owing to the

capital-intensive investment requirements for

the sector; (ii) the flat glass import tariffs

applied to cheap glass manufacturers (Iran,

China, Ukraine). As a result we expect the

company to maintain its large market share

for the foreseeable future. We believe that the

proximity of Trakya Cam’s plants to

industrial sites also gives the company an

edge in terms via the resultant logistics cost

advantage. Although Trakya Cam is

vulnerable to fuel cost increases (such as

natural gas, which Turkey imports) we expect

the company to sustain RoE levels in the

years ahead thanks to its efficient production

facilities and strong pricing power. The

company also has existing and planned

investments outside Turkey, which strengthen

its presence in the region along with its

partner Saint Gobain. As a result of its

sustainable competitive advantage, high

profitability, strong balance sheet and

geographically diversified operations the

company is the winner under our analysis.

Winner 2: Although real estate is one of the

most fragmented sectors in Turkey owing to

sizeable unregistered construction firms and a

bleak regulatory framework, Emlak Konut

REIT has key advantages such as: (i) ease of

access to treasury land thanks to its position

as a state-run company; (ii) limited risk and

operational workload thanks to its revenue-

sharing mechanism; and (iii) a well-known

brand name. Its privileged access to the

treasury land bank strengthens the company’s

profitability as its land costs are lower than

those of its peers. The revenue-sharing

methodology has the advantage of limiting

risks and workload while also making the

company’s direct peers work for Emlak,

thereby eliminating direct competition. Emlak

Konut REIT was established in the 1950s and

its long history makes the company one of the

most trusted brands in Turkey. We believe

these advantages will persist in the long term,

making Emlak Konut REIT one of the

winners in our competitive strength analysis.

Winner 3: Among the Turkish banks,

Halkbank scores the best within our

competition analysis, having been one of the

country’s most profitable banks for years.

Having analysed the sources of its superior

profitability we find that they lie primarily in

better product pricing, a relatively lower cost to

revenue ratio and higher leverage. We believe

Halkbank will maintain its relatively more

profitable structure, which gives it the means it

needs for sustainable growth. Halkbank scores

better than banking peers on our competitive

outlook analysis owing to its stronger

profitability, its size – sufficient to achieve

42


abc

economies of scale – and its strong market share

gain in loans over the past few years.

Winner 4: Like discount retail market leader

BIM, we believe Bizim can also sustain its

market share gains and high RoE level.

Unlike BIM, Bizim is not yet the largest

player in its sector, although we believe it has

adopted the right model to increase its reach

in Turkey and gain market share from small

and regional competitors. The mass cash &

carry and wholesale business is still in its

initial growth stage in Turkey. We believe

Bizim, with its ambitious plans to expand

both its own operations and the market itself,

has considerable potential to grow at a faster

pace than the total retail sector. By expanding

via its smaller stores, we believe the company

will continue to post high RoEs, while the

pace of store expansion should support

market share gains. These qualities make

Bizim one of the winners according to the

theme of this report.

Winner 5: Tupras enjoys a monopolistic

position in the domestic market, with

significant control over the oil infrastructure,

and this results in strong pricing power. The

main benefit Tupras obtains from its sole

refiner status is its ability to charge fuel

distributors/retailers for refining product at

prices above international levels. We view

this as a natural benefit of serving hinterland

markets and having substantial storage and

pipeline infrastructure, which provides a

deeper reach at lower cost. In its core refining

Thematic vs valuation – Winners with attractive valuation are Trakya Cam, Emlak REIT, Bizim, Tupras and Halkbank

Torunlar REIT

Zorlu Enerji

YKB

Vak ifbank

Turkish Airlines

Turkcell

Turk Telekom

Turcas

Tupras

Trakya Cam

Tofas

Albaraka

TAV

Tat Konserve

Sisecam

Sinpas REIC

Petkim

Migr os

Kiler

Kardemir

Is Reit

IS Bankasi

Hurriyet

Halkbank

Gubretas Garanti Bankasi

Ford Otosan

Erdemir

Emlak REIT

Dogus Otomotiv

CCI

Cimsa

Biz im

BIM

Bank Asya

BagfasAygaz

Arcelik

Anadolu Sigor ta

Anadolu Hayat

Anadolu Efes

Anadolu Cam

Aksigorta

Aksa Ener ji

Akenerji

AkcansaAkbank

Adana Cimento

0.0

1.0

2.0

3.0

4.0

5.0

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Thematic relative

Valu

atio

n re

lativ

e

Torunlar REIT

Zorlu Enerji

YKB

Vak ifbank

Turkish Airlines

Turkcell

Turk Telekom

Turcas

Tupras

Trakya Cam

Tofas

Albaraka

TAV

Tat Konserve

Sisecam

Sinpas REIC

Petkim

Migr os

Kiler

Kardemir

Is Reit

IS Bankasi

Hurriyet

Halkbank

Gubretas Garanti Bankasi

Ford Otosan

Erdemir

Emlak REIT

Dogus Otomotiv

CCI

Cimsa

Biz im

BIM

Bank Asya

BagfasAygaz

Arcelik

Anadolu Sigor ta

Anadolu Hayat

Anadolu Efes

Anadolu Cam

Aksigorta

Aksa Ener ji

Akenerji

AkcansaAkbank

Adana Cimento

0.0

1.0

2.0

3.0

4.0

5.0

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Thematic relative

Valu

atio

n re

lativ

e

Source: HSBC estimates * Size of bubbles represents market capitalisation

43


abc

business, the company faces no threats until

end-2015 when the Socar and Turcas refinery

is scheduled to come on stream.

Theme winners with limited potential returns

Some of the winners on our scorecard system do

not appear as attractively valued according to our

valuations (see company sections for details):

BIM, Tofas, Sisecam, Garanti Bank, and Petkim

BIM is the market leader among the

organised retailers and by far the largest

player among the discounters. We think the

company will retain its position of strength

among the retailers since it is one of the most

efficient players in the sector. Since,

moreover, penetration in the retail sector is

still low (45%), this should support share

gains from traditional outlets. Growth among

the other discounters in the market will

almost certainly erode BIM’s market share in

the discounters segment, where it is by far the

largest discounter by net sales. However,

within the retail sector as a whole, we expect

the company to make market share gains from

unorganised retailers. We therefore view

BIM’s high RoE and rising market share

trend as sustainable.

Tofas has made great progress in improving

its market position in recent years. Its sales

growth has far outstripped the average rate in

the geographies where it sell its products,

thanks to its success in attracting new

products. This allowed it to achieve a major

turnaround in capacity, output and scale

benefits. In the past five years, Tofas has

become an LCV hub for Fiat via the

commissioning of new models (Doblo,

Minicargo), which has led to a reversal in its

fortunes. The company is now becoming an

LCV OEM for multiple brands (Fiat, PSA,

Opel) and leads the LCV segment in Turkey

with a c38% market share, giving it a high

profile in a very competitive industry.

Sisecam is the market leader in flat glass (via

Trakya Cam), packaging and glassware

markets, with a 70-90% market share

depending on the type of product. The

conglomerate’s market position is secured by

high entry costs and tariffs in the flat glass

segment and a strong brand name in

glassware segment. We expect its market

share in the packaging segment to decrease

with the addition of one competitor, but do

not expect to see any fragmentation in the

market owing to the lower margins and scaled

production requirement of this segment.

Sisecam is also active in Egypt, Bulgaria and

Russia via its subsidiaries. The group is not a

leader in these markets but is a prominent

player with market shares of 20%-40%. We

believe its profitability and market share are

sustainable in the longer term, thanks to the

company’s well-established relationships with

clients, incumbent position in the segments

where it operates and geographical

diversification. These position the company

as one of the winners under the analysis we

have conducted in this report.

Garanti Bank scores strongly among the

Turkish banks within our competition

analysis. Although the Turkish banking sector

cannot be defined as a fragmented compared

with other sectors since the top five account

for 63% of the sector by asset size one, the

level of competition has always been quite

high. Garanti has differentiated itself within

this highly competitive sector and thereby

gained market share (up c4pp in the last five

years), while managing to keep its

profitability level higher than those of most of

its large peers. In the banking sector size

matters, as it allows economies of scale,

44


abc

which is very important in order to achieve a

lower cost to income ratio and therefore a

higher level of ROAA. Most of the smaller

banks have higher cost to income ratios,

which prevents them from achieving

sustainably high ROAE levels. In the past few

years, Garanti has risen to its current position

as one of the top three banks in different

categories – loans, deposits and assets. This

gives it the strength it needs to keep its

profitability levels above the sector average.

Petkim is the only naphtha-based

petrochemical producer in Turkey and faces

no major competitive pressures other than

from import products. It is also protected by

import tariffs. The current structure works in

favour of Petkim as it has close relationships

with its customers and can deliver small

quantities of products in timely fashion.

Potential integration benefits via its

shareholders’ refining investment are another

plus. The sector recovery we expect in the

next few years should further improve the

company’s competitive power.

45


abc

Financials

46


abc

Overall competitive outlook is medium

Akbank scored medium in our scorecard for

competitive analysis. While the bank has a medium

to weak profitable market share, its market share

momentum has been negative during the last few

years. Although operating in a not highly fragmented

sector, as all the rest of the banks do, Akbank faces

strong competition from its peers.

"Profitable market share" score is medium to

weak

According to our ROE vs. market share matrix

Akbank scores weak compared to banks like

Garanti, Isbank, Halkbank or Yapi Kredi, which

all have higher profitability with lower market

share. As stated in our latest banking sector note,

Akbank is among the banks who price their

products at unfavourable rates despite a

favourable balance sheet breakdown. However, in

the event of better pricing of its products

Akbank’s profitability could increase given its

advantageous market share position.

Market share momentum is medium

After strong growth in 2004 and 2005, during the

period between 2006 and 2010 the bank lost

steam in terms of asset growth, lagging slightly

below the market.

Sustainable growth outlook is medium

Compared to its peers and the rest of the sector,

Akbank’s cost to income was much better in

2010, yet its asset turnover was relatively lower

than that of most large size peers. Hence we

define Akbank’s sustainable growth outlook as

medium. However, if the bank were to improve

the pricing for the products that it offers, the

sustainable growth outlook could improve.

Market fragmentation structure is medium to

strong

The top five players claimed 63% market share as of

2010, while the top 10 claimed 87%. Hence, the

remaining c30banks constitute only 13% of the

sector. From that perspective, the Turkish banking

sector is not very fragmented compared to some

other sectors, yet it is still quite competitive.

Entry barriers to the sector are quite high, not only

due to the low fragmented structure of the sector but

also due to the tight regulations. Given the relatively

lower profitability of the Turkish banking sector due

to the low interest rate environment, we believe

small sizes banks are likely to consolidate in the

Akbank

Akbank’s overall competitive outlook is medium among the

Turkish equities and banks

However, our base-case scenario for Turkish banks does not

favour Akbank. On a 2012e PE of 10.5x it is trading at a c50%

premium to the banks on which we have Overweight ratings

Target price maintained at TRY7.6; maintain Underweight

Tamer Sengun* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 4615 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

47


abc

future due to their relatively higher cost to

income ratios.

Low interest rate environment should be

positive in the short term but negative in the

long term for Turkish banks and Akbank

Turkish banks benefit from declining interest rates

due to the maturity mismatch between their assets

and liabilities (liabilities reprice faster than

assets). Hence, declining interest rate periods have

historically resulted in widening margins for

Turkish banks and Akbank. However, when

interest rates stabilise at lower levels, the income

on free funds (free equity and demand deposits

etc.) declines – resulting in a lower NIM, but

stronger loan growth.

Weak TRY environment should be neutral to

negative for Turkish banks and Akbank

A weak TRY environment has almost no direct

impact on the Turkish banks as they do not carry

any significant FX positions. However, there are

two main indirect effects of a weak TRY. The

first one is increasing asset quality risks as the

SMEs or commercial companies that the banks

lend to may face some difficulties in paying their

FX debts, if they do not have sustainable FX

revenue streams. The second one is related to the

capital adequacy ratio of the bank. Almost one

third of the risk weighted assets are denominated

in FX. Therefore, any weakness in TRY results in

an inflation of the FX risk weighted assets, and

results in a lower capital adequacy ratio.

Investment thesis

According to our analysis of the Turkish banking

sector, Akbank will be the bank which will benefit

least from the ‘new normal’ in 2012 (higher TRY

loan to deposit spread and lower securities yield); ie

we expect only a 11% net income increase for the

bank in 2012. On a 2012e PE of 10.5x, Akbank

trades at a c50% premium to the banks on which we

have Overweight ratings.

Rating, valuation and risks

We value Turkish banks using a residual income

valuation methodology, in which the intrinsic value

of the bank is the sum of its current NAV and the

present value of future residual income (returns

achieved over the cost of equity). The model consists

of three stages: the first includes residual income

based on an explicit forecast period (2011e-13e), the

second (maturity/ transition stage) assumes a

constant growth rate for net profit (2014e-29e) and

the final (declining stage) assumes a convergence of

returns towards the cost of equity (2030e-39e). Our

cost of equity assumptions incorporate an 8.0% risk-

free rate and a 5.5% equity risk premium. We use a

beta of 1.0 for Akbank. This implies a cost of equity

of 13.5% until the end of our valuation horizon

in 2039e.

Our residual-income DCF method yields a target

price of TRY7.6 for Akbank, which implies a

potential return of c6%. This is below the 8.5%-

18.5% Neutral band for non-volatile Turkish stocks.

Therefore, we maintain our Underweight rating.

Risks

The main upside risk specific to Akbank is a

faster-than-expected rise in inflation, from which

the bank would benefit most owing to its sizeable

CPI-linker position.

48


abc

Financials & valuation: Akbank Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 4,277 3,771 4,519 5,124Net fees/commissions 1,309 1,547 1,737 1,959Trading profits 33 203 152 114Other income 891 723 819 1,042Total income 6,510 6,245 7,227 8,240Operating expense -2,417 -2,516 -2,739 -2,914Bad debt charge -348 -354 -708 -1,188Other -171 -367 -433 -369HSBC PBT 3,574 3,008 3,348 3,769Exceptionals 0 0 0 0PBT 3,574 3,008 3,348 3,769Taxation -718 -587 -654 -736Minorities + preferences 0 0 0 0Attributable profit 2,857 2,420 2,694 3,033HSBC attributable profit 2,857 2,420 2,694 3,033

Balance sheet summary (TRYm)

Ordinary equity 17,565 18,294 20,262 22,486HSBC ordinary equity 17,565 18,294 20,262 22,486Customer loans 52,896 70,275 87,014 106,935Debt securities holdings 49,879 43,268 45,550 47,250Customer deposits 67,167 77,712 89,837 104,144Interest earning assets 101,543 118,938 138,224 160,068Total assets 113,183 131,957 152,732 176,504

Capital (%)

RWA (TRYm) 83,035 106,976 126,253 151,971Core tier 1 0.0 0.0 0.0 0.0Total tier 1 19.1 16.6 15.7 14.5Total capital 20.6 17.5 16.5 15.3

Ratio, growth & per share analysis

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Year-on-year % change

Total income -1.3 -4.1 15.7 14.0Operating expense 10.7 4.1 8.8 6.4Pre-provision profit -7.2 -8.9 20.4 18.7EPS 4.8 -15.3 11.3 12.6HSBC EPS 4.8 -15.3 11.3 12.6DPS 12.5 5.6 27.4 11.3NAV (including goodwill) -7.2 4.1 10.8 11.0

Ratios (%)

Cost/income ratio 37.1 40.3 37.9 35.4Bad debt charge 0.8 0.6 0.9 1.2Customer loans/deposits 78.8 90.4 96.9 102.7NPL/loan 2.4 1.7 1.8 2.1NPL/RWA 1.5 1.2 1.3 1.5Provision to risk assets/RWA 1.5 1.2 1.3 1.5Net write-off/RWA 0.0 0.0 0.0 0.0Coverage 100.0 100.0 100.0 100.0ROE (including goodwill) 18.0 13.5 14.0 14.2

Per share data (TRY)

EPS reported (fully diluted) 0.71 0.61 0.67 0.76HSBC EPS (fully diluted) 0.71 0.61 0.67 0.76DPS 0.14 0.14 0.18 0.20NAV 4.39 4.57 5.07 5.62NAV (including goodwill) 4.39 4.57 5.07 5.62

Core profitability (% RWAs) and leverage

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Net interest income 5.8 4.0 3.9 3.7Net fees/commissions 1.8 1.6 1.5 1.4Trading profits 0.0 0.2 0.1 0.1Total income 8.9 6.6 6.2 5.9Other income 1.2 0.8 0.7 0.7Operating expense -3.3 -2.6 -2.3 -2.1Pre-provision profit 5.6 3.9 3.8 3.8Bad debt charge -0.5 -0.4 -0.6 -0.9HSBC attributable profit 3.9 2.5 2.3 2.2Leverage (x) 4.6 5.3 6.0 6.5Return on average equity 18.0 13.5 14.0 14.2

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

PE* 9.6 11.4 10.2 9.1Pre-provision multiple 6.7 7.4 6.1 5.2P/NAV 1.6 1.5 1.4 1.2REP multiple 1.0 1.3 1.2 1.1Equity cash flow yield (%) 5.4 2.7 4.9 4.5Dividend yield (%) 2.0 2.1 2.6 2.9

Issuer information

Share price (TRY) 7.2 Target price (TRY) 7.60 Potent'l return (%) 5.5

Reuters (Equity) AKBNK.IS Bloomberg (Equity) AKBNK TIMarket cap (USDm) 14,929 Market cap (TRYm) 27,520Free float (%) 25 Country Turkey Sector Commercial BanksAnalyst Tamer Sengun Contact +90 212 376 4615

Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

49


abc

Overall competitive outlook is weak

Among the sectors listed in the ISE, the Insurance

sector can be defined as the sector which suffers

the most from a high level of fragmentation and a

fragmentation-led low level of profitability. As of

YE2010, there were 57 insurers sharing an annual

total premium generation amount of TRY14bn

(1.26% of GDP). The total shareholders’ equity

held by the insurers amounts to TRY5bn, which

makes it very difficult to post RoEs above CoE

given the low level of penetration of insurance

products. Therefore, we believe the sector is a

candidate for consolidation and increased-

penetration-led profit recovery over the long term.

If the degree of market fragmentation does not

diminish, we believe the profitability levels will

continue to be lower than those of most other

sectors in Turkey. Aksigorta suffers from the

unfavourable competitive landscape of the sector

and this is why the H1 2011 ROAE of the

company was just below 1%.

"Profitable market share" score is weak


Aksigorta scores medium to weak. Although a

market share of around 7-8% (within non-life

insurers) in a highly fragmented market can be

considered as a relative strength, similar to most

of its peers with higher market shares Aksigorta

suffers form a low level of profitability ie. H1

2011 ROAE below 1%.


Aksigorta’s market share remained quite flat

within the total insurance sector between 2006

and 2010.

Sustainable growth outlook is weak

For the companies operating in the Turkish

insurance sector sustainable growth is a function

of the level of competition. Unless the sector

consolidates, it is highly likely that the level of

competition will stay high and irrational pricing

will continue to exist.

Market fragmentation structure is weak

The sector is highly fragmented. The top 5 players

claim only 40% market share, and the top 10

players claim 73%. We believe consolidation is a

must given this level of fragmentation.

Aksigorta

Aksigorta is one of the top-five insurers in Turkey, yet its overall

competitive outlook is weak due to high competition and

fragmentation in its sector

We see the competitive environment creating serious headwinds

for Aksigorta and preventing it from reaching its RoAE target of

15% in the next three years

Target price cut to TRY1.3 from TRY1.94; maintain Underweight



50


abc

Low interest rate environment is negative for

insurance companies

Investment income is one of the revenue sources

of the insurance companies. During low interest

rate environments, yields on TRY securities

decline which results in lower revenue

contributions for the insurance companies. Hence,

Aksigorta is not a beneficiary of a declining

interest rate environment.


negative for Turkish insurers and Aksigorta


impact on pensions business and therefore on

Aksigorta.

Investment thesis

We define the non-life insurance sector as one of

the least attractive sectors in Turkey due to the

high level of fragmentation and competition. It is

almost impossible for any of the players to protect

themselves from the intensely competitive

landscape.


We value Aksigorta by using the implied

valuation from the warranted equity method

(WEM) and a valuation based on previous

insurance sector transactions. We value

Aksigorta’s core insurance business operations at

TRY101m. We use the JV deal value in our

valuation, at USD710m, since we believe it will

form a benchmark for market valuations.

We give a 30% weight to the value implied from

the deal (down from 50% as the psychological

impact of the deal has diminished). The remaining

70% (from 50% previously) is the value implied

by the WEM. On this basis, we lower our target

price to TRY1.30 from TRY1.94, implying a

potential return of -0.8%. Our Neutral band for

non-volatile Turkish stocks is 8.5% - 18.5%. We

maintain our Underweight rating on Aksigorta.

Risks

Competition is fierce in the sector and companies

are working with core insurance losses to sustain

their market shares. A more rational competitive

environment in the sector is an upside risk for our

core insurance valuation.

51


abc

Financials & valuation: Aksigorta Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Gross written premium 886 996 1,126 1,242Net earned premium 635 714 807 890Other income 0 0 0 0PBT (operating) 3 8 15 24PBT (reported) 9 11 20 29Total tax -7 -1 -2 -3Net operating profit 1 10 18 26Net reported profit 1 10 18 26

Net earned primary life & health prem 0 0 0 0Net earned primary P&C prem Net earned life & health re-ins prem 0 0 0 0Net earned P&C re-ins prem 0 0 0 0


Total investments 960 1,021 1,117 1,199Banking assets 0 0 0 0

Tangible assets 960 1,021 1,117 1,199Value of in-force business 0 0 0 0Intangible & other assets 8 8 8 8Total assets 1,033 1,095 1,191 1,273Technical reserves 527 593 670 739Banking liabilities 0 0 0 0

Other liabilities 135 121 122 123Debt capital 0 0 0 0Total liabilities 662 713 792 859

Shareholders funds 372 381 399 411Average invested capital 1,520 377 390 405Equity 372 381 399 411Quasi equity 0 0 0 0

Long-term debt & hybrid capital 0 0 0 0Short-term debt 133 118 119 120Third party assets under mgmt 0 0 0 0Total assets under mgmt 0 0 0 0

Ratios & growth

12/2010a 12/2011e 12/2012e 12/2013e


Gross net earned life prem Gross net earned P&C prem 16.0 12.4 13.1 10.3Operating PBT -160.1 180.4 86.1 59.5Reported PBT -74.4 25.0 75.0 46.5EPS (operating) -109.9 1430.3 86.1 90.9EPS (reported) -95.8 582.4 75.0 46.5DPS -100.0 46.5Total investments -70.0 6.4 9.4 7.4Third party asset managed Net asset value

Ratios (%)

Life new business margin 0.0 0.0 0.0 0.0P&C combined ratio 101.6 100.9 100.3 99.4P&C loss ratio 74.5 70.3 71.0 71.5P&C expense ratio 27.1 30.7 29.3 27.9P&C reserve ratio 34.2 32.3 32.3 32.3


12/2010a 12/2011e 12/2012e 12/2013e

EPS reported (fully diluted) 0.00 0.03 0.06 0.08HSBC EPS (fully diluted) 0.00 0.02 0.04 0.08DPS 0.00 0.00 0.05 0.07NAV 1.21 1.25 1.30 1.34Embedded value 0.00 0.00 0.00 0.00

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

PE reported* 271.6 39.8 22.7 15.5PE (HSBC)* 844.1 55.2 29.6 15.5New business multiple 1.1 1.1 1.0 1.0Reported ROEV 0.0 0.0 0.0 0.0Dividend cover 1.0 1.3

Note: * = Based on fully diluted shares

Issuer information

Share price (TRY) 1.31 Target price (TRY) 1.30 Potent'l return (%) -0.8

Reuters (Equity) AKGRT.IS Bloomberg (Equity) AKGRT TIMarket cap (USDm) 217 Market cap (TRYm) 401Free float (%) 38 Country Turkey Sector INSURANCEAnalyst Tamer Sengun Contact +90 212 376 4615

Price relative

0

1

2

3

4

5

6

7

2009 2010 2011 2012

0

1

2

3

4

5

6

7

Aksigorta Rel to ISTANBUL COMP

Source: HSBC

Note: price at close of 28 Sep 2011

52


abc


Albaraka Turk scored medium to weak in our

scorecard for competitive analysis. Having a

market share below 1% within the Turkish

banking sector, Albaraka Turk does not have any

pricing power, and therefore, is more of a price

taker. Having said that, since it operates in a niche

segment – participation banking – Albaraka has

its own advantages. The segment has grown

rapidly compared to the conventional banking

sector over the past several years and Albaraka

Turk has participated in this growth. In addition,

Albaraka Turk’s profitability level is comparable

to that of the conventional banks’ average, which

is another positive.


weak


Albaraka scores weak compared to most

conventional banks given its market share below

1%. Although operating in a niche segment is a

positive, within the segment (which has only four

players) the market share of the bank is around

20%, ie it is not the top player.

Market share momentum is strong

During the period between 2006 and 2010 Albaraka

Turk’s asset growth posted a 36% CAGR versus

sector growth of 19%. The participation banking

sector has been growing quite rapidly and Albaraka

has participated in this. Capital adequacy poses the

biggest constraint for the future growth prospects of

Albaraka. We believe if the capital of the bank is

increased, the faster-than-conventional-bank growth

can be maintained.


Albaraka’s cost to income ratio was comparable

to that of the sector both in H1 2011 and in 2010,

and its asset turnover was slightly better. Hence

we define Albaraka’s sustainable growth outlook

as medium.


weak

The top five players claimed 63% of the market

share as of 2010, while the top 10 claimed 87%.

Hence, the remaining c30banks constitute only 13%

of the sector. From that perspective, the Turkish

banking sector is not very fragmented compared to

some other sectors, yet it is still quite competitive.

Albaraka Turk

Albaraka Turk’s overall competitive outlook is weak among Turkish

equities and banks

However it is a well-managed bank with decent profitability in a niche

segment offering significant growth, and looks undervalued on a

2012e PE of 5.7x

Target price maintained at TRY2.8; maintain Overweight



53


abc

In the participation banking sector, which is a

subsector of the Turkish banking sector, the

market is shared by only four players which

command 4.2% of the total Turkish banking

sector. There has always been talk that a fifth

participation banking license may be issued by the

BRSA. If issued, it would increase the level of

competition among participation banks. Recall

that participation banks’ competitors for loans are

the conventional banks, but they do also compete

among themselves, mostly for deposits.


participation banks and Albaraka

While Turkish banks benefit from declining

interest rates due to the maturity mismatch

between their assets and liabilities (liabilities

reprice faster than assets), participation banks do

not benefit as they do not offer fixed deposit rates.

In declining interest rate periods, the participation

banks usually pay higher returns to their deposit

holders, which is positive from a deposit

collection perspective but negative for margins.

Therefore, participation banks are negatively

affected by declining and low interest rates.


negative for Turkish banks and Albaraka














results in a lower capital adequacy ratio.

Investment thesis

Albaraka Turk is a well-managed bank with decent

profitability in a niche segment that offers

significant growth. We believe the market’s main

concerns are the low trading volume of the stock

(USD1m average daily turnover) and fears of a

potential rights issue. Although our model shows

that the bank can sustain asset growth of 15-20%

with the the current level of profitability, if

management were to seek to increase its market

share within the sector we believe a rights issue

might be considered. But even with these concerns

in mind, we still find Albaraka a very attractive

stock within the Turkish banking sector universe.






achieved over the cost of equity). The model

consists of three stages: the first includes residual

income based on an explicit forecast period (2011e-

13e), the second (maturity/ transition stage)

assumes a constant growth rate for net profit

(2014e-29e) and the final (declining stage) assumes

a convergence of returns towards the cost of equity

(2030e-39e). Our cost of equity assumptions

incorporate a 8.0% risk-free rate and a 5.5% equity

risk premium. We use a beta of 1.0 for Albaraka.

This implies a cost of equity of 13.5% until the end

of our valuation horizon in 2039e.

Our residual-income DCF method yields a 12-

month forward target value of TRY1.5bn, or

TRY2.8 per share. The stock is trading at a

significant discount to Turkish conventional banks

on a 2012e PE and PBV of 5.7x and 0.9x,

respectively, with an expected ROAE of 16%.

Our target price implies a 50% potential return, and

we maintain the stock at Overweight.

54


abc

Risk

In addition to the risks common to the Turkish

banks, the main downside risk for Albaraka Turk

is a potential stock overhang if the bank were to

announce a rights issue.

55


abc

Financials & valuation: Albaraka Turk Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 316 379 456 549Net fees/commissions 83 92 107 124Trading profits 16 14 11 9Other income 57 54 74 95Total income 472 540 649 777Operating expense -201 -244 -284 -327Bad debt charge -68 -69 -102 -140Other -37 -37 -43 -50HSBC PBT 166 190 219 260Exceptionals 0 0 0 0PBT 166 190 219 260Taxation -32 -38 -44 -52Minorities + preferences 0 0 0 0Attributable profit 134 152 175 208HSBC attributable profit 134 152 175 208


Ordinary equity 853 989 1,165 1,373HSBC ordinary equity 853 989 1,165 1,373Customer loans 6,271 7,188 8,699 10,461Debt securities holdings 435 537 590 649Customer deposits 6,882 7,810 9,116 10,636Interest earning assets 7,073 8,659 10,014 11,839Total assets 8,406 9,808 11,609 13,666

Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income 7.1 14.3 20.2 19.9Operating expense 13.6 21.1 16.4 15.3Pre-provision profit 2.8 9.2 23.3 23.4EPS 27.3 13.1 15.7 18.7HSBC EPS 27.3 13.1 15.7 18.7DPS NAV (including goodwill) 20.0 16.0 17.7 17.9

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e


Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Issuer information


Reuters (Equity) ALBRK.IS Bloomberg (Equity) ALBRK TIMarket cap (USDm) 547 Market cap (TRYm) 1,008Free float (%) 42 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615

Notes: price at close of 27 Sep 2011

56


abc


Anadolu Hayat operates in both the life insurance

and pensions business segments. While life

insurance is a relatively older sector, the pensions

sector is a very newly established one in Turkey

(established in 2003). There are currently a total

of 14 private pensions companies which

commanded total assets under management of

TRY14bn (c1.15% of GDP) as of mid-September.

Anadolu Hayat has c21% market share both in

terms of contributions and assets under

management (AUM), and ranks as first among its

peers. As the AUM is still posting rapid growth,

and as the costs associated with acquiring private

pension customers are still high, the private

pensions sector has not yet reached breakeven.

However, we believe that in the very near future,

the private pension system will become a very

profitable sector and, having a really strong

position in this segment; Anadolu Hayat will be

one of the major beneficiaries.

"Profitable market share" score is strong


Anadolu Hayat scores strong. Having the largest

market share and an ROE above 15%, Anadolu

Hayat scores quite well according to the criteria,

despite the fact that its pension business has not

yet broken even.


While Anadolu Hayat gained some market share

in the private pension segment since 2006 (up by

2.7pps), its life segment market share has not

improved considerably. Given that the pension

business is still growing at a rapid pace, market

share in this segment may well be volatile.

Therefore, in this analysis, we preferred rating the

company as medium.

Sustainable growth outlook is medium to

strong

As stated previously, as the AUM is still posting

rapid growth, and as the costs associated with

acquiring private pension customers are still high,

the private pension sector has not yet reached

breakeven. However, we believe that in the very

near future, the private pension system will

become a very profitable sector and having a

really strong position in this segment; Anadolu

Hayat will be one of the major beneficiaries.


strong

While the market is highly fragmented in the

insurance sector, the private pension sector (with

Anadolu Hayat

Anadolu Hayat’s overall competitive outlook is medium among

Turkish equities but stronger among insurance companies

We favour private pension business within the Turkish insurance

sector for its earnings visibility and sustainable growth

Target price cut to TRY4.5 from TRY5.33; maintain Overweight



57


abc

a total of only 14 players) can be considered as

quite consolidated (the top four players account

for 74% of total AUM), although there is a risk

that new players are likely to enter the sector as it

is still in the developing phase.


insurance companies

Investment income is one of the revenue sources for

insurance companies. During low interest rate

environments, yields on TRY securities decline

which results in lower revenue contribution for the

insurance companies. In addition, the fixed income

funds do not yield high returns and management fee

growth is also negatively affected. On the other

hand, as equities usually rally during declining

interest rate periods, equity funds tend to appreciate

more and result in higher management fees.

However, the share of equity funds is lower than that

of the fixed income pension funds. Hence, on

balance, Anadolu Hayat is not a beneficiary of a

declining interest rate environment.


negative for Turkish insurers and Anadolu Hayat

Weak TRY environment has almost no direct

impact on the pensions business and therefore

Anadolu Hayat. A potential indirect impact is a

positive contribution to the FX Eurobond pension

funds’ value appreciation in TRY terms, and

hence a higher revenue contribution from

management fees.

Investment thesis

Within the insurance sector, we favour the private

pensions business – and therefore Anadolu Hayat

– as it is the only segment that offers decent

visibility regarding sustainable profit growth, in

our view. Anadolu Hayat is the only listed

insurance company with direct exposure to the

secular growth story of the private pensions

business. The short-term outlook for the company

is also supportive. In 2011, we expect total private

pension funds to grow by 26% (previously 34%)

vs 14% for total non-life premium growth. Also,

we expect Anadolu Hayat to post ROAEs of 16%

in 2012 and 19% in 2013, compared with c5% for

Aksigorta and Anadolu Sigorta.

In this note, we lowered our net income estimates

for Anadolu Hayat for 2012 and 2013, to

TRY79m and TRY94m – on lower investment

income due to lower interest rates and slower

AUM growth assumptions – from the previous

TRY87m and TRY127m.

Forecast changes

___ 2011e____ ___ 2012e ____ ___ 2013e____TRYm old New Old new old new

Premiums 391 373 411 392 431 412 Fund size 3,540 3,247 4,570 4,228 5,586 5,226 Net income 74 78 87 79 127 94 RoE 16% 17% 18% 16% 21% 19%



We use a DDM for the explicit period and a

warranted equity method for the post-explicit

period. Our main assumptions are an 8.5% risk-

free rate, 5.5% equity risk premium, and 0.70 beta

yielding a 12.4% CoE. On our lower net income

forecasts, our warranted equity method-driven

valuation yields a target price of TRY4.5 (from

TRY5.33). Our new target price implies a 51%

potential return. That is above our Neutral band

for non-volatile Turkish stocks of 8.5%- 18.5%,

so we maintain our Overweight rating.

Risks

The main downside risk to our rating is the

emergence of greater competition, mainly in the

pensions sector, that could lead to lower fees for

all companies. That in turn would hurt the ROE of

Anadolu Hayat and hence our valuation. An

unexpected catastrophic event is the major risk for

the life branch.

58


abc

Financials & valuation: Anadolu Hayat Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Gross written premium 551 570 602 674Net earned premium 356 373 392 412Other income 56 71 88 108PBT (operating) 79 83 86 105PBT (reported) 87 95 98 117Total tax -15 -16 -20 -23Net operating profit 64 67 66 105Net reported profit 71 78 79 94



Total investments 5,269 5,979 7,293 8,713Banking assets 0 0 0 0

Tangible assets 5,269 5,979 7,293 8,713Value of in-force business 0 0 0 0Intangible & other assets 2 3 3 3Total assets 5,299 6,014 7,330 8,751Technical reserves 2,155 2,222 2,561 2,979Banking liabilities 0 0 0 0

Other liabilities 2,693 3,310 4,270 5,266Debt capital 0 0 0 0Total liabilities 4,848 5,532 6,826 8,239

Shareholders funds 451 482 498 506Average invested capital 440 466 490 502Equity 451 482 498 506Quasi equity 0 0 0 0

Long-term debt & hybrid capital 0 0 0 0Short-term debt 2,688 3,305 4,265 5,260Third party assets under mgmt 2,671 3,286 4,245 5,239Total assets under mgmt 2,671 3,286 4,245 5,239

Ratios & growth

12/2010a 12/2011e 12/2012e 12/2013e


Gross net earned life prem -28.3 5.0 5.0 5.0Gross net earned P&C prem Operating PBT -13.8 4.3 3.4 22.1Reported PBT -11.4 8.8 3.9 19.4EPS (operating) -12.9 4.3 -1.1 58.4EPS (reported) -9.9 9.9 0.1 19.4DPS 31.0 -27.3 56.9 12.6Total investments 19.5 13.5 22.0 19.5Third party asset managed 34.1 23.0 29.2 23.4Net asset value

Ratios (%)



12/2010a 12/2011e 12/2012e 12/2013e

EPS reported (fully diluted) 0.29 0.31 0.31 0.38HSBC EPS (fully diluted) 0.26 0.27 0.26 0.42DPS 0.22 0.16 0.25 0.28NAV 1.80 1.93 1.99 2.02Embedded value 0.06 0.12 0.12 0.13

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

PE reported* 10.4 9.5 9.5 7.9PE (HSBC)* 11.6 11.2 11.3 7.1Price / EV 53.4 25.2 24.9 23.4Price / NAV 53.4 25.2 24.9 23.4New business multiple 1.7 1.5 1.5 1.5Reported ROE Reported ROEV 0.0 0.0 0.0 0.0Dividend cover 1.2 1.7 1.1 1.5


Issuer information


Reuters (Equity) ANHYT.IS Bloomberg (Equity) ANHYT TIMarket cap (USDm) 484 Market cap (TRYm) 894Free float (%) 20 Country Turkey Sector INSURANCEAnalyst Tamer Sengun Contact +90 212 376 4615

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Anadolu Hayat Rel to ISTANBUL COMP

Source: HSBC


59


abc


Among the sectors listed in the ISE, the Insurance

sector can be defined as the sector which suffers

the most from a high level of fragmentation and a

fragmentation-led low level of profitability. As of

YE2010, there were 57 insurers sharing an annual

total premium generation amount of TRY14bn

(1.26% of GDP). The total shareholders’ equity

held by the insurers amounts TRY5bn, which

makes it very difficult to post ROEs above COE

given the low level of penetration of insurance

products. Therefore, we believe the sector is a

candidate for consolidation and increased-

penetration-led profit recovery over the long term.

If the degree of fragmentation does not diminish,

we believe profitability levels will continue to be

lower than those of most other sectors in Turkey.

Anadolu Sigorta suffers from the unfavourable

competitive landscape of the sector and this is

why we expect the company to post only a 4%

adj. ROAE in 2011.

"Profitable market share" score is medium


Anadolu Sigorta scores medium. Despite having a

market share of around 12% (within non-life

insurers), which in a highly fragmented market

share can be considered as a relative strength,

similar to most of its peers with higher market

shares, Anadolu Sigorta suffers from a low level

of profitability.


Anadolu Sigorta has been improving its market

share during the past years. The company remains

market share focused, as is the case with the rest

of the sector. We do not think the company will

lose market share going forward but that same

reason will continue to prevent all sector players

from posting decent profit numbers.

Sustainable growth outlook is weak

For the companies operating in the Turkish

insurance sector sustainable growth is a function

of the level of competition. Unless the sector

consolidates, it is highly likely that the level of

competition will stay high and irrational pricing

will continue to exist.


The sector is highly fragmented. The top 5 players

claim only 40% market share, and the top 10

players claim 73%. We believe consolidation is a

must given this level of fragmentation.

Anadolu Sigorta

Anadolu Sigorta is the second largest non-life insurer in Turkey.

Still, its competitive outlook is weak due to very high

fragmentation in its sector

The high level of competition will put pressure on Anadolu Sigorta;

we expect adj. ROAE to remain below 7% until YE2013

Target price cut to TRY1.05 from TRY1.32; maintain Neutral



60


abc


insurance companies

Investment income is one of the revenue sources

for insurance companies. During low interest rate

environments, yields on TRY securities decline

which results in a lower revenue contribution for

the insurance companies. Hence, Anadolu Sigorta

is not a beneficiary of a declining interest rate

environment.


negative for Turkish insurers and Anadolu

Sigorta


impact on the pensions business and therefore

Anadolu Sigorta.

Investment thesis

We define the non-life insurance sector as one of the

least attractive sectors in Turkey due to the high

levels of fragmentation and competition. It is almost

impossible for any of the players to protect

themselves from the intensely competitive

landscape. However, we favour Anadolu Sigorta

over Aksigorta, due to its better profitability and its

participation portfolio (Anadolu Hayat and Is REIT).


We value the company by using a sum-of-the-

parts valuation for the operations and a valuation

based on past insurance sector transactions. Our

SOTP is driven by a TRY0.2 per share (was

TRY0.3 per share) value for the Core Insurance

operations and TRY0.48 per share (was TRY0.54

per share) for the NAV of participations which

yields TRY0.7 per share when combined. We

assign an 85% weight to the SOTP value (up from

80% as we believe a potential deal within the

insurance sector is highly unlikely in the short to

medium term given the turbulence in the markets)

and a 15% weight (previously 20%) to the implied

value from previous deals yielding TRY0.46 per

share (was TRY0.61 per share).

We lower our target price to TRY1.05 (from

TRY1.32). The main reason for the TP cut is the

lower value attributed to past deals. As this implies a

c18% potential return, we maintain our

Neutral rating.

Risks

Upside risks include potential consolidation in the

market that may act as a positive catalyst for

insurance stocks. The main downside risks are

catastrophic events, such as an earthquake; and a

worsening global macroeconomic downturn.

61


abc

Financials & valuation: Anadolu Sigorta Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Gross written premium 1,420 1,622 1,810 1,969Net earned premium 1,112 1,228 1,369 1,488Other income 0 0 0 0PBT (operating) 44 42 56 72PBT (reported) 44 42 56 72Total tax -6 -8 -10 -13Net operating profit 38 34 45 59Net reported profit 38 34 45 59



Total investments 1,638 1,779 1,925 2,065Banking assets 0 0 0 0

Tangible assets 1,638 1,779 1,925 2,065Value of in-force business 0 0 0 0Intangible & other assets 26 26 26 26Total assets 1,951 2,109 2,271 2,429Technical reserves 933 1,064 1,187 1,293Banking liabilities 0 0 0 0

Other liabilities 170 172 179 189Debt capital 0 0 0 0Total liabilities 1,103 1,236 1,367 1,440

Shareholders funds 849 873 905 947Average invested capital 827 861 889 926Equity 849 873 905 947Quasi equity 0 0 0 0

Long-term debt & hybrid capital 0 0 0 0Short-term debt 129 131 138 147Third party assets under mgmt 0 0 0 0Total assets under mgmt 0 0 0 0

Ratios & growth

12/2010a 12/2011e 12/2012e 12/2013e


Gross net earned life prem Gross net earned P&C prem 7.7 10.5 11.5 8.7Operating PBT -26.1 -3.2 31.2 30.0Reported PBT -26.1 -3.2 31.2 30.0EPS (operating) -39.5 -2.2 -7.7 -24.8EPS (reported) -22.0 -8.3 31.2 30.0DPS -60.0 32.1 23.4 36.6Total investments 12.3 8.7 8.2 7.3Third party asset managed Net asset value

Ratios (%)



12/2010a 12/2011e 12/2012e 12/2013e

EPS reported (fully diluted) 0.08 0.07 0.09 0.12HSBC EPS (fully diluted) -0.07 -0.07 -0.06 -0.05DPS 0.02 0.03 0.03 0.04NAV 1.70 1.75 1.81 1.89Embedded value 0.00 0.00 0.00 0.00

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

PE reported* 11.9 12.9 9.9 7.6PE (HSBC)* Price / EV Price / NAV New business multiple 0.5 0.5 0.5 0.5Reported ROE Reported ROEV 0.0 0.0 0.0 0.0Dividend cover 3.8 -2.5 -1.8 2.6


Issuer information


Reuters (Equity) ANSGR.IS Bloomberg (Equity) ANSGR TIMarket cap (USDm) 241 Market cap (TRYm) 445Free float (%) 48 Country Turkey Sector INSURANCEAnalyst Tamer Sengun Contact +90 212 376 4615

Price relative

0

0.5

1

1.5

2

2.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

Anadolu Sigorta Rel to ISTANBUL COMP

Source: HSBC


62


abc


Bank Asya scored medium to weak in our

scorecard for competitive analysis. Having a

market share of around 1.5% within Turkish

banking sector, Bank Asya does not have any

pricing power on the asset front and, therefore, is

more of a price taker. Having said that, since it

operates in a niche segment – participation

banking – Bank Asya has its own advantages ie.

not directly competing with the conventional

banks for deposits.

The participation banking segment has grown

rapidly compared to the conventional banking

sector during the past several years and Bank

Asya has participated in this growth.

Compared to Albaraka, Bank Asya’s profitability

level is lower, which is a negative for the bank’s

competitive outlook. However, the new

management is taking steps to improve the

profitability of the bank via better allocation of

the limited capital.


weak


Bank Asya scores weak compared to most

conventional banks given its market share of only

around 1.5%. However, operating in a niche

segment is a positive, especially for a bank that

commands almost one-third of the market.


During the period between 2006 and 2010 the

bank’s asset growth posted a 37% CAGR versus

sector growth of 19%. The participation banking

sector has been growing quite rapidly and Bank

Asya has participated in this growth. Capital

adequacy poses the biggest constraint for the

future growth prospects of Bank Asya, as is the

case for Albaraka. We believe if the capital of the

bank were to be increased, the faster-than-

conventional-bank growth could be maintained.

Sustainable growth outlook is medium to weak

Bank Asya’s cost to income ratio was weaker than

the sector average in both H1 2011 and 2010, but

its asset turnover was better. Yet, with such a high

cost to income ratio, we define Bank Asya’s

sustainable growth outlook as medium to weak.


weak



Bank Asya

Bank Asya’s overall competitive outlook is weak among Turkish

equities and banks

However, despite a lower-than-consensus net income estimate for

2012, we believe the valuation is compelling and most of the

negatives have been more than priced in

Target price maintained at TRY2.75; maintain Overweight



63


abc




other sectors, yet it is still quite competitive. In the

participation banking sector, which is a subsector of

the Turkish banking sector, the market is shared by

only four players which command 4.2% of total

Turkish banking sector assets. There has always

been talk that a fifth participation banking license

could be issued by the BRSA. If issued, it would

increase the level of competition for the participation

banks. Recall that participation banks’ competitors

for loans are the conventional banks, but they do also

compete among themselves, mostly for the deposits.


participation banks and Bank Asya

While Turkish banks benefit from declining interest

rates due to the maturity mismatch between their

assets and liabilities (liabilities reprice faster than the

assets), participation banks’ do not benefit as they do

not offer a fixed deposit rate. In declining interest

rate periods, participation banks usually pay higher

returns to their deposit holders, which is positive

from a deposit collection perspective but negative

for margins. Therefore, participation banks are

negatively affected by declining and low

interest rates.


negative for Turkish banks and Bank Asya











third of the risk weighted assets are in FX terms.

Therefore, any weakness in TRY results in an

inflation of the FX risk weighted assets, and a

lower capital adequacy ratio.

Investment thesis

Despite a lower-than-consensus for 2012 net

income estimate for Bank Asya, we believe that

the valuation is compelling and most of the

negatives have been more than priced in after

relative underperformances of 18% and 21%,

respectively, versus the ISE-Banks and the ISE-

100 y-t-d. We also believe that the new

management’s strategy for the bank is realistic.















beta of 1.0 for Bank Asya. This implies a cost of

equity of 13.5% until the end of our valuation

horizon in 2039e.

The stock is currently trading at a 2012e PE and

PBV of 6.3x and 0.7x, respectively. We maintain

our target price at TRY2.75, which implies a 40%

potential return. This is above the 8.5%-18.5%

Neutral band for non-volatile Turkish stocks.

Therefore, we keep our rating for Bank Asya

at Overweight.

Risks

The main downside risk is the lower returns to be

shared with participation account owners in the case

of higher-than-expected NPLs, which may result in

slower IEA growth for the bank.

64


abc

Financials & valuation: Bank Asya Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 594 620 775 913Net fees/commissions 249 267 305 347Trading profits 45 46 50 55Other income 134 91 98 111Total income 1,022 1,024 1,228 1,426Operating expense -530 -573 -632 -692Bad debt charge -108 -114 -196 -249Other -60 -55 -47 -51HSBC PBT 324 281 353 434Exceptionals 0 0 0 0PBT 324 281 353 434Taxation -64 -56 -71 -87Minorities + preferences 0 0 0 0Attributable profit 260 225 282 347HSBC attributable profit 260 225 282 347


Ordinary equity 1,942 2,159 2,442 2,789HSBC ordinary equity 1,942 2,159 2,442 2,789Customer loans 10,955 12,961 15,324 17,887Debt securities holdings 474 601 662 728Customer deposits 11,167 12,726 14,917 17,473Interest earning assets 10,862 14,029 16,981 20,185Total assets 14,513 17,475 20,596 24,488

Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income -3.1 0.2 20.0 16.1Operating expense 15.5 8.1 10.4 9.4Pre-provision profit -17.4 -8.4 32.2 23.3EPS -13.7 -13.4 25.4 23.1HSBC EPS -13.7 -13.4 25.4 23.1DPS NAV (including goodwill) 13.7 11.2 13.1 14.2

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e


Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Issuer information


Reuters (Equity) ASYAB.IS Bloomberg (Equity) ASYAB TIMarket cap (USDm) 952 Market cap (TRYm) 1,755Free float (%) 42 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


65


abc

Overall competitive outlook is strong

Among the Turkish banks, Garanti scores strong

within our competition analysis. Although, with

the top five accounting for 63% of the sector in

terms of assets, the Turkish Banking sector cannot

be defined as a fragmented one compared to other

sectors, the level of competition has always been

quite high. Garanti has differentiated itself within

this highly competitive sector by gaining a

significant amount of market share since 2004 (up

by 4.3pps) while managing to keep its

profitability level superior to that of most of its

large size peers. Size (from the point of view of

economies of scale) is very important in the

banking sector in order to be able to achieve a

lower cost to income ratio and therefore a higher

ROAE. Most of the smaller banks suffer from

higher cost to income ratios, which prevent them

from achieving sustainably high ROAE levels.

Over the last few years, Garanti has improved its

position and now ranks as one of the top three

banks in the key categories ie. loans, deposits,

assets This gives the bank the necessary strength

to protect its relatively more profitable operations

compared to sector averages.



Garanti scores strong compared to its large cap

private peers like Akbank or Isbank


Garanti has differentiated itself within the highly

competitive banking sector by gaining a

significant amount of market share since 2004 (up

by 4.3pps), while managing to keep its

profitability level superior to that of most of its

large size peers.



Garanti’s cost to income ratio lagged peers like

Halkbank and Akbank in 2010, yet its asset

turnover was relatively better than that of most of

its large size peers ie Akbank, Isbank, Vakifbank

and Ziraat. Hence we define Garanti’s sustainable

growth outlook as medium.


strong





Garanti Bank

Garanti’s overall competitive outlook is strong among Turkish

equities and banks

However, high trading gain and asset sale income in H1 2011

creates an unfavourable base for Garanti Bank’s earning growth

in 2012

Target price maintained at TRY8.1; maintained at Neutral



66


abc


some other sectors, yet it is still quite competitive.


due to the low fragmented structure of the sector

but also due to the tight regulations. Given the

relatively lower profitability of the Turkish

banking sector due to the low interest rate

environment, we believe small sized banks are

likely to consolidate in the future due to their

relatively higher cost to income ratios.



long term for Turkish banks and Garanti






Turkish banks and Garanti. However, when






negative for Turkish banks and Garanti













an inflation of the FX risk weighted assets, and a


Investment thesis

High trading gain and asset sale income in H1 2011

creates an unfavourable base for Garanti Bank’s

earning growth in 2012. We expect net income

growth of 13% for Garanti Bank. On a 2012e PE of

11.0x, Garanti trades at a c30% premium to the

banks on which we have Overweight ratings.














free rate and a 5.5% equity risk premium. We use

beta of 1.12 for Garanti Bank. This implies a cost of


horizon in 2039e.

According to our residual income discount model,

we set our target price for Garanti at TRY8.1,

which implies a potential return of 15%. This is

within the 8.5%-18.5% Neutral band for non-

volatile Turkish stocks. Therefore, we maintain

our rating for Garanti at Neutral.

Risks

Eureko has a call option to buy a 35% stake in

Garanti Pension from Garanti Bank. If completed,

we expect the transactions to result in a

cUSD400m capital gain for Garanti. However;

that transaction is not in our forecasts and

valuations, yet. If completed, it would have a

positive impact on Garanti Bank’s valuation. The

main downside risk is further regulatory pressure

relating to credit cards.

67


abc

Financials & valuation: Garanti Bankasi Neutral Financial statements

Year to 12/2009a 12/2010e 12/2011e 12/2012e

P&L summary (TRYm)

Net interest income 5,080 4,755 4,226 5,148Net fees/commissions 1,772 1,816 1,986 2,379Trading profits 881 364 419 314Other income 358 643 655 731Total income 8,091 7,577 7,286 8,573Operating expense -2,699 -3,041 -3,015 -3,241Bad debt charge -1,212 -387 -325 -792Other -70 -198 -436 -416HSBC PBT 4,109 3,952 3,509 4,124Exceptionals -330 0 176 0PBT 3,779 3,952 3,685 4,124Taxation -816 -807 -753 -825Minorities + preferences 0 0 0 0Attributable profit 2,962 3,145 2,933 3,299HSBC attributable profit 3,292 3,145 2,757 3,299



Capital (%)



Year to 12/2009a 12/2010e 12/2011e 12/2012e


Total income 59.3 -6.3 -3.9 17.7Operating expense 10.6 12.6 -0.8 7.5Pre-provision profit 104.4 -15.9 -5.9 24.9EPS 69.2 6.2 -6.8 12.5HSBC EPS 100.8 -4.5 -12.3 19.7DPS 27.3 62.9 2.9NAV (including goodwill) 40.6 23.7 9.8 15.0

Ratios (%)





Year to 12/2009a 12/2010e 12/2011e 12/2012e


Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

PE* 9.0 9.4 10.8 9.0Pre-provision multiple 5.5 6.5 6.9 5.6P/NAV 2.2 1.8 1.6 1.4REP multiple 1.0 1.2 1.0Equity cash flow yield (%) 10.6 5.6 3.5 6.8Dividend yield (%) 0.9 1.2 1.9 2.0

Issuer information


Reuters (Equity) GARAN.IS Bloomberg (Equity) GARAN TIMarket cap (USDm) 16,086 Market cap (TRYm) 29,652Free float (%) 49 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


68


abc


Halkbank has been one of the most profitable

banks for years. When we analyse what the

sources of the superior profitability are, we find a

better pricing of its products, relatively lower

costs to revenues and higher leverage as the key

reasons. We believe Halkbank will maintain its

relatively more profitable structure going forward,

which provides the bank the necessary

ammunition for sustainable growth.

Halkbank scores the best in the competitive

outlook analysis among its peers in the banking

sector due to its stronger profitability, its decent

size, enabling economies of scale, and its strong

market share gain in loans over the last few years.


According to our Du Pont profitability matrix

Halkbank scores the best among the large size

banks, excluding Ziraat whose ROAE declined in

H1 2011.

Market share momentum is medium to strong

In terms of asset market share, Halkbank has kept its

market share almost flat during the last four years.

However, when the market share of total loans is

analysed, it has been the bank posting the strongest

market share gain (up by 3.1pps). The bank has

carried a vast amount of marketable securities on its

balance sheet since the end of 2001. Transforming

the bank into a more loan-focussed bank resulted in

a big switch from a security- heavy asset structure to

a loan-heavy one.


strong


Halkbank’s cost to income ratio was better than

that of most private bank peers in 2010, and its

asset turnover was comparable to theirs.

Therefore, we believe that sustainable growth

outlook for Halkbank is medium to strong.


strong










Halkbank

Halkbank’s overall competitive outlook is strong among both

Turkish equities and the banks

We believe the market is attaching a higher risk premium for

Halkbank’s potential secondary public offering; on a 2012e PE of

7.1x, Halkbank is one of the most attractively valued banks

Target price kept at TRY17.4; rating maintained at Overweight



69


abc



environment, we believe small size banks are





long term for Turkish banks and Halkbank




assets). Hence, declining interest rate periods

historically have resulted in widening margins for

Turkish banks and Halkbank. However, when

interest rates stabilise at the lower levels, the

income on free funds (free equity and demand

deposits etc.) declines – resulting in a lower NIM,

but stronger loan growth.


negative for Turkish banks and Halkbank











third of the risk weighted assets are in FX terms.

Therefore, any weakness in TRY results in an

inflation of the FX risk weighted assets, and a

lower capital adequacy ratio. Given its relatively

lower FX weight within total assets Halkbank is

less susceptible to TRY weakness.

Investment thesis

Being one of the expected beneficiaries of the ‘new

normal’ and having proved its prudent and profitable

banking style for many years, Halkbank is among

our most favoured banking sector stocks in Turkey.

It is also the Turkish bank most favoured by the

competition as well, with 23 Overweight ratings out

of a total of 32 recommendations.

We believe that the market attaches a higher risk

premium for Halkbank’s long-expected potential

secondary public offering. On a 2012e PE of 6.9x,

Halkbank is one of the most attractively valued

banking sector stocks.



valuation methodology, in which the intrinsic

value of the bank is the sum of its current NAV

and the present value of future residual income

(returns achieved over the cost of equity). The

model consists of three stages: the first includes

residual income based on an explicit forecast

period (2011e-13e), the second (maturity/

transition stage) assumes a constant growth rate

for net profit (2014e-29e) and the final (declining

stage) assumes a convergence of returns towards

the cost of equity (2030e-39e). Our cost of equity

assumptions incorporate an 8.0% risk-free rate

and a 5.5% equity risk premium. We use a beta of

1.05 for Halkbank. This implies a cost of equity of

13.8% until the end of our valuation horizon in

2039e. As we wish to be conservative, we

continue to apply a 10% haircut to account for a

potential SPO.

We maintain our target price for Halkbank at

TRY17.4, which implies a potential return of

42%. This is above the 8.5%-18.5% Neutral band

for non-volatile Turkish stocks. Hence we

maintain our rating for Halkbank at Overweight.

Risks

The main downside risk to our rating for

Halkbank is a potential SPO in 2012 of a nature

that would imply a higher risk premium than our

10% haircut.

70


abc

Financials & valuation: Halkbank Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 3,191 3,183 4,014 4,628Net fees/commissions 526 647 781 876Trading profits 115 162 122 91Other income 451 611 635 737Total income 4,283 4,603 5,551 6,332Operating expense -1,495 -1,730 -1,944 -2,183Bad debt charge -316 -221 -463 -699Other -142 -293 -353 -251HSBC PBT 2,329 2,358 2,791 3,199Exceptionals 180 0 0 0PBT 2,509 2,358 2,791 3,199Taxation -499 -468 -558 -640Minorities + preferences 0 0 0 0Attributable profit 2,010 1,890 2,233 2,560HSBC attributable profit 1,830 1,890 2,233 2,560



Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income 11.0 7.5 20.6 14.1Operating expense 25.3 15.7 12.4 12.3Pre-provision profit 4.7 3.1 25.6 15.0EPS 23.3 -6.0 18.1 14.6HSBC EPS 12.2 3.3 18.1 14.6DPS 15.4 34.6 -4.4 77.2NAV (including goodwill) 29.3 16.6 21.4 17.9

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e


Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Issuer information


Reuters (Equity) HALKB.IS Bloomberg (Equity) HALKB TIMarket cap (USDm) 8,307 Market cap (TRYm) 15,313Free float (%) 25 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


71


abc


Having one of the largest deposit franchises

among the Turkish banks, Isbank has always been

one of the most advantageously positioned

Turkish banks in terms of competition. However,

we do not see this advantage reflected in the

profitability levels of the bank. We therefore rate

the overall competitive outlook of the bank as

weak within Turkish equities and medium within

Turkish banks.


According to our Du Pont profitability matrix

Isbank only scores better than Akbank and

Vakifbank among the big banks. Garanti, Yapi

and Halkbank score better.

Market share momentum is medium to weak

In terms of asset market share, Isbank has lost

some market share in both loans (down by 1.4pps)

and assets (down by 2.0bps) since 2006.



Isbank’s cost to income ratio was slightly lower

than that of most private bank peers in 2010, and

its asset turnover was comparable to theirs.

Therefore, we believe that the sustainable growth

outlook of Isbank is medium to weak.


strong












environment, we believe small size banks are



Isbank is the only big private bank with no foreign

partner. One might think that having no foreign

partner could make Isbank an acquisition

candidate for foreign banks. However, given the

ownership structure (one-third being owned by

the political party CHP and another one-third by

Isbank

Isbank’s overall competitive outlook is medium among Turkish

equities and banks

However, among the Turkish banks we favour it given its positive

fundamentals, ie a widespread deposit base, a low loan-to-deposit

ratio and a free provision level amounting to cTRY1bn

Target price kept at TRY5.85; maintained at Overweight



72


abc

the employees’ pension fund), we see this as

highly unlikely.



long term for Turkish banks and Isbank






Turkish banks and Isbank. However, when






negative for Turkish banks and Isbank


impacts on the Turkish banks as they do not carry













Investment thesis

Despite a relatively less favourable 2012 outlook

compared to banks like Yapi Kredi, Isbank and

Vakifbank, Isbank remains among the Turkish

banks that we favour, given that it is trading at a

discount to its large-cap peers (on a 2012e PE of

7.8x), with positive fundamental qualities such as

a widespread deposit base, one of the lowest loan-

to-deposit ratios in the sector and a free provision

level amounting to cTRY1bn.















beta of 1.0 for Isbank. This implies a cost of equity

of 13.5% until the end of our valuation horizon

in 2039e.

We keep our residual-income DCF-driven target

price at TRY5.85. This target price implies a 26%

potential return which is above the 8.5% to 18.5%

Neutral band for non-volatile Turkish stocks. We

therefore maintain our Overweight rating.

Risks

We believe Isbank’s low earnings visibility on its

other provisions item is the key risk to forecasts

alongside potential risks related to its pension

fund. Note that the bank’s pension fund is running

a deficit, which is currently being financed by

the bank.

73


abc

Financials & valuation: IS Bankasi Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 4,582 4,487 5,448 6,205Net fees/commissions 1,236 1,337 1,487 1,662Trading profits 135 154 116 87Other income 1,938 1,765 1,924 2,289Total income 7,891 7,744 8,975 10,243Operating expense -3,203 -3,551 -3,896 -4,250Bad debt charge -770 -625 -1,029 -1,526Other -366 -611 -648 -601HSBC PBT 3,553 2,957 3,401 3,865Exceptionals 0 0 0 0PBT 3,553 2,957 3,401 3,865Taxation -571 -503 -680 -773Minorities + preferences 0 0 0 0Attributable profit 2,982 2,454 2,721 3,092HSBC attributable profit 2,982 2,454 2,721 3,092



Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income 0.7 -1.9 15.9 14.1Operating expense 18.9 10.9 9.7 9.1Pre-provision profit -8.8 -10.6 21.1 18.0EPS 25.7 -17.7 10.9 13.6HSBC EPS 15.8 -17.7 10.9 13.6DPS 128.0 25.4 6.5 10.9NAV (including goodwill) -13.7 11.6 13.2 13.2

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e


Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Issuer information


Reuters (Equity) ISCTR.IS Bloomberg (Equity) ISCTR TIMarket cap (USDm) 11,327 Market cap (TRYm) 20,880Free float (%) 30 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


74


abc


With a lower-than-sector-average profitability, the

competitive outlook of Vakifbank can be defined

as medium to weak compared to both Turkish

banks and also Turkish equities. Given the

relatively low level of profitability, shareholders

equity accumulation for Vakifbank is slower and

that limits the sustainable growth prospects of the

bank. The positive front according to our analysis

is the behaviour of the bank’s CAR against weak

TRY. Since the bank’s assets are more in TRY

terms, it is less exposed to TRY weakness from a

CAR perspective.


weak


Vakifbank scores weaker than its large cap

private peers.


Vakifbank has maintained its market share in

loans, deposits and assets during the last four

years. Given the relatively low level of

profitability, shareholders equity accumulation for

Vakifbank is slower and that limits the potential

growth prospects of the bank.



Vakifbank’s cost to income ratio slightly lags

peers like Garanti, Halkbank and Akbank in 2010,

and the asset turnover was also relatively worse

than most large size peers excluding Ziraat. Hence

we define Vakifbank’s sustainable growth outlook

as medium to weak.


strong






some other sectors, yet it still quite competitive.









Vakifbank

Vakifbank’s overall competitive outlook is medium among the

Turkish equities and banks

Having 42% of its total assets as TRY loans, we expect Vakifbank

to be positively affected by the expansion in the TRY loan to

deposit spread




75


abc


positive in the short term but negative in

thelong term for Turkish banks and Vakifbank


due to the maturity mismatch between assets and

liabilities (liabilities reprice faster than assets).

Hence, declining interest rate periods historically

have resulted in widening margins for Turkish banks

and Vakifbank. However, when interest rates

stabilise at lower levels, the income on free funds

(free equity and demand deposits etc.) declines –

resulting in a lower NIM, but stronger loan growth.


negative for Turkish banks and Vakifbank





first one is increasing asset quality risk as the









hence a lower capital adequacy ratio. Given its

relatively lower FX weight within total assets

Vakifbank is less susceptible to TRY weakness.

Investment thesis

Having 42% of its total assets as TRY loans, we

expect Vakifbank to be positively affected by the

expansion in the TRY loan to deposit spread similar

to Halkbank. In addition, the bank’s ‘securities to

assets’ ratio is also among the lowest among the

large banks at 21%. Therefore, we estimate a 33bps

NIM expansion for Vakifbank in 2012, which would

result in a rise of 28% in NII.

On the provisioning expenses front, things are not

as positive as the NIM forecasts. Because of the

change in the general provisioning regulation,

Vakifbank – with 10.6% of its total assets as

general purpose loans – will be the most

negatively affected large bank. We expect the

bank’s general provisioning expenses to increase

by 185% in 2011 and 13% in 2012.

The mix of a positive outlook for margins but a

negative outlook for provisioning expenses yields

a 19% net income growth estimate for Vakifbank

in 2012.














free rate and a 5.5% equity risk premium. We use

beta of 1.05 for Vakifbank. This implies a cost of


horizon in 2039.

The stock currently trades on a 2012e PE and PBV

of 6.9x and 0.9x, respectively, both at a discount to

peers. We keep our target price for Vakifbank at

TRY4.75. The stock offers a c30% potential return

which is above the 8.5% to 18.5% Neutral band for

non-volatile Turkish stocks. We therefore keep our

rating at Overweight for Vakifbank.

Risks

The main downside risk is related to a rapid rise

in interest rates, as the bank’s level of hedges

against long-term mortgages are among the lowest

in the sector.

76


abc

Financials & valuation: Vakifbank Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 2,730 2,838 3,627 4,096Net fees/commissions 443 547 655 754Trading profits 316 82 62 46Other income 636 860 817 959Total income 4,126 4,328 5,161 5,855Operating expense -1,690 -1,952 -2,178 -2,371Bad debt charge -664 -509 -808 -1,142Other -309 -447 -509 -408HSBC PBT 1,463 1,419 1,666 1,934Exceptionals 0 0 0 0PBT 1,463 1,419 1,666 1,934Taxation -306 -294 -333 -387Minorities + preferences 0 0 0 0Attributable profit 1,157 1,126 1,333 1,547HSBC attributable profit 1,157 1,126 1,333 1,547



Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income 1.7 4.9 19.3 13.4Operating expense 10.2 15.5 11.6 8.9Pre-provision profit -3.5 -2.5 25.6 16.8EPS -7.5 -2.7 18.4 16.1HSBC EPS -7.5 -2.7 18.4 16.1DPS -100.0 18.4NAV (including goodwill) 16.0 10.9 12.9 13.2

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e


Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

PE* 7.9 8.1 6.9 5.9Pre-provision multiple 3.8 3.9 3.1 2.6P/NAV 1.1 1.0 0.9 0.8REP multiple 0.9 0.9 0.8Equity cash flow yield (%) 3.6 2.4 5.9 6.0Dividend yield (%) 1.3 0.0 1.2 1.5

Issuer information


Reuters (Equity) VAKBN.IS Bloomberg (Equity) VAKBN TIMarket cap (USDm) 4,964 Market cap (TRYm) 9,150Free float (%) 25 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


77


abc


While the bank’s relatively higher-than-sector-

average profitability provides a competitive

strength for Yapi Kredi, the bank has lost some

market share during the last four years while

improving its profitability. Although operating in

a not highly fragmented sector, as all the rest of

the banks do, Yapi Kredi faces strong competition

from its peers.


strong

According to our ROE vs.market share matrix Yapi

Kredi scores higher than its large cap private peers.


Compared to the levels back in 2006, Yapi Kredi

has lost market share in assets and deposits, of

1.4pps and 1.5pps, respectively. Its market share

in loans is slightly down, by 0.3pps.


Having a “large banks high” asset turnover, and a

“large banks average” cost to income ratio, Yapi

Kredi ranks as one of the favoured banks from a

Du Pont profitability matrix perspective. Hence

we define Yapi Kredi’s sustainable growth

outlook as medium to strong.


strong






other sectors, yet is still quite competitive.











long term for Turkish banks and Yapi Kredi


due to the maturity mismatch between assets and

liabilities (liabilities reprice faster than the assets).

Hence, declining interest rate periods have


Turkish banks and Yapi Kredi. However, when

Yapi Kredi Bank

Yapi Kredi’s overall competitive outlook is medium among Turkish

equities and banks

The best-positioned bank, not only with respect to our base-case

margin scenario but also to the general provisioning regulation; trading

at a 2012e PE and PBV of 6.8x and 1.1x, the stock offers value




78


abc






negative for Turkish banks and Yapi Kredi


impacts on the Turkish banks as they do not carry












lower capital adequacy ratio. Given its relatively

lower FX weight within total assets Yapi Kredi is

less susceptible to TRY weakness.

Investment thesis

Yapi Kredi Bank is the best positioned bank not only

with respect to our base-case margin scenario but

also to the general provisioning regulation. Our 2012

net income estimate for Yapi is 10% higher than

consensus and we expect consensus to revise its

earnings estimates for the bank upwards.

Moreover, the valuation has also become more

compelling after the 7% and 11%

underperformances versus the ISE-Banks and ISE-

100 indices y-t-d.

Yapi Kredi is now trading at a 2012e PE and PBV of

6.8x and 1.1x.















beta of 1.0 for Vakifbank. This implies a cost of


horizon in 2039e.

Our residual-income DCF driven target price for

Yapi Kredi is TRY5.4. This implies a potential

return of 43%. This is above the 8.5%-18.5%

Neutral band for non-volatile Turkish stocks. Hence

we keep our rating for Yapi Kredi at Overweight.

Risks

A larger-than-expected reduction in the credit card

interest rate caps to be set by the CBRT is the key

downside risk for the bank.

79


abc

Financials & valuation: Yapi Kredi Bankasi Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

P&L summary (TRYm)

Net interest income 3,185 3,215 4,194 4,715Net fees/commissions 1,596 1,821 2,072 2,356Trading profits -67 -21 0 0Other income 1,361 938 1,043 1,312Total income 6,076 5,953 7,310 8,384Operating expense -2,489 -2,653 -2,940 -3,211Bad debt charge -881 -759 -1,123 -1,564Other -188 -196 -236 -276HSBC PBT 2,519 2,345 3,010 3,332Exceptionals 325 0 0 0PBT 2,844 2,345 3,010 3,332Taxation -459 -457 -602 -666Minorities + preferences 0 0 0 0Attributable profit 2,384 1,888 2,408 2,666HSBC attributable profit 2,059 1,888 2,408 2,666



Capital (%)



Year to 12/2010a 12/2011e 12/2012e 12/2013e


Total income 9.2 -2.0 22.8 14.7Operating expense 7.6 6.6 10.8 9.2Pre-provision profit 10.3 -8.0 32.4 18.4EPS 76.0 -20.8 27.6 10.7HSBC EPS 52.0 -8.3 27.6 10.7DPS NAV (including goodwill) 24.8 17.2 19.9 16.7

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Net interest income 5.0 3.8 4.0 3.9Net fees/commissions 2.5 2.2 2.0 1.9Trading profits -0.1 0.0 0.0 0.0Total income 9.5 7.0 7.0 6.9Other income 2.1 1.1 1.0 1.1Operating expense -3.9 -3.1 -2.8 -2.6Pre-provision profit 5.6 3.9 4.2 4.2Bad debt charge -1.4 -0.9 -1.1 -1.3HSBC attributable profit 3.2 2.2 2.3 2.2Leverage (x) 6.9 7.5 7.8 7.8Return on average equity 22.2 16.8 18.1 17.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Issuer information


Reuters (Equity) YKBNK.IS Bloomberg (Equity) YKBNK TIMarket cap (USDm) 8,914 Market cap (TRYm) 16,432Free float (%) 18 Country Turkey Sector COMMERCIAL BANKSAnalyst Tamer Sengun Contact +90 212 376 4615


80


abc

This page has been intentionally left blank

81


abc

Industrials

82


abc


Adana Cimento came out weak in our scorecard

for competitive analysis. The reason for that is the

cement industry's overcapacity in Turkey and its

fragmented market structure. In addition, Adana

Cimento is also exposed to competition in its

export markets (Iraq, Syria and North Africa in

particular) and has lost market share in both

domestic and export markets.

Looking forward, we expect fragmentation in the

market to decrease via consolidation, yet

overcapacity should remain as a source of concern

as long as economic activity stays slow.


Adana Cimento had an ROE of 15% in 2010,

which puts the company in the leading position in

this metric when compared with other building

material stocks in Turkey. However, due to the

very low market share of the company its overall

profitability market share scores only at the

medium level (3). With the recently announced

capacity investment in the Iskenderun plant we

expect the company's market share to improve in

the domestic market, yet due to the low pricing

power of Turkish manufacturers we do not expect

Adana's export market share to change.

Market share momentum is weak

Adana Cimento's market share momentum is

weak as the company has not increased its

capacity in the last five years while the sector's

overall capacity hasincreased by c25%. This has

caused market share loss for Adana Cimento.

With the new capacity investment Adana's market

share momentum should recover.


strong

Adana Cimento's DuPont scoring is in the

medium range compared to its peers in the

domestic market. Its gross profit is slightly better

compared to cement manufacturers but worse

compared to glass manufacturers. Its growth

outlook is mediocre as profitability of cement

manufacturers is dependent on demand growth

and fuel costs.


weak

The cement market in Turkey is heavily

fragmented with the top 8 players claiming 50%

of the market and with about 20 mid-sized players

Adana Cimento

Adana Cimento's overall competitive outlook is weak compared to

its peers and other industrials in Turkey

The company offers exposure to the high growth of residential

construction in the Mediterranean region

Target price cut to TRY5.75 (from TRY6.5) on lower peer

valuations, upgrade to OW (from Neutral)

Levent Bayar* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 4617 [email protected]


83


abc

in the sector. Compared to EM and developed

markets the Turkish market is particularly

fragmented and is in need of consolidation, in our

view. However, due to the Competition Board's

close supervision of the sector (as a result of past

misdemeanours) and its strict limit of 30%

maximum market share we see limited prospects

for domestic consolidation. We also see little

appetite from international cement companies as

Turkey's cement market has limited appeal

compared to some of the other EM markets such

as Iraq, Syria and some North Africa countries.


positive for Adana Cimento

A low interest environment should have a positive

impact on Adana Cimento and other Turkish cement

companies in the short term as the low rate

environment will boost mortgage affordability and

public infrastructure investment. Adana Cimento has

limited leverage (even when taking into account the

upcoming investment of EUR80m) hence lower

rates do not play a critical role with respect to the

debt position of the company.

Weak TRY environment should be positive in

the short term and negative in the long term for

Adana Cimento

A weak TRY should boost Adana Cimento's

exports in the short term. However, in the long

term, due to higher fuel and (indirectly) electricity

costs, the effect would be negative.

Investment thesis

Adana Cimento is located in a growing region of

Turkey and has plans to build up its capacity in

order to reclaim the market share that it has lost

over the last five years. It is also close to Iraq,

Syria and Mediterranean where demand is strong.

While we have concerns for the company, due to

high competition in both local and export markets,

with fuel costs remaining another source of

uncertainty, we believe the current valuation

presents an attractive investment opportunity.


We use a blend of DCF, EV/clinker and peer

multiples comparison to value Adana Cimento.

Our DCF assumptions are: 8.5% RFR, 5.5% ERP,

0.69 beta (up from 0.58 before) leading to an

11.3% WACC (up from 10.9% before). We

assume a 3% terminal growth rate. Our DCF

model implies a valuation of TRY6.0 per share

(from TRY6.1).

Adana Cimento trades at USD85/t EV/tonne,

which is a 14% discount to the domestic average

of USD100/t. Applying the domestic average, we

reach a valuation of TRY5.6 per share (from

TRY7.1). On the multiples front, Adana Cimento

currently trades at an 9.3x2012e PE, a 20%

discount to the global peer average of 11.6x. The

company is trading at a 4.8x 2012e EV/EBITDA

compared with a peer average of 7.5x. Applying

peer multiples leads to a valuation of TRY5.6 per

share (from TRY6.3).

Taking the average of the three provides a target

price of TRY5.75 for Adana Cimento (from

TRY6.5). Under our research methodology, the

hurdle rate for non-volatile Turkish stocks is 8.5-

18.5%. Since our target price implies a 40%

potential return, we upgrade our rating to

Overweight from Neutral.

Risks

The key downside risks to our valuation are a

slowdown in the Mediterranean region residential

market, further competitive pressures in Syria that

would force Adana out of the market, and a

prolonged North African construction slowdown.

84


abc

Financials & valuation: Adana Cimento Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Profit & loss summary (TRYm)

Revenue 305 328 347 359EBITDA 68 74 73 72Depreciation & amortisation -22 -18 -20 -23Operating profit/EBIT 46 56 53 49Net interest 74 41 40 40PBT 116 80 85 59HSBC PBT 116 80 85 59Taxation -13 -14 -14 -10Net profit 102 67 71 49HSBC net profit 102 67 71 49

Cash flow summary (TRYm)

Cash flow from operations 91 108 48 74Capex -17 -45 -80 -80Cash flow from investment -17 -45 -80 -80Dividends -63 -58 -40 -50Change in net debt 92 20 -45 56FCF equity 135 90 -17 24


Intangible fixed assets 7 7 7 7Tangible fixed assets 258 254 275 329Current assets 149 242 271 192Cash & others 26 85 129 45Total assets 734 822 873 847Operating liabilities 28 28 48 51Gross debt 60 140 140 112Net debt 35 55 11 67Shareholders funds 446 454 485 485Invested capital 361 390 376 431

Ratio, growth and per share analysis

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 4.2 7.6 5.8 3.4EBITDA -13.5 9.0 -1.1 -2.0Operating profit -28.5 21.0 -4.3 -7.8PBT 23.7 -30.6 6.1 -30.4HSBC EPS 29.9 -34.8 6.1 -30.4

Ratios (%)

Revenue/IC (x) 0.9 0.9 0.9 0.9ROIC 11.4 11.2 10.5 9.1ROE 21.0 14.8 15.1 10.1ROA 14.9 8.6 8.3 5.7EBITDA margin 22.3 22.5 21.1 20.0Operating profit margin 15.1 16.9 15.3 13.7EBITDA/net interest (x) Net debt/equity 7.8 12.2 2.2 13.7Net debt/EBITDA (x) 0.5 0.7 0.1 0.9CF from operations/net debt 261.7 194.4 452.2 110.6


EPS Rep (fully diluted) 0.24 0.13 0.12 0.07HSBC EPS (fully diluted) 1.16 0.76 0.80 0.56DPS 0.38 0.36 0.24 0.30Book value 2.83 2.89 3.08 3.08

Key forecast drivers

Year to 12/2010a 12/2011e 12/2012e 12/2013e

ASP - Domestic (TRY/t) 76.0 78.3 78.3 83.7Sales volume (m tonnes) 3.2 3.3 3.4 3.4Domestic market sales (m tonne 2.3 2.4 2.4 2.5Export sales (m tonnes) 0.9 0.9 0.9 1.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.4 1.3 1.1 1.3EV/EBITDA 5.6 5.4 4.8 5.7EV/IC 1.2 1.1 1.1 1.0PE* 6.4 9.9 9.3 13.4P/Book value 1.5 1.4 1.3 1.3FCF yield (%) 35.0 23.4 -4.4 6.2Dividend yield (%) 9.4 8.7 6.0 7.4

Note: * = Based on HSBC EPS (fully diluted)

Issuer information


Reuters (Equity) ADANA.IS Bloomberg (Equity) ADANA TIMarket cap (USDm) 380 Market cap (TRYm) 701Free float (%) 86 Enterprise value (TRYm) 441Country Turkey Sector CONSTRUCTION

MATERIALSAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

1

2

3

4

5

6

7

2009 2010 2011 2012

1

2

3

4

5

6

7

Adana Cimento Rel to ISTANBUL COMP

Source: HSBC Note: price at close of 27 Sep 2011

85


abc


Akcansa scored medium to weak in our scorecard

for competitive analysis. The main reason for that

is the cement industry's overcapacity in Turkey

and the fragmented market structure which

weakens the pricing power of the manufacturers.

On the other hand, Akcansa has an advantage in

export markets given its access to the Aegean Sea,

from where it can service the Black Sea and

Mediterranean markets.

Looking forward, we expect fragmentation in the

market to decrease via consolidation, yet

overcapacity will likely remain as a source of

concern as long as economic activity stays slow.

Due to the significant infrastructure planned for

the Marmara region, we expect lower competitive

pressure for Akcansa compared to peers.


Akcansa had an ROE of 9% in 2010, which puts

the company at the bottom of the range in this

metric when compared with other building

material stocks in Turkey. However, due to its

higher market share the company’s overall

profitable market share score is medium (3). We

expect Akcansa's ROE to improve over time with

the commissioning of its waste heat recovery

facility and the better pricing outlook in the

Marmara region.


Akcansa's market share momentum is medium to

strong as the company has increased its capacity

in the last five years by 70% with organic growth

via the Canakkale plant coupled with the

acquisition of the Ladik plant. Given the sector's

capacity growth of only 25% over the same

period, Akcansa has therefore gained significant

market share. However we do not expect

Akcansa's market share to change much from here

as it has no immediate plans for capacity

expansion in Turkey and we do not expect

capacity growth in the Marmara region from other

companies either.


strong

Akcansa's DuPont scoring is 4. While it's gross

profit is slightly lower compared to its peers its

asset turnover is much better thanks to its new and

more efficient plants. We think that Akcansa's

Akcansa

Akcansa's overall competitive outlook is medium compared to its

peers and other industrials in Turkey

The company is the best vehicle to benefit from the infrastructure

investment plans for the Istanbul region and is also a potential

export play on Russia


valuations, maintain OW rating



86


abc

sustainable growth outlook will be boosted by the

significant infrastructure investment planned for

the Marmara region (third Bosphorus Bridge,

Marmara bridge, Izmir highway projects).

However, fuel costs may distort gross profit if pet

coke prices increase above product prices.


weak

The cement market in Turkey is heavily fragmented

with the top 8 players claiming 50% of the market

and with about 20 mid-sized players in the sector.

Compared to EM and developed markets the

Turkish cement market is particularly fragmented

and is in need of consolidation. However, due to the

Competition Board's close supervision of the sector

(as a result of past misdemeanours) and its strict

limit of 30% maximum market share we expect

limited prospects for domestic consolidation. We

also see little appetite from international cement

companies as Turkey's cement market has limited

appeal compared to some of the other EM markets

such as Iraq, Syria and some North Africa countries.

Akcansa is located in an oligopolistic region of

Turkey with four main players and may benefit

from this via more rational competition.


positive for Akcansa


impact on Akcansa and other Turkish cement

companies in the short term as the low rate

environment will boost mortgage affordability and

public infrastructure investment. Akcansa should

also benefit from low rates as it has a TRY240m

debt position with 70% of it being short term and

therefore eligible for cheaper refinancing in the

near term.



Akcansa

Similar to other cement companies, weak TRY

should boost Akcansa's exports in the short term.

However, in the long term, due to higher fuel and

(indirectly) electricity costs, the weak TRY

environment will likely be negative.

Investment thesis

Our investment case for Akcansa has not changed

from our previous report on the company (please

see Turkish Construction and Real Estate Sector

Thematic – April 2011). We believe Akcansa is a

play on the Marmara region's infrastructure story

and Russian export potential for 2012.


We use a blend of DCF and multiples methodologies

to value Akcansa. Our DCF assumptions are 8.5%

RFR, 5.5% ERP, 0.73 beta (down from 0.8 before)

resulting in a WACC of 11.3% (down from 11.6%).

We assume a 3% terminal growth rate. Our DCF

valuation is TRY9.4 per share (from TRY9.5). In

terms of EV/tonne, we compare Akcansa with

domestic and global players. Akcansa is currently

trading at USD90/t compared with the average of

USD100/t for domestic peers and USD165/t for

international players. Applying the domestic peer

average yields a valuation of TRY8.4 per share,

down from TRY10.5. Akcansa is trading at a slight

discount to peers, at a 10.2x 2012e PE, compared to

11.6x for the peer group, and on a 2012e

EV/EBITDA of 6.1x, compared with a peer group

average of 7.5x. Our multiples methodology yields a

valuation of TRY7.8 per share (from TRY9.1).

Taking the average of the three gives us a TRY8.5

target price for Akcansa. This implies a 28%

potential return, which falls above our Neutral

range of 8.5-18.5% for non-volatile Turkish

stocks. We therefore maintain our Overweight

rating on the stock.

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=ECjzM5c2Q6&n=295752.PDF

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=ECjzM5c2Q6&n=295752.PDF

87


abc

Risks

The key downside risk to our rating is a stronger-

than-expected increase in raw-material and fuel

costs for Akcansa.

Launch of big-ticket projects in the Marmara

region (Marmara Bridge and Third Bridge on the

Bosphorus) and the nuclear power plant in the

Black Sea region are potential catalysts.

88


abc

Financials & valuation: Akcansa Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 817 942 1,113 1,183EBITDA 136 193 233 257Depreciation & amortisation -64 -60 -61 -63Operating profit/EBIT 72 134 171 194Net interest -12 -12 -7 -5PBT 72 114 154 198HSBC PBT 72 114 154 198Taxation -13 -21 -28 -36Net profit 59 94 126 163HSBC net profit 59 94 126 163


Cash flow from operations 150 183 237 226Capex -52 -60 -40 -20Cash flow from investment -52 -60 -40 -20Dividends -39 -70 -95 -122Change in net debt 12 125 -23 -74FCF equity 121 125 200 210


Intangible fixed assets 129 129 129 129Tangible fixed assets 642 638 639 619Current assets 312 222 258 334Cash & others 40 -86 -103 -49Total assets 1,232 1,137 1,175 1,230Operating liabilities 188 199 220 228Gross debt 201 200 160 140Net debt 161 286 263 189Shareholders funds 640 694 750 818Invested capital 855 876 910 904


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 15.2 15.2 18.2 6.3EBITDA -20.7 42.5 20.5 10.4Operating profit -28.5 86.3 28.2 13.3PBT -19.1 58.1 34.8 28.8HSBC EPS -20.4 57.9 34.8 28.8

Ratios (%)

Revenue/IC (x) 1.0 1.1 1.2 1.3ROIC 7.8 12.9 16.0 17.8ROE 8.7 14.1 17.5 20.8ROA 4.9 7.6 10.5 13.1EBITDA margin 16.6 20.5 20.9 21.7Operating profit margin 8.8 14.2 15.4 16.4EBITDA/net interest (x) 11.8 16.1 34.2 49.4Net debt/equity 24.6 40.4 34.5 22.7Net debt/EBITDA (x) 1.2 1.5 1.1 0.7CF from operations/net debt 93.7 64.0 90.2 120.1




Year to 12/2010a 12/2011e 12/2012e 12/2013e

ASP - Domestic (TRY/t) 82.0 87.7 93.0 97.7Total sales vol. (m tonnes) 8.5 8.9 9.8 9.8Domestic market sales (m tonne 6.5 6.8 7.6 7.5Export sales (m tonnes) 2.0 2.1 2.2 2.3

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.6 1.5 1.3 1.1EV/EBITDA 9.6 7.4 6.0 5.2EV/IC 1.5 1.6 1.5 1.5PE* 21.5 13.6 10.1 7.8P/Book value 2.0 1.8 1.7 1.6FCF yield (%) 10.6 11.0 17.6 18.4Dividend yield (%) 3.1 5.5 7.4 9.6


Issuer information


Reuters (Equity) AKCNS.IS Bloomberg (Equity) AKCNS TIMarket cap (USDm) 692 Market cap (TRYm) 1,275Free float (%) 20 Enterprise value (TRYm) 1425Country Turkey Sector CONSTRUCTION


Price relative

123456789

10

2009 2010 2011 2012

12345678910

Akcansa Rel to ISTANBUL COMP


89


abc

Overall competitive outlook weak

Akenerji scored weak in our scorecard for

competitive analysis. The reason for that is the weak

market share momentum of the company given the

reduction in its market share as its peers have

increased their capacity in Turkey's growing power

market. This offsets the company’s improving

profitability leading to a medium score overall.


Akenerji scores moderately on our score card

comparing ROE vs market share as Turkish

utilities have weak ROEs compared to most of

their EM peers and some of their developed peers.

Akenerji's main ROE edge is its 50% renewable

energy capacity. Going forward we expect

Akenerji's ROE to improve further due to

establishment of new hydro power capacity and

an improvement in the general power pricing

mechanism in Turkey.


Due to significant capacity build-up in the

industry over the last five years and Akenerji's

choice of building fewer but more profitable

capacities the company has lost market share.

Looking forward we expect to see more market

share loss for Akenerji if the company fails to

build its 900 MW natural gas power plant (which

is currently on hold) or fails to acquire additional

capacity in the upcoming power plant

privatisations.

Sustainable growth outlook medium

Akenerji's DuPont scoring falls in the medium

range compared to its peers in emerging markets.

Its asset turnover ratio is slightly better than that

of Zorlu Enerji (its domestic peer) but lower than

that of Aksa Enerji and some of the other

emerging market peers. The company has lower

asset turnover compared to Aksa Enerji (the

market leader in this metric) due to lower output

of its hydro power plants compared to that of

Aksa Enerji's lower valued gas fired power plants.

We believe the growth outlook is modest as with

the commencement of the new hydro plants the

company’s profitability should improve.

Market fragmentation structure is medium

The State’s share in the power generation market

will decrease substantially as it is determined to

privatise 70% of its generation portfolio which

currently comprises 50% of Turkey's power

generation capacity. The keen interest of utility

Akenerji

Akenerji's overall competitive outlook is weak

But high margin generation capacity and potential sale by its

parent companies at what would likely be a premium makes a

compelling investment case

Target price cut to TRY4.6 (from TRY5) on last week's gas price

hike, maintain Overweight rating



90


abc

players in the privatisation process will likely lead

to fragmentation in the Turkish energy market.

Thus the outlook for Akenerji's market share rests

on how the privatistaion process pans out. If the

company manages to acquire some assets its

market share will improve, and vice versa.


positive for AKNR


impact on Akenerji and the Turkish utility sector

in general as a major portion of its capex is

financed by debt.

Akenerji is a highly leveraged company (TRY1bn

net debt as of Q2 2011) and lower interest rates

will reduce the interest burden on its P&L thus

helping to boost its bottom line.

Weak TRY environment should be negative for

Akenerji

Akenerji should be negatively impacted by a weak

TRY due to both its short FX position of TRY1bn

(related to its debt position) and a potential FX-

related rise in natural gas prices, albeit the latter

effect should be less compared to peers thanks to

its higher share of renewable generation.

Investment thesis

Akenerji offers a strong investment case being

poised in Turkey's growing power market with

unsaturated demand meeting short supply in a

liberated price environment. However it scored low

in our analysis for competition as it has limited

market share in a non-fragmented industry.

50% of the company's capacities are renewable

power generation which operate at higher

profitability and are more resilient in the face of

gas price hikes.

Akenerji's parents (Akkok and CEZ) have decided

to sell some or all of the company following their

decision to investigate other sectors and regions.

We believe that if they manage to sell the

company at the market prices for its relevant

capacities then this would imply substantial

upside as the company currently trades at a 40%

discount to its SOTP valuation based on appraisal

of its assets.


Our 50/50 weighted DCF and SOTP driven

valuation provides a target price of TRY4.6 (from

TRY5.0) for Akenerji.

Our DCF assumptions are: 8.5% RFR and 5.5%

ERP, 0.87 beta and 5% terminal growth rate. This

provides a fair value of TRY4.6 per share (vs

TRY4.8 before) while our SOTP is also TRY4.6

per share (vs TRY5.2).

The decrease in our DCF is attributable to our gas

price hike projection for Q3 which decreases the

margins of the company in 2011 and 2012 (since

prices are carried forward from the previous year).

Our SOTP is based on the summation of

individual DCFs for the generation and

distribution businesses from which we then

subtract the net debt position of the company.

This SOTP has decreased due to the significant

depreciation of TRY which has increased the net

Revision to forecasts

(TRYmn) ______________New ______________ ______________Old _______________ _________ Change (%) _________ FY11e FY12e FY13e FY11e FY12e FY13e FY11e FY12e FY13e

Sales 519 582 610 519 582 610 0% 0% 0% EBITDA 110 139 161 115 144 167 -4% -4% -4% EBITDA margin 21% 24% 26% 22% 25% 27% 1% 1% 1% Net profit -6 62 78 61 88 89 -110% -30% -12%

Source: HSBC estimates, company data

91


abc

debt position of the company. In addition, our

DCF valuation is now lower with a 4% cut in

EBITDA in 2011e, 2012e and 2013e.

Our target price implies a 55% potential return,

which is above the Neutral range of 8.5%-18.5%

for non-volatile Turkish stocks – hence we

maintain our Overweight rating.

Risks

The key downside risk is a cancellation of the

potential sale by the parent companies.

92


abc

Financials & valuation: Akenerji Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 428 519 582 610EBITDA 28 110 139 161Depreciation & amortisation -28 -44 -44 -44Operating profit/EBIT 0 66 95 117Net interest -57 -70 -70 -65PBT -27 -8 79 100HSBC PBT -27 -8 79 100Taxation 1 2 -16 -20Net profit -26 -6 62 78HSBC net profit -26 -6 62 78


Cash flow from operations 111 29 110 123Capex -570 -68 -68 -43Cash flow from investment -551 -68 -68 -43Dividends 0 0 0 0Change in net debt 369 39 -42 -81FCF equity -589 -58 -28 26


Intangible fixed assets 37 37 37 37Tangible fixed assets 1,353 1,377 1,401 1,400Current assets 245 239 260 311Cash & others 40 3 4 46Total assets 1,913 1,931 1,976 2,026Operating liabilities 220 241 264 272Gross debt 926 929 887 848Net debt 886 925 884 803Shareholders funds 766 760 822 900Invested capital 1,375 1,409 1,431 1,430


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue -7.6 21.2 12.1 4.7EBITDA -53.8 288.4 26.1 15.9Operating profit -100.4 43.7 23.3PBT -244.2 26.4HSBC EPS -126.1 26.4

Ratios (%)

Revenue/IC (x) 0.4 0.4 0.4 0.4ROIC 0.0 3.8 5.3 6.5ROE -3.6 -0.8 7.8 9.1ROA 1.6 2.6 6.1 6.6EBITDA margin 6.6 21.2 23.9 26.4Operating profit margin 0.0 12.7 16.3 19.2EBITDA/net interest (x) 0.5 1.6 2.0 2.5Net debt/equity 115.8 122.0 107.5 89.1Net debt/EBITDA (x) 31.2 8.4 6.4 5.0CF from operations/net debt 12.5 3.1 12.5 15.4


EPS Rep (fully diluted) -0.10 -0.02 0.16 0.21HSBC EPS (fully diluted) -0.10 -0.02 0.16 0.21DPS 0.00 0.00 0.00 0.00Book value 2.04 2.02 2.19 2.39


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Tariff prices (TRY/MWh) 151.1 155.2 166.1 177.7DUY (free market) prices (TRY/ 122.5 131.1 140.3 150.1Natural Gas prices (TRY/mcm) 491 511 537 563Power output (GWh) 2,811 3,079 3,254 3,183

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 4.0 3.4 3.0 2.7EV/EBITDA 60.8 16.0 12.4 10.2EV/IC 1.3 1.3 1.2 1.1PE* 18.0 14.3P/Book value 1.5 1.5 1.4 1.2FCF yield (%) -70.4 -6.9 -3.3 3.1Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) AKENR.IS Bloomberg (Equity) AKENR TIMarket cap (USDm) 606 Market cap (TRYm) 1,116Free float (%) 25 Enterprise value (TRYm) 1762Country Turkey Sector INDEPENDENT POWER

PRODUCERSAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Akenerji Rel to ISTANBUL COMP


93


abc


Aksa Enerji scored medium in our scorecard for

competitive analysis. On the positive side the

company has managed to increase its market share

with profitable, efficient assets. However,its

significant debt position and FX vulnerability

imposes risks on its profitability and the company

achieves a medium score from our analysis as

a result.


Aksa Enerji’s ROE of 9% in 2010, puts the

company in a leading position when compared to

its domestic peers, but slightly below other

emerging market utilities. But due to Turkey's

consolidated market structure Aksa Enerji scores

medium with respect to the profitable market

share metric.

However, given its plans to expand its capacity to

4,200MW by 2014 we expect the company's

domestic market share to improve.


Aksa Enerji's market share momentum is strong,

scoring level (5) on our score card, as the

company’s ambitious expansion plans have

increased its capacity significantly in the last five

years (CAGR 30% vs 5% for the market). We

believe that, although its growth will slow as the

bulk of its investments are now complete, Aksa

Enerji will continue to gain market share. Aksa

Enerji is also the only Turkish utility company

that exports power, which affords additional

opportunities for growth, particularly in relation to

exports to power-hungry Syria and Cyprus.


strong

Highest asset turnover compared to other Turkish

utilities, coupled with high profitability, leads

Aksa Enerji to score level (4) on our score card.

Although Turkish power generators’ gross profit

is lower compared to that of both developed and

emerging peers, due to high gas prices and the

weak power price environment in 2010, the

growth outlook is attractive as we expect greater

liberalisation to boost the profitability of the

Turkish utility players.

Aksa Enerji, with its new and more efficient

power plants, scores highly on asset turnover and

we expect this ratio to increase further as those

capacities that were in ramp-up mode during 2010

come fully on stream.

Aksa Enerji

Aksa Enerji's overall competitive outlook is medium

Its well-diversified operations with new efficient capacities imply a

strong margin outlook

Target price cut to TRY5.8 (from TRY7) with the gas price hike in

last week, maintain Overweight (V) rating



94


abc


The State’s share in the power generation market

will decrease substantially as it is determined to

privatise 70% of its generation portfolio which

currently comprises 50% of Turkey's power

generation capacity. The keen interest of the utility

players in the privatisation process will likely lead to

fragmentation in the Turkish energy market.

We expect Turkey's power market to become

much more fragmented and Aksa Enerji to be a

moderate beneficiary of privatisation (losing some

market share but operating in a better price

environment).


positive for Aksa Enerji

Being a highly levered company (TRY1.4bn net

debt as of Q2 2011) lower interest rates will benefi

Aksa Enerji by way of reduced interest expenses.


Aksa Enerji

Due to its TRY1.2bn short FX position Aksa

Enerji is very vulnerable to TRY weakness.

On the operational side, although a weak TRY

would benefit Aksa Enerji by improving its export

competitiveness, on the other hand its fuel costs

would surge, thereby curbing its operating margin.

Investment thesis

Aksa Enerji is Turkey’s biggest IPP with its 2,000

MW installed capacity. It is also the only player in

Turkey that has access to isolated regions and

exports power. We believe this diversification in

its operations, along with its new and efficient

capacities, implies a strong outlook for its

operational profitability.

Aksa Enerji’s parent recently drew up an

agreement with an investment bank to sell 26% of

its stake for USD450m. While the final price is

subject to change it currently implies a 75%

premium over the current price and would go a

long way towards addressing the company's low

free float problem.

Asa result we believe the company currently offers

an attractive investment opportunity, with its positive

operational profitability outlook coupled with the

potential upside from a partial sale.


Our DCF and SOTP and multiples driven

valuations lead to a target price of TRY5.8

(previously TRY7.0) for Aksa Enerji.

The decrease in our target price is attributable to a

lower DCF valuation as a result of the cuts to our

EBITDA forecasts (15% for 2011 and 14% for

2012) due to last week's 14% natural gas price

hike which has a significant cost effect on Aksa

Enerji as 75% of company's capacity is gas-fired.

Revision to forecasts

2010 _____ 2011e _______ _____ 2012e _____ actual old new chg(%) old new chg(%)

Sales 911 1,492 1,492 0% 1,766 1,766 0% EBITDA 190 330 281 -15% 417 359 -14% EBITDA m 21% 22% 19% -3% 24% 20% -3% Net profit 61 146 9 -94% 204 154 -24%


The DCF component of our valuation (8.5% RFR,

5.5% ERP, 1.0 beta) leads to a fair value of

TRY6.5 per share (from TRY7.7) while our SOTP

valuation falls to TRY5.0 per share (from

TRY5.8). We base our SOTP on cost-driven asset

valuation for the assets of the company and

subtract the net debt position.

Our new target price implies a 106% return

potential, which is above the Neutral range of

3.5%-23.5% for volatile Turkish stocks – hence

we maintain Overweight (V) rating.

Risks

The key downside risk for Aksa Enerji is failure

to seal new bilateral contracts for its power as the

company currently under-utilises its power

generation capacity.

95


abc

If political tension between Turkey and Syria

increases, it may also pose a downside risk as

Aksa Group has a power sales agreement with

Syria, which is supplied by Aksa Enerji (20% of

our EBITDA projection for 2012 comes from

this source).

96


abc

Financials & valuation: Aksa Enerji Overweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 911 1,492 1,766 2,114EBITDA 190 281 359 369Depreciation & amortisation -59 -106 -106 -106Operating profit/EBIT 131 176 253 263Net interest -82 -49 -50 -42PBT 85 12 193 222HSBC PBT 85 12 193 222Taxation -24 -2 -39 -44Net profit 61 9 154 177HSBC net profit 61 9 154 177


Cash flow from operations -161 47 578 237Capex -405 -471 -206 -81Cash flow from investment -354 -471 -206 -81Dividends 0 -7 -7 -31Change in net debt 212 424 -366 -125FCF equity -613 -264 382 156


Intangible fixed assets 6 6 6 6Tangible fixed assets 1,332 1,696 1,796 1,772Current assets 960 870 870 1,005Cash & others 78 -345 -115 -166Total assets 2,385 2,659 2,760 2,869Operating liabilities 239 549 637 776Gross debt 1,276 1,276 1,140 965Net debt 1,197 1,621 1,256 1,130Shareholders funds 824 833 981 1,127Invested capital 1,980 2,369 2,151 2,172


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 3.8 63.7 18.3 19.7EBITDA -16.4 48.4 27.4 3.0Operating profit -5.9 34.4 43.8 4.2PBT -20.0 -86.4 1573.9 14.9HSBC EPS -30.3 -84.9 1574.0 14.9

Ratios (%)

Revenue/IC (x) 0.5 0.7 0.8 1.0ROIC 5.1 6.5 9.0 9.8ROE 9.4 1.1 17.0 16.8ROA 5.6 1.9 7.2 7.5EBITDA margin 20.8 18.9 20.3 17.5Operating profit margin 14.4 11.8 14.3 12.5EBITDA/net interest (x) 2.3 5.7 7.1 8.8Net debt/equity 145.3 194.6 128.1 100.3Net debt/EBITDA (x) 6.3 5.8 3.5 3.1CF from operations/net debt 2.9 46.0 21.0




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Tariff prices (TRY/MWh) 152.5 163.3 174.8 187.0DUY (spot) prices (TRY/MWh) 162.0 162.0 173.3 185.5Natural Gas prices (TRY/mcm) 46.0 47.8 50.2 52.7Power output (GWh) 4,576 8,375 9,539 11,482Blended PLF (%) 41 53 57 62Effective installed capacity 1,398 1,819 1,940 2,165

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 3.0 2.1 1.6 1.3EV/EBITDA 14.4 11.2 7.8 7.2EV/IC 1.4 1.3 1.3 1.2PE* 26.8 176.6 10.5 9.2P/Book value 2.0 2.0 1.7 1.4FCF yield (%) -39.8 -17.1 24.8 10.1Dividend yield (%) 0.0 0.4 1.9 2.2


Issuer information


Reuters (Equity) AKSEN.IS Bloomberg (Equity) AKSEN TIMarket cap (USDm) 883 Market cap (TRYm) 1,629Free float (%) 6 Enterprise value (TRYm) 3163Country Turkey Sector INDEPENDENT POWER

PRODUCERSAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

22.5

33.5

44.5

55.5

66.5

2009 2010 2011 2012

22.533.544.555.566.5

Aksa Enerji Rel to ISTANBUL COMP


97


abc


Anadolu Cam scored weak in our competitive

analysis. While the company currently enjoys a

monopolistic market share in Turkey an

aggressive competitor planning to match 70% of

Anadolu Cam's capacity has started construction

of its furnaces which are due to become

operational in the next four years. While

increasing public awareness in Turkey towards

the use of glass packaging will boost consumption

and increase diversification for Anadolu Cam, the

new competitor will bring pressure for the

company as well.

In Russia, Anadolu Cam operates in an

oligopolistic market and competes with glass

packaging, tetrapak and tin packaging companies.

Due to the increased cost and tax burden on

beverage manufacturers Anadolu Cam lost

significant share in the market during the 2008-

2009 turmoil. However, we believe the outlook

may improve for Anadolu Cam as consumer

spending has now recovered substantially.


weak

Anadolu Cam had an adjusted ROE of 11% in

2010. When we look at the individual regions,

Turkey's ROE was 18% and Russia’s ROE was

2%. For Turkey we expect to see a contraction in

ROE with the entry of the new competitor in

2013e. For Russia, we expect to see an

improvement in ROE via better consumer

spending compared to 2010. However, due to the

significant exposure of the company to the beer

market in Russia, any legal action against alcohol

consumption puts Anadolu Cam at risk.


Anadolu Cam's market share in Turkey has not

changed in the last five years, while it has posted

c20% growth per annum in Russia over the same

period. The latter has been driven by the increased

capacity in Russia which has led to market share

gains. However, we expect tougher going in both

markets over the next five years, due to the entry

of the new competitor in Turkey and higher

competition in Russia with different product types

(tetrapak, cans etc)

Anadolu Cam

Anadolu Cam is facing a weak competitive outlook

Increasing public awareness in Turkey towards glass packaging

supports demand while the worst is likely over in the Russian

market

Target price increased to TRY4.5 (from TRY4.1); upgrade to

Overweight from Neutral



98


abc


Anadolu Cam's DuPont scoring is 3. The

company's adjusted gross profit margin is stronger

compared to its peers, yet its asset turnover is

lower, which offsets the former and leaves the

DuPont score at the medium level. Since the

company has pricing power in Turkey, and

increasing awareness of glass packaging should

boost demand, we expect to see slight growth in

the gross profit margin over the next two years.

Thereafter, following the entry of the new

competitor, we expect to see a decrease in the

gross profit margin, which will also decrease the

DuPont score.

In the Russian market we expect to see an

increase in the gross profit margin as it hit trough

levels during the 2008-2010 period and the

outlook for the Russian market has now improved

given the recovery in consumer spending.


strong

As mentioned before, Anadolu Cam is the

monopolistic market leader in Turkey in the glass

packaging segment and is one of the oligopoly

players in Russia. We do not expect to see a

fragmentation beyond a few number of new

competitors in either market, hence the sector should

still score strong on our fragmentation metric.

Low interest rate environment should have a

slightly positive impact on Anadolu Cam

A low interest rate environment would have a

limited impact on Anadolu Cam as the company

mainly supplies to a rateinsensitive sector.

However, with increased consumer spending

people could shift their preference towards better

quality containers which would have a positive

impact on Anadolu Cam.

Anadolu Cam would also benefit from a low

interest rate environment from a financing

perspective as the company has a TRY670m net

debt position of which 50% is short term.

Weak TRY environment should have a mixed

impact on Anadolu Cam

Similar to other exporters, a weak TRY would

boost Anadolu Cam's international sales. As the

bulk of the operations in Russia are handled in

RUB, changes in the RUB-TRY exchange rate are

particularly important for Anadolu Cam.

In addition, the company has a TRY250m short

FX position which would result in FX losses in

the event of a further devaluation of TRY.

Investment thesis

We believe Anadolu Cam will continue its solid

growth at least for the next two years in Turkey,

due to the ongoing increase in glass packaging

demand. Recent articles in the press about health

issues regarding plastic containers for water and

other beverages should boost demand for glass

packaging, in our view. Over the longer term,

following the entry of the new player, we may see

a contraction in Anadolu Cam’s profitability due

to greater price competition.

In Russia, we believe the worst is over, as

consumer spending is much better compared to

the crisis period and the company should benefit

from this.

Revisions to forecasts

We increase our 2011 EBITDA and net profit

estimates on the back of very strong Q2 numbers.

For 2H 2011 and 2012 we increase our sales

estimates with the assumption of higher sales

volumes in Turkey due to ongoing campaigns for

using glass as the preferred container.

99


abc

Revisions to forecasts

2010a _____ 2011e ______ _____2012e _____(TRYm) actual old new chg(%) old new chg(%)

Sales 1,117 1,171 1,220 4% 1,267 1,345 6% EBITDA 268 293 328 12% 317 366 15% margin 24% 25% 27% 2ppt 25% 27% 2ppt Net Income 102 111 133 20% 129 142 10%

Source: HSBC estimates, company data Rating, valuation and risks

We use a 50/50 weighted average of DCF and peer

multiples driven valuation for Anadolu Cam. Our

DCF assumptions are: 8.5% RFR and 5.5% ERP for

Turkey and 7% RFR and 5% ERP for Russia, and a

0.80 beta, leading to a 10.3% WACC for Turkey and

a 9.3% WACC for Russia. We assume a 2%

terminal growth rate. Our DCF yields a valuation of

TRY6.0 per share (from TRY4).

Anadolu Cam is trading on a 7.7x 2012e PE and

3.3x 2012e EV/EBITDA vs the peer set averages

of 9.6x and 5.2x, respectively. Applying the peer

set multiples we arrive at a valuation of TRY2.9

per share (from TRY4.2).

Our new target price of TRY4.5 (from TRY4.1)

implies a 43% potential return, which is above the

Neutral band of 8.5-18.5% for non-volatile

Turkish stocks. We therefore upgrade our rating

to Overweight from Neutral.

Risks

Risks to our view include weakness in Russian beer

demand through further tax rate increases. An

additional downside risk is a possible devaluation of

the TRY and/or the RUB against the USD.

Positive growth in Russia beer demand is an

upside risk to our valuation for Anadolu Cam.

If Anadolu Cam acquired new capacity in a growing

region it may act as a catalyst for the shares.

100


abc

Financials & valuation: Anadolu Cam Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 1,117 1,220 1,345 1,483EBITDA 268 328 366 391Depreciation & amortisation -140 -147 -167 -180Operating profit/EBIT 128 180 199 211Net interest -1 -10 -17 -21PBT 127 170 182 189HSBC PBT 127 170 182 189Taxation -26 -34 -36 -38Net profit 102 133 142 147HSBC net profit 102 133 142 147


Cash flow from operations 352 286 403 419Capex -215 -276 -198 -461Cash flow from investment -215 -276 -198 -461Dividends 26 27 28 37Change in net debt -97 -243 28 -65FCF equity 110 -35 151 -101


Intangible fixed assets 3 3 3 3Tangible fixed assets 909 869 984 1,008Current assets 685 833 849 937Cash & others 253 446 422 466Total assets 1,744 1,785 1,916 2,028Operating liabilities 153 159 171 183Gross debt 658 609 613 593Net debt 406 163 191 127Shareholders funds 788 871 987 1,106Invested capital 1,191 1,100 1,243 1,298


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 23.2 9.2 10.2 10.2EBITDA 41.2 22.2 11.6 6.9Operating profit 261.2 40.8 10.6 5.8PBT 9472.5 33.7 6.9 4.1HSBC EPS 556.6 30.1 6.8 3.9

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Turkey contain. sales grw. (%) 10.0 6.0 6.0 6.0Russia contain. sales grw. (%) 7.0 7.0 7.0 7.0USD/TRY - yearend 1.5112 1.7550 1.6000 1.5500

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.2 1.0 0.9 0.8EV/EBITDA 5.0 3.6 3.3 2.9EV/IC 1.1 1.1 1.0 0.9PE* 10.7 8.2 7.7 7.4P/Book value 1.4 1.3 1.1 1.0FCF yield (%) 11.7 -3.4 15.0 -10.0Dividend yield (%) 2.3 2.4 2.6 3.4


Issuer information


Reuters (Equity) ANACM.IS Bloomberg (Equity) ANACM TIMarket cap (USDm) 592 Market cap (TRYm) 1,091Free float (%) 20 Enterprise value (TRYm) 1174Country Turkey Sector CONTAINERS & PACKAGINGAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Anadolu Cam Rel to ISTANBUL COMP


101


abc


Not surprisingly, Anadolu Efes ranks highly in

terms of competitive outlook. The company has a

monopolistic position in the Turkey beer market,

the highest EBITDA contributor, a very strong

position in soft-drinks through its subsidiary CCI

and an increasing market share in the Russian

beer market. In terms of competition, we think

Anadolu Efes will have no problems.


Anadolu Efes has a similar ROE to that of its EM

peers but ranks higher in terms of market share.

We calculate the company’s EBITDA-weighted

average market share (Turkey beer, EBI, CCI) to

be much higher than that of any EM peer. ROE of

around 20% at 2010-end tells us that the company

is well positioned within its industry.


The company has been instrumental in further

increasing its market share in the Turkish beer

market from what was already almost a

monopoly. Its market share hit 89% in 2010. It

has also been gaining market share in the Russian

beer market. Further market share gains from this

point on will be very tough to achieve but past

performance clearly shows the company’s

managerial skills.

Sustainable growth outlook is strong

Anadolu Efes ranks well in terms of its adjusted

gross margin, a result of its monopolistic position

and strong business model in Turkey. It has a similar

asset turnover ratio to its peers. While its gross

margin might come under attack from greater

competition, especially in Russia, we think the

company can sustain growth in the longer term.


strong

Apart from in the Russian beer market, Anadolu

Efes has dominant positions in its businesses

which give it the upper hand versus the

competitors. We see the chances of consolidation

in the Turkey beer and soft drink markets as low.

Since these two businesses represent 70% of the

EBITDA we see the company as immune to any

risks associated with potential M&A in the sector.

In Russia, potential consolidation would

negatively affect the company since competition

is already becoming tougher.

Anadolu Efes

Competitive outlook is medium thanks to strong market positions

in core sectors and countries

But lack of growth momentum and increasing competitive

pressures in Russia are key concerns

TP cut to TRY21.80 (from TRY23.4) on lower valuation of soft-

drink and international beer operations; maintain Underweight

Erol Hullu* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 4616 [email protected]


102


abc


neutral for Anadolu Efes

Without a doubt a low interest rate environment

positively affects the interest burden of the

company. Yet we do not believe beer or soft-drink

businesses are highly sensitive to interest rates.


Anadolu Efes

The Company had a c1x net debt/EBITDA

position at the 2010 year end. Most of the debt is

denominated in USD and EUR which increases

the EPS sensitivity to fluctuations in TRY.

Furthermore, the company uses commodities such

as pet, aluminium, barley, and sugar in its

products, the prices of which are either linked to

USD or are in USD.

Investment thesis

Even though beer consumption in Turkey and

Russia is lower than the DM average, volume

growth in both countries has been under pressure

from substantial tax hikes. During 2010 the

special consumption tax on beer was increased by

a total of c70% in Turkey and by a mammoth

200% in Russia.

The company has a dominant position in Turkey

where the price sensitivity of consumers is low.

Yet a 17% price increase in Q4 was apparently

too much to digest even for Turkish consumers. In

Russia, total beer volumes have been contracting

since 2009 and this has continued to be the case

so far in 2011. Both countries’ governments look

committed to curbing alcoholic consumption or

see taxing it as an efficient way to increase tax

revenues, both of which are unsupportive for

Anadolu Efes. Moreover, in Russia we have been

seeing signs of irrational pricing behaviour since

all players want to increase their market share in

the absence of demand growth.


We value the company using a sum-of-the-parts

analysis. We value the domestic beer business on

the average of our DCF and peer multiples. Our

DCF for the domestic beer operations, using a

risk-free-rate of 8.5%, ERP of 5.5%, beta of 0.70

and a WACC of 12.0%, produces a fair value of

TRY6,884m (was TRY6,621m). Our multiples-

based analysis using 7.1x 2012e and 6.3x 2013e

EV/EBITDA and 14.2x 2012e and 12.9x 2013e

PE indicates a fair value of TRY5,161m (was

TRY4,975m). The average of the two yields

TRY6,023m (was TRY5,798m) for the Turkey

beer operations.

For the soft drink operations, we use our target value

for Coca-Cola Icecek. For EBI (not rated) we value

the operations using the same peer multiples we use

for the domestic beer operations which yields

TRY1,029m (was TRY1,605m). For Alternatifbank

(not rated), we take the current market capitalisation

of TRY378m (was TRY465m).

Our target price for Anadolu Efes is TRY21.80,

down from TRY23.40 previously. The target price

decline is a result of lower valuations for the

international beer operations and CCI. Under our

research model, the Neutral band for non-volatile

Turkish stocks is 8.5% -18.5%. As our target price

implies a 4% potential return we maintain our

Underweight rating.

Risks

The company’s major value driver is the Turkish

beer operations. Better sales growth or margin

performance here is an upside risk. We have

factored in increasing raw material prices

following the surge in global grain prices. A sharp

fall will have a positive impact on our valuation.

Also, the company has been very active in M&A

in international markets during the past few years.

Any unexpected large scale acquisition could

present an upside risk to our rating.

103


abc

Financials & valuation: Anadolu Efes Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 4,169 4,609 5,047 5,624EBITDA 1,019 1,049 1,204 1,336Depreciation & amortisation -316 -341 -375 -420Operating profit/EBIT 703 708 829 915Net interest -6 -13 -26 -14PBT 659 656 837 893HSBC PBT 659 656 837 893Taxation -140 -140 -173 -185Net profit 504 501 645 688HSBC net profit 504 501 645 688


Cash flow from operations 893 1,450 1,508 1,413Capex -644 -234 -250 -271Cash flow from investment -644 -234 -250 -271Dividends -144 -216 -200 -258Change in net debt -13 151 -42 -391FCF equity 172 1,128 1,175 1,064


Intangible fixed assets 1,233 1,357 1,357 1,357Tangible fixed assets 2,178 2,052 1,934 1,791Current assets 2,141 2,713 3,258 3,943Cash & others 994 1,078 1,129 1,582Total assets 5,589 6,163 6,594 7,142Operating liabilities 905 934 1,007 1,043Gross debt 1,764 1,999 2,009 2,071Net debt 770 921 879 489Shareholders funds 2,767 3,052 3,496 3,926Invested capital 3,652 4,111 4,412 4,467


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 9.4 10.6 9.5 11.4EBITDA 11.2 3.0 14.7 10.9Operating profit 7.7 0.7 17.0 10.4PBT 21.1 -0.4 27.6 6.7HSBC EPS 19.2 -0.6 28.8 6.6

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Domestic Beer volume (ml) 851 827 852 877EBI volume (ml) 1,570 1,604 1,706 1,812Soft Drinks volume (m.uc) 665 756 840 936Beer export volume growth % 5 5 5 5

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) AEFES.IS Bloomberg (Equity) AEFES TIMarket cap (USDm) 5,127 Market cap (TRYm) 9,450Free float (%) 45 Enterprise value (TRYm) 10392Country Turkey Sector BEVERAGESAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

5

10

15

20

25

2009 2010 2011 2012

5

10

15

20

25

Anadolu Efes Rel to ISTANBUL COMP


104


abc


The Turkish durable goods sector, led by Arcelik,

has high production capacities providing scale and

efficiency in production, a relatively low tax burden

(6.7% consumer tax rate vs. 37% to 84% for cars), a

strong Turkish brand regionally (Beko), the highest

technology (in energy efficient products) and a fully

liberalised industry that has been open to

competition since 1996 (when Turkey became a

member of the EU Customs Union).


Arcelik is placed in the mid range of ROE

rankings in Europe. Arcelik makes up for its

disadvantage in terms of scale compared with

larger European competitors through highly

efficient plants with large capacities under a

single roof. BSH and Electrolux top the industry

as the two dominant players in white goods

market in Europe.


Arcelik has posted higher growth than its relevant

sales markets during the past five years.

Successful penetration into European markets and

new sales channels, especially with the 2008-09

crisis (when consumers switched from premium

towards low-cost brands) has been the driving

factor in our view. Going forward, market share

gains in the main market, Turkey, look difficult

whereas gains in selective markets in Europe still

look possible. Arcelik seeks further growth via

acquisitions in new markets (e.g. South Africa)


The Du Pont Profitability Matrix paints a mixed

picture for Turkish (listed) white goods

manufacturers: Arcelik ranks at around the

European sector averages.


strong

The top three players account for a significant

share (c90%) of the market. The unique

distribution system in Turkey (through

manufacturer-owned retail stores) sets a higher

barrier to entry and results in a low import share.

Therefore, we not expect the existing rankings

(Arcelik-BSH-Vestel-Indesit) to change much in

at least the next five years despite the evolution of

mass retail stores in big cities.

Low interest rate environment is positive

Arcelik benefits from a low interest rate environment due to increased consumption. Although white

Arcelik

Arcelik's overall competitive outlook is medium compared to its


New export markets and strong local demand may help mitigate

the risk of lower volumes in Europe

Cutting target price to TRY9.0 (from TRY10), maintain Overweight

(though remove the V flag)

105


abc

goods demand is less interest rate sensitive than automotive demand, there is a long-term positive correlation between demand and interest rates. Also,

Arcelik continues to generate a positive margin generally between interest earned on instalment sales and interest paid on loans.

Weak TRY has a neutral impact

Arcelik operates with various currencies but it’s

largely protected against FX changes through hedges. The FX exposure is very limited in the on the balance sheet (only a USD18m short as of

end-H1 2011). A 10% increase in various currencies against TRY (USD, EUR, GBP, RUB and others) curbs bottom-line profits by only

cTRY3m (based on the balance sheet footnotes as of end H1 2011)

Investment thesis Arcelik generates c30% of revenues from Western Europe and a slowdown in the European economy would affect its exports negatively. That said,

Arcelik’s low-to-medium end market position in Europe can help cushion the pressure to some extent. On the other hand, a slowdown in Turkey

would not hit white goods demand significantly, in our view, as there is still some pent up demand in this market (compared to autos). Turkish white

goods demand has been solid in 2011 YTD with 21% y-o-y growth (wholesale volumes) in the Jan-Aug period.

Arcelik continues to seek growth outside Turkey and outside its main export markets; the

acquisition of South Africa’s leading white goods brand Defy recently (12.5% EBITDA margin) may be followed by similar actions (brand

acquisitions and/or green field investment decisions) in new geographies, such as South East Asia. We believe that Arcelik has a sound growth

strategy, complementing its strong organic growth profile in Turkey with inorganic growth in new and promising markets. We see the company

generating above industry margins in the foreseeable future.

Rating, valuation and risks We revise our forecasts on more cautious export volume assumptions in Europe (5% growth in 2012e vs. 8% previously). We look for total sales

volume growth (white goods) of 9% this year and 5% in 2012 (vs. 10% and 7% previously). We curb our margin forecasts slightly, incorporating

the lower volume impact, leading to an 8% lower net profit for 2011e and 7% lower for 2012e.

These estimate changes, incorporating also new macro parameters (GDP growth, FX etc) result in a lower DCF-based target price of TRY9.0, down

from TRY10.0. Under our research methodology, the hurdle rate for non-volatile Turkish stocks is 8.5- 18.5%. Based on the potential return of 31%,

we maintain our Overweight rating, though we remove the volatility (V) flag in recognition of the stock's historical volatility having stabilised.

Our DCF parameters remain the same as before:

8.5% risk free rate, 5.5% equity risk premium, 3%

terminal growth and 0.91 (was 1.08) beta, leading

to 11.2% WACC (previously 11.8%).

Arcelik - Forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Revenue 7,744 7,627 8,363 8,147 9,077 8,695 EBITDA 910 859 988 945 1,071 1,028 margin 11.8% 11.3% 11.8% 11.6% 11.8% 11.8%

Net profit 569 523 636 592 674 642


The main downside risks to our valuation and rating would be i) lower sales volumes in Turkey

and export markets than assumed, ii) tougher competition in Turkey and Europe leading to lower-than-expected margins, iii) acquisitions or

investments in foreign markets that would be deemed as “expensive” or “out of scope” by the market, iv) an increase in the 6.7% consumer tax

rate on white goods sales in Turkey (although very unlikely in the context of a slowing economy, v) adverse developments in global TV

markets (sharp price or demand falls) hurting the profitability of Arcelik’s TV segment.

106


abc

Financials & valuation: Arcelik Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 6,936 7,627 8,147 8,695EBITDA 758 859 945 1,028Depreciation & amortisation -193 -209 -223 -238Operating profit/EBIT 638 650 722 790Net interest 7 -5 2 13PBT 657 658 737 818HSBC PBT 657 658 737 818Taxation -107 -115 -130 -160Net profit 517 523 592 642HSBC net profit 479 523 592 642


Cash flow from operations 653 913 939 962Capex -196 -290 -321 -344Cash flow from investment -196 -290 -321 -344Dividends -100 -250 -262 -355Change in net debt -464 -23 -119 -114FCF equity 377 621 615 611


Intangible fixed assets 469 469 469 469Tangible fixed assets 1,309 1,381 1,479 -2,436Current assets 4,748 5,715 6,281 6,708Cash & others 1,318 1,986 2,338 2,544Total assets 7,322 8,450 9,212 5,834Operating liabilities 1,628 1,742 1,828 1,967Gross debt 2,058 2,702 2,936 3,027Net debt 739 716 598 483Shareholders funds 3,342 3,676 4,007 4,293Invested capital 3,580 3,838 4,062 230


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 5.2 10.0 6.8 6.7EBITDA -13.4 13.4 10.0 8.8Operating profit -14.8 2.0 11.0 9.5PBT 13.9 0.2 12.0 11.0HSBC EPS 15.4 9.1 13.2 8.3

Ratios (%)

Revenue/IC (x) 1.9 2.1 2.1 4.1ROIC 13.2 14.5 15.1 29.6ROE 15.9 14.9 15.4 15.5ROA 11.4 10.9 11.1 13.7EBITDA margin 10.9 11.3 11.6 11.8Operating profit margin 9.2 8.5 8.9 9.1EBITDA/net interest (x) 177.7 Net debt/equity 21.7 19.1 14.6 11.0Net debt/EBITDA (x) 1.0 0.8 0.6 0.5CF from operations/net debt 88.3 127.4 157.1 199.1




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Turkish GDP growth 9.0 7.0 3.0 5.1EUR/TRY - year end 2.01 2.52 2.61 2.69EUR/TRY - year avg. 2.00 2.52 2.56 2.65CBT Policy rates (year-end) 6.5% 5.5% 5.5% 5.0%Arcelik domestic unit sales gr 10% 10% 6% 5%Arcelik int'l unit sales gr. 7% 8% 5% 6%

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) ARCLK.IS Bloomberg (Equity) ARCLK TIMarket cap (USDm) 2,515 Market cap (TRYm) 4,635Free float (%) 21 Enterprise value (TRYm) 4540Country Turkey Sector Household DurablesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

0123456789

10

2009 2010 2011 2012

012345678910

Arcelik Rel to ISTANBUL COMP


107


abc


Aygaz has a strong brand and the highest market

share in the Turkish LPG market. Excluding auto-

LPG, which includes the presence of large fuel

retailers, it faces a lower competitive threat. Auto-

LPG is the fastest growing fuel in the domestic

market, rapidly replacing gasoline, and the market

offers higher competitive intensity than for other

fuels.


Turkish LPG distribution margins are high in all

segments (except exports). With a strong

franchise and extensive distribution infrastructure,

Aygaz clearly remains the market leader in this

defensive and yet lucrative segment.


Aygaz’s market share in the LPG market has

stagnated at around 30%. However, underlying

this, Aygaz has been holding its share steady in

the fast growing auto-LPG segment as well as

retaining its market lead and maintaining its share

in other LPG segments. Other than consolidation

opportunities, we see little potential for increasing

market share.


Aygaz’s business is attractive with above average

asset turnover ratio (2.10x) and a decent adjusted

gross profit margin (13%). However, we think

there is downside risk to this, as low-profit auto

sales will contribute a larger share of revenues in

coming years.

Market fragmentation structure is strong

The market is dominated by Aygaz in the LPG

segment and is the price setter. Two thirds of the

market is controlled by the top three players

therefore the market is not fragmented.


neutral

As Aygaz is not significantly leveraged, lower

interest rates do not have a major impact on

financial expenses. Also, business demand is not

sensitive to interest rates.

Weak TRY environment should be neutral

Aygaz has an FX short position worth around

TRY100m on its balance sheet, but it is also

exposed to FX-based leverage through the Tupras

SPV, in which it has a 20% share. Therefore, the

impact on financial expenses of a weak TRY

should be negative as it will result in FX losses.

Aygaz

Aygaz’s overall competitive outlook is medium. It has defensive

and profitable business stream but growth is limited at this stage

Possible acquisitions in the energy and gas sectors may prove to

be a positive catalyst for the shares

However, we maintain our Underweight rating with a revised

target price of TRY10.8 (down from TRY11.9)

Bulent Yurdagul* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 4612 [email protected]


108


abc

However, since Aygaz’s product prices are linked

to USD, a weaker TRY supports operational

profitability which compensates for its negative

impact on the P&L.

Investment thesis

We maintain our Underweight call on Aygaz,

simply because we think that its valuation has

been over-done despite running a defensive and

safer business. Aygaz actually posted very strong

results at the operating level (EBITDA) in 2008 as

well as in 2009, helped by strong auto-LPG

demand growth and stronger margins. However,

in the current scenario, we do not expect this to

continue with domestic auto-LPG growth having

slowed down. Also, with the current inflation

expectations, margins are unlikely to improve.

Aygaz also suffers from non-cash FX losses on

the balance sheet, due to TRY depreciation.

Aygaz: HSBC forecast changes

(TRYm) _________ 2011e __________________ 2012e_________ New Old change New Old change

EBITDA 266 311 -14.5% 284 321 -11.5% EBIT 186 228 -18.4% 207 244 -15.2% Net profit 429 455 -5.7% 245 273 -10.3%



We reduce our estimates for 2011 and 2012 by up

to 18% due to lower-than-expected H1 2011

performance and a weaker TRY environment.

We reduce our 12-month target price to TRY10.8

(from TRY11.9), derived from a SOTP valuation.

Our DCF model uses a WACC of 13.0% and a

terminal growth rate of 3.0%, which is derived using

a risk-free rate of 8.5%, an equity risk premium of

5.5%, a beta of 0.87, and a cost of debt of 5.75%.

We use 6.3x (down from 8.1x) as the peer average

for Aygaz's PE valuation for 2012e.

Under our research model, for non-volatile stocks,

the Neutral band is 8.5% to 18.5%. Our target

price of TRY10.80 per share implies a potential

return of 8%, which falls below the Neutral band.

Hence, we maintain Aygaz’s Underweight rating.

Risks

Better-than-expected LPG margins, lower-than-

expected competition in the market and higher

growth in demand are the main upside risks to our

valuation. Aygaz’s strategic target of being a

bigger gas and energy player through acquisitions

of new assets may also prove an upside risk, if

acquisitions were to be realised at reasonable

price levels.

Aygaz: SOTP valuation

TRYm TRY/share Basis

LPG business valuation 1,651 5.5 50% DCF and 50% EV/EBITDA Electricity business valuation 151 0.5 Based on AES deal Valuation of core businesses 1,801 6.0 a + b Valuation of participations 1,022 3.4 At HSBC target mcap with a conglomerate discount of 20% (excluding Opet which is

valued at a 10.3x PE multiple) Total enterprise value 2,823 9.4 Less: minority offset (25) (0.1) at transaction price Less: net debt 435 1.4 Equity value 3,233 10.78


109


abc

Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 4,658 5,114 4,667 4,549EBITDA 306 266 284 317Depreciation & amortisation -89 -81 -77 -78Operating profit/EBIT 217 186 207 239Net interest 9 -6 -4 -6PBT 283 472 287 323HSBC PBT 283 472 287 323Taxation -43 -43 -40 -45Net profit 239 429 245 276HSBC net profit 239 429 245 276




Intangible fixed assets 8 8 8 8Tangible fixed assets 529 529 531 533Current assets 1,246 1,425 1,476 1,609Cash & others 262 515 569 695Total assets 2,804 2,983 3,037 3,171Operating liabilities 679 561 561 561Gross debt 111 81 51 20Net debt -151 -435 -518 -675Shareholders funds 1,978 2,263 2,337 2,515Invested capital 841 886 885 894


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 23.0 9.8 -8.7 -2.5EBITDA -21.6 -12.9 6.8 11.5Operating profit -26.0 -14.3 11.4 15.6PBT -24.3 66.7 -39.3 12.6HSBC EPS -23.9 79.1 -42.9 12.7

Ratios (%)

Revenue/IC (x) 5.6 5.9 5.3 5.1ROIC 22.2 19.6 20.1 23.1ROE 13.0 20.2 10.7 11.4ROA 8.6 15.0 8.3 9.1EBITDA margin 6.6 5.2 6.1 7.0Operating profit margin 4.7 3.6 4.4 5.3EBITDA/net interest (x) 48.0 71.1 49.8Net debt/equity -7.5 -18.9 -21.9 -26.4Net debt/EBITDA (x) -0.5 -1.6 -1.8 -2.1CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Turkish cylinder LPG market gr -0.08 -0.05 -0.05 -0.05Turkish Auto LPG market growth 0.08 0.06 0.04 0.04Cylinder LPG sales margin 679 697 670 671Auto LPG sales margin 359 365 339 336

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information

Share price (TRY) 9.98 Target price (TRY) 10.80 Potent'l tot rtn (%) 8.2

Reuters (Equity) AYGAZ.IS Bloomberg (Equity) AYGAZ TIMarket cap (USDm) 1,624 Market cap (TRYm) 2,994Free float (%) 100 Enterprise value (TRYm) 1574Country Turkey Sector Oil & GasAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

2

4

6

8

10

12

14

2009 2010 2011 2012

0

2

4

6

8

10

12

14

Aygaz Rel to ISTANBUL COMP


Financials & valuation: Aygaz Underweight

110


abc


Bagfas is a regional player with no intention to go

national and compete with the current duopoly of

Gubretas and Tekfen. It has been losing market

share due to an increased focus on exports. It

scored 19 in our scorecard, in the mid range of the

score spectrum. Although the company is more

profitable than other domestic players we do not

believe it has the muscle to compete with the

leaders in the Turkish market overall.


Bagfas operates with a higher ROE than its major

competitors. During the up-cycle the ROE gap

widens further even though the company has only

a c3% market share. Going forward, if demand

from export markets dries, the company would

have to focus more on the domestic market which

might lead to a higher market share, but also a

lower ROE, in our view.


The company has been losing market share in

Turkey over the past few years since the booming

global fertiliser demand and the value-added product

portfolio of the company has enabled it to generate

higher revenues from exports. During 2005-2010

Bagfas’ domestic sales volume declined 52% versus

a total market contraction of 4%.


The company’s operational agility is high thanks

to it being a small regional player. Hence, it has

one of the highest asset turnover ratios among its

fertiliser peers. This will support the company in

sustaining growth, in our view. Yet, like all

commodity players, tproduct prices will be critical

in determining the level of growth.


weak

We don’t think current market conditions are very

positive for Bagfas. It has given up market share

in the domestic market for the sake of higher

exports. Operating at higher profit margins clearly

gives Bagfas the upper hand verus the competition

but we doubt the market leaders would want to

give away their market share gains easily. If any

consolidation were to happen in the sector, it

would increase competition for Bagfas and might

hurt its margins and market share.

Bagfas

Competitive outlook is medium since the company is a small

regional player albeit an efficient one

The high DAP exposure calls for caution given our expectation of

a price decline in 2012; we expect margin erosion next year

TP increased to TRY170.5 (from TRY164) on new forecasts;

downgrade to Underweight from Neutral



111


abc


neutral for Bagfas

Low interest rates certainly lower farmers’ financial

burdens, but we think the trend in global fertiliser

prices is more critical for fertiliser companies.

Hence, we regard the impact of the change in

domestic interest rates as neutral for Bagfas.

Weak TRY environment should be positive for

Bagfas

Bagfas is one of the winners when TRY

depreciates. The company’s selling prices are

linked to global prices which are based in USD.

The company also has a long USD position on its

balance sheet which corresponded to 25% of total

assets at 1H 11.

Investment thesis

We expect DAP prices to fall over 20% y-o-y in

2012, whereas our price expectations for N-type

fertilisers are more optimistic. Bagfas is more

exposed to DAP than other major Turkish

fertiliser company: in 2006-10, DAP sales

constituted 30% of its total sales volume on

average, compared with 9% for Gubretas

(including Razi) and 8% for Tekfen. In our view,

Bagfas is more at risk of margin erosion,

especially in 2012.

We think the significant margin gains Bagfas has

made over the past two years will come to an end

in 2012. Given its high exposure to DAP we

expect Bagfas’s net sales to fall 10% in the lower

pricing environment.

Forecast changes

2010 ____2011e ____ ____2012e ____TRYm old new old new

Net sales 280 350 354 307 318 EBIT 53 73 76 22 24 EBITDA 63 84 87 34 36 EBITDA margin 23% 24% 25% 11% 11% Net profit 47 68 79 26 23


As a result of TRY weakness we slightly revise up

our forecasts for Bagfas given that its product

prices are linked USD and it has a long USD

position. We forecast that the EBITDA margin

will decline to 11% in 2012 from 25% (was 24%)

in 2011. We increase our net income expectation

for 2011 by 16% to TRY79m on higher FX gains.

On our new estimates, we expect y-o-y

contractions of c60% in EBITDA and c70% in net

income for 2012.


Our DCF valuation for Bagfas uses a risk-free rate

of 9.5%, a risk premium of 5.5% and a beta of

1.2. The terminal growth rate of 3% implies a

value of TRY515m (was TRY492m) and a target

price of TRY171.5 (was TRY164).

Under our research model, for stocks without a

volatility indicator, the Neutral band is 8.5% to

18.5%. Our target price of TRY170.5 implies a

potential return of 3%; we therefore downgrade

our rating from Neutral to Underweight.

Risks

Fertiliser prices are linked to food and commodity

prices. Continued upward trends would positively

affect our valuation.

112


abc

Financials & valuation: Bagfas Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 280 354 318 350EBITDA 63 87 36 57Depreciation & amortisation -10 -12 -12 -13Operating profit/EBIT 53 76 24 43Net interest 0 0 0 0PBT 58 98 29 49HSBC PBT 58 98 29 49Taxation -11 -20 -6 -10Net profit 47 79 23 40HSBC net profit 47 79 23 40


Cash flow from operations 73 77 45 45Capex -7 -8 -8 -11Cash flow from investment -7 -8 -8 -11Dividends 0 -24 -39 -12Change in net debt -55 -46 3 -19FCF equity 56 48 31 24


Intangible fixed assets 0 0 0 0Tangible fixed assets 87 84 80 77Current assets 160 238 209 249Cash & others 99 150 147 166Total assets 250 325 291 329Operating liabilities 59 75 57 67Gross debt 0 5 5 5Net debt -99 -145 -142 -161Shareholders funds 186 240 224 252Invested capital 89 97 84 93


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 4.4 26.5 -10.3 10.4EBITDA 38.7 -58.8 57.3Operating profit 44.2 -68.8 82.7PBT 70.8 -70.4 69.8HSBC EPS 67.4 -70.4 69.8

Ratios (%)

Revenue/IC (x) 2.9 3.8 3.5 4.0ROIC 44.9 65.4 20.9 39.1ROE 28.9 36.9 10.0 16.6ROA 20.0 27.4 7.6 12.8EBITDA margin 22.5 24.7 11.3 16.2Operating profit margin 18.8 21.5 7.5 12.3EBITDA/net interest (x) Net debt/equity -53.1 -60.4 -63.4 -63.8Net debt/EBITDA (x) -1.6 -1.7 -3.9 -2.8CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Average sales price TRY/ton 545 772 633 665Sales volume (kt) 514 458 502 527Production (kt) 472 436 462 475CUR % 72 67 71 73

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) BAGFS.IS Bloomberg (Equity) BAGFS TIMarket cap (USDm) 269 Market cap (TRYm) 497Free float (%) 60 Enterprise value (TRYm) 350Country Turkey Sector CHEMICALSAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

21416181

101121141161181201

2009 2010 2011 2012

21416181101121141161181201

Bagfas Rel to ISTANBUL COMP


113


abc


BIM scores high on our overall scorecard. The

company’s high market share in Turkish food

retail along with its small store format gives it an

upper hand in terms of competition. The

increasing penetration of organised retail in

Turkey and the low financial leverage of the

company further improve the outlook.


Among the food retailers in Turkey BIM had a

market share of 6% in 2010. The company ranks

high in terms of ROE with 55% in 2010. We

believe that with the small store format and the

current plans for accelerated expansion, BIM will

be able to maintain a high ROE along with its

market share. Due to these factors BIM scores

high on the profitable market share metric.


BIM is currently the market leader among Turkish

food retailers. However, among the hard

discounters in Turkey the company has lost a little

market share to the competition. Nevertheless, we

believe that the company is still strong on the

market share momentum metric as the penetration

of organised retailers has been increasing over the

years and we see the trend continuing going

forward. We expect the company to grow by

taking share from unorganised retailers.


BIM is a hard discounter and by virtue of its

business model the company has a lower gross

profit margin as compared to companies operating

supermarkets in Turkey. However, taking the

business model into consideration we believe that

BIM’s gross profit margin is good and is

sustainable going forward. BIM more than makes

up for its lower gross profit margin with a high

asset turnover ratio. In 2010, the company had an

asset turnover ratio of 5.9x, which is among the

highest in the industry.


strong

BIM’s position with regards to market

fragmentation is medium to strong. We believe

that, even though there are good chances of

consolidation happening in the Turkish retail

market, BIM, with its strong store network will

not be impacted by it. The increasing penetration

of organised retail in the country further

strengthens its case.

BIM

Competitive outlook is strong given a successful business model

and market leadership position

However, valuation remains a concern; the premium to EM peers

on 2012e is 25% on PE and 60% on EV/EBITDA

Target price kept at TRY59.0; maintain Neutral



114


abc


positive for BIM

The company currently has a small debt position. As

of Q2 2011, BIM had TRY38m in short-term debt

whereas it had TRY209m in cash and cash

equivalents. Due to this, there will be little impact

from reduced interest costs. However, BIM will

certainly benefit from higher consumer spending and

greater traffic in a low interest rate environment.

Weak TRY environment should be neutral for

BIM

BIM does not have any foreign exchange

denominated debt or significant exposure to

foreign currency denominated assets. Due to this

we believe that a weak TRY environment will

have a neutral effect on the company.

Investment thesis

We think BIM has been a very rational leader

during the past years. Being the leader, and the

most efficient player in the market, BIM is the

price setter for all of its SKUs. Competitors

benchmark themselves to BIM but at these price

level competitors are making the same margins as

BIM. So, if it wanted to, BIM could have attacked

the competition by introducing even lower prices

at the expense of margins. We’re yet to see

whether the company has made the right decision

over the past years.

Having said that, we appreciate management

comments on year-end new store openings, which

will be north of 350. This is the highest number

among the competitors and should compensate for

the market share losses of recent years.

We are optimistic on BIM’s 2011 results.

However, on our estimates the stock is trading at a

2012e PE of 25.2x and 16.3x EV/EBITDA. At our

target price the stock would trade at a PE multiple

of 24.8x for 2012e, and EV/EBITDA of 17.6x,

leaving little room for further appreciation.


Our DCF analysis, using a TRY-based risk-free

rate of 8.5%, ERP of 5.5%, a beta of 0.70, a

WACC of 12.4%, and a terminal growth rate of

6%, produces value of TRY59 per share.

In our research model for non-volatile Turkish

stocks, the Neutral band 8.5% -18.5%. Our target

price implies an 8% potential return. Hence we

maintain our rating at Neutral.

Risks

Higher store expansion and better LFL sales growth

are the major upside risks. Abdulrahman El Khereiji

still holds over 10% stake in the company. If he

continues to sell his stakes in the market, it might

create an overhang on stock performance.

115


abc

Financials & valuation: BIM Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 6,574 7,912 9,420 11,010EBITDA 356 425 487 567Depreciation & amortisation -65 -76 -94 -114Operating profit/EBIT 292 349 393 453Net interest 10 12 13 14PBT 306 366 412 474HSBC PBT 306 366 412 474Taxation -60 -73 -82 -95Net profit 246 293 330 379HSBC net profit 246 293 330 379




Intangible fixed assets 3 3 3 3Tangible fixed assets 555 649 741 830Current assets 815 882 1,064 1,281Cash & others 258 288 361 462Total assets 1,372 1,534 1,808 2,113Operating liabilities 832 923 1,102 1,291Gross debt 8 0 0 0Net debt -250 -288 -361 -462Shareholders funds 500 611 707 822Invested capital 283 324 346 360


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change


Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Store Number 2,951 3,326 3,676 3,676GPM (%) 16.8 16.4 16.1 16.1Opex/Sales (%) -12.4 -12.0 -12.0 -12.0Capex/Sales (%) 2.2 2.2 2.0 2.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) BIMAS.IS Bloomberg (Equity) BIMAS TIMarket cap (USDm) 4,509 Market cap (TRYm) 8,311Free float (%) 55 Enterprise value (TRYm) 8023Country Turkey Sector MULTILINE RETAILAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

9

19

29

39

49

59

69

2009 2010 2011 2012

9

19

29

39

49

59

69

BIM Rel to ISTANBUL COMP

Source: HSBC Note: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2002 are IFRS compliant

116


abc


Bizim scores among the top-ten on our overall

scorecard. The company has maintained consistent

market share in the Turkish cash and carry segment.

We also like Bizim’s small store format which we

believe is beneficial for expansion. We think

opening small stores is the main pillar of the

business model in terms of handling the competition.

The low financial leverage along with the high ROE

further strengthens our view on the company. We do

not see any significant weak points in our scorecard

for Bizim.


Bizim is the second largest player in the Turkish

cash and carry segment in terms of sales. The cash

and carry segment in Turkey has very few

organised players. Yet since the sector is at an

initial growth stage Bizim only had a c2% market

share as of 2010 and hence it’s hard to say that it

commands substantial market power. The

company was able to maintain a very healthy

ROE of 42% in 2010, which is one of the highest

among peers and should fuel future growth. Due

to these factors Bizim scores medium on our

profitable market share metric.


Bizim, with the help of its small store format has

been able to grow faster compared to the overall

food retail market. Bizim has the largest number of

cash and carry stores in Turkey and has presence in

the largest number of cities. We believe that these

factors will help the company to maintain and grow

its market share going forward.


Bizim operates solely in the cash and carry

segment. This segment operates on very tight

gross margins: in 2010, Bizim had an 8.6% gross

margin. It is actually more important to look at the

asset turnover ratio where Bizim fares extremely

well with respect to its peers. In 2010, the

company had an asset turnover ratio of 5.9x.

Thanks to these qualities we believe that Bizim’s

sustainable growth outlook is strong.


strong

The top two Turkish cash and carry players have a

market share of only c4%. The cash and carry

segment is highly fragmented with very low

penetration by organised players. We believe

consolidation will happen in this sector. However,

Bizim

Competitive outlook is strong due to a strong business model and

an under-penetrated sector

We are fans of the small sized store formats and appreciate its

advantages. Bizim achieves a ROIC of c80%

TP reduced slightly to TRY37.3 (from TRY39.6) on lower

forecasts; maintain Overweight (V)



117


abc

Bizim, with strong financial backing from Yildiz

Holdings, would likely not be affected in a

negative manner. The company’s small store

format, due to which it has been able to expand

into a large number of cities, will bode well in the

event of a significant consolidation in the market.

Due to these factors Bizim scores medium in

terms of market fragmentation structure.


positive for Bizim

Bizim does not have any significant debt on its

balance sheet. Due to this, there will be little

impact from lower interest costs. However, a low

interest rate environment is clearly beneficial for

many of Bizim’s customers which in turn will

increase the traffic and basket sizes in its stores.

Weak TRY environment should be neutral for

Bizim

Bizim does not have foreign exchange

denominated debt or significant exposure to

foreign currency denominated items on its balance

sheet, nor does it have any costs based in FX.

Hence, a weak TRY environment will have little

impact on the company.

Investment thesis

We see Bizim’s business model and investment

thesis as solid based on three main factors. It

operates in a niche segment of the retail sector with a

very low penetration level supporting LFL growth

which will be positive for the top-line. The company

aims to increase non-tobacco sales, which will

support the gross margin since tobacco sales

generate far lower gross margins than non-tobacco

sales (1.8% versus 11.1% in Q2 11). Lastly, the

strategy to open small sized stores enables it to

operate with one of the highest ROICs in the sector

which will support FCF generation and encourage

the company to expand faster.

Rating, valuation and risks Forecast changes

______ 2011e________ _______ 2012e _______TRYm Old New Old New

Sales 1757 1751 2180 2177 EBITDA 65 62 85 81 EBIT 57 53 74 70 Net profit 34 31 45 42


We have only slightly revised our forecasts for

Bizim. We expect TRY 31m net income for 2011

(was TRY34m) and TRY42m for 2012 (was

TRY45m). We slightly lower our EBITDA

margin forecast for 2011 to 3.5% from 3.7%.

Our DCF-based valuation leads to a target price of

TRY37.3 (was TRY39.6) using a WACC of

11.5%, a risk-free rate of 8.5%, an ERP of 5.5%

and a beta of 0.70, terminal growth rate of 6%.

Under our research model, for stocks with a

volatility indicator, the Neutral band is 3.5% -

23.5%. Our target price implies a potential return

of c70%, which is above the Neutral band; hence,

we maintain our Overweight (V) rating.

Risks

The main risk we foresee to our valuation is

lower-than-expected LFL ticket growth and LFL

traffic growth for non-tobacco products. With the

increasing number of stores opening in the

medium term, there is also a risk of

cannibalisation among the stores situated near

each other. The company’s valuation may be

weighed down by pressure on margins due to an

increase in the number of store openings and

expansion into low-margin regions. The

performance of Sok discount stores going forward

will also add to the risk.

118


abc

Financials & valuation: Bizim Toptan Satis Overweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 36 43 47 77Capex -12 -54 -18 -20Cash flow from investment -10 -54 -18 -20Dividends -14 -14 -21 -30Change in net debt -24 25 -8 -27FCF equity 24 -10 29 57




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 17.4 20.6 24.3 23.9EBITDA 22.8 13.1 30.8 30.0Operating profit 29.0 12.4 32.1 31.3PBT 50.3 10.0 35.6 40.6HSBC EPS -25.1 10.5 35.6 40.6

Ratios (%)

Revenue/IC (x) 31.0 29.9 28.6 31.9ROIC 80.7 72.8 74.0 87.5ROE 41.7 34.4 38.4 43.9ROA 11.5 9.5 10.2 12.4EBITDA margin 3.8 3.5 3.7 3.9Operating profit margin 3.3 3.0 3.2 3.4EBITDA/net interest (x) 5.2 4.4 4.7 5.9Net debt/equity -40.5 -8.2 -13.0 -28.1Net debt/EBITDA (x) -0.6 -0.1 -0.2 -0.4CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Stores added 12 16 20 20Total number of stores 109 125 145 165Lfl sales growth % - tobacco 3.0 1.0 -1.0 -1.0Lfl sales growth % - non-tobac 16.0 13.9 15.4 14.4

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.6 0.5 0.4 0.3EV/EBITDA 15.5 13.8 10.5 7.8EV/IC 17.7 12.3 10.2 9.5PE* 31.0 28.1 20.7 14.7P/Book value 10.7 8.8 7.3 5.8FCF yield (%) 2.8 -1.2 3.4 6.6Dividend yield (%) 1.6 1.5 2.4 3.4


Issuer information


Reuters (Equity) BIZIM.IS Bloomberg (Equity) BIZIM TIMarket cap (USDm) 477 Market cap (TRYm) 880Free float (%) 40 Enterprise value (TRYm) 852Country Turkey Sector SPECIALTY RETAILAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

17192123252729313335

2009 2010 2011 2012

17192123252729313335

Bizim Toptan Satis Rel to ISTANBUL COMP


119


abc


Cimsa scored medium in our scorecard for

competitive analysis. The main reason for that is

the cement industry's overcapacity in Turkey and

the fragmented market structure which weakens

the pricing power of manufacturers. Looking

forward, we expect fragmentation in the market to

decrease via consolidation, yet overcapacity

should remain as a source of concern as long as

economic activity stays slow.

Cimsa caters to the strongest growing region of

Turkey which gives the company an edge against

the overcapacity problem. In addition, the

company has an efficient network mechanism

among its plants which enables it to distribute its

product among different pricing regions in order

to attain the maximum possible margin.


Cimsa had an ROE of 11% in 2010, which puts the

company at the middle position in this metric when

compared with other building material stocks in

Turkey. With the highest weighted market share of

the company among its peers under our coverage the

company scores at the medium level (3). We expect

Cimsa's ROE to increase further with the start of

construction of Turkey's first nuclear power plants

and the Summer games 2013 – two big ticket

projects that will boost cement demand in the

Mediterranean region.


Cimsa's market share momentum is strong as the

company has increased its capacity in the last five

years by 70% with the acquisition of the Eskisehir

and Nigde plants and organic growth at the

Eskisehir and Kayseri plants. Given the sector's

capacity growth of only 25% over the same

period, Cimsa gained significant market share.

We do not expect Cimsa's market share to change

dramatically in the Central Anatolia region as

there are no plans to increase capacity there.

Cimsa will lose some market share to Adana

Cimento in the Mediterranean region once the

latter's capacity investment completes in 2013.


strong

Cimsa's DuPont scoring is 4. While its gross profit

is slightly lower compared to its peers its asset

turnover is better thanks to new and more efficient

plants. We think that Cimsa's sustainable growth

outlook is strong given the big ticket projects

Cimsa

Cimsa's overall competitive outlook is medium among its peers

and other industrials in Turkey

It is the highest margin cement producer in Turkey, thanks to

strong demand and an efficient production network


valuations; maintain Overweight rating



120


abc

planned in the Mediterranean region. Our only

concern is fuel costs which could hamper

profitability if pet coke prices increase by more

than the average sales price of the company.


weak

The cement market in Turkey is heavily

fragmented with the top 8 players claiming 50%

of the market and with about 20 mid-sized players

in the sector. Compared to EM and developed

markets the Turkish market is much more

fragmented and is in need of consolidation.

However, due to the Competition Board's close

supervision of the sector (due to past

misdemeanours), and its strict limit of 30%

maximum market share, we see little prospect of

domestic consolidation. We also see little appetite

from international cement companies as Turkey's

cement market has limited appeal compared to

some of the other EM markets such as Iraq, Syria

and some North Africa countries.

Cimsa is located in the most fragmented region of

Turkey in terms of market share. This creates the

problem of irrational pricing by small competitors

which challenges Cimsa's margins. However, thanks

to the company's superior intraplant network and

ability to scale production the competition's effect on

its margins has been limited.


positive for Cimsa

A Low interest environment should have a

positive impact on Cimsa and other Turkish

cement companies in the short term as the low

rate environment will boost mortgage

affordability and public infrastructure

investments. Cimsa would also benefit from low

rates as it has a TRY260m debt position with 70%

of it being short term that would benefit from

lower refinancing costs.



Cimsa

Similar to other cement companies, a weak TRY

would boost Cimsa's exports in the short term.

However, in the long term, due to higher fuel and

electricity costs, the effect would be negative.

Investment thesis

Our investment case for Cimsa has not changed

from our previous report on the company (please

see Turkish top picks – April 2011). We believe

that the company will continue to be the highest

operating margin mainstream cement producer in

Turkey due to strong demand in its hinterland and

an efficient production network.


We use a blend of DCF and multiples-based

methodologies to value Cimsa.

Our DCF assumptions include 8.5% RFR and

5.5% ERP and a 0.75 beta, resulting in a WACC

of 11.1%. We assume a 3% terminal growth rate.

Our DCF implies a valuation of TRY13.1 per

share (from TRY13.2).

We have compared Cimsa to domestic and

international peers. The stock trades at USD125/t

EV/tonne vs a local peer average of USD100/t

and a global average of USD165/t. Applying the

domestic peer average, this methodology yields a


Cimsa is trading at a 31% discount to the peer set

average of 11.6x on 2012e PE and a 47% discount

to the 2012e peer group average EV/EBITDA of

7.5x. Applying peer average multiples provides a


Taking the average of the three valuations we

arrive at our new target price of TRY11.0, down

from TRY12.8. This implies a 47% potential

return, which falls above our Neutral range of

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=hnRlQRabtu&n=296979.PDF

121


abc

8.5%-18.5% for non-volatile Turkish stocks. We

therefore maintain our Overweight rating.

The key downside risk to our rating is a stronger

than-expected increase in raw-material and fuel

costs.

The start of nuclear power plant construction is a

key catalyst for the stock. If Cimsa goes forward

with its regional acquisition and investment plans

these could also act as catalysts, depending on the

price paid.

122


abc

Financials & valuation: Cimsa Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 708 738 775 811EBITDA 183 203 212 219Depreciation & amortisation -37 -38 -41 -43Operating profit/EBIT 146 165 171 176Net interest -7 -20 -10 -4PBT 130 153 164 222HSBC PBT 130 153 164 222Taxation -27 -28 -30 -40Net profit 103 126 135 182HSBC net profit 103 126 135 182


Cash flow from operations 126 166 207 234Capex -47 -101 -45 -30Cash flow from investment -47 -101 -45 -30Dividends -95 -116 -124 -168Change in net debt 42 -154 50 -31FCF equity 129 66 136 167


Intangible fixed assets 137 137 137 137Tangible fixed assets 500 442 503 507Current assets 252 597 488 476Cash & others 11 349 228 204Total assets 1,136 1,329 1,281 1,272Operating liabilities 95 93 97 86Gross debt 114 299 228 173Net debt 104 -50 0 -32Shareholders funds 875 906 925 982Invested capital 784 734 802 828


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 15.2 4.1 5.0 4.6EBITDA 2.6 11.3 4.5 2.9Operating profit 0.1 13.3 3.8 2.8PBT -2.1 17.6 7.1 34.7HSBC EPS -4.5 21.9 7.1 34.7

Ratios (%)

Revenue/IC (x) 1.0 1.0 1.0 1.0ROIC 15.5 17.8 18.3 17.7ROE 11.4 14.1 14.7 19.1ROA 9.6 11.8 11.2 14.6EBITDA margin 25.8 27.5 27.4 27.0Operating profit margin 20.5 22.3 22.1 21.7EBITDA/net interest (x) 24.5 10.2 21.9 56.2Net debt/equity 11.9 -5.5 0.0 -3.2Net debt/EBITDA (x) 0.6 -0.2 0.0 -0.1CF from operations/net debt 121.8




Year to 12/2010a 12/2011e 12/2012e 12/2013e

ASP - Domestic (TRY/t) 80.3 94.1 99.7 105.7Sales volume (m tonnes) 5.6 5.6 5.6 5.6Domestic market sales (m tonne 4.2 4.2 4.2 4.2Export sales (m tonnes) 1.4 1.4 1.4 1.4

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) CIMSA.IS Bloomberg (Equity) CIMSA TIMarket cap (USDm) 550 Market cap (TRYm) 1,013Free float (%) 27 Enterprise value (TRYm) 813Country Turkey Sector CONSTRUCTION


Price relative

1

3

5

7

9

11

13

2009 2010 2011 2012

1

3

5

7

9

11

13

Cimsa Rel to ISTANBUL COMP


123


abc


Similar to its parent Anadolu Efes, CCI is also in

an advantageous competition position. But unlike

Anadolu Efes its operations are less diversified

and CCI generates c80% of its EBITDA from

Turkey. Since CCI has a c70% market share in

Turkey with very strong brand awareness in

almost all of its products we think its market

position will not be easily challenged.


The company’s ROE is similar to those of its

global bottling peers. Yet most of its peers operate

in more diversified geographies than CCI and do

not command a combined market share of CCI’s

magnitude. A dominant position in Turkey,

growing presence in international markets and

comparable ROE level means CCI ranks well on

this metric.


Market share momentum is strong for CCI as the

company has proved in the past that it effectively

protects it market share, especially in Turkey. We

think it unlikely that the company would lose

substantial market share in Turkey but nor do we

expect it to further increase its share. In

international markets we expect the company to

maintain/increase its market share going forward.


CCI ranks well when its asset turnover and gross

profit margin are considered. It has relatively high

asset turnover and a decent gross margin. Since it

doesn’t have the cost advantages that Anadolu

Efes has in Turkey, its gross margin is lower. Yet,

given its strong market position and respectable

asset turnover we think growth will be sustained

in the longer term as well.


strong

The company has a 70% market share in its core

market where the top three command 96% of the

market. With almost no fragmentation in the

market, consolidation is unlikely and hence the

company’s position is protected, in our view.


positive for CCI

The company had a 1.5x net debt/EBITDA as of

2010 year-end. Hence lower interest rates bode

well for the company in terms of lower interest

expense. Also, in a low interest rate environment

Coca-Cola Icecek

Competitive outlook is medium thanks to a strong market position

in Turkey, the main EBITDA generator

Depreciation of TRY against hard currencies and signs of

deterioration in consumer confidence imply tough times ahead

TP cut to TRY21.80 (from TRY24.3) on reduced forecasts;

downgrade to Underweight from Neutral



124


abc

consumer confidence tends to improve which in

turn improves the company’s product mix.


CCI

Company has a short FX position on its balance

sheet and most of the position is in USD. Also,

the majority of its raw material costs are either

linked to USD or are in USD, which negatively

affects the gross margin. Hence, we think the

recent depreciation in TRY will have negatively

affected CCI’s bottom line, especially in Q3 11.

Investment thesis

Even though we are positive on the long-term

growth potential of CCI and the markets it

operates in we think the short-term outlook is

growing dimmer. Firstly, as outlined above, the

company has a short FX position and is also

exposed to higher raw material costs since its raw

material costs (PET, sugar, aluminium) are either

linked to USD or based in USD. Given that TRY

depreciated by 14% in Q3 q-o-q we expect a poor

Q3 performance from the company. The company

states a 10% depreciation of TRY/USD rate

results in a TRY55m FX loss. Thus the impact of

the currency depreciation alone will offset almost

all of the 1H 11 net profit of TRY76m.

Furthermore, the consumer confidence index

prepared by the CBRT has been showing signs of

weakness recently. Although an early indicator, if

the current downward trend persists we’d expect

CCI’s product mix to be hurt as consumers will

likely trade down. During the downbeat market of

2009 the company’s EBITDA margin contracted

by 2.5pp y-o-y.


Historically, CCI traded at a discount to its peers

offering similar growth potential owing to it

carrying higher EM exposure. This trend has

changed since mid 2009 as EM markets have

shown stonger growth than DM markets. We

agree that Turkish companies with solid track

records and relatively better growth outlooks

should trade at a premium to their peers.

However, we believe the market has now fully

priced in the positives, with the stock trading at a

c60% premium on 2012e PE on our estimates.

Valuation

Following the depreciation in TRY against hard

currencies and the weaker guidance from the

company, we have revised down our forecasts.

We now expect TRY172m net income in 2011,

down from TRY251m, mainly due to higher FX

losses and partially due to a lower EBITDA

margin, as a result of higher cost pressures and

deterioration in the product mix. We expect a

recovery in 2012 on potentially lower cost

pressures and a stronger TRY. Still, our net

income for 2012 also falls by 6% to TRY276m.

We value the company using a DCF (50%

weight), including a RFR of 8.5% in TRY terms,

a WACC of 10.7%, ERP of 5.5% and a 0.70 beta.

This yields a fair value of TRY29.9 per share

(from TRY35.0). We also use an average of

implied equity value (50% weight) using PE

(13.5x 2012e, 12.2x 2013e) and EV/EBITDA

(7.1x 2012, 6.2x 2013) multiples implied by peer

average leading to a value of TRY12.7 per share

(from TRY13.6). This leads to our new target

price of TRY21.8 (from TRY24.3). Our new

forecasts are the main reason behind our lower

target price.

Under our research model, the Neutral band for non-

volatile Turkish stocks is 8.5% to 13.5%. As our

Forecast changes

______ 2011e _______ _____ 2012e_______ TRYm Old New Old New

Net sales 3,336 3,357 3,865 3,739 EBIT 339 307 408 355 EBITDA 523 491 629 570 EBITDA margin 15.7% 14.6% 16.3% 15.2% Net profit 215 172 295 276


125


abc

target price implies a -6% potential return we

downgrade our rating from Neutral to Underweight.

Risks

Stronger currencies versus USD would positively

affect CCI’s margins and hence our valuation.

Company management has stated that they are

always active in inorganic expansion and

constantly review the region. Any news on this

front may also positively affect our valuation.

126


abc

Financials & valuation: Coca-Cola Icecek Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 304 345 426 573Capex -160 -403 -336 -407Cash flow from investment -184 -410 -363 -467Dividends -50 -70 -52 -83Change in net debt -57 219 -44 -16FCF equity 144 -57 89 165


Intangible fixed assets 459 448 437 427Tangible fixed assets 1,203 1,449 1,589 1,766Current assets 1,294 1,341 1,439 1,640Cash & others 599 514 522 624Total assets 3,014 3,300 3,533 3,907Operating liabilities 332 377 421 470Gross debt 1,246 1,380 1,344 1,429Net debt 647 865 822 805Shareholders funds 1,417 1,520 1,744 1,983Invested capital 2,025 2,346 2,522 2,739


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 14.4 21.9 11.4 14.7EBITDA 30.8 10.3 16.1 20.0Operating profit 35.5 9.1 15.6 22.3PBT 18.5 -12.8 57.6 16.7HSBC EPS 16.6 -12.8 60.2 16.7

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Sales volume-Turkey 494 554 608 668Sales volume-International 171 202 233 267Opex/sales % 27.2 26.6 26.6 27.1USD/TRY average 1.477 1.770 1.700 1.700CPI y-o-y 8.6 5.7 7.4 7.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 2.4 2.0 1.8 1.6EV/EBITDA 14.8 13.8 11.8 9.8EV/IC 3.2 2.9 2.7 2.4PE* 29.9 34.3 21.4 18.3P/Book value 4.2 3.9 3.4 3.0FCF yield (%) 2.4 -1.0 1.5 2.8Dividend yield (%) 0.8 1.2 0.9 1.4


Issuer information


Reuters (Equity) CCOLA.IS Bloomberg (Equity) CCOLA TIMarket cap (USDm) 3,201 Market cap (TRYm) 5,901Free float (%) 25 Enterprise value (TRYm) 6767Country Turkey Sector BEVERAGESAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

2

7

12

17

22

27

2009 2010 2011 2012

2

7

12

17

22

27

Coca-Cola Icecek Rel to ISTANBUL COMP


127


abc


A strong position in the ad market through its

subsidiary Dogan Yayin and its large net cash

position support Dogan Holding’s competitive

position and investment theme. However, slowing

economic growth is a risk to its profitability in the

short term.


Dogan Holding’s RoE has been volatile over the

last three years due to lower earnings from media

(as a result of tax penalties) and the sale of its oil

& gas operations last year as well as the weaker

TRY. We expect higher RoE going forward as

worries over the potential tax fines are over now

and the media segment should register higher

margins in the long term.


Dogan Holding’s market share in the broadcasting

segment has been maintained. However, in print

media it has lost market share during the last five

years due to increased competition.


Dogan’s strong margins, higher asset turnover and

higher financial leverage imply strong sustainable

growth potential. Though margins have been volatile

over the last three years, we expect margins to return

to normal over the next three years.


The Turkish ad market is dominated by a very

small number of players and Dogan media group

has maintained its leading position in all forms of

media. We see limited chances of consolidation.

However, the entry of foreign players into the

market cannot be ruled out.


Advertising spend is mainly driven by the real

estate, automotive and retail sectors, which are

sensitive to interest rate policy.

Weak TRY environment is negative

With a USD1.0bn short position on the balance

sheet, FX losses become a threat to bottom-line

profitability (a 10% depreciation leads to

TRY101m of FX losses).

Investment thesis

Dogan Holding had a net cash position of

TRY2.0bn at the end of H1 2011. Following the

Petrol Ofisi stake sale, Dogan Holding is

evaluating options to enter new businesses as well

as other acquisition opportunities. Other than

Dogan Holding

Dogan Holding’s overall competitive outlook is medium. Solid

competitive position in the media business continues with rising

profitability in theTV business

Dogan Holding continues to seek investment opportunities after

the sale of its energy subsidiary

Maintain Neutral (V); cut target price to TRY0.78 from TRY1.07



128


abc

expansion plans, the investment theme is mostly

linked to performance of the media operations as

well as the future of recent investments in the

energy business.


As a result of our forecast downgrades for Dogan

Yayin and tax penalty provisions in H1, together

with expected higher FX losses, we estimate a net

loss of TRY679m in 2011 (excluding possible

further provisions for tax penalties at the media

company). However, we raise our 2012e net profit

by 21% and 2013e by 23%.

We value Dogan Holding at a 40% holding

discount (constant) to our target net asset

valuation (NAV). Our NAV is now TRY0.47

(was TRY1.78), which yields a new target price

of TRY0.78 (from TRY1.07). The 40% discount

is the average holding discount of Dogan Holding

shares during 2008-10. As the 20% potential

return indicated by our target price is below the

23.5% needed for an Overweight rating for

volatile Turkish stocks, we maintain our

Neutral (V) rating.

Risks

The group’s strategy of utilising its large cash

position, its relations with the government and the

sale process of its media assets should trigger the

next share price move either to the up or

downside. Any recovery in the macroeconomic

environment fuelling ad market growth would be

an upside risk for our valuation. In the same way,

a downturn would hamper market growth and be a

downside risk to our valuation.

Dogan Holding NAV table

TRYm Ticker Direct Stake Target price Current Value Value of Stake

Dogan yayin Holding DYHOL.IS 75% 0.77 1,540 1,148 Hurriyet HURGZ.IS 11% 1.5 828 92 Other listed 123 50 Listed Companies 1,289 Unlisted Companies 0 Total Value from participations 1,289 Net (Debt) / Cash 1,900 Total NAV 3,189 Total NAV per share (TRY) 1.30 Holding Discount 40% Target Price from NAV 0.78


Dogan Holding: HSBC forecast changes

(TRYm) _____________ New _______________ ______________ Old _______________ ___________Difference____________ 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e

Sales 2,992 3,440 3,899 3,175 3,560 3,943 -6% -3% -1% EBITDA 303 352 419 294 348 380 3% 1% 10% Net profit -728 47 118 -180 77 112 n.m. -39% 5%


129


abc

Financials & valuation: Dogan Holding Neutral (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 2,850 2,992 3,440 3,899EBITDA 321 303 352 419Depreciation & amortisation -402 -267 -266 -267Operating profit/EBIT -81 36 86 152Net interest -25 84 48 92PBT 682 -847 73 184HSBC PBT 682 -847 73 184Taxation -75 -137 -15 -37Net profit 656 -728 47 118HSBC net profit 656 -728 47 118


Cash flow from operations 47 372 241 285Capex -544 -69 -76 -82Cash flow from investment 1,298 -251 -258 -264Dividends 0 0 -9 -35Change in net debt -1,824 454 -113 -169FCF equity -468 428 274 356


Intangible fixed assets 1,756 1,696 1,643 1,597Tangible fixed assets 929 868 808 747Current assets 4,780 3,927 4,108 4,346Cash & others 3,663 3,209 3,322 3,491Total assets 8,033 7,834 7,915 8,059Operating liabilities 972 819 852 884Gross debt 2,415 2,415 2,415 2,415Net debt -1,247 -793 -906 -1,075Shareholders funds 3,865 4,073 4,111 4,193Invested capital 2,831 2,463 2,386 2,315


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 6.1 4.9 15.0 13.3EBITDA 83.9 -5.3 16.0 19.2Operating profit 137.2 77.6PBT -224.2 150.9HSBC EPS -210.9 150.9

Ratios (%)

Revenue/IC (x) 0.8 1.1 1.4 1.7ROIC -1.9 1.6 2.8 5.2ROE 17.9 -18.3 1.1 2.8ROA 10.3 -10.7 1.9 3.0EBITDA margin 11.2 10.1 10.2 10.8Operating profit margin -2.8 1.2 2.5 3.9EBITDA/net interest (x) 13.0 Net debt/equity -27.0 -17.3 -19.6 -22.7Net debt/EBITDA (x) -3.9 -2.6 -2.6 -2.6CF from operations/net debt


EPS Rep (fully diluted) 0.27 -0.30 0.02 0.05HSBC EPS (fully diluted) 0.27 -0.30 0.02 0.05DPS 0.00 0.00 0.00 0.01Book value 1.58 1.66 1.68 1.71

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.3 0.4 0.3 0.2EV/EBITDA 3.0 3.7 2.9 2.1EV/IC 0.3 0.5 0.4 0.4PE* 2.4 34.0 13.5P/Book value 0.4 0.4 0.4 0.4FCF yield (%) -21.2 22.2 14.3 18.4Dividend yield (%) 0.0 0.0 0.6 2.2


Issuer information


Reuters (Equity) DOHOL.IS Bloomberg (Equity) DOHOL TIMarket cap (USDm) 864 Market cap (TRYm) 1,592Free float (%) 34 Enterprise value (TRYm) 1133Country Turkey Sector ConglomeratesAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

0.5

1

1.5

2

2.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

Dogan Holding Rel to ISTANBUL COMP


130


abc


A strong share of the growing Turkish ad market

and the conclusion of long-running tax issues

support Dogan Yayin’s competitive position.

However, slowing economic growth and

weakness in TRY are possible risks to its

profitability. While it benefits from a low interest

rate policy, USD-exposed debt means weaker

TRY is negative for Dogan Yayin. The recently

completed rights issue has provided much needed

cash on the balance sheet.


Dogan Yayin is the leader in broadcasting and

print media in Turkey with brands like Hurriyet,

Star TV and Kanal D. Dogan Yayin’s RoE has

been negative over the last three years due to

lower earnings from the broadcasting and retail

segments, large tax fine provisions and weaker

TRY. We expect a higher RoE going forward as

the tax fines are over now and the broadcasting

segment is registering higher margins. However,

we expect market share to decline in the long term

as new players enter the market.


Dogan Yayin has maintained its market share in

the broadcasting segment, however in print media

it has lost market share over the last five years due

to increased competition.


Dogan Yayin’s strong margins, higher asset

turnover and higher financial leverage imply

strong sustainable growth potential. Though

margins have declined in the last three to four

years, we expect margins to return to normal over

next three years.



small number of players and Dogan media group

has maintained its leading position in all forms of

media. We see little opportunity for consolidation

as media companies are held by big business

groups. However, entry of foreign players in the

market cannot be ruled out.


Advertising spend is mainly driven by the real estate,

automotive and retail sectors, which are sensitive to

interest rate policy. Dogan Yayin also has net debt of

Dogan Yayin Holding

Overall competitive outlook is medium. Strong competitive

position in newspaper and TV segments despite loss of market

share to new players in recent years

A slowdown in the economy and TRY weakness weaken the

investment theme in the short term

We cut our target price to TRY0.77 (from TRY1.15) due to losses

in H1 2011 and weaker sector prospects; maintain Neutral (V)



131


abc

USD305m, which should benefit from lower interest

expenses when interest rates fall.


Due to short positions worth USD615m on the

balance sheet, FX losses become a threat to

bottom-line profitability (a 10% depreciation

leads to TRY106m of FX losses according to

audit reports).

Investment thesis

Turkey’s domestic ad market continued its upward

trend in H1 2011 with a y-o-y increase of 19%.

Dogan Yayin’s broadcasting segment outperformed,

with increasing margins driven by strong ad

revenues offsetting lower publishing margins.

The large tax fine imposed on Dogan Yayin and the

related lawsuits and settlements have been major

negative catalysts for a long time. However, with the

final hearing and liability fixed at TRY988m, to be

paid over three years, uncertainty over the legal issue

is now over, which should also mean reduced

tension with the government.

Dogan Yayin Holding sold its Milliyet and Vatan

titles to Demiroren & Karacan Group in May

2011 and raised TRY1bn in a fresh capital issue.

This brought much-needed cash onto the balance

sheet and the company has announced that it is

seeking opportunities for more assets to be sold.


We forecast a net loss of TRY1,074m in 2011,

mainly because of tax provisions of TRY924m in

H1 2011 and higher FX losses of TRY137m.

However, we raise 2012e and 2013e net profit by

22% and 12%, respectively, on improved margin

performance from the broadcasting segment and

strong revenue growth.

We use a DCF methodology to arrive at our new

12-month target price of TRY0.77 (TRY1.15

earlier). The tax fine has been finally reduced to

TRY988m. In our valuation, we assume the cash

outflow will be made in three equal annual

instalments of TRY329m starting in 2011. We

keep our WACC assumption unchanged at 12.4%,

cost of equity at 14.1% (with an 8.5% risk-free

rate, 1.02 beta and 3% (was 5%, lowered on a

poorer growth outlook for the media sector) long-

term growth rate. Our new target price of

TRY0.77 implies a potential return of 16%, which

is within the Neutral band of 3.5%-23.5% for

volatile Turkish stocks. Hence, we maintain our

Neutral (V) rating on the stock.

Risks

Sale of its media assets, macroeconomic

developments and the group’s relationship with

the government are the key potential risks, both

downside and upside, to our valuation.

Dogan Yayin Holding: HSBC forecast changes

(TRYm) _____________ New _______________ ______________ Old _______________ ____________Change_____________ 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e

Sales 2,717 3,139 3,584 2,914 3,301 3,686 -7% -5% -3% EBITDA 294 363 435 296 353 385 -1% 3% 13% Net profit -1,163 47 112 -326 58 98 -256% -19% 14%


132


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 2,620 2,717 3,139 3,584EBITDA 229 294 363 435Depreciation & amortisation -220 -197 -199 -200Operating profit/EBIT -128 77 154 225Net interest -62 -64 -36 -20PBT -219 -1,068 97 188HSBC PBT -219 -1,068 97 188Taxation -62 -83 -19 -38Net profit -237 -1,163 47 112HSBC net profit -237 -1,163 47 112


Cash flow from operations -25 109 289 348Capex -144 -126 -135 -127Cash flow from investment -81 -126 -135 -127Dividends 0 0 0 0Change in net debt 29 -918 -118 -201FCF equity -221 94 148 226


Intangible fixed assets 1,740 1,718 1,698 1,666Tangible fixed assets 602 550 501 457Current assets 1,284 1,823 1,666 1,395Cash & others 240 793 553 194Total assets 3,892 4,359 4,136 3,791Operating liabilities 727 786 845 908Gross debt 1,741 1,376 1,018 458Net debt 1,501 583 465 264Shareholders funds 790 1,551 1,598 1,710Invested capital 2,659 2,511 2,467 2,415


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 7.6 3.7 15.5 14.2EBITDA 282.6 28.3 23.5 19.7Operating profit 100.9 46.1PBT 94.7HSBC EPS 139.4

Ratios (%)

Revenue/IC (x) 1.0 1.1 1.3 1.5ROIC 0.4 4.0 5.3 7.7ROE -27.7 -99.4 3.0 6.8ROA -4.3 -25.9 2.9 4.5EBITDA margin 8.7 10.8 11.6 12.1Operating profit margin -4.9 2.8 4.9 6.3EBITDA/net interest (x) 3.7 4.6 10.1 21.4Net debt/equity 119.6 28.7 22.1 11.7Net debt/EBITDA (x) 6.5 2.0 1.3 0.6CF from operations/net debt 18.7 62.3 131.7


EPS Rep (fully diluted) -0.12 -0.58 0.02 0.06HSBC EPS (fully diluted) -0.12 -0.58 0.02 0.06DPS 0.00 0.00 0.00 0.00Book value 0.79 1.55 1.60 1.71


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Turkish ad spend (USDm) 2,371 3,098 3,531 0YTL/USD AVG. exchange rate 2 1 2 0YTL/USD year-end rate 2 1 2 0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.2 0.9 0.7 0.6EV/EBITDA 14.1 7.9 6.2 4.8EV/IC 1.2 0.9 0.9 0.9PE* 28.3 11.8P/Book value 0.8 0.4 0.4 0.4FCF yield (%) -12.8 5.4 8.4 12.5Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) DYHOL.IS Bloomberg (Equity) DYHOL TIMarket cap (USDm) 716 Market cap (TRYm) 1,320Free float (%) 30 Enterprise value (TRYm) 2328Country Turkey Sector MediaAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

0.5

1

1.5

2

2.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

Dogan Yayin Holding Rel to ISTANBUL COMP


Financials & valuation: Dogan Yayin Holding Neutral (V)

133


abc


Turkey’s leading vehicle importer Dogus

Otomotiv (DOAS) benefited strongly from the

surge in domestic vehicle demand in 2010 and

2011 YTD. DOAS’s competitive position

improved notably in this period thanks to 1)

support from its OEM Volkswagen in the pricing

of vehicles (i.e. VW bearing the burden of price

cuts, especially for LCVs), 2) better availability of

vehicles, 3) a wider spectrum of vehicle versions

as demanded by consumers (such as small

engines, automatics and diesel engines) and 4)

strong TRY (for most of 2010). DOAS’s strong

distribution network in Turkey has also been an

important driver behind the company’s success.

Going forward, weak TRY reduces the

competitiveness of DOAS against local

manufacturers but we believe OEM support in

terms of pricing and product feed will help absorb

some of the pressure from slowing demand in

Turkey and weak TRY.


DOAS’s market share in light vehicles declined

from 12% to 8.9% in 2009 but recovered back to

12.6% as of end of Sep-2011 with surging profits

in 2010 and H1 2011.


With the help of the strong quality perception of

VW Group brands in Turkey and the strong retail

franchise, DOAS aims to increase its market share

in Turkey towards VW’s market share level in

Europe ie 18%. We see a market share of 15% as

being achievable in the next 3-4 years provided

that i) the currency environment is benign and ii)

support from VW in terms of pricing and

availability is as strong as in the past two years.


DOAS’s almost full exposure to the Turkish

market makes it both a volatile and attractive

business in terms of growth. We believe that the

long-term growth prospects are strong with very

low vehicle penetration in Turkey (140 vehicles

per 1000 people, including LCVs). DOAS stands

out as a strong beneficiary.


weak

The Turkish vehicle market is highly competitive

with 60 global brands operating. Therefore,

notwithstanding, the fact that the top 3 players

account for c45% market share, the industry is

fragmented.

Dogus Otomotiv

Dogus Otomotiv's competitive outlook is medium among its peers

and Turkish industrials

Following an impressive 2011 (YTD), 2012 looks more difficult

with slowing Turkish vehicle sales and pressure from weak TRY

Cutting target price to TRY5.0 (from TRY5.4), maintain Neutral

(adding a V flag)

Cenk Orcan* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 4614 [email protected]


134


abc


Low interest rates are supportive of DOAS’s

operations through access to cheaper financing by

consumers.

Weak TRY has a negative impact

A weak TRY affects the business negatively

through re-pricing pressure on imported vehicles

(although 85% are sold in TRY and 15% in EUR).

A mitigating factor is the sharing of the increased

cost with the OEM.

Investment thesis

New vehicle sales comprise c90% of DOAS’s

revenues and c65% of EBITDA (the rest comes

mostly from non-cyclical parts sales). Passenger

cars (PC) comprise c75% of the company's total

unit sales (vs. 27% for Tofas excluding imports,

zero for FROTO). Accordingly, DOAS is more

vulnerable to a slow-down, particularly in PC

demand. Market share gains thanks to improved

model variety and support from VW should

provide some cushion against demand weakness

but margins, we believe, should reflect tougher

competition (and probably a weaker TRY impact

starting from H2 2011). We therefore expect

lower EPS in 2012 compared to 2011.


We have revised our forecasts for DOAS as in the

table below. We factor in the weaker TRY

assumptions of our currency team, the unit sales

performance so far in Q3 and guidance from the

company. As a result, we expect slightly higher

revenue, margins and profitability than before (for

2011-13) but continue to project lower net profit

in 2012 due to the expected slow-down in the

Turkish vehicle market.

We continue to value DOAS on a SOTP (sum-of-

the-parts) basis, with the use of DCF for core

operations. Of our sum-of-parts valuation, nearly

half comes from vehicle distribution and retail

business and the rest from vehicle inspection

operation and stake value in parent Dogus

Holding (and hence in Garanti Bank).

Dogus Otomotiv - Forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Unit sales (000) 100 105 95 98 101 104 Revenue 4,276 4,386 4,294 4,339 4,676 4,726 EBITDA 210 229 189 200 206 217 margin 4.9% 5.8% 4.4% 4.6% 4.4% 4.6%

Net profit (adj.) 153 161 119 144 161 167

Source: Company, HSBC estimates

Despite the slight increase in our 2011-13 forecasts,

we arrive at a lower target price of TRY5.0 (down

from TYRY5.4) due to 1) more cautious long-term

margin assumptions, 2) an adjustment of the value of

the c1% indirect stake in Garanti Bank (via the 3.8%

Dogus Holding stake) since our last update (the bank

is trading at a lower market price now). Our DCF

valuation uses the following parameters: 8.5% RFR,

5.5% ERP, 1.00 beta, 3% terminal growth and

14.0% CoE.

DOAS – Components of the target price

TRY/share old new chg.

Core business 2.49 2.12 -15% Vehicle inspection 1.40 1.42 1% Dogus Holding stake 1.40 1.35 -4% VDF 0.11 0.11 0% Total 5.40 5.00 -8%


Under our research methodology, the hurdle rate for

volatile Turkish stocks is 3.5%-23.5%. Since our

target price implies a 21% potential return, we

maintain our Neutral rating on the stock, though we

add a volatility (V) flag in recognition of the stock's

historical volatility having increased.

Risks

Upside risks are i) stronger-than-expected Turkish

vehicle demand, ii) stronger market share gains than

we assume, iii) euro weakness (mild declines rather

than sharp falls) and iv) a stronger price tag than our

fair value for the vehicle inspection business (with

DOAS having announced the planned sale of its

stake in the Istanbul region). The key downside risks

would be the opposite of these.

135


abc

Financials & valuation: Dogus Otomotiv Neutral (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 116 70 81 63Capex -30 -123 -28 -29Cash flow from investment -30 -123 -28 -29Dividends 0 -27 -48 -58Change in net debt -80 43 -21 -14FCF equity 86 -53 52 34


Intangible fixed assets 0 0 0 0Tangible fixed assets 269 366 368 369Current assets 713 992 1,087 1,248Cash & others 28 74 111 136Total assets 1,499 1,876 1,972 2,134Operating liabilities 413 538 523 564Gross debt 349 438 453 465Net debt 321 364 342 328Shareholders funds 736 898 994 1,103Invested capital 541 746 821 916


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 61.0 27.9 -1.1 8.9EBITDA 131.5 3.1 -13.0 8.9Operating profit 160.1 0.6 -14.5 8.9PBT 365.9 4.5 -10.2 15.5HSBC EPS 163.9 15.5 -22.5 15.5

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Domestic vehicle demand gr. 37% 8% -5% 5%DOAS unit vehicles sales gr. 75% 27% -6% 6%Turkish GDP growth 9.0% 7.0% 3.0% 5.1%EUR/TRY – year average 1.99 2.52 2.56 2.65EUR/TRY – year end 2.05 2.52 2.61 2.69EUR/USD – year average 1.33 1.38 1.40 1.40

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.3 0.2 0.2 0.2EV/EBITDA 4.0 4.1 4.6 4.2EV/IC 1.7 1.3 1.1 1.0PE* 5.8 5.1 6.5 5.6P/Book value 1.3 1.0 0.9 0.9FCF yield (%) 14.9 -9.2 9.0 5.8Dividend yield (%) 0.0 2.9 3.3 6.4Note: * = Based on HSBC EPS (fully diluted)

Issuer information


Reuters (Equity) DOAS.IS Bloomberg (Equity) DOAS TIMarket cap (USDm) 493 Market cap (TRYm) 909Free float (%) 35 Enterprise value (TRYm) 910Country Turkey Sector AutosAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

012345678

2009 2010 2011 2012

012345678

Dogus Otomotiv Rel to ISTANBUL COMP


136


abc


Emlak Konut REIT is strong on our scorecard for

competitive analysis thanks to its unique position

in the Turkish real estate market, where it is

supplied by the State with cheap land, utilises

third-party developers to minimise risk and has

the biggest market share in its segment.

The Turkish real estate market is highly

fragmented due to a fragmented landbank

resulting from inheritance laws splitting

landholdings, and weak legal enforcement against

unregistered construction activity. If the regulator

started to follow the sector closely it would push

small players out of the market and lead to

consolidation. Yet in the short term, we do not

expect the competitive environment to change

significantly. Hence we do not expect to see

Emlak Konut REIT’s competitive outlook change.


strong

Emlak Konut REIT had an adjusted RoE of 10%

in 2010, which is well above that of its Turkish

peers and most of the EM peers as well. The

reason for this is access to cheaper land via its

parent TOKI (a State-run mass house builder).

Since the business model is not subject to change

for the foreseeable future we do not expect to see

a decrease in RoE of the company. Although

Emlak Konut REIT’s RoE is strong, it has very

limited market share due to Turkey’s fragmented

real estate market. We do not expect to see a

consolidation taking place if the regulator does

not take action against unregistered developers.


Emlak Konut REIT’s market share momentum is

strong as the company has posted impressive sales

growth in the last five years (a CAGR of 14% from

2005-2010) versus Turkey’s growth in the Turkish

real estate sector as a whole of 2% per annum.

Since Emlak Konut REIT has a strong brand

name and its sub contractors are also happy with

the company’s sales performance we believe there

will be more developers attracted to this the sub

contracting business model and Emlak Konut

REIT’s market share will continue to grow faster

than the sector.


For the real estate companies, we have applied a

slightly different DuPont analysis and have

compared cap yield ( = Gross Profit / (5 *

Revenues) ) instead of gross profit margin for the

companies. On this scale Emlak Konut REIT’s

Emlak Konut REIT

Emlak Konut REIT’s overall competitive outlook is strong among


The company offers strong growth in a supportive regulatory

environment at a cheap price

Target price kept at TRY3.7, maintain Overweight (V)



137


abc

score is 5 and it is placed well above its domestic

and EM peers.

The company gains the highest turnover from its

assets as it operates with fixed-return agreements.

In addition the company has a high cap yield from

its unit sales compared to all of its peers in the

local market. The reason for this is that the

company has higher pricing power in the market

thanks to its brand name.


The real estate market is highly fragmented in

Turkey, as the top 8 players constitute only 20%

industry. The key reasons for this are the division

of the landbank through inheritance and a high

number of unregistered developers because of the

lack of supervision over the market.

We believe the only route to consolidation is through

the tighter application of regulations which would

drive small players out of the industry.

Emlak Konut REIT remains resilient against

competition due to its strong brand name, fixed-

return contracts and ability to utilise its

competitors as developers on its own projects via

revenue sharing agreements.


positive


impact on the real estate sector as a whole and so

on Emlak Konut REIT as low rates will boost

mortgage affordability.

Since Emlak Konut REIT does not utilise debt for

construction activities the company would not be

affected by a low rate environment from a

financing perspective.

Weak TRY environment is neutral

Emlak Konut REIT has very few projects that it has

sold on USD or EUR terms. In addition, the

company does not have any FX positions and pays

its costs in TRY. Hence a weak TRY environment

has no material impact on the company.

Investment thesis

Emlak Konut REIT is the best vehicle with which

to play Turkey’s mainstream residential growth

story as the company has easy access to a

landbank, which lowers costs, has a solid business

model utilising third party developers which

limits operational risks and a strong brand name

which gives the company pricing power.

Emlak Konut REIT currently trades at a 3%

premium to its NAV versus the historic average of

a 17% premium and we expect to see 20% growth

in NAV in the next three quarters with the

addition of new projects. This makes Emlak

Konut REIT a compelling story with a cheap price

tag, in our opinion.

Emlak Konut REIT: HSBC forecast changes

2010a ____ 2011e______ ____2012e ____(TRYm) Actual Old New Chg(%) Old New Chg(%)

Revenues 1498 894 811 -9% 1260 1297 3% EBITDA 653 393 307 -22% 457 557 22% Net profit 470 376 270 -28% 459 559 22%


We have changed our 2011 and 2012 P&L

projections as the company has delayed some

portion of deliveries from 2011 to 2012. Since our

sales and related cash flow estimations have not

changed, these revisions have no effect on our

valuation of the company.


We use a DCF-based valuation for Emlak Konut

REIT. Our DCF parameters are: 5.5% equity risk,

premium, 8.5% risk-free rate, 8.5% RFR, 5.5% ERP,

1 beta and 5% terminal growth rate, leading to a

12.4% WACC. Our project-based, DCF-driven

valuation approach to Emlak Konut REIT implies a

target price of TRY3.70 per share (unchanged), and

a 60% potential return. That is above the 3.5% to

138


abc

23.5% Neutral band for volatile Turkish stocks, so

we maintain our Overweight (V) rating.

Risks

The key risk to our rating is a weakening in Turkey’s

economy. Property demand is fuelled by confidence

in the economy and in GDP growth. Any

impediment to that growth creates a risk. Recent

moves by the CBRT have also raised concerns about

interest rates. That may push up mortgage rates,

which would hurt affordability and demand.

Since TOKI supplies most of Emlak Konut

REIT’s land, the relationship with the parent is

important. If TOKI were to cut the supply of land

for any reason, Emlak Konut REIT could lose

some of its competitive edge.

139


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 1,498 811 1,297 2,239EBITDA 653 307 557 680Depreciation & amortisation 0 0 0 0Operating profit/EBIT 653 307 557 680Net interest -183 -37 2 -60PBT 470 270 559 620HSBC PBT 470 270 559 620Taxation 0 0 0 0Net profit 470 270 559 620HSBC net profit 470 270 559 620


Cash flow from operations 1,037 508 1,101 860Capex 0 0 0 0Cash flow from investment 0 0 0 0Dividends 0 -141 -81 -196Change in net debt -1,372 -381 -993 -700FCF equity 470 270 559 620


Intangible fixed assets 0 0 0 0Tangible fixed assets 6 6 6 6Current assets 7,110 7,227 9,021 10,672Cash & others 1,813 2,072 2,965 3,564Total assets 7,115 6,889 8,357 9,728Operating liabilities 2,243 2,124 3,215 4,261Gross debt 1,256 1,134 1,034 934Net debt -558 -938 -1,931 -2,630Shareholders funds 3,615 3,630 4,108 4,533Invested capital 3,059 3,036 2,847 2,852


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 73.2 -45.9 60.1 72.6EBITDA 39.6 -53.1 81.6 22.1Operating profit 39.5 -53.1 81.6 22.1PBT 5.3 -42.6 107.3 10.9HSBC EPS 5.3 -42.6 107.3 10.9

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Housing loan rates (%, 5yr) 11.45 11.91 11.87 11.87NAV (TRYm) 5,798 6,551 8,919 9,640Unit sales (annual) 7,200 10,000 10,000 8,580

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) EKGYO.IS Bloomberg (Equity) EKGYO TIMarket cap (USDm) 3,133 Market cap (TRYm) 5,775Free float (%) 25 Enterprise value (TRYm) 5181Country Turkey Sector Real EstateAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

1

1.5

2

2.5

3

3.5

4

4.5

2009 2010 2011 2012

1

1.5

2

2.5

3

3.5

4

4.5

Emlak Konut REIT Rel to ISTANBUL COMP


Financials & valuation: Emlak Konut REIT Overweight (V)

140


abc


Enka lnsaat’s competitive power comes from i) its

long-lasting partnership in construction with US

company Bechtel, especially in Eastern Europe, 2)

BOT-based risk-free power business in Turkey

(that secures stable/visible cash flows), and 3) a

prominent name as a contractor in Russia/CIS and

an office space rental company in

Moscow/Russia. These have led to a business

portfolio and a balance sheet that we believe are

more resilient than many of the other ISE listed

companies to global/domestic shocks.


Enka generates high returns on businesses that it

operates, where it is mostly the leader in the

relevant market. The office rental business in

Moscow is a high margin business (70% EBITDA

margin) and Enka leads the A-class market there.

The construction business generates higher

margins than most EM constructors (with an

average 16% EBITDA margin in 2005-10). The

power generation business in Turkey is currently

the largest (3,854MW) among private sector

players with stable cash flows thanks to the take-

or-pay scheme under the State guarantee and fixed

margins. These provide Enka with a high ROE

(which averaged 13% between 2005 and 2010).


In the energy market in Turkey, Enka’s market

share of generation capacity and output are likely

to reduce as other players continue to invest

(although this is not a threat for Enka’s profits). In

construction, Enka’s backlog has seen

considerable shrinkage but we believe may start

growing again. And in Moscow’s office space

market, Enka holds on to its existing premises.


Enka’s future growth prospects are rather

dependent on its construction segment given that

its real estate business in Moscow and power

business in Turkey are relatively stable.


Enka operates in sectors (power, real estate,

construction) with high competition but its

positioning is strong allowing for above peer

margins and profitability.

Low interest rate environment is neutral

Enka’s Turkish exposure is limited to its power

operations where the level of market interest rates

is not relevant for the profitability of its business.

Enka Insaat

Enka’s overall competitive outlook is strong

A risk-free power business in Turkey, a strong brand in

Russia/CIS and a sound balance sheet make for a compelling

investment case

Cutting our target price to TRY5.6 (from TRY6.42), maintain

Overweight

141


abc

Its large cash position, on the other hand, benefits

to some extent from higher rates.

Weak TRY has medium impact

Enka has a very strong balance sheet, sitting on a

significant FX position. But weak EUR/USD

hurts its profitability since most of its liquid assets

are held in EUR-denominated investments.

Investment thesis

The key change in Enka’s normally safe and

stable portfolio has been the sharp decline in its

construction backlog from the USD7.5bn peak in

2007 to cUSD2.0bn today. Enka did not have any

North African exposure in construction, but the

stoppages of its Blue City project in Oman

(cUSD900m backlog share) and the motorway

project in Romania (cUSD3.5bn backlog share) in

2010 have weighed negatively on the share price,

which has underperformed the ISE in 2011 YTD.

Also, the slow pace of the Russian economic

recovery from the 2009 crisis, and hence the only

gradual improvement in Moscow’s rental rates,

have kept sentiment towards Enka rather muted.

The recent announcement from Enka regarding

the Romanian motorway project (that it will

complete EUR400m worth of the job before

termination of its contract by end-2013), is rather

positive news in our view. It removes an

uncertainty and kicks off activity on a “frozen”

project. We believe that at current levels, Enka’s

valuation more than prices in the backlog

contraction to USD2.0bn. With the prospect of

new project awards (which we assume at

USD1.0bn pa from 2012), we believe the shares

still look undervalued.


We make three key revisions to our forecasts and

valuation; 1) we lower backlog estimates in line with

recent developments, 2) we use a higher DCF risk

free rate for construction (6.5% in USD vs 5.9%)

and 3) we revise macro parameters in our model in

line with our macro team’s new forecasts. As a

result, the overall impact on our TRY based financial

forecasts is positive from 2012 onwards while our

target price goes down mainly because of lower fair

value for construction.

We continue to use DCF to value Enka. We use

the following parameters; 6.5% risk free USD rate

(previously 5.9%), 5.5% equity risk premium, 3%

terminal growth rate and 0.85 company beta,

which filter through to a weighted average WACC

of 11.2% (vs. 9.5% previously).

Our target price falls from TRY6.42 to TRY5.6. We

apply a 20% holding discount to our calculated

NAV in setting our target price. Based on the 37%

potential return, which is above the Neutral band of

8.5% -18.5% for non-volatile Turkish stocks, we

maintain our Overweight rating.

Enka - forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Revenue 7,406 7,301 7,727 8,008 8,336 8,826 EBITDA 1,218 1,293 1,224 1,422 1,373 1,633 Net profit 876 848 887 955 994 1,098

Source: HSBC estimates NAV changes

USDm Enka stake old

Enka stake new

old / new

Construction 4,206 3,568 -15% Energy 3,021 3,022 0% Real estate 3,251 3,130 -4% Retail 859 932 8% Trade & Manuf. 374 232 -38% Total Participation value 10,850 9,993 -8% Market cap 6,320 6,320 Premium (disc.) to NAV -42% -37% Holding discount 20% 20% NAV per share 3.47 3.20 -8% 12m NAV per share (TRY) 6.42 5.60 -13%


Downside risks include i) failure to deliver new

wins (or below expected) ii) slower recovery in

Russia (along with an unexpectedly high drop in

oil prices) than we expect, iii) significant

delays/payment problems in the major existing

construction projects iv) sustained EUR/USD

weakness hurting investment income.

142


abc

Financials & valuation: Enka Insaat Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 7,065 7,301 8,008 8,826EBITDA 1,135 1,293 1,422 1,633Depreciation & amortisation -192 -229 -244 -266Operating profit/EBIT 942 1,064 1,178 1,368Net interest 14 -85 76 78PBT 1,018 1,102 1,290 1,483HSBC PBT 1,018 1,102 1,290 1,483Taxation -179 -194 -269 -309Net profit 819 848 955 1,098HSBC net profit 819 848 955 1,098


Cash flow from operations 1,197 1,369 1,382 1,581Capex -97 -111 -150 -209Cash flow from investment -97 -111 -150 -209Dividends -120 -140 -158 -163Change in net debt -524 -1,038 -776 -842FCF equity 936 979 1,039 1,142


Intangible fixed assets 224 270 280 288Tangible fixed assets 5,822 7,122 7,529 7,983Current assets 3,711 5,001 5,863 6,806Cash & others 2,043 3,171 3,891 4,678Total assets 10,999 13,887 15,218 16,672Operating liabilities 2,670 3,115 3,261 3,403Gross debt 923 1,013 958 903Net debt -1,120 -2,158 -2,933 -3,775Shareholders funds 6,368 8,022 9,165 10,487Invested capital 5,044 6,108 6,520 6,997


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue -10.8 3.3 9.7 10.2EBITDA -17.3 13.9 10.0 14.9Operating profit -16.5 12.9 10.7 16.1PBT -9.4 8.3 17.1 15.0HSBC EPS 0.3 3.6 12.5 15.0

Ratios (%)

Revenue/IC (x) 1.4 1.3 1.3 1.3ROIC 15.5 15.7 14.8 16.0ROE 13.7 11.8 11.1 11.2ROA 7.7 7.9 6.6 7.0EBITDA margin 16.1 17.7 17.8 18.5Operating profit margin 13.3 14.6 14.7 15.5EBITDA/net interest (x) 15.3 Net debt/equity -16.6 -25.4 -30.2 -34.0Net debt/EBITDA (x) -1.0 -1.7 -2.1 -2.3CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Effective aggregate tax rate 18% 18% 18% 18%Construction EBITDA margin 19.2% 28.0% 20.0% 18.3%Energy EBITDA margin 9.8% 9.2% 9.6% 10.1%Real estate EBITDA margin 63.5% 62.1% 63.5% 65.0%Trade & Industry EBITDA margin 7.0% 7.6% 8.0% 8.0%Effective aggregate tax rate 18% 18% 18% 18%

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) ENKAI.IS Bloomberg (Equity) ENKAI TIMarket cap (USDm) 5,560 Market cap (TRYm) 10,250Free float (%) 13 Enterprise value (TRYm) 7242Country Turkey Sector ConglomeratesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

1

2

3

4

5

6

7

2009 2010 2011 2012

1

2

3

4

5

6

7

Enka Insaat Rel to ISTANBUL COMP


143


abc


While increasing supply in the local market and

possible slowing demand (as a result of the weaker

global growth outlook) are risk factors for Erdemir's

strong and profitable competitive position, it benefits

from a low interest rate policy, and the flexibility to

adjust prices in USD terms provides a safeguard for

profitability in the long term.

"Profitable market share" score is high

Erdemir's strong market share in the Turkish flat

steel market and its above-average ROE make it

one of the best positioned companies in the

Turkish universe in terms of profitable market

share. We expect the high ROE level to be

sustained in the long term due to the company’s

competitive edges (ie. ability to produce/sell value

added products, efficient new capacity). However,

market share loss is inevitable in the long term

(beyond 2013) due to capacity constraints and the

lack of new investment plans.


Erdemir has lost market share in the last 5-6 years

period due to capacity constraints as it has been

utilising all of its capacity and market growth has

been fast.


Despite strong margins and asset turnover ratios

Erdemir rates medium with its Dupont score (due to

a lack of sufficient integration) implying relatively

lower sustainable growth potential. However, we

believe utilisation of new capacity in the coming

quarters should improve Erdemir's position.


Despite an increasing number of players, Erdemir

is still well positioned in the flat steel segment as

it does not see major competition in some value

added products. However, going forward,

Erdemir's may experience pressure on its

profitability if macro conditions worsen in 2012.


Since Erdemir has a USD852bn net short FX

position and end sectors (ie. autos, consumer

durables, pipelines, construction) are sensitive to

low interest rates, the low interest rate policy of

the Government and Central Bank is positive for

the company.

Erdemir

Erdemir’s overall competitive outlook is medium. Flat steel

industry faces price pressure due to global weakness.

Competition in Turkey may intensify with rising supply

We expect Erdemir to maintain its share in the local market,

however lower prices will negatively affect profitability starting Q4

Target price reduced to TRY4.95 (from TRY5.25) due to falling

peer valuations; maintain Overweight



144


abc

Weak TRY has negative to medium impact

As product prices are linked to USD, TRY

depreciation positively affects operational

profitability. However, due to a USD1.0bn short

position on the balance sheet, FX losses become a

threat to bottom-line profitability (a 10% TRY

depreciation leads to TRY145m of FX losses).

Investment thesis

Despite weaker demand in the current global

economic scenario, Erdemir has already secured its

order book till the end of November. We believe the

strong order book and still-strong steel prices should

drive reasonable earnings growth. However, ongoing

turbulence in financial markets may slow demand in

end sectors and have some negative impact on

operational profitability in Q4 2011. In a bear case

scenario of global recession, Erdemir also faces risks

of inventory losses as it caries 150 days of inventory

on average. We calculate that Erdemir would not

face major inventory losses unless product prices see

a sharp 30-40% fall (from the current USD700-720

per tonne to the USD480-520 level for HRC) as it is

protected by short-term raw material contracts and

lower costs compared to spot levels. According to

our sensitivity analysis, a 15% fall would not lead to

any inventory write downs and its impact (through

the EBIT line) would be limited to 10% of our year-

end 2011 net profit estimate for Erdemir.

Valuation

We value Erdemir based on the simple average of its

DCF value and global peer 2012e PE and

EV/EBITDA multiples to arrive at our new target

price of TRY 4.95 (from TRY5.25). Using the DCF

method and assuming a WACC of 11.6% (cost of

equity: 14.4%; RFR 8.5%, ERP 5.5% and beta1.07,

cost of debt: 9%, terminal growth rate of 3%), we

arrive at a fair value of TRY5.19 per share

(unchanged). For our global peer multiple based

valuation we use the FY12e PE and EV/EBITDA

multiples and apply these to Erdemir’s 2012e

earnings and EBITDA. We use a PE of 8.6x for

2012e and EV/EBITDA of 5.3x which results in a

fair value of TRY3.46 per share (from TRY3.98).

Thus, we arrive at a blended valuation of TRY4.32

per share and raise it by the cost of equity (14.4%) to

reach our new 12-month target price of TRY4.95.

Our target price plus 2011e DPS implies a potential

return of 53% and justifies an Overweight rating on

Erdemir. At our target price, Erdemir would trade on

a 2012e PE of 9.4x.

Erdemir’s share price has a strong positive

correlation with commodity and steel prices. Any

increase in steel prices from hereon would be

positive for the shareprice.

Risks to our rating include a downturn in macro

conditions, which could lower demand locally and

steel prices globally. Increasing supply from flat-

steel investments by other companies in Turkey

might threaten Erdemir’s plans. Further

depreciation of TRY against USD is another

major risk as Erdemir carries short FX position

(even though USD-based sales prices mitigate this

to some extent).

145


abc

Financials & valuation: Erdemir Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 6,633 8,442 9,175 9,630EBITDA 1,428 1,632 1,825 2,236Depreciation & amortisation -299 -306 -313 -311Operating profit/EBIT 1,130 1,326 1,512 1,925Net interest -142 -76 -79 -82PBT 974 1,229 1,470 1,792HSBC PBT 974 1,229 1,470 1,792Taxation -178 -241 -288 -351Net profit 766 950 1,136 1,385HSBC net profit 766 950 1,136 1,385


Cash flow from operations 912 2,383 1,238 2,093Capex -305 -260 -278 -278Cash flow from investment -288 -242 -278 -278Dividends -6 -444 -570 -618Change in net debt -202 -1,041 -35 -806FCF equity -94 1,389 569 1,475


Intangible fixed assets 144 165 165 165Tangible fixed assets 6,780 6,726 6,691 6,657Current assets 6,325 5,067 5,342 5,649Cash & others 2,878 1,948 1,478 1,732Total assets 13,541 12,238 12,479 12,752Operating liabilities 705 794 928 930Gross debt 5,883 3,912 3,407 2,855Net debt 3,005 1,964 1,929 1,123Shareholders funds 6,511 7,033 7,599 8,366Invested capital 9,665 9,215 9,792 9,809


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 26.7 27.3 8.7 5.0EBITDA 260.6 14.3 11.8 22.5Operating profit 1611.0 17.4 14.0 27.3PBT 26.2 19.6 22.0HSBC EPS -7.7 19.6 22.0

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Average TRY/USD 1.48 1.56 1.50 1.50Sales (mt) 6.5 7.1 7.9 8.3Average HRC price (USD/t) 640 725 748 750Average CRC price (USD/t) 847 899 908 895Average iron ore price (USD/t) 135 132 126 120Average Coal price (USD/t) 231 260 255 226

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.5 1.1 1.0 0.8EV/EBITDA 7.0 5.5 4.9 3.6EV/IC 1.0 1.0 0.9 0.8PE* 6.8 7.3 6.1 5.0P/Book value 0.8 1.0 0.9 0.8FCF yield (%) -1.4 19.9 8.2 21.2Dividend yield (%) 6.5 8.2 8.9 11.4


Issuer information


Reuters (Equity) EREGL.IS Bloomberg (Equity) EREGL TIMarket cap (USDm) 3,779 Market cap (TRYm) 6,966Free float (%) 48 Enterprise value (TRYm) 8930Country Turkey Sector METALS & MININGAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Erdemir Rel to ISTANBUL COMP


146


abc


In Turkey, light commercial vehicle (LCV)

manufacturers benefit from tax advantages,

economies of scale in production, a well educated

labour force, and a developed parts industry in

generating high sales (over assets) and profits.

The ability to attract new models is one of the key

drivers for the industry which we expect will

continue to be the case in upcoming years. Ford

Otosan sets a good example of the new model

story as one of the leaders of the LCV market and

a production hub for Ford Europe for LCVs. It has

low cost production, good R&D capabilities and a

strong balance sheet, and pays high dividends

relative to the Turkish market.

"Profitable market share" is strong

Ford Otosan has generated an average ROE of

27% during the past years, one of the highest in

the ISE universe. It has an established market

leader position in medium commercial vehicles in

Turkey (c35% in Jan-Aug 2011) and ranks second

in the light commercial vehicle segment (with a

c20% share). Its efficient production (generating

economies of scale from high export quantities as

well) provides the company with a very strong

competitive position.


Ford Otosan’s overall market share in Turkey

peaked in 2005-07 at around 17% and came down

to c15% in 2008-11 due to increased competition

in the LCV segment (mainly from Tofas) and in

the passenger car import market. Going forward,

we expect an increase in Ford’s LCV market

share with completion of new model investments

in 2013-14 (new Transit and a new LCV).


Ford Otosan is in the midst of a big capital

expenditure program to renew its best selling model,

Transit, and to launch a completely new minivan

model in 2013-14. Until then, newer products by

competitors may limit the company’s relative growth

but the long-term growth outlook is intact. On

existing products, we expect Ford Otosan to compete

mainly on pricing, which argues for a higher need

for discounts, in our view.


weak to

Although the top 3 brands control c45% of the

Turkish light vehicle market and the top 5 brands

60%, the market is more fragmented than

consolidated in our view. There is tough

Ford Otosan

Ford Otosan's overall competitive outlook is medium compared to


A strong LCV market position in Turkey, a cost plus fee scheme in

exports and a sound balance sheet are counterbalanced by a big

investment program and slowing European vehicle demand

Cutting target price to TRY15.5 (from TRY16), remain Neutral



147


abc

competition with c60 global brands operating in

the market (either as manufacturers and/or

importers). Compared to the last 10-15 years, we

expect no major changes in market structure.


A low interest rate environment triggers

consumption through access to cheaper financing

and supports auto sales. Nevertheless, the sector’s

response to a low interest rate environment may

be more limited than normal due to the surge in

demand that we have already seen in 2010 and

YTD 2011.


Ford Otosan has an ungeared balance sheet with

no meaningful FX exposure. Operationally, weak

TRY supports export revenues (stated in TRY)

and is positive for margins. But huge investments

in excess of USD1.0bn in the next three years will

increase leverage and FX sensitivity.

Investment thesis

Ford Otosan offers exposure to the relatively more

resilient commercial vehicle segment in a period

when demand will likely weaken in both Turkey

and in export markets. Moreover, Ford’s main

export markets (UK, Germany, US) offer a

relatively better demand outlook than other main

geographies in Europe (such as Italy and France).

That said, we believe that Ford Otosan’s

advantages are curbed by the fact that its outdated

models may need more discounts against

competition to keep volumes high. This filters

through to lower than historical margins in the

next two years, in our view. Considering also the

USD1.0bn worth of investments in the 2011-13

period, we maintain our cautious view.


We expect Turkish automotive demand to grow

8% in 2011, reaching 860k units (light vehicles

825k). This implies a c15% demand contraction in

the second half y-o-y. For 2012, we are cautious

on our market expectations considering the

economic slow-down and the strength in the auto

market over the last three years (auto sales were

up 63% cumulatively in 2009-11e). We expect a

5% decline in total market sales next year; a 7%

decline for cars but flat demand for LCVs. Under

these sector assumptions, we lower our unit sales

forecasts for Ford Otosan, particularly for exports

but under new FX assumptions (weaker TRY)

revenues are adjusted up. We also trim our margin

forecasts considering a more competitive

environment in the remainder of 2011 and

throughout 2012, in the face of slowing demand.

Ford Otosan - Forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Unit sales (000) 347 346 351 333 370 351 Domestic 135 134 130 129 134 133 Exports 212 212 221 204 236 218 Revenue 9,055 10,222 9,136 10,115 9,835 11,018 EBITDA 885 916 866 906 981 1,152 margin 9.8% 9.0% 9.5% 9.0% 10.0% 10.5%

Net profit 604 627 524 592 565 667


We continue to value Ford Otosan using DCF with

the following parameters: 8.5% risk free rate, 5.5%

equity risk premium, 0.73 beta (previously 0.65), 3%

terminal growth and 11.2% WACC (previously

10.7%) Due to the increase in the WACC, our target

price declines to TRY15.5 from TRY16.0. We

remain Neutral based on a 14% potential return,

which is within the 8.5%-18.5% Neutral band for

non-volatile stocks in Turkey.

Risks

Key upside risks are i) stronger-than-expected

Turkish, European and North American LCV

markets, ii) a sharp fall in raw material prices

(expanding domestic margins) and iii) moderate

TRY weakness (supporting exports). Key

downside risks would be the opposite of these,

plus tax hikes for auto.

148


abc

Financials & valuation: Ford Otosan Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 7,649 10,222 10,115 11,018EBITDA 751 916 906 1,152Depreciation & amortisation -141 -149 -198 -381Operating profit/EBIT 610 767 708 771Net interest 9 -2 -116 -104PBT 619 764 592 667HSBC PBT 634 801 592 667Taxation -114 -138 0 0Net profit 505 627 592 667HSBC net profit 520 663 592 667


Cash flow from operations 486 518 543 766Capex -86 -548 -815 -624Cash flow from investment -86 -548 -815 -624Dividends -400 -525 -313 -296Change in net debt -8 556 586 154FCF equity 355 -41 -242 137


Intangible fixed assets 42 42 42 42Tangible fixed assets 1,060 1,455 2,068 2,307Current assets 2,229 2,646 2,729 3,300Cash & others 521 357 305 515Total assets 3,335 4,146 4,842 5,652Operating liabilities 1,008 1,325 1,209 1,284Gross debt 528 921 1,455 1,818Net debt 7 564 1,149 1,303Shareholders funds 1,755 1,857 2,135 2,506Invested capital 1,803 2,461 3,325 3,850


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 37.2 33.6 -1.0 8.9EBITDA 44.9 22.0 -1.0 27.1Operating profit 56.7 25.6 -7.6 8.9PBT 51.5 23.5 -22.6 12.8HSBC EPS 55.8 27.7 -10.8 12.8

Ratios (%)

Revenue/IC (x) 4.4 4.8 3.5 3.1ROIC 26.8 29.3 24.3 21.4ROE 30.5 36.7 29.7 28.8ROA 19.4 19.4 17.8 16.5EBITDA margin 9.8 9.0 9.0 10.5Operating profit margin 8.0 7.5 7.0 7.0EBITDA/net interest (x) 395.6 7.8 11.1Net debt/equity 0.4 30.4 53.8 52.0Net debt/EBITDA (x) 0.0 0.6 1.3 1.1CF from operations/net debt 6481.4 91.8 47.2 58.8




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Froto – domestic unit sales gr. 47% 7% -4% 3%Froto – export unit sales gr. 37% 20% -4% 7%Froto – total unit sales gr. 41% 14% -4% 5%EBITDA margin 9.8% 9.0% 9.0% 10.5%Effective tax rate 18% 18% 0% 0%Capex (EURm) 43 217 318 236

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.6 0.5 0.6 0.6EV/EBITDA 6.4 5.8 6.5 5.3EV/IC 2.6 2.2 1.8 1.6PE* 9.2 7.2 8.1 7.2P/Book value 2.7 2.6 2.2 1.9FCF yield (%) 7.5 -0.9 -5.1 2.9Dividend yield (%) 11.0 6.6 6.2 11.2


Issuer information


Reuters (Equity) FROTO.IS Bloomberg (Equity) FROTO TIMarket cap (USDm) 2,589 Market cap (TRYm) 4,772Free float (%) 18 Enterprise value (TRYm) 5333Country Turkey Sector AutosAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

2468

1012141618

2009 2010 2011 2012

24681012141618

Ford Otosan Rel to ISTANBUL COMP


149


abc


Gubretas scores medium on our overall scorecard.

Its production capabilities and market power in

Turkey coupled with access to cheap raw material

in Iran gives it an advantage in terms of

competition. The company’s market share is equal

to that of Tekfen in Turkey and it achieves a high

ROE thanks to its profitable Iranian operations.

The only weak point in our scorecard is the Euro

short on its balance sheet and the potential for

significant FX losses when TRY depreciates.


Gubretas ranks high in terms of its market share

(28% in Turkey) and consolidated ROE (32% at

2010-end). We think it can protect its market

share given its diverse distribution network and

strong brand recognition in Turkey and the Iranian

operation will continue to support a high ROE.

Thanks to this combination Gubretas scores

strong on the profitable market share metric.


Bagfas’ lost market share has been shared

between Gubretas and Tekfen. Total fertiliser

consumption has declined by 4% in Turkey during

the past 5 years while Gubretas’ sales volumes

have increased by 17%. We do not expect any

significant deterioration in the company’s market

share going forward.


Gubretas operates at a lower gross profit margin

than pure fertiliser producers due to its Turkish

operations. Yet we think it has a positive growth

outlook. Its Turkish operations are solid and the

Iranian operations should continue to improve

with higher Capacity Utilisation Rate and

continuing access to cheap natural gas resources.


The company scores medium in terms of its position

with regards to market fragmentation. In Turkey it is

the 2nd largest fertiliser company by a marginal

difference. In Iran, after the company fulfils its quota

to the Iranian government, it has no problem

whatsoever in exporting the rest of its production.

We see the chances of consolidation as low in

Turkey and company’s position is strong. Yet, since

Iran is a closed market and generates c90% of

consolidated EBITDA there is an inherent risk with

regard to market conditions there.

Gubretas

Competitive outlook is strong since the company has a strong

position in its core market, Turkey, and achieves a high RoE

thanks to its access to cheap raw material in Iran

Its low exposure to DAP, whose price we expect to fall in 2012,

leaves Gubretas with a more positive outlook than, say, Bagfas




150


abc


neutral to negative for Gubretas

Low interest rates certainly lower farmers’ financial

burdens. Yet we think the trend of global fertiliser

prices is more critical for fertiliser companies.

Hence, we regard the impact of the change in

domestic interest rates as neutral to negative.


Gubretas

Ever since the acquisition of Razi in 2008,

Gubretas has been operating with a leveraged

balance sheet. The company had a USD61m and a

EUR112m net short position on its balance sheet

as of 1H 11. Despite the fact that product prices

are linked to USD, weakness in TRY negatively

affects the bottom line.

Investment thesis

2011 has not been an impressive year for

Gubretas so far. The Iranian government’s

decision to increase gas costs by almost 7x at the

beginning of the year has been a drag on EBITDA

generation in Iran. Although the company has

performed much better in Turkey, where sales

volumes grew by 20% y-o-y in H1 2011 versus

6% for the overall market, it posted a y-o-y fall of

roughly 11pp in its H1 2011 consolidated

EBITDA margin because Iran is the major

EBITDA contributor.

Despite the margin contraction this year, we are

more optimistic on the stock than before. First, the

increase in gas costs is well known to the market

and we think the potential for further downside

surprises is limited. Second, DAP, for which we

now expect a price decline of over 20% in 2012,

accounts for less than 10% of total sales volumes,

so the company’s margins should be more

resilient than those of, say, Bagfas. Finally, on our

2012 estimates the stock is trading at an attractive

4.0x EV/EBITDA and 7.3x PE.


We value the company’s domestic operations at

TRY496m. We use a DCF based on the following

assumptions: an 8.5% risk-free rate, 1.20 beta, a

5.5% ERP and a 3% terminal growth rate. We

value Gubretas’s c49% stake in the Iranian

operations at TRY756m, based on the average of

a USD-based DCF valuation that uses a 20%

WACC and the value implied by peer multiples

(the average of 2012e-13e PE at12.3x and 11.0x,

EV/EBITDA at 9.1x and 8.7x and EV/sales at

3.7x and 3.8x). By combining our values for the

Turkish and Iranian operations, we reach our target

price of TRY15.4.

Our12-month target price implies a potential

return of 26%, which is above the 3.5% to 23.5%

Neutral band for volatile Turkish stocks under

HSBC’s research model. We therefore maintain

our rating at Overweight (V).

Risks

The auditors highlight that the company has not

booked provisions for a TRY132m payables

dispute with the National Iranian Oil Company

and a TRY24m tax dispute with the Iranian tax

authority. If the company loses these disputes, our

valuation might be severely affected, depending

on the amount it is required to pay out.

Other major downside risks include global price

movements, country risks in Iran and the

depreciation in TRY against the euro and/or the

Iranian riyal since the company has short

positions in both currencies.

151


abc

Financials & valuation: Gubretas Overweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 434 126 387 430Capex -20 -35 -144 -146Cash flow from investment -20 -35 -144 -146Dividends 0 0 0 -28Change in net debt -206 272 -102 -106FCF equity 345 48 213 266


Intangible fixed assets 247 247 247 247Tangible fixed assets 897 848 895 930Current assets 974 873 838 881Cash & others 212 77 75 100Total assets 2,139 1,988 2,001 2,079Operating liabilities 618 496 483 514Gross debt 353 490 386 304Net debt 141 413 311 205Shareholders funds 453 551 689 825Invested capital 1,287 1,395 1,422 1,444


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 32.6 45.3 -4.1 6.1EBITDA 280.1 16.7 -10.1 12.4Operating profit 810.6 16.9 -15.5 11.6PBT 3.7 15.3 4.6HSBC EPS -25.7 55.9 17.5

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Sales growth-Domestic % 11 38 -6 10Sales growth-Razi % 82 38 1 1Sales - Domestic (kt) 1,449 1,605 1,677 1,715Sales - Razi (kt) 1,486 1,713 1,800 1,897EBITDA margin-Domestic % 6.7 2.9 -0.1 6.2EBITDA margin-Razi % 59 48 47 45

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) GUBRF.IS Bloomberg (Equity) GUBRF TIMarket cap (USDm) 555 Market cap (TRYm) 1,023Free float (%) 25 Enterprise value (TRYm) 1819Country Turkey Sector CHEMICALSAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

13579

111315171921

2009 2010 2011 2012

13579111315171921

Gubretas Rel to ISTANBUL COMP


152


abc


Strong ad market growth and strong market share

had been supporting Hurriyet’s competitive power

up until the end of H1 2011. In contrast, recent

market share momentum has been weak as the

company was unable to cope with the pace of

growth in the market and so lost some share over

the last few years. Rising newsprint costs, TRY

weakness and slowing economic growth are risks

to its profitability and its competitive position.

While it benefits from the low interest rate policy,

weaker TRY is negative for Hurriyet as it results

in FX losses due to its FX short position.

Profitable market share score is medium to

strong

Hurriyet’s dominant market share in the Turkish

ad space and parent Dogan Yayin’s strong media

presence make it one of the best companies in

media segment. Although Hurriyet’s RoE has

suffered in the last two to three years due to the

economic downturn, tax fines, weak foreign

operations and a weaker TRY, we expect things to

change, with a higher RoE level in the long term

as most of the macro concerns dissipate.

However, we expect Hurriyet’s share of the

advertising market to decline in the long term as

new players enter the market and other ad

segments increase their share.


Hurriyet has lost market share in the last five

years due to increased competition from new

entrants and some of its competitors.


Hurriyet’s strong margins, higher asset turnover

and higher financial leverage imply a strong,

sustainable growth potential. Although margins

have declined in the last three to four years, we

expect margins to return to normal over the next

two to three years.


strong


small number of players and Hurriyet has

maintained its leading position in the print media.

However, entry of new/foreign players in the

market cannot be ruled out in the long term.

Hurriyet

Hurriyet’s competitive outlook is medium. Its dominant share in

Turkish newspaper business supports its competitive power

However TRY weakness, increased newsprint costs and a

slowdown in ad spend are the negative factors in the investment

theme

Despite a cut in target price from TRY2.0 to TRY1.5, Hurriyet

remains a value play; maintain Overweight (V)



153


abc


Advertising spends are mainly driven by the real

estate, automotive, finance and retail sectors,

which are sensitive to interest rate policy.

Hurriyet also has net debt of USD150m, which

will benefit from lower expenses in a low rate

environment.


With a short position worth USD120m on the

balance sheet, FX losses become a threat for the

bottom-line profitability (a 10% depreciation of

TRY leads to TRY40m of FX losses).

Investment thesis

Print ad spend recovery started in 2010, and

continued into 2011, with spend growing at 11%

y-o-y in H1 2011. Strong economic growth,

mainly in real estate, automotive and retail,

boosted the sales of print media advertisements.

Hurriyet’s Russian operations are also recovering

well after a fall in the ad market in the past two

years. A possible increase in ad revenues in both

regions underpins the investment thesis in the

long term.

However, ad market growth is overshadowed by

rising newsprint prices globally; these rose 20%

y-o-y in H1 2011. This has impacted margins

despite the rising top line. Alongside this, the

recent TRY depreciation of 15% against USD will

put more pressure on Hurriyet’s profitability in

the short term.


We now forecast a net loss in 2011 due to higher

FX losses and increasing newsprint costs, instead

of our previous profit forecast. We also cut our

2012 and 2013 net earnings estimates by 13% and

17%, respectively, on expected FX losses due to

depreciation of TRY. Our estimates are 3% below

consensus for 2012 and 9% below for 2013.

We change our valuation methodology to

EV/EBITDA from DCF as we believe a multiple-

based approach is more appropriate in a

recessionary environment in the media sector.

Hurriyet's peers trade on an average 2012e

EV/EBITDA multiple of 7.4x. Applying this

multiple to our 2012e EBITDA gives us our new

12-month target price of TRY1.50 (TRY2.0

earlier). Our new target price of TRY1.50 implies

a potential total return of 60%, which is above the

Neutral band for volatile Turkish stocks of 3.5-

23.5%; thus, we reiterate our Overweight (V)

rating on Hurriyet.

Risks

Possible macro risks threatening the Turkish

advertising market recovery and further

depreciation of the TRY against USD would be

major investment risks for Hurriyet.

Hurriyet: HSBC forecast changes

(TRYm) _____________ New _______________ ______________ Old _______________ ___________Difference____________ 2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e

Sales 865 970 1,081 875 982 1,094 -1% -1% -1% EBITDA 136 163 187 142 172 198 -5% -5% -6% Net Income -21 54 63 33 62 76 -164% -13% -17%


154


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 794 853 965 1,075EBITDA 130 124 158 181Depreciation & amortisation -84 -86 -86 -86Operating profit/EBIT -20 42 82 105Net interest -9 -13 -12 -9PBT -50 -33 65 80HSBC PBT -50 -33 65 80Taxation -6 -1 -13 -16Net profit -40 -32 50 58HSBC net profit -40 -32 50 58


Cash flow from operations 45 156 151 175Capex -14 -30 -34 -32Cash flow from investment -55 -30 -34 -32Dividends -59 32 -16 -19Change in net debt 45 -60 -82 -93FCF equity 82 108 83 107


Intangible fixed assets 709 682 656 632Tangible fixed assets 459 430 404 375Current assets 348 366 484 612Cash & others 90 136 235 344Total assets 1,579 1,532 1,588 1,653Operating liabilities 103 104 107 111Gross debt 506 493 510 525Net debt 417 357 275 181Shareholders funds 685 652 686 725Invested capital 1,322 1,238 1,202 1,164


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 1.3 7.4 13.1 11.4EBITDA 0.2 -4.6 27.3 14.6Operating profit -187.2 94.3 27.6PBT 23.1HSBC EPS 16.6

Ratios (%)

Revenue/IC (x) 0.6 0.7 0.8 0.9ROIC 3.7 3.1 4.7 6.4ROE -5.4 -4.9 7.4 8.2ROA -2.1 -1.2 4.2 4.8EBITDA margin 16.3 14.5 16.3 16.8Operating profit margin -2.6 5.0 8.5 9.7EBITDA/net interest (x) 14.0 9.5 13.6 19.7Net debt/equity 53.9 48.3 35.4 22.1Net debt/EBITDA (x) 3.2 2.9 1.7 1.0CF from operations/net debt 10.9 43.8 55.1 96.4


EPS Rep (fully diluted) -0.07 -0.06 0.09 0.10HSBC EPS (fully diluted) -0.07 -0.06 0.09 0.10DPS 0.00 -0.06 0.03 0.03Book value 1.24 1.18 1.24 1.31

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.2 1.0 0.8 0.7EV/EBITDA 7.1 7.0 5.0 3.9EV/IC 0.7 0.7 0.7 0.6PE* 10.4 9.0P/Book value 0.8 0.8 0.8 0.7FCF yield (%) 16.5 21.3 16.0 20.4Dividend yield (%) 0.0 -6.3 3.0 3.7


Issuer information


Reuters (Equity) HURGZ.IS Bloomberg (Equity) HURGZ TIMarket cap (USDm) 281 Market cap (TRYm) 519Free float (%) 40 Enterprise value (TRYm) 865Country Turkey Sector MediaAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

0.5

1

1.5

2

2.5

3

3.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

3

3.5

Hurriyet Rel to ISTANBUL COMP


Financials & valuation: Hurriyet Overweight (V)

155


abc


The Turkish retail property market is highly

fragmented as there are a significant number of

commercial property developers. However, due to

sharp segmentation of the property types (A, A+,

B, etc) the impact of competition is not severe on

single-segment companies. Is REIT scored weak

on our scorecard for competitive analysis mainly

due to its profitable but low market share in retail

property. We believe this will not change in the

foreseeable future.


weak

Is REIT has an RoE of 6% in 2010, which is

mediocre compared to its Turkish peers and most

of the EM peers as well. The reason for that is the

low average rental yield in Turkey due to high

asset prices. The company also has a small market

share due to the fragmented market structure.

We do not expect to see an increase in RoE as the

company increases rents based on contracts with

maturities from one to five years and reappraisal

of the portfolio allows the valuation to catch up

with the earning increase. If the company

launches its residential projects or its hotel project

in Russia its RoE may improve.


Is REIT’s market share momentum has been weak

in the last five years due to limited additions to its

portfolio (3% per annum) which has caused

market share loss when compared to the sector

growth rate of 12% per annum.

We do not expect to see an improvement in

market share as the company does not have an

aggressive growth agenda for the next two years

while the market is expected to grow by 20% in

terms of sqm.


strong


slightly different DuPont analysis and have

compared cap yield ( = Annual Rental Income /

Asset value ) instead of gross profit margin for the

companies. On this scale Is REIT’s score is 4 and

it is placed in the middle segment of the peer set.

Is REIT

Is REIT’s overall competitive outlook is weak among its peers and

other industrials in Turkey

However a 50% NAV discount is excessive given the FX-based

income, upcoming residential projects and exposure to Russia

Target price unchanged at TRY1.75 (after adjusting for the stock

split), maintain Overweight (adding a V flag)



156


abc


weak

The rental property market is very fragmented in

Turkey as the top five players constitute only 50%

of the retail space. The main reason for this is the

large number of players in the market (as almost

every construction company develops its own

retail centre to tap lucrative yields).

We do not expect to see a consolidation in the

short term as the market is still not yet saturated in

terms of retail and commercial space.


positive

A low interest environment should boost retail

consumption and consumer spending which

would increase the demand for Is REIT’s retail

space and rents.

Since Is REIT does not utilise debt for construction

activities, the company would not be affected by a

low rate environment through financing.

Weak TRY environment is positive in the short

term, neutral in the longer term

A weak TRY environment has a positive effect on

Is REIT as 65% of the total rental income is FX

denominated. However, the effect is short term. If

TRY does not appreciate, usually tenants will

eventually pressure the property operator for

rental discounts which would cancel out the

depreciation impact. Hence we believe the long-

term impact of TRY weakness should be neutral

on Is REIT.

Investment thesis

Is REIT plans to launch three new projects in

2011 and H1 2012. These would have a positive

impact on the RoE of the company as they will be

at higher returns due to the inclusion of residential

units (which will be for sale only) in contrast to

the existing rental-only assets.

In addition to these projects, the company also plans

to develop an airport hotel in Russia, which would

diversify the portfolio and increase the overall cap

yield due to higher average rents in Russia.

Is REIC currently trades at a 50% discount to its

NAV, which we see as excessive. We expect to

see 20% growth in NAV if the company manages

to launch three new projects in the following two

quarters.


Our DCF-driven target price is TRY1.75

(unchanged from the previous TRY2.3 taking into

account the 33% stock split) for Is REIT. Our

DCF parameters are a 5.5% equity risk premium,

8.5% risk-free rate, 13.5% CoE, 0.80 beta and

12.4% WACC (unchanged).

We continue to apply a 25% discount to the new

projects allow for some delay in their opening

dates, since Is REIT has been inactive project

development for some time.

The 48% potential return implied by our target

price falls above the 3.5%-23.5% band for a

Neutral rating for volatile Turkish stocks. Hence

we maintain our Overweight rating, adding a

volatility (V) flag in recognition of the stock's

historical volatility having increased.

Risks

The key downside risk is a weakening in retail

rents, due to a significant depreciation of TRY

which would lead tenants to ask for cuts in rents.

Any delay in the new projects is also a downside

risk, as we have included them in our valuation.

Starting more than three projects in 2011 and H1

2012 or starting them earlier than expected would

be a catalyst.

157


abc

Financials & valuation: Is Reit Overweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 96 101 105 114EBITDA 82 74 83 87Depreciation & amortisation -24 -24 -24 -25Operating profit/EBIT 58 50 59 62Net interest 3 12 4 6PBT 61 61 62 67HSBC PBT 61 61 62 67Taxation 0 0 0 0Net profit 61 61 62 67HSBC net profit 61 61 62 67


Cash flow from operations 84 79 87 92Capex -20 -20 -20 -20Cash flow from investment -20 -20 -20 -20Dividends 30 31 31 34Change in net debt 0 45 19 16FCF equity 66 70 71 78


Intangible fixed assets 0 0 0 0Tangible fixed assets 866 928 928 928Current assets 145 147 128 113Cash & others 132 132 113 97Total assets 1,012 1,075 1,056 1,041Operating liabilities 21 21 21 21Gross debt 0 45 45 45Net debt -132 -87 -68 -52Shareholders funds 940 971 952 937Invested capital 859 922 922 923


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 7.4 5.5 4.1 8.4EBITDA 10.8 -9.5 12.6 4.2Operating profit 15.5 -14.2 17.8 5.2PBT 1.0 0.6 1.4 8.1HSBC EPS 1.0 0.7 1.4 8.1

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Inflation (%) 0.0 10.2 10.2 10.2Rental income growth (USD, %) 4.7 2.9 -2.0 18.9GDP growth (%) 9.0 5.1 3.0 5.1USD/TRY average 1.5112 1.6000 1.7000 1.5500

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) ISGYO.IS Bloomberg (Equity) ISGYO TIMarket cap (USDm) 384 Market cap (TRYm) 708Free float (%) 49 Enterprise value (TRYm) 621Country Turkey Sector Real EstateAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

0

0.5

1

1.5

2

2.5

3

3.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

3

3.5

Is Reit Rel to ISTANBUL COMP


158


abc


We believe that Kardemir, one of the leading long

steel producers in Turkey, has improved its

competitive power in the last couple of years by

transforming itself from a low value added

construction steel producer to a high value added

rail steel/profile producer. This transformation,

when completed in the medium term, will

eliminate most of the risks related to high

competitive threats from oversupply in the long

steel market.

Profitable market share score is medium

Kardemir had a below average RoE (2010) of

2.6%, but its market share in some segments of

long steel makes it one of the important players in

the market. Notably in rail steel Kardemir does

not face competition in Turkey or in MENA. A

higher share of rails in the sales mix will improve

Kardemir's profitable market share score in the

coming years.


Kardemir has lost market share due to its capacity

constraints in the last few years despite growth in

the Turkish long steel market. Its plans to increase

crude steel capacity should help it regain some of

this lost share.


Despite strong margins, the asset turnover ratio

remains below average for the peer group (due to

lack of enough integration), implying relatively

lower sustainable growth potential. We expect

increasing RoE and ROA and higher market share

in line with a rising share of value added products

in the sales mix.


strong

Lack of competition in the rail segment

compensates for the fragmented structure of the

overall long steel segment. Therefore, we believe

that Kardemir has the potential to benefit from its

dominant position in value added segments.


positive

A low interest rate environment supports

construction activities and accelerates

government-led railway projects. Additionally,

Kardemir benefits from low interest expenses as it

plans to increase investment expenditure.

Kardemir

Kardemir’s overall competitive outlook is medium. The competitive

position is set to improve in the coming years with growth

achieved in less competitive segment

Rail steel’s increasing share of sales improves profitability and

gives protection from global macro volatility

We reiterate our Overweight rating with a target price of TRY1.25



159


abc

Weak TRY environment should be negative

Even though Kardemir has a short FX position

due to its financial loans, its sales prices are set in

USD terms, which helps compensate for the

financial expenses.

Investment thesis

Kardemir is currently making investments to

increase its capacity to 1.8m tonnes by the end of

2012, and to make it more cost efficient with

upgrades to blast furnace facilities. Kardemir also

plans to invest in a new 1.2mt/a blast furnace and a

1.5 t/a slab production unit. This longer-term plan,

which we do not include in our model at this stage,

aims to more than double crude steel capacity to 3m

tonnes by 2015 and improve volumes of more value-

added products further out.

Kardemir’s plans to increase rail production

capacity to 1mt/a from the current 450,000t/a over

the next three years confirms its growing focus on

the more profitable rail steel segment. Kardemir

has signed contracts for more than 200k tonnes of

rail exports to the Middle East and new rail

contracts with Turkish State Railways, which

suggest that Kardemir is well positioned to reap

the benefits from growing railway investments

both in Turkey and in the region. We expect the

rail segment’s share of revenues to pick up from

11% in 2010 to 19% in 2011 and 22% in 2012.

Kardemir’s raw material cost advantage

(utilisation of low-cost local iron ore production)

and higher contribution from value added

products - profiles and rail – should boost

earnings growth for the next two to three years.


We increase our 2011 net profit forecast by 61%

as first half 2011 net profit amounted to more than

our earlier full year forecast.

We value Kardemir based on the simple average of

its DCF value and global peer average 2011-12e

PE and EV/EBITDA multiples to arrive at our 12-

month target price of TRY1.25. Our DCF implies

a 12-month value of TRY1.52 per share. We

assume a WACC of 13.0% with underlying

assumptions of a risk free rate of 8.5%, a risk

premium of 5.5%, beta of 1.0 and terminal growth

rate of 3%, all unchanged. In our multiple

valuations, we use the global peer average of PE

and EV/EBITDA for 2011e-12e and apply them to

Kardemir’s 2011e-12e earnings and EBITDA. We

apply a 15% discount (to reflect Kardemir’s

reliance on long steel, a lower value added product

compared to flat steel) to the sector average PE of

8.1x and EV/EBITDA of 5.1x (was average PE of

10.6x and EV/EBITDA of 5.9x), which results in a

value of TRY1.06 per share.

Thus, we arrive at a blended per share value of

TRY1.29. We raise it by the cost of equity (14%)

and apply a 15% D-share discount (based on the

last 12-month average discount to other share

types) to reach our 12-month target price of

TRY1.25. Our target price of TRY1.25 implies a

potential return of 51%, which is above the

Neutral band of 8.5% -18.5% for non volatile

Turkish stocks. We therefore reiterate our

Overweight rating on Kardemir D shares.

Kardemir: HSBC forecast changes

_____________2011e ______________ _____________ 2012e ______________ ____________ 2013e______________TRYm old new change old new change old new change

Revenue 1,353 1,392 3% 1,584 1,584 0% 1,749 1,748 0% EBITDA 196 235 20% 254 277 9% 300 309 3% EBIT 103 180 74% 150 194 29% 196 208 6% Net income 83 134 61% 116 142 23% 155 157 1%


160


abc

Risks

Kardemir’s earnings are highly sensitive to steel

prices, and a change in steel prices is the main risk

to our valuation and rating. Any sudden fall in

demand for steel products could be negative. Any

negative developments in MENA markets would

also be negative as they are Kardemir’s main

export markets.

161


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 61 245 238 276Capex -157 -112 -109 -109Cash flow from investment -144 -112 -109 -109Dividends 0 0 0 0Change in net debt 104 -64 -77 -116FCF equity -114 62 75 114


Intangible fixed assets 3 3 3 3Tangible fixed assets 868 924 950 958Current assets 486 711 839 898Cash & others 10 175 252 268Total assets 1,404 1,685 1,839 1,905Operating liabilities 236 283 295 305Gross debt 285 385 385 285Net debt 274 210 133 17Shareholders funds 810 944 1,086 1,243Invested capital 1,110 1,180 1,245 1,285


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 27.1 38.0 13.8 10.4EBITDA 172.8 17.7 11.5Operating profit 1447.1 7.7 7.5PBT 578.7 19.2 10.4HSBC EPS 535.7 5.9 10.4

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Average TL/USD 1.51 1.54 1.50 1.50Sales (mt) 1,150.7 1,266.7 1,387.5 1,557.5Average Rebar price (USD/t) 509 634 642 726Average Billet price (USD/t) 552 678 726 704Average Profile price (USD/t) 678 824 793 770Average iron ore price (USD/t) 135 113 118 109

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.1 0.8 0.6 0.5EV/EBITDA 12.9 4.4 3.5 2.8EV/IC 1.0 0.9 0.8 0.7PE* 34.6 5.4 5.1 4.7P/Book value 0.9 0.8 0.7 0.6FCF yield (%) -13.6 7.5 9.0 13.6Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) KRDMD.IS Bloomberg (Equity) KRDMD TIMarket cap (USDm) 453 Market cap (TRYm) 836Free float (%) 48 Enterprise value (TRYm) 1046Country Turkey Sector Metals & MiningAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

0.5

1

1.5

2

2.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

Kardemir Karabuk Demir Rel to ISTANBUL COMP


Financials & valuation: Kardemir Karabuk Demir Overweight

162


abc


On our overall scorecard Kiler ranks medium. The

company has been able to keep up consistent

growth in market share along with good gross

profit margins. However, limited market power,

low ROE, high indebtedness and exposure to

foreign exchange risk offset these merits.


weak

Kiler had only a c1% market share in the Turkish

food retail market as of 2010. The company is the

second largest player among supermarkets in

Turkey in terms of sales, however it lags the

leader Migros by a large distance. Kiler’s ROE is

also low compared to that of the other players.

The company had a 7% ROE in 2010. This is

mainly due to the high leverage of the company.

We do not see much scope for a reduction in the

indebtedness of the company in the near term as

the company still uses a combination of organic

and inorganic growth for its expansion.


Kiler has improved its market share among

Turkish supermarkets from c2% in 2005 to c3.5%.

The company has the second largest market share

among Turkish supermarkets. We believe the

company is strong on the market share momentum

metric as it has gradually grown its market share

thanks to rapid inorganic expansion. Along with

this, the penetration of organised retailers in

Turkey has been also increasing over the years

and we see this trend continuing going forward.


Kiler operates solely in the supermarket segment.

Over the last two years the company has seen gross

margins in the range of 26%-28%. Among its peers,

Kiler has one of the highest gross margins. However,

in terms of asset turnover the company lags behind

its peers with an asset turnover ratio of 1.36x at

2010-end. However, relative to other industries the

turnover ratio is still high. We believe that the

company will be able to maintain its high gross

margins going forward.


weak

Kiler is the second largest player in the Turkish

supermarket segment where fragmentation and

competition is the highest. The company has

c3.5% market share in this segment whereas the

market leader Migros has a c16% share. Other

Kiler

Competitive outlook is medium due to a fragmented supermarket

sector and the low RoE of the company

Working capital management, high indebtedness and a slow-

growing competitive supermarket segment look challenging

TP cut to TRY3.10 (from TRY6.5) on a sharp reduction in

forecasts; maintain Underweight (V)



163


abc

large players such as CarrefourSA and Tesco Kipa

are close on its heels in this segment.

Consolidation is likely in the sector and if

competitors become more aggressive than Kiler, it

would negatively affect the company.


positive for Kiler

As of Q2 2011, Kiler had gross debt of

TRY235m. In 2010 the company paid TRY17m

in interest expenses, equivalent to c30% of

EBITDA. A low interest rate environment will

definitely help the company in bringing down

interest costs and improving its bottom line.


Kiler

Kiler has a significant portion of its debt

denominated in USD. As of Q2 2011, c70% of

Kiler’s debt was USD denominated. In Q2 2011,

Kiler posted cTRY8m of net FX losses. A weak

TRY environment will negatively affect the

company’s bottom line.

Investment thesis

The supermarket segment is the most saturated

among the major retail formats in Turkey.

According to Euromonitor, the combined share of

the top-3 players in the segment has not increased

since 2006. This, in our view, shows how difficult

gaining market share in the segment is. Although

growth can be mainly driven by consolidation,

that’s a very long and a costly way since the

company is after only small-sized acquisitions.

The average store size for new stores is highly

volatile, again because of inorganic expansion and

the company’s occasional portfolio reshuffling. A

good example is 2009 when even though the

company opened 1 net store during the year, the

total sales area declined by 4% y-o-y.

Kiler has seen a considerable amount of volatility

in terms of net working capital over the years. The

net working capital of the company has increased

from 26TRYm in 2009 to 133TRYm in 2010. The

ratio of net debt to EBITDA for Kiler has also

been very volatile. From the highs of 7.6 in 2007

it came down to 1.7 in 2009, but subsequently

rose again in 2010, to 3.5.

Given the sector that the company is active in, the

low visibility on selling space growth and thje

volatility in the balance sheet, we choose to stay

conservative on Kiler’s growth and FCF

generation prospects.


Following weaker-than-expected 1H 11

performance, we revise down our forecasts for the

company sharply. The net income is also affected

by a weaker TRY/USD rate. We now expect a

TRY15m net loss from the company (was

TRY20m net income) in 2011 and TRY10m net

income in 2012 (was TRY30m). We have lowered

EBITDA to TRY52m for 2011 (from TRY71m)

and the EBITDA margin comes down to 6.4%

(from 7.7%).

Our DCF-based valuation points to a 12-month

target price of TRY3.1 (from TRY6.50) using a

WACC of 11.6%, a risk-free rate of 8.5%, ERP of

5.5% and a beta of 0.85 terminal growth rate of

5%. Under our research model, for stocks with a


23.5%. Our target price for Kiler implies a

negative potential return of 10%, hence we

maintain our Underweight (V) rating.

Forecast changes

______ 2011e________ _______ 2012e _______TRYm Old New Old New

Sales 921 807 1118 917 EBITDA 71 52 86 61 EBIT 50 32 60 36 Net profit 20 -15 30 10


164


abc

Risks

The major upside risk to our valuation is a better-

than-expected performance in terms of LFL

growth by the company. LFL growth is a critical

aspect of our valuation and a better-than-expected

performance here will improve our valuation. A

larger number of store additions than expected

with higher average selling space may also push

the valuation to the upside.

165


abc

Financials & valuation: Kiler Alisveris Hizmetler Underweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 771 807 917 1,035EBITDA 59 52 61 69Depreciation & amortisation -19 -20 -25 -29Operating profit/EBIT 40 32 36 40Net interest -23 -46 -18 -25PBT 14 -18 13 11HSBC PBT 14 -18 13 11Taxation -4 4 -3 -2Net profit 10 -15 10 9HSBC net profit 10 -15 10 9


Cash flow from operations 7 8 17 45Capex -7 -17 -23 -21Cash flow from investment -30 -18 -23 -21Dividends 0 0 0 0Change in net debt 100 10 5 -24FCF equity -28 2 5 30




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 0.1 4.7 13.6 12.9EBITDA -3.3 -11.6 16.4 14.2Operating profit -15.3 -21.6 14.0 10.7PBT -20.0 -232.0 -13.7HSBC EPS 10404.7 -232.5 -13.9

Ratios (%)

Revenue/IC (x) 2.7 2.3 2.6 3.0ROIC 10.1 7.3 8.2 9.1ROE 7.4 -11.0 7.7 6.2ROA 1.8 -2.4 1.7 1.4EBITDA margin 7.6 6.4 6.6 6.7Operating profit margin 5.2 3.9 3.9 3.8EBITDA/net interest (x) 2.5 1.1 3.4 2.8Net debt/equity 132.7 153.5 146.7 123.3Net debt/EBITDA (x) 3.5 4.1 3.6 2.8CF from operations/net debt 3.5 3.6 7.9 23.0



Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.9 0.9 0.8 0.6EV/EBITDA 11.5 13.3 11.5 9.5EV/IC 2.0 2.0 1.9 1.9PE* 42.0 46.3 53.8P/Book value 3.0 3.7 3.4 3.2FCF yield (%) -5.9 0.5 1.1 6.4Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) KILER.IS Bloomberg (Equity) KILER TIMarket cap (USDm) 251 Market cap (TRYm) 463Free float (%) 15 Enterprise value (TRYm) 689Country Turkey Sector MULTILINE RETAILAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

23456789

10

2009 2010 2011 2012

2345678910

Kiler Alisveris Hizmetler Rel to ISTANBUL COMP


166


abc


Koc operates in Turkey’s key industries with a top

position. On the consumer side, it’s the clear

domestic market and export leader in automotive

and white goods. In the energy sector, it’s the owner

of the sole refiner, number one in LPG distribution,

number three in fuel retailing. In finance, its JV with

Unicredit, Yapi Kredi is the long standing leader in

the credit card business. Strong partnerships, a large

scale and industrial know-how (including R&D)

have been the key elements that have brought

Turkish industrial leadership for Koc today. The

Group represents (by sales) 7% of Turkish GDP and

10% of exports.


Koc Group has dominant market share and high

profits in all the core sectors in which it operates.

These include autos, durable goods, refining, LPG,

and financial services (banking, leasing, factoring).

During the past five years, Koc has enerated a

consolidated annual average ROE of 16.5%.


The market shares that Koc has in various sectors

are mostly mature. Yet, the group’s keen interest

in the power generation segment of the energy

sector may help it gain market share in upcoming

years depending on implementation. Koc aims to

build 3,000MW of generation capacity in the next

few years. On the other hand, its refining market

share may fall in the future with pending

investments in this area by others.


strong

Koc’s portfolio is a strong proxy for the Turkish

economy. In 2000-05, Koc posted 11% revenue

CAGR (inflation adjusted) vs. a GDP CAGR of

5%. In 2005-10, these figures were 9% (Koc) and

3% (GDP). Koc offers high single-digit growth in

an economy which likely has sustainable growth

potential of 4-6%. But exports constitute c20% of

Koc’s total revenues and c15% go to Europe.

Therefore a slowdown in Europe may curb growth

to some extent through the export leg.


strong

While Koc enjoys (still) a lack of any other

players in the refining market, as well as the

oligopolistic structure in the white goods and LPG

markets, it also operates in the highly competitive

automotive and banking sectors.

Koc Holding

Koc's overall competitive outlook is strong compared to its peers

and other industrials in Turkey

With an aim to “fine-tune” its highly efficient portfolio, Koc seeks

opportunities such as in power generation and via privatisations

including toll-roads

We have a TRY8.15 target price and a Neutral rating on Koc

167


abc


Koc is the group that’s regarded as the closest to

the Turkish consumer. Low interest rates in

Turkey benefit the group through high

consumption of cars and durable goods as well as

mortgages and consumer loans.

Weak TRY has neutral impact

Koc has a consolidated FX short position of

USD3.2bn while the holding company (alone) is

FX long USD339m. Weak TRY leads to FX

losses through some subsidiaries (mainly Tupras’s

SPV) while the group’s vulnerability has declined

considerably in recent years through deleveraging.

Investment thesis

Koc runs a very well balanced and highly efficient

portfolio thanks to viable actions taken during the

past 5-6 years in terms of portfolio re-shuffling

(acquisitions and divestitures). Yet, this seems to

have been credited by the market to a large extent

in our view; we calculate Koc is trading at a slight

3% discount to its current NAV and a 24%

discount to its target NAV. We find these levels

close to fair and believe further catalysts are

needed to justify a stock performance above the

sum-of-parts. This could be any new venture at

the holding company level to be deemed as a

value-accretive move. To this end, green field

investments by Koc in power generation and

privatisations in Turkey (power generation, toll

roads and bridges etc) may give Koc the

opportunity to “fine-tune” its portfolio and offer

investors a new story.


We present in the table below our forecast changes.

These mainly include an increase in revenue

estimates due to the high oil price impact on the

energy segment revenues while net profit remains

broadly the same due to higher FX loss estimates

(impact of changes in currency forecasts).

Koc Holding - forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Revenue 57,538 64,763 62,974 67,093 65,353 69,599 EBITDA 5,721 6,164 6,229 6,248 6,549 6,791 Net profit 1,965 2,005 2,172 2,008 2,279 2,222

Source: HSBC estimates We continue to value Koc Holding based on our

NAV model and by applying a 10% conglomerate

discount to our calculated target NAV. Our

forecast target NAV of USD11.97bn with the

10% discount applied gives as a target price of

USD4.46 or TRY8.15. We have a Neutral rating

on Koc.

Key upside risks to our call are acquisitions at the

parent company level (especially in power

generation), faster-than-expected economic

growth, better-than-expected domestic

consumption, refinery and banking margins. The

downside risks would be the opposite of these

plus a possible decision by Koc family members

(although the chances are low in our view) to

register part of their non-floating shares for sale.

Koc - Summary NAV Table (USDm)

Segment Total Stake Current Total Stake Target Value Value NAV % Value Value NAV %

Finance 9,863 3,048 32.5% 13,091 4,039 33.7% Automotive 5,936 2,380 25.4% 7,408 2,938 24.5% Cons. Durables 2,681 1,086 11.6% 3,662 1,483 12.4% Energy 6,789 2,635 28.1% 7,974 3,097 25.9% Food & Retail 409 166 1.8% 493 202 1.7% Other 356 148 1.6% 356 148 1.6% TOTAL SOP 26,033 9,462 100.9% 32,982 11,908 99.5%

Total Listed 9,073 96.8% 11,518 96.2% Total unlisted 390 4.2% 390 3.3%

Net Cash (Koc Holding) 702 7.5% 702 5.9% Net Cash (SPV/Energy) -788 -8.4% -638 -5.3%

Current NAV 9,377 100.0% 11,972 100.0% Current MCAP 9,057 9,057

Prem./(Disc.) -3.4% -24.4% Targ. NAV @ 10% discount 10,775

TP in USD per share 4.46 TP in TRY per share 8.15


168


abc

Financials & valuation: Koc Holding Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 53,812 64,763 67,093 69,599EBITDA 5,074 6,164 6,248 6,791Depreciation & amortisation -969 -989 -1,040 -1,122Operating profit/EBIT 4,105 5,175 5,208 5,669Net interest -219 -545 -571 -538PBT 3,886 4,630 4,637 5,131HSBC PBT 3,886 0 0 0Taxation -748 -926 -927 -1,026Net profit 1,734 2,005 2,008 2,222HSBC net profit 1,734 2,005 2,008 2,222


Cash flow from operations -1,729 2,148 2,460 2,873Capex -1,246 -2,633 -3,200 -3,897Cash flow from investment -961 -2,457 -3,012 -3,702Dividends -550 -867 -1,002 -1,004Change in net debt 1,657 -3 -98 -6FCF equity -2,993 -504 -761 -1,045


Intangible fixed assets 4,838 4,838 4,838 4,838Tangible fixed assets 24,581 28,096 31,948 36,536Current assets 39,214 43,817 47,028 50,431Cash & others 9,745 10,532 11,452 12,321Total assets 74,667 82,786 89,849 97,840Operating liabilities 36,434 42,189 46,473 51,421Gross debt 15,666 16,450 17,272 18,136Net debt 5,921 5,918 5,820 5,814Shareholders funds 12,186 13,323 14,329 15,547Invested capital 22,454 24,030 25,889 28,063


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change


Ratios (%)

Revenue/IC (x) 2.6 2.8 2.7 2.6ROIC 16.3 17.8 16.7 16.8ROE 14.9 15.7 14.5 14.9ROA 6.9 7.1 6.6 6.4EBITDA margin 9.4 9.5 9.3 9.8Operating profit margin 7.6 8.0 7.8 8.1EBITDA/net interest (x) 23.2 11.3 10.9 12.6Net debt/equity 28.0 25.9 23.6 21.7Net debt/EBITDA (x) 1.2 1.0 0.9 0.9CF from operations/net debt 36.3 42.3 49.4




Year to 12/2010a 12/2011e 12/2012e 12/2013e

GDP Growth (%) 9.0% 7.0% 3.0% 4.0%USD/TRY (Average) 1.51 1.76 1.88 1.95USD/TRY (Year-end) 1.55 1..85 1.91 1.98

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.3 0.3 0.2 0.2EV/EBITDA 2.9 2.7 2.6 2.4EV/IC 0.7 0.7 0.6 0.6PE* 9.5 8.2 8.2 7.4P/Book value 1.4 1.2 1.1 1.1FCF yield (%) -33.1 -4.8 -7.3 -10.0Dividend yield (%) 3.3 5.3 6.1 6.1


Issuer information


Reuters (Equity) KCHOL.IS Bloomberg (Equity) KCHOL TIMarket cap (USDm) 8,935 Market cap (TRYm) 16,471Free float (%) 20 Enterprise value (TRYm) 16354Country Turkey Sector ConglomeratesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

0123456789

10

2009 2010 2011 2012

012345678910

Koc Holding Rel to ISTANBUL COMP


169


abc


Migros scores medium on our overall scorecard.

The company’s leadership in Turkish

supermarkets along with improved profitability

post the Sok sale can be considered advantageous

in terms of competition. Yet low ROE and asset

turnover are concerns. A low interest rate regime

will definitely help the highly leveraged company

whereas the large Euro-denominated debt on the

balance sheets exposes it to substantial FX losses

in the case of weak TRY.


weak

Migros is among the top 3 players in the Turkish

food retail market. The company has lost

considerable market share since the sale of its

discount chain operations. However Migros is still

by far the market leader among supermarkets in

Turkey. Yet, due to its high leverage, Migros has

a very low ROE and hence ranks low in terms of

“profitable market share”. That said, we believe

that with the cash generated from the sale of Sok

and higher profitability of the existing operations,

Migros should be able to deleverage considerably

in the coming quarters.


Migros has been able to improve its market share

among Turkish supermarkets over the years. From

a mere 8.8% market share among organised

retailers in 2005 the company has grown to c16%

now. With the divestiture of operations in

discount chain Sok, we believe that Migros will

now be more efficient in improving its

supermarket operations. We also see penetration

of organised retail increasing in Turkey.


Migros has historically operated at gross margins in

the range of c25%-26%. Compared to its peers,

Migros fares well in terms of this parameter. The

company however had an asset turnover ratio of

1.36x in 2010 which is quite low compared to its

peers. With the sale of Sok, we believe that Migros

will be able to improve its gross margins further as

the discount chain had pulled down its gross margin

historically. With better gross margins going

forward, we believe that the sustainable growth

outlook is strong for the company.


Migros is the market leader with a c16% market

share in Turkish supermarkets. The number two

Migros

Competitive outlook is medium thanks to market leadership

position in supermarkets and a growing organised retail sector

The focus on the supermarket format will create value after the

Sok divestiture, in our view

TP cut to TRY22.80 (from TRY26.8) on reduced forecasts and

higher WACC; maintain Overweight (V)



170


abc

player has only around a c4% market share. Even

though we believe that there are good chances of

consolidation happening in the Turkish

supermarket space, Migros, with its strong market

share should not be heavily impacted by this.


positive for Migros

As of Q2 2011, Migros had gross debt of

TRY2.7bn. Migros plans to use a large portion of

the TRY600m proceeds from the Sok sale to

reduce its leverage. We believe that a low interest

rate environment will certainly help Migros in

reducing the interest cost burden and should be a

positive for the company.


Migros

Since 2009 Migros has had a short position in

EUR, which has led the company to face FX

losses in Q1 and Q2 2011. As of Q2 2011, Migros

had Euro-denominated debt to the tune of

EUR1.1bn. Hence a weaker TRY will negatively

affect the company’s bottom line.

Investment thesis

After Migros’ decision to divest its discount chain

Sok, we believe the market will focus on the

potential exit strategies of BC Partners (BC),

which holds an 80.5% stake. We think the most

likely scenario is a sale to a strategic partner and

would expect this to be positive for minorities at

the current valuation level.

Another important issue is the performance of the

remaining formats, especially the supermarkets.

Migros already has a dominant presence in the

supermarket space in Turkey but has nonetheless

been increasing market share. Although we are not

positive on the supermarket format in Turkey, we are

encouraged by the margin improvement the

company can sustain. We are also positive on the

new small stores and their potential for success.


We substantially lower our net income for 2011

based on the lower TRY/EUR rate. We now

expect a TRY387m net loss (was TRY16m loss)

from the company in 2011. However we have

revised up our 2012 net income to TRY107m

(from TRY70m) on lower FX losses.

Forecast changes

______ 2011e________ _______ 2012e _______TRYm old New old new

Net sales 5,628 5,684 6,265 6,326 EBIT 200 229 258 265 EBITDA 328 360 393 402 NP -16 -387 70 107


Based on our revised forecasts, our new DCF-

based valuation points to a 12-month target price

of TRY22.8 (was TRY26.8), using a WACC of

12.9% (was 11.3%), a risk-free rate of 8.5%, ERP

of 5.5% and a beta of 0.80 (was 0.70), terminal

growth rate of 5%. The revision to our forecasts

and the higher WACC are the reasons for the

lower target price.

Under our research model, for stocks with a


23.5%.. Our target price implies a potential return of

50%, hence we maintain our Overweight (V) rating.

Risks

The major risk to our valuation is higher-than-

expected pressure on EBITDA margins owing to

the increasing number of store openings. Second,

Migros has a large proportion of EUR-

denominated debt, exposing the company to

foreign exchange risk which could imply a lower

IRR and hence lower EV for Migros.

171


abc

Financials & valuation: Migros Overweight (V) Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 6,365 5,684 6,326 7,142EBITDA 355 360 402 451Depreciation & amortisation -130 -131 -136 -157Operating profit/EBIT 226 229 265 294Net interest -154 -168 -159 -162PBT 79 -375 133 92HSBC PBT 79 -375 133 92Taxation -36 -12 -27 -18Net profit 43 -387 107 74HSBC net profit 28 38 80 114


Cash flow from operations 295 -361 315 340Capex -230 -127 -158 -162Cash flow from investment -182 473 -158 -162Dividends -196 0 -43 -29Change in net debt 207 -112 -114 -148FCF equity -24 -69 129 217


Intangible fixed assets 2,556 2,144 2,159 2,163Tangible fixed assets 1,246 1,054 1,061 1,062Current assets 1,745 1,611 1,724 1,878Cash & others 884 832 877 955Total assets 5,567 4,829 4,963 5,123Operating liabilities 1,713 1,526 1,666 1,852Gross debt 2,388 2,224 2,154 2,084Net debt 1,504 1,392 1,278 1,129Shareholders funds 1,347 959 1,024 1,068Invested capital 2,951 2,451 2,401 2,297


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 11.4 -10.7 11.3 12.9EBITDA -9.8 1.3 11.6 12.3Operating profit -15.1 1.2 16.0 11.0PBT -41.4 -575.8 -31.0HSBC EPS -85.6 37.4 109.5 43.1

Ratios (%)

Revenue/IC (x) 2.2 2.1 2.6 3.0ROIC 4.2 8.7 8.7 10.0ROE 1.9 3.3 8.1 10.9ROA 0.8 -7.4 2.2 1.5EBITDA margin 5.6 6.3 6.4 6.3Operating profit margin 3.5 4.0 4.2 4.1EBITDA/net interest (x) 2.3 2.1 2.5 2.8Net debt/equity 111.7 145.0 124.7 105.7Net debt/EBITDA (x) 4.2 3.9 3.2 2.5CF from operations/net debt 19.6 24.7 30.1


EPS Rep (fully diluted) 0.24 -2.17 0.60 0.41HSBC EPS (fully diluted) 0.16 0.21 0.45 0.64DPS 1.10 0.00 0.24 0.17Book value 7.56 5.39 5.75 6.00


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Number of discounters 1,254 0 0 0Number of supermarkets 637 680 730 780Number of small supermarkets 0 15 65 115Number of hypermarkets 11 15 18 20

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) MGROS.IS Bloomberg (Equity) MGROS TIMarket cap (USDm) 1,468 Market cap (TRYm) 2,706Free float (%) 19 Enterprise value (TRYm) 4096Country Turkey Sector FOOD & STAPLES

RETAILINGAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

16

11162126313641

2009 2010 2011 2012

1611162126313641

Migros Rel to ISTANBUL COMP


172


abc

Overall competitive outlook is strong Petkim’s monopoly in an under-served market

enables it to continue with its strong domestic sales

and rising exports. Petkim’s capacity is enough to

serve only about 25% of the fast growing domestic

petrochemicals demand and therefore it faces

competition from imports (subject to import tariffs).

The only downside is the sharp fall in its market

share due to lack of capacity additions. We expect

plans to double capacity after the major shareholder's

refinery investment to improve the competitive

power further.


strong

Petkim is the largest petrochemical producer in

Turkey with a market share of c25% and a ROE of

8.5% (for 2010), which is slightly below the average

of the Turkish universe. We expect new projects to

improve market share and, together with the

recovery in the petrochemical cycle next year,

Petkim should have a better profitability level.


Petkim aims to become a regional power in the

petrochemicals sector by 2018 and to attain a 40%

domestic market share, through capacity

increases, from the current level of 25%. Petkim

is losing market share as its capacity has seen

limited increases in the past decade despite fast

rising domestic demand. The ongoing

debottlenecking project may only serve to

maintain Petkim’s market share since Turkish

thermoplastics consumption is growing at nearly

double the GDP growth rate.


Despite strong 2010 figures (above average asset

turnover and gross margins), we remain

cautiously optimistic as Petkim is fairly

susceptible to international price and margin

fluctuations. In the current scenario of weaker

petrochemical demand, the strong margins seen in

the recent past may not be sustainable in the short

term. However, we do not see a return to 2009

scenario of worse margins due to industry

consolidation and restructuring efforts during the

recent past which leaves the industry better

prepared to face a possible recession.


strong

Petkim enjoys a monopolistic position in an

under-served market. As imports are also subject

Petkim

Petkim’s overall competitive outlook is strong. It’s a dominant

player in an under-served market

Investment case driven by long-term integration prospects and

strong product portfolio

Target price reduced to TRY3.0 (from TRY3.30); maintain

Overweight



173


abc

to tariffs, we see the current market structure

working in favour of Petkim with no foreseeable

threat from new entrants.


Petkim and its shareholders have refinery

investment and petrochemical capacity expansion

plans which should benefit from a low interest

rate environment. Also, lower rates should benefit

all the industries which are customers of Petkim.

Weakness in the TRY is positive

Petkim has no FX short position and its sales

prices are directly linked to USD. Since some of

the costs are TRY related, a weak TRY is positive

for Petkim

Investment thesis

Petkim’s performance has seen a remarkable

turnaround after privatisation in 2008 under

Turcas-Socar ownership. Its EBITDA turned from

a loss of TRY21m in 2008 to a TRY145m profit

in 2009, despite the industry facing its worst crisis

ever due to recession. Petkim’s steady

improvement in its EBITDA since 2009 could be

challenged by recent fears of weaker

petrochemical demand but its strong portfolio will

help, in our view.

The potential direct gas supplies by Azerbaijan’s

state oil and gas company, Socar, which is also

the main shareholder in Petkim, at subsidised

prices will help Petkim reduce its energy costs,

which account for c10% of the total cost of goods

sold. Natural gas usage instead of liquid fuels

should benefit the company due to increased

efficiency and price discounts. Initially, this might

mean cTRY25-30m savings per annum for

Petkim, assuming that a 10% discount is secured.

Depending on the details of the agreement (which

are yet to be announced) and given growing

capacity, the benefits might be even higher in the

long term.

Petkim will also share its utility and port facilities

with the new refinery (to be built by its shareholders

on Petkim's lands), which should help it earn some

extra fees on these services. Though still some time

far into future, Petkim is looking to invest in its port

to upgrade its capacity, which could be used as extra

source of revenue.

Petkim forecast changes

_________ 2011e ________ _________ 2012e ________Petkim New Old change New Old change

EBITDA 306 365 -16.2% 332 382 -13.1% EBIT 235 287 -18.1% 249 307 -18.9% Net profit 282 235 20.0% 199 245 -18.8%



Due to the recent correction in petrochemical

prices, we have lowered our estimates. However,

we have increased our net profit estimate for 2011

by 20% due to possible one-off gains (from real

estate and plant equipment sales). Our valuation is

the average of the figures obtained using DCF and

EV/EBITDA methodologies, assigning an equal

weighting to each. We then increase this by the

COE over 12 months at 12.8% to reach our target

price of TRY3.0 (from TRY3.3). Our DCF model

uses a WACC of 12.5%, calculated using a risk

free rate of 8.5%, beta of 0.79 and an equity risk

premium of 5.5%, terminal growth rate of 4% and

yields TRY3.25 per share. Our EV/EBITDA-

based calculation using a 6.2x global peer average

yields TRY2.70 per share.

Our target price for the company implies a 27%

potential return, which is above the Neutral range

of 8.5% - 18.5% for non-volatile Turkish stocks.

Based on this, we maintain our Overweight rating.

Petrochemical margins and macro conditions are

the biggest risks for Petkim’s business. The scarce

naphtha availability, which we think Petkim has

managed successfully so far, could be a risk to its

operating rates. In addition, worse-than-expected

domestic macro conditions could have a negative

impact on valuation as most of its profitability

depends on domestic customers.

174


abc

Financials & valuation: Petkim Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e




Cash flow from operations 75 -5 282 300Capex -79 -107 -179 -26Cash flow from investment -79 -107 -179 -26Dividends 0 0 -119 -119Change in net debt -14 159 -146 -194FCF equity -3 -254 104 274


Intangible fixed assets 10 10 10 10Tangible fixed assets 1,260 1,286 1,381 1,321Current assets 1,106 1,191 1,337 1,531Cash & others 202 170 316 511Total assets 2,376 2,487 2,728 2,863Operating liabilities 606 373 373 373Gross debt 169 297 297 297Net debt -33 127 -19 -214Shareholders funds 1,600 1,882 2,081 2,176Invested capital 1,568 1,943 2,039 1,979


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 41.4 24.1 2.2 6.6EBITDA 34.4 57.5 8.4 6.6Operating profit 196.1 73.6 5.9 7.8PBT 116.2 148.3 -28.5 7.8HSBC EPS -76.6 116.7 -29.5 7.8

Ratios (%)

Revenue/IC (x) 1.9 2.1 1.9 2.0ROIC 8.3 10.8 10.0 10.7ROE 8.5 16.2 10.0 10.1ROA 5.8 11.6 7.6 7.7EBITDA margin 6.7 8.5 9.0 9.0Operating profit margin 4.6 6.5 6.7 6.8EBITDA/net interest (x) Net debt/equity -2.0 6.7 -0.9 -9.8Net debt/EBITDA (x) -0.2 0.4 -0.1 -0.6CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

TRY/USD (Average) 1.51 1.59 1.50 1.50TRY/USD (period end) 1.55 1.50 1.50 1.50

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) PETKM.IS Bloomberg (Equity) PETKM TIMarket cap (USDm) 1,286 Market cap (TRYm) 2,370Free float (%) 39 Enterprise value (TRYm) 2497Country Turkey Sector CHEMICALSAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

0.5

1

1.5

2

2.5

3

3.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

3

3.5

Petkim Rel to ISTANBUL COMP


175


abc


Sabanci’s core competencies lie in banking via

Akbank, in cement via market leaders Akcansa and

Cimsa and in tyre and tyre cord via Brisa and

Kordsa. The energy JV with Verbund, Enerjisa, has

become one of the top players in the electricity

market (both generation and distribution) while the

group still needs to address the poor performance in

retail (via Carrefour) and in non-life insurance (via

Aksigorta) which are hurt by the very high

competition in these two sectors.


Sabanci’s average ROE was c13% in the past five

years, driven mainly by Akbank (ROE of c19%).

With the exception of the established cement, tyre

and tyre cord lines, the portfolio’s performance

has been dragged down by the low return on the

retail and insurance lines. High growth in the

energy sector and potential actions to restructure

the retail operations with Carrefour provide

optimism for higher overall returns in the non-

finance portfolio while visibility is low for the

non-life insurance operation (despite the alliance

with Ageas).


Sabanci has established market shares in Turkey

in banking (10% in credit cards), cement (27%),

tyres (33%), life insurance and pensions (21%),

electronics retailing (13%) and globally in tyre

cords (20%). These offer limited market share

gains going forward. That said, in energy Sabanci

aims to attain 10% market share by 2015 in terms

of Turkey’s total generation capacity vs c3%

today. Also, depending on the success of the

restructuring and turnaround expected in food

retail, there is prospect of market share gains for

Sabanci there too.


strong

Sabanci posted a consolidated (inflation-adjusted)

revenue CAGR of c3% between 2005-10, in line

with Turkish GDP growth. Future growth will

depend more on the industrial businesses, and

particularly on energy where we project high

growth in the next five years (c19% CAGR in

nominal terms vs c8% for consolidated revenues),

contributing positively to the group’s overall

performance.


We give negative points for the insurance (non-

life) and retail sectors but positive points for

cement, banking and energy.


Given that Sabanci’s industrial portfolio is geared

more towards intermediary goods, it benefits from

a low interest rate environment. Sabanci benefits

Sabanci Holding

Sabanci Holding's overall competitive outlook is medium

The main focus is attaining a better-balanced portfolio via higher

growth in non-finance lines - progress so far is promising

Target price kept at TRY10.0, maintain Overweight

176


abc

from a low interest rate environment mainly via

its banking exposure where loan demand growth

is spurred by low interest rates.

Weak TRY has medium impact

The group has a sound balance sheet with low

gearing and low FX exposure (cUSD190m FX

short as of end of H1 2011, 0.2% of total assets).

Investment thesis

We expect Sabanci’s deep and, in our view,

unjustified NAV discount to narrow with the

gradual elimination of the overhang from the

family stake sale (7% of total capital for now) and

improvement in the non-finance portfolio so that

it relies less on banking profits and the stock is no

longer seen as simply an Akbank proxy. Growth

in energy and potential improvement in retail will

be the key drivers of such positive portfolio

change. In H1 2011, Sabanci grew non-finance

revenue and EBITDA by 37% and 90%,

respectively (vs finance revenue and EBITDA

down 3% and 22%, respectively).


We have made some changes to our forecasts for

Sabanci as a result of our review of individual

business line estimates, guidance from the

company and changes to our macro assumptions

(including currency estimates) since our previous

update on the company. In 2011, we now look for

a lower EBITDA thanks before, due to low

finance segment profitability, but higher net profit

as tax and minority share of profits decline. In

2012, we look for 9% revenue and 8% EBITDA

growth but 4% net profit growth due to increasing

finance expenses (mainly energy loans).

The basis for our valuation is NAV and we

calculate Sabanci trades at a 45% discount to

current NAV and a 50% discount to target NAV.

We continue to assume the fair NAV discount for

Sabanci is 20%, which we apply to our target

NAV when setting the target price. Based on a

target NAV of USD14.6bn, this gives us a target

price of USD5.74, equating to TRY10.0. Based on

the 60% potential return offered by our target

price, which is above the Neutral band for non-

volatile Turkish stocks of 8.5-18.5%, we maintain

our Overweight rating. Sabanci Holding - Summary NAV Table (USDm)

Segment Total Stake Current Total Stake Target Value Value NAV % Value Value NAV%

Finance 16,964 7,035 52.8% 18,530 7,619 52.1% Auto, Tyres 1,167 719 5.4% 1,167 719 4.9% Textile 160 136 1.0% 160 136 0.9% Cement 1,266 556 4.2% 1,943 863 5.9% Retailing 1,436 674 5.1% 1,436 674 4.6% Energy 4,479 2,239 16.8% 4,479 2,239 15.3% Other 5,005 1,275 9.6% 5,005 1,275 8.7% TOTAL 30,477 12,634 94.8% 32,720 13,525 92.5%

Total Listed 8,284 62.2% 9,588 65.5% Total unlisted 4,351 32.7% 4,351 29.7%

Net Cash 690 5.2% 690 4.7% Current NAV 13,324 100.0% 14,629 100.0%

Current MCAP 7,320 7,320 Pre./(Disc.) -45.1% -50.0%

Targ. NAV @ 20% discount 11,703 TP in USD per share 5.74

TP in TRY per share 10.00


Notwithstanding the finance segment’s

dominance, Sabanci Holding has a diversified

portfolio and we therefore believe the key

downside risk to our rating is lower-than-expected

economic recovery. A worse earnings

performance than we expect by the single most

important subsidiary, Akbank, delays in energy

investments, lower returns than targeted, and

negative regulatory changes in the energy sector

would be other downside risks.

Sabanci Holding - forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Revenue 21,242 21,362 24,337 23,248 27,511 25,357 EBITDA 4,710 4,293 5,295 4,622 6,246 5,292 Net profit 1,563 1,712 1,714 1,778 2,005 2,004


177


abc

Financials & valuation: Sabanci Holding Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 19,541 21,362 23,248 25,357EBITDA 4,536 4,293 4,622 5,292Depreciation & amortisation -422 -486 -547 -582Operating profit/EBIT 4,114 3,807 4,075 4,710Net interest -56 -97 -222 -351PBT 4,246 3,891 4,040 4,554HSBC PBT 4,246 3,891 4,040 4,554Taxation -839 -778 -808 -911Net profit 1,583 1,712 1,778 2,004HSBC net profit 1,583 1,712 1,778 2,004


Cash flow from operations 9,985 16,303 10,087 12,992Capex -1,110 -1,755 -1,882 -1,948Cash flow from investment -1,110 -1,755 -1,882 -1,948Dividends -576 -831 -856 -889Change in net debt 12,450 4,224 3,526 4,199FCF equity 8,865 14,539 8,195 11,034


Intangible fixed assets 2,260 2,841 3,516 4,254Tangible fixed assets 4,865 6,524 8,302 10,144Current assets 54,971 71,034 83,885 98,319Cash & others 16,246 15,555 15,905 15,195Total assets 130,060 149,063 172,682 198,872Operating liabilities 89,036 101,921 118,450 137,434Gross debt 15,852 19,384 23,261 26,751Net debt -394 3,830 7,356 11,555Shareholders funds 13,069 13,950 14,871 15,986Invested capital -43,185 -37,077 -38,652 -39,912


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 3.7 9.3 8.8 9.1EBITDA 13.2 -5.4 7.7 14.5Operating profit 14.2 -7.5 7.1 15.6PBT 16.4 -8.4 3.8 12.7HSBC EPS 24.4 8.2 3.8 12.7

Ratios (%)

Revenue/IC (x) -0.5 -0.5 -0.6 -0.6ROIC -7.9 -7.6 -8.6 -9.6ROE 13.2 12.7 12.3 13.0ROA 3.1 2.5 2.3 2.3EBITDA margin 23.2 20.1 19.9 20.9Operating profit margin 21.1 17.8 17.5 18.6EBITDA/net interest (x) 80.6 44.3 20.8 15.1Net debt/equity -1.6 14.1 24.3 34.3Net debt/EBITDA (x) -0.1 0.9 1.6 2.2CF from operations/net debt 425.7 137.1 112.4




Year to 12/2010a 12/2011e 12/2012e 12/2013e

GDP Growth (%) 9.0% 7.0% 3.0% 4.0%USD/TRY (Average) 1.51 1.76 1.88 1.95USD/TRY (Year-end) 1.55 1..85 1.91 1.98

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales -2.9 -2.5 -2.5 -2.5EV/EBITDA -12.7 -12.5 -12.6 -12.0EV/IC PE* 8.1 7.5 7.2 6.4P/Book value 1.0 0.9 0.9 0.8FCF yield (%) -15.5 -25.4 -12.5 -14.7Dividend yield (%) 4.5 6.5 6.7 7.0


Issuer information


Reuters (Equity) SAHOL.IS Bloomberg (Equity) SAHOL TIMarket cap (USDm) 6,929 Market cap (TRYm) 12,773

Country Turkey Sector ConglomeratesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

123456789

10

2009 2010 2011 2012

12345678910

Sabanci Holding Rel to ISTANBUL COMP


178


abc


The Turkish real estate market is highly

fragmented due to a fragmented landbank

resulting from inheritance laws splitting

landholdings, and weak legal enforcement against

unregistered construction activity. If the regulator

startsedto follow the sector closely it would push

small players out of the market and lead to

consolidation. Yet in the short term, we do not

expect the competitive environment to change

significantly.

Sinpas REIC scored medium on our scorecard for

competitive analysis mainly due to the

fragmentation of the Turkish real estate market

and Sinpas’ small market share in it. Despite

substantial growth in its portfolio we believe

Sinpas REIC’s market share will remain low for

the foreseeable future.


weak

Sinpas REIC had an RoE of 7% in 2010, which is

well above its Turkish peers (except for Emlak

Konut REIT) and most of the EM peers as well.

Sinpas REIC’s business model is the acquisition

of problematic lands at lower than market price

and the development of it to achieve higher

returns than its peers over the long term. This has

worked so far, and the company has managed to

post strong RoEs. We believe that Sinpas REIC

will be able to maintain the RoE band of 7-10%

for the foreseeable future with this model.

Although Sinpas REIC’s RoE is strong, it has a

tiny market share due to Turkey’s fragmented real

estate market. This offsets the impact of strong

RoE and decreases overall scoring to medium to

weak (2).

We do not expect consolidation to take place if

the regulator does not takesaction against

unregistered developers. We therefore believe

Sinpas REIC’s market share will remain at around

current levels.


Sinpas REIC has strong market share momentum as

the company posted a higher growth in sales in the

last five years (CAGR of 6% from 2005-2010) than

Turkey’s growth in the Turkish real estate sector as a

whole of 2% per annum for the same period.

With the sizeable landbank of 1.5m sqm we

believe Sinpas REIC will continue to grow and to

outperform market growth.

Sinpas REIC

Sinpas REIC’s overall competitive outlook is medium compared to


We see a 37% NAV discount as unjustified given the solid sales

performance and portfolio growth prospects

Target price unchanged at TRY2.50, maintain Overweight



179


abc


strong


slightly different DuPont analysis and compared

cap yield ( = Gross Profit / (5 * Revenues) )

instead of gross profit margin for the companies.

On this scale Sinpas REIC’s score is 4 and it is

placed below its peers in terms of yield while it

performs better in asset turnover.


The real estate market is heavily fragmented in

Turkey, as the top 8 players constitute only 20%

of the industry. The key reasons for that are the

division of the landbank with inheritance and the

high number of unregistered developers with a

lack of supervision of the market.

We believe the only way for consolidation to

happen would be the tighter application of

regulations which would drive small players out

of the industry.

Sinpas REIC will continue to be adversely

affected by the high level of competition in the

sector as the company has to defend its market

share against unregistered small developers who

can operate with lower margins and do not have to

obey REIT regulation.


neutral

The low interest environment should have a

positive impact on the real estate sector as a whole

and so on Sinpas REIC as low rates will boost

mortgage affordability.

However, since Sinpas REIC does not utilise debt

for construction activities the company would not

be affected by a low rate environment in terms of

its financing.

Weak TRY environment is neutral for Sinpas

REIC

A weak TRY environment has no material impact

on the company as it does not have USD- or

EUR-based sales.

Investment thesis

Sinpas REIC is an attractive way of accessing

Turkey’s real estate sector. It has smaller

operations compared to Emlak REIT which makes

the company more flexible and easy to manoeuvre

in changing market conditions.

Sinpas REIC currently trades at a 37% discount to

its NAV which we see as excessive given the

company’s current sales performance. We expect

to see 10% growth in NAV by the end of 2011 if

the company manages to launch two new projects

in October as guided.


Our valuation methodology for Sinpas REIC is

project-based DCF, with parameters of 8.5% RFR

and 5.5% ERP, 0.7 beta (changed from 0.8)

leading to 11.9% WACC.

Our valuation for the company consists of five

active residential projects, one active commercial

project and one potential residential project with

11 land blocks in the landbank and TRY50m of

net cash. Our DCF valuation provides a target

price of TRY3.0 (unchanged).

The 72% potential return implied by our target

price falls above the 8.5% - 18.5% band for a

Neutral rating for non-volatile Turkish stocks,

hence we maintain our Overweight rating

Risks

Key downside risks to our valuation include an

increase in mortgage rates (via regulatory action

or market conditions) which would reduce

affordability and housing demand; slower-than-

expected sales, either from low demand or greater

competition; and failing to begin a new residential

project in 2011.

Launching more than one project in 2011 and H1

2012 would be a catalyst.

180


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 353 600 767 728EBITDA 52 211 248 374Depreciation & amortisation 0 0 0 0Operating profit/EBIT 52 211 248 374Net interest 9 -41 -21 -21PBT 61 170 227 353HSBC PBT 61 170 227 353Taxation 0 0 0 0Net profit 61 170 227 353HSBC net profit 61 170 227 353


Cash flow from operations 45 10 32 222Capex 0 0 0 0Cash flow from investment 1 1 1 1Dividends 0 -30 -59 -113Change in net debt 34 -142 -56 -100FCF equity 35 22 144 361


Intangible fixed assets 0 0 0 0Tangible fixed assets 14 14 14 14Current assets 1,499 1,499 1,611 1,768Cash & others 65 192 247 348Total assets 1,592 1,592 1,704 1,861Operating liabilities 675 400 373 438Gross debt 40 26 26 26Net debt -24 -166 -222 -322Shareholders funds 936 1,174 1,400 1,661Invested capital 774 921 1,004 996


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 106.7 69.7 27.8 -5.0EBITDA 307.0 17.7 50.7Operating profit 307.0 17.7 50.7PBT 177.9 33.8 55.4HSBC EPS 177.9 33.8 55.4

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Housing loan rates (m/%, YE) 11.45 11.91 11.87 11.20Avg. Cost per sqm (TRY/m2) 1,155 1,213 1,273 1,337Avg. Price per sqm (TRY/m2) 2,926 3,102 3,288 3,485

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) SNGYO.IS Bloomberg (Equity) SNGYO TIMarket cap (USDm) 475 Market cap (TRYm) 875Free float (%) 49 Enterprise value (TRYm) 630Country Turkey Sector Real EstateAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

0

0.5

1

1.5

2

2.5

3

3.5

2009 2010 2011 2012

0

0.5

1

1.5

2

2.5

3

3.5

Sinpas REIC Rel to ISTANBUL COMP


Financials & valuation: Sinpas REIC Overweight

181


abc


Sisecam scored strong in our scorecard for

competitive analysis. The main reason for that is

the glass giant has very high market shares in its

segments and generates high returns from these

activities. The group controls the flat glass and

glass packaging markets in Turkey in a

monopolistic fashion while also having very high

market share in the glassware and soda chemicals

segments as well.

Looking forward, we expect to see competitive

pressures in the glass packaging segment due to a

new competitor building up capacity. In the flat glass

segment we do not expect to see competition due to

high entry costs and import tariffs. Sisecam has a

very strong brand name in glassware (Pasabahce).

While there are competitors in this segment,

Pasabahce still controls 65% of the market.


Sisecam had a consolidated ROE of 14% in 2010,

which puts the company at the upper middle

segment in this metric when compared with other

building material stocks in Turkey. Thanks to the

high market share of the company its overall

profitable market share scores at the strong level

(5). We expect Sisecam to hold this position as

the company's ROE outlook is good, with healthy

demand and pricing, while its consolidated market

share should also remain strong for the forseeable

future due to its monopolistic position in most of

the markets in which it operates.


Sisecam's market share momentum is medium as

the company has increased its capacity by 25% in

the last five years and has expanded into three

new regions besides Turkey (Russia, Bulgaria,

and Egypt). Compared to the individual growth of

these markets Sisecam's growth has been higher

which has resulted in market share gaining

momentum. We expect Sisecam's market share

gains to continue as the company is currently

building a new flat glass capacity in Russia and

plans to build new packaging facilities in CEE.


Sisecam's DuPont scoring is 5. The glass giant has

the highest asset turnover rate in HSBC's building

materials coverage for Turkey. In addition, the

company has an above average gross profit

margin which ranks the company highly on the

DuPont scale. We think that Sisecam's sustainable

Sisecam

Sisecam's overall competitive outlook is strong

While the restructuring plan and the strong subsidiaries offer value

we believe this is now priced in following the substantial

outperformance y-t-d

Target price increased to TRY3.85 (from TRY3.5) on changes in

subsidiaries valuations, maintain Neutral



182


abc

growth outlook is strong given the promising

outlook for Turkey's construction, automotive,

durables, energy and food and retail segments. We

also expect to see substantial growth in Egypt and

Russia. The only risk on the DuPont scale is a

potential increase in production costs (such as a

gas price hike) which would impact the gross

profit margin and weaken the score.


strong

Sisecam's segments are largely non-fragmented

due to high investment costs and special

protective measures. This is similar to developed

markets as glass manufacturers are giant entities

in both developed and EM markets. Hence we do

not expect to see a change in the market structure

in the short term.


positive for Sisecam


impact on Sisecam as it will boost the

construction and automotive markets for flat

glass, and it will boost consumer spending on

glass packaging and glassware.

Since the group has a TRY575m net debt position

and an aggressive growth agenda, a low rate

environment would support the company's

balance sheet and capacity growth plans.

Weak TRY environment is positive for Sisecam


boost Sisecam's exports and international sales.

Investment thesis

We believe Sisecam offers one of the best

conglomerate stories in the Turkish universe with

exposure to the growing construction, industrials

and retail segments and a potentially value-

unlocking corporate restructuring story. However,

we believe that this is now largely priced in

following the strong outperformance of the shares

in 2011 so far.


We update our SOTP-based valuation for Sisecam

to factor in changes in the subsidiary valuations.

Our new target price for the company is TRY3.85

(from TRY3.5). The increase is mainly based on

three factors: (i) a 10% increase in thw target

price of Anadolu Cam, (ii) an increase in the

valuation of Pasabahce's land after the official

appraisal announcing the land value as TRY209m

vs our projection of TRY120m. (iii) an increase in

the valuation of Pasabahce following the

restructuring plan.

Our new target price for the company implies a

16% potential return, which falls within the

Neutral range of 8.5% - 18.5% for non-volatile

Turkish stocks. Based on this, we maintain our

Neutral rating.

The key downside risk to our valuation is a

decrease in construction demand in Turkey. Any

additional tax in Russia is also a downside risk to

our valuation.

Although it is unlikely in the current market

environment, if the management decides to do an

IPO for Pasabahce it would unlock additional

value for Sisecam which would be an upside risk.

183


abc

Sisecam NAV

Participation Name Method Effective Stake (%) Current Value (TRYm)

Stake value –current (TRYm)

Target Value (TRYm)

Stake value - target (TRYm)

Listed Trakya Cam DCF & Multiples 70% 1,792 1,256 2,594 1,819 Anadolu Cam DCF & Multiples 79% 1,108 877 1,558 1,233 Soda Sanayi Market Value 82% 831 682 831 682 Denizli Cam Market Value 48% 71 34 71 34Unlisted Pasabahce Cam (& land) Market multiples 95% 1,537 1,467 1,537 1,467 Other Packaging Market multiples 15% 166 25 166 25 Other flat glass Market multiples 15% 269 40 269 40 Recently acquired (Cayirova, Camis)

Sales price 92% 369 347 369 347

Other (Fibre, Avea, Elect.) Misc. 4,008 375 4,008 375Listed participations 2,848 3,767Unlisted participations 2,272 2,272Cash (Debt) on Holding level 140 140Total Enterprise Value 5,261 6,179Sisecam Current MCAP 4,329 4,329Prem./(Disc) to NAV -18% -30% Sisecam NAV (@20% discount) No. of shares (m) 1,300 Target price (TRY) 3.85 Closing price (TRY) 3.31 Potential return 16%


184


abc

Financials & valuation: Sisecam Holding Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 4,206 4,521 4,900 5,159EBITDA 983 1,102 1,207 1,206Depreciation & amortisation -450 -471 -500 -530Operating profit/EBIT 532 631 707 676Net interest -51 -66 -62 -56PBT 586 511 600 621HSBC PBT 586 511 600 621Taxation -101 -87 -103 -106Net profit 412 346 412 425HSBC net profit 412 346 412 425


Cash flow from operations 868 989 1,094 1,118Capex -381 -513 -548 -774Cash flow from investment -381 -513 -548 -774Dividends 0 0 -206 -213Change in net debt -521 -327 -296 -121FCF equity 334 325 380 182


Intangible fixed assets 9 9 9 9Tangible fixed assets 3,464 3,374 3,387 3,405Current assets 3,024 2,750 3,135 3,272Cash & others 1,505 1,129 1,383 1,415Total assets 6,731 6,366 6,764 6,920Operating liabilities 446 462 490 516Gross debt 1,897 1,193 1,151 1,062Net debt 392 65 -232 -353Shareholders funds 3,275 3,621 4,034 4,253Invested capital 4,546 4,542 4,658 4,756


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 15.4 7.5 8.4 5.3EBITDA 42.1 12.2 9.5 -0.1Operating profit 150.1 18.6 12.1 -4.4PBT 278.8 -12.8 17.5 3.4HSBC EPS 268.3 -16.0 19.2 3.1

Ratios (%)

Revenue/IC (x) 0.9 1.0 1.1 1.1ROIC 9.6 11.5 12.7 11.9ROE 13.5 10.0 10.8 10.3ROA -0.3 6.5 7.6 7.5EBITDA margin 23.4 24.4 24.6 23.4Operating profit margin 12.7 14.0 14.4 13.1EBITDA/net interest (x) 19.2 16.8 19.4 21.7Net debt/equity 9.6 1.5 -4.8 -7.0Net debt/EBITDA (x) 0.4 0.1 -0.2 -0.3CF from operations/net debt 221.4 1532.7




Year to 12/2010a 12/2011e 12/2012e 12/2013e

PPI (%) 0.0 10.2 7.7 0.1GDP growth (%) 9.0 5.1 3.0 0.1Average USD/TRY 1.5112 1.7550 1.6000 1.5500Average USD/RUB 31.7 35.3 0.0 0.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) SISE.IS Bloomberg (Equity) SISE TIMarket cap (USDm) 2,334 Market cap (TRYm) 4,303Free float (%) 30 Enterprise value (TRYm) 4134Country Turkey Sector CONGLOMERATESAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Sisecam Holding Rel to ISTANBUL COMP


185


abc


Tat Konserve ranks close to the average in our

competition analysis. Tat is a leading player in the

food sector with numerous well known brands.

Yet the company operates in a fragmented market

where most of the players are targeting market

share gains. The short FX position of the company

will weigh on the bottom line as TRY depreciates.


strong

Tat’s ROE has not been high during the past years

mainly because of high cost pressures and

indebtedness. It’s one of the most prominent

players in the markets it operates. Yet since it

does not command a majority share in any of its

market it is exposed to competitive pressures.


Tat operates in a highly competitive market where

there are numerous decent players in each product

group. We think Tat has been doing a very good

job in defending, and in some cases increasing, its

market share. Yet we think market share

momentum is medium for the company since we

see little chance of a substantial change in its

market shares.


Tat Konserve ranks high on our sustainable

growth metric since it has a high 1.43x asset

turnover and a healthy gross margin which should

enable it to sustain growth in the long term.


weak

The Turkish food market is fragmented with

various strong players fighting for market share in

different categories. We calculate that Tat has a

weighted market share of around 20%, not enough

for it to be dominant in the market. The chances

of consolidation are high and if that happens we

don’t think Tat will be immune to rising threats.


positive for Tat

Food producers are not very sensitive to interest

rates. Yet the company had a 4.3x net debt/EBITDA

ratio as of 2010 year-end. Hence a lower interest rate

environment will be positive for Tat since it will

reduce its interest expense burden.


Tat

The company holds cUSD80m financial debt in

USD and thereby has a large short FX position on

Tat Konserve

Competitive outlook is medium for Tat due to a fragmented market

and low ROE

The impact of cost-side pressures and increasing competition on

financials is still uncertain

TP cut to TRY3.10 (from TRY4.0) on reduced forecasts; maintain

Neutral



186


abc

its balance sheet. Hence, when the TRY/USD rate

depreciates the bottom line is substantially hurt.

Investment thesis

Although Turkey’s packaged food market is

among the largest in the world, consumption per

capita is still low. Packaged food spending is

USD470 per capita versus cUSD1,400 in Western

Europe and USD1,000 in the US at 2009-end.

Milk consumption is 24 litres per capita vs c95

litres in the EU and c85 litres in the US . Meat

consumption is c20kg per capita vs over 120kg in

the US and over 40kg for the world average.

Yet, as outlined before, competitive pressures are

also high in the food sector and cost pressures

have been pressurising the gross margin in 2011

y-t-d. We saw a slight improvement in the gross

margin in 1H 11 (up 90bps y-o-y). Yet high opex

resulting from increased transportation and

marketing expenses weighed on the EBITDA

margin (down 3.7pp y-o-y).


Following the poor 1H 11 performance we have

cut our forecasts for Tat. We now expect the

company to close 2011 with a 6.1% EBITDA

margin (was 7.7%). We cut our 2011 net income

forecast to TRY6m from TRY23m, reflecting the

impact of the depreciation of TRY against USD.

We also cut our estimates for 2012. Our net

income falls to TRY29m (from TRY33m) on the

weak competitive outlook for the sector.

Forecast changes

_______2011e _______ ______ 2012e ________TRYm old new old new

Net sales 828 763 944 880 EBITDA 64 47 80 65 EBIT 46 28 60 46 Net profit 23 6 33 29


We value the company using a DCF. Our DCF

analysis, using a risk-free rate of 8.5%, a WACC

of 11.1%, a terminal growth rate of 5.5%, equity

risk premium of 5.5% and beta of 0.80, yields a

fair value of TRY3.10 per share (was TRY4.0).

The main reason for the downward revision in our

target price is the revisions to our forecasts.



18.5%. Our target price implies a potential return

of 9%, hence we maintain our Neutral rating.

Risks

On the upside, unexpected growth from the

Harranova operations (i.e. higher-than-expected

sales turnover and a better gross margin) would

lead us to revisit our valuation. Also, the company

is one of the few listed food producers to offer

exposure to emerging markets and hence may

come under the radar of global food companies.

Newsflow about any potential M&A is another

upside risk.

On the downside, a higher-than-anticipated increase

in raw material costs and further depreciation of

TRY against US D are the main risks.

187


abc

Financials & valuation: Tat Konserve Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 787 763 880 1,000EBITDA 58 47 65 86Depreciation & amortisation -16 -18 -20 -21Operating profit/EBIT 42 28 46 64Net interest -20 -18 -15 -14PBT 27 12 50 65HSBC PBT 27 12 50 65Taxation -10 -4 -18 -23Net profit 16 6 29 37HSBC net profit 16 6 29 37


Cash flow from operations 2 35 20 41Capex -19 -18 -21 -24Cash flow from investment -19 -18 -21 -24Dividends 0 0 0 0Change in net debt -10 -80 2 -5FCF equity -27 13 -19 -7




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 13.4 -3.1 15.4 13.6EBITDA -17.4 -19.3 40.1 31.0Operating profit -24.5 -32.3 61.0 40.6PBT -26.6 -57.3 322.4 32.0HSBC EPS -51.7 -61.2 357.0 28.4

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Total production 306 328 351 375Gross margin % 18.3 19.2 19.6 20.1

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.9 0.8 0.7 0.6EV/EBITDA 11.8 12.9 9.3 7.0EV/IC 1.5 1.5 1.4 1.3PE* 23.9 61.6 13.5 10.5P/Book value 2.1 2.0 1.8 1.5FCF yield (%) -6.2 3.0 -4.3 -1.5Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) TATKS.IS Bloomberg (Equity) TATKS TIMarket cap (USDm) 210 Market cap (TRYm) 388Free float (%) 41 Enterprise value (TRYm) 601Country Turkey Sector FOOD PRODUCTSAnalyst Erol Hullu Contact 90 212 376 4616

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Tat Konserve Rel to ISTANBUL COMP


188


abc


TAV Airports scores reasonably well in our

analysis due to its strong market position,

relatively low competitive forces in the industry

(concession based, averaging 16 years), strong

operational leverage provided by high volume

growth and a fixed cost base and simple airport

regulations in Turkey compared to Europe,

providing visibility for future cash flows.


strong

TAV represents c45% of total airport passengers in

Turkey. Compared to European airports, it generates

a lower ROE but this should increase as operations

mature with growing passenger numbers (capex is

front-end loaded). We expect passenger traffic to

almost double at Ataturk airport in the next 10 years.

The only setback is the capacity issue at the airport.

If appropriate measures are taken by authorities to

create space, TAV can accommodate such growth at

Istanbul Ataturk.


TAV’s passenger traffic growth in Turkish

airports was slightly below the market’s growth in

the 2005-10 period (CAGR 11% vs 13%). But we

give credit to TAV on this metric for two reasons:

1) TAV’s growth is well above the European

airport averages (c4% CAGR in 2005-10) and 2)

Sector growth in Turkey is driven largely by

domestic passenger traffic which is lower value

added compared to international traffic.


strong

TAV generates a higher asset turnover than

European peers with compatible margins. TAV’s

integrated structure (with ground handling, duty free

and f&b) provide it with an efficient structure, in our

view. As its foreign airport operations mature, one

can expect TAV to improve its asset turnover and

profit margins further through better scale and

operational leverage.


The top three players constitute 80%+ of the airport

market (in terms of passengers) in Turkey. While

there are 46 airports in total, 38 of which are

operated by the State, scope for further privatisations

is limited given the low commercial profile of these

“inland” airports. Yet, tenders for operating right

renewals (such as for TAV’s Izmir airport) create

opportunities for potential newcomers.

TAV Airports

TAV's competitive outlook is medium compared to its peers and

Turkish equities

Pending key events - signing of contract for Medina airport, Izmir

airport tender and main shareholders’ exit strategy – are more

likely to be positive rather than negative catalysts, in our view

Target price kept at TRY9.5, maintain Overweight rating

189


abc


While lower interest rates should benefit TAV via

a reduced interest burden (EUR907m net debt as

of the end of H1 2011), operationally the impact

is neutral as airport passenger traffic is not

correlated with the general level of interest rates.

Weak TRY has neutral to negative impact

As most of the company's revenue streams are

linked to EUR and USD (vs costs in TRY), TRY

depreciation positively affects TAV’s operational

profitability. However, a volatile currency

environment also creates volatility for bottom-line

earnings (translation gains/losses), especially

weak EUR/USD.

Investment thesis

TAV’s long-term growth prospects remain intact

with continued double-digit growth in passenger

traffic in Turkey. Foreign operations also look on

track except for Tunisia where volumes are still

c45% down y-o-y but we anticipate a quick

recovery from 2012 onwards.

The three major items on the agenda for TAV in

short–term are: 1) Signing of the contract for the

Medina Int’l Airport project (likely in the next

few weeks), 2) Renewal of the tender for Izmir

Airport in Turkey (end November) and 3)

Controlling shareholders, Akfen and Tepe’s,

mandate (to sell) their 26.1% stake each. We

deem the last item as neutral for the stock for the

time being. We are positive about Medina’s

potential inclusion in the portfolio. We take a

cautious view on the Izmir tender for now as it is

uncertain how competition will shape up although

TAV’s chances of winning as an existing operator

seem much stronger.

In the longer term, our key investment highlight

remains the strong operational leverage story but a

key item to watch is Istanbul Ataturk airport’s

capacity. We are hopeful that it is in the best

interest of all the authorities to take the necessary

steps to improve the airport for future growth.


We value TAV using 50% peer comparison and

50% DCF. We utilise DCF in calculating a sum-

of-the-parts value for TAV’s underlying airport

and services assets. We apply no conglomerate

discount on the SOTP value as these are inter-

related businesses.

Incorporating into our estimates our macro team’s

new assumptions (FX, GDP growth), traffic

developments year-to-date, the H1 results and

guidance, we lower our 2011 and 2012 net profit

forecasts as in the table below, now looking for

EUR49m and EUR76m, respectively, due mainly

to higher FX cost estimates. Our operating

forecasts remain broadly unchanged.

Forecast changes

EURm 2011e-old 2011e-new 2012e-old 2012e-new

Revenue* 889 888 996 1014 EBITDA* 258 256 307 304 Net profit 76 49 100 76

Source: HSBC estimates * Adjusted with guaranteed pax fees at Ankara and Izmir airports

TAV trades at 5.8x EV/EBITDA, 13.6x PE, 1.8x

P/B for 2012e vs the peer set average of 6.9x,

14.1x and 1.4x, respectively. Using peer averages

we reach a valuation of TRY7.5 per share (from

TRY9.86) while our DCF yields a higher

TRY11.6 per share (from TRY9.14). The average

of the two gives us a TRY9.5 target price as

before. Our key DCF parameters are: 5.5% equity

risk premium, 5.0% risk-free EUR rate, 3%

terminal growth, and 0.66 one-year company beta

(previously 0.88) leading to 7.4% WACC. We

maintain our Overweight rating based on the 34%

potential return, which is above the 8.5%-18.5%

Neutral band for non-volatile Turkish stocks.

Downside risks to our rating include i) lower-

than-expected traffic growth (due to external

events such as terror, pandemics, regional

political unrests, natural events), ii) a crisis in

credit markets so that financing for new projects

becomes difficult and iii) a fast depreciation in

EUR vs USD pressurising operating margins.

190


abc

Financials & valuation: TAV Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Profit & loss summary (EURm)

Revenue 785 888 1,014 1,084EBITDA 212 256 304 356Depreciation & amortisation -60 -68 -72 -77Operating profit/EBIT 120 155 198 243Net interest -57 -52 -82 -62PBT 63 68 111 174HSBC PBT 0 0 0 0Taxation -12 -14 -22 -35Net profit 50 49 76 111HSBC net profit 50 49 76 111

Cash flow summary (EURm)

Cash flow from operations 125 143 167 224Capex -93 -110 -75 -50Cash flow from investment -93 -110 -75 -50Dividends 0 0 -15 -38Change in net debt -120 2 -73 -128FCF equity 62 65 125 209

Balance sheet summary (EURm)

Intangible fixed assets 192 187 182 178Tangible fixed assets 1,303 1,402 1,420 1,375Current assets 545 482 461 512Cash & others 415 328 285 318Total assets 2,039 2,071 2,063 2,065Operating liabilities 252 261 283 301Gross debt 1,233 1,148 1,033 938Net debt 819 821 748 620Shareholders funds 437 531 582 648Invested capital 1,373 1,483 1,495 1,446


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 22.7 13.1 14.2 6.8EBITDA 26.7 20.6 18.9 17.0Operating profit 21.1 28.7 27.5 23.1PBT 18.9 7.4 64.2 55.7HSBC EPS -2.1 -1.3 55.1 46.6

Ratios (%)


Per share data (EUR)



Year to 12/2010a 12/2011e 12/2012e 12/2013e

Istanbul total pax traffic gr. 8% 12% 9% 7%Ankara total pax traffic gr. 28% 11% 10% 10%Izmir total pax traffic gr. 28% 16% 12% 8%Tblisi total pax traffic gr. 16% 25% 15% 15%Tunisia total pax traffic gr. 4% -40% 12% 12%

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) TAVHL.IS Bloomberg (Equity) TAVHL TIMarket cap (USDm) 1,399 Market cap (TRYm) 2,579Free float (%) 18 Enterprise value (EURm) 1847Country Turkey Sector Transport InfrastructureAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

123456789

10

2009 2010 2011 2012

12345678910

TAV Rel to ISTANBUL COMP


191


abc


Tekfen leads the Turkish fertiliser market with a

30-35% market share but pricing power is not as

strong due to the commodity nature of the product

and the price-link to global trends. Also, lack of

key ingredients in Turkey for fertiliser production

limits the value added. In construction, Tekfen’s

specialisation in infrastructure projects only (and

particularly oil related) helps it escape the more

competitive residential and commercial market,

giving it a competitive edge.


strong

Tekfen’s ROE has been quite volatile during the

past 5 years (ranging between 5% to 22%) due

mainly to the cyclical fertiliser business.

Following the boom in the fertiliser market

globally in 2007, the years 2008 and in particular

2009 saw a declining trend, followed by a

recovery again in 2010. 2011 and 2012 stand out

as years of relative stabilisation at high levels.


In fertilisers, Tekfen lost some market share in

2011 due to stronger prices and demand than they

expected and which they were unable to meet.

Going forward, we expect the company’s market

share to remain in the historic 30-35% range

while in contracting, we expect its Turkey

exposure to increase.


strong

Tekfen has an asset turnover ratio in the mid-range

(1.0x in 2010) in our Turkish coverage universe and

profit margins that are volatile due to the fertiliser

business. We expect more stable margins and an

improvement in asset turnover due to growing

backlog and relative stabilisation in the fertiliser

market compared to the past five years.


The Turkish fertiliser market is dominated by two

players - Tekfen’s Toros and Gubretas. Therefore,

the market is fairly consolidated although pricing

power is not that strong due to global links.


Operationally, a low interest rate favours Tekfen

indirectly through an increase in farmer’s

financing capabilities. Otherwise, Tekfen sits on a

net cash position and lower rates in principal curb

gains from the liquid holdings.

Weak TRY has negative to neutral impact

Tekfen is USD60m FX short on its balance sheet,

therefore it incurs FX losses when TRY weakens,

Tekfen Holding

Tekfen Holding's overall competitive outlook is medium

Due to a tough competitive landscape in the contracting markets

of MENA-CIS, Tekfen’s desire to increase exposure to Turkey has

increased

Target price kept at TRY8.1, maintain Overweight

192


abc

curbing its bottom-line profits (a 10%

depreciation leads to cTRY50m of FX losses).

Investment thesis

Tekfen offers good value, in our view, given the

prospect of new construction project awards in

upcoming months (in Turkey in particular) and its

strong position in the Turkish fertiliser market,

which has performed better than expected y-t-d in

terms of price and demand mix. Return to growth

mode in the construction backlog seems to be

only partially credited by the market. It will likely

continue to grow such as to help alleviate the

geographical risk perception for the company. In

fertilisers, prices and volumes may gradually

decline but we still think management targets may

prove conservative.

What would catalyse the stock? We believe 1)

sizable new project awards (e.g. c25% of the total

current backlog of USD2.0bn or higher in value) and

2) continuation of better-than-guided numbers for

the fertiliser arm in the remainder of 2011 (Q2 came

out better than management had guided for in terms

of revenues, price and margins).


Our valuation for both the construction and the

fertiliser businesses is based on DCF and peer

comparisons, to which we assign equal weight.

These yield a target price of TRY8.1 (unchanged),

implying a 48% potential return, which is above

the Neutral band of 8.5%-18.5% for non-volatile

Turkish stocks, hence our rating remains

Overweight.

For the DCF part of the construction division, our

parameters are a 6.0% risk-free rate (in USD

terms), a 5.5% equity risk premium, a 0.9

company beta and 3% terminal growth, leading to

a WACC of 7.5% (all as before). For the DCF part

of the fertiliser division, our parameters also remain

unchanged with a 6.0% RFR (in USD terms), a 5.5%

equity risk premium, a 0.90 beta and 3% terminal

growth, leading to a WACC of 9.3%.

For the peer comparison, we use 2012e PE and

EV/EBITDA multiples: 10.2x and 5.7x (EM

construction) and 10.5x and 6.5x (EM chemicals)

On 7.6x 2012e PE and 4.3x EV/EBITDA, Tekfen

(as a group) still trades at a noteworthy discount to

both the EM construction peer average and the EM

fertiliser average.

Downside risks for the construction division

include problems with or delays to existing

projects; a failure to win new sizable projects;

lower-than-expected margin generation.

Downside risks for the fertiliser division include

lower-than-expected volumes and prices; sharp

falls in oil prices; and higher-than-expected

competition hurting market share.

Summary NAV Table

Business Valuation Method Effective Stake Target value Value to Tekfen

Tekfen Construction DCF, Peer Comp. 100% 795 795 Agriculture & fertilisers DCF, Peer Comp. 100% 921 872 Real estate DCF 714 210 Others (Eurobank-Tekfen) Put option value 29% 617 179 Total participation value 3,053 2,055 Holding Cash (net) 212 Tekfen Holding target NAV 2,268 Tekfen Holding current MCAP 1,068 Prem./(Disc) to NAV -53% Target NAV per share (USD) @ 20% congl. disc. 4.9 Target NAV per share (TRY) 8.1


193


abc

Financials & valuation: Tekfen Holding Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e






Intangible fixed assets 3 3 3 3Tangible fixed assets 696 766 862 973Current assets 1,957 2,448 2,781 3,143Cash & others 759 904 925 1,018Total assets 3,066 3,627 4,056 4,529Operating liabilities 805 979 1,101 1,192Gross debt 475 570 588 617Net debt -283 -334 -338 -401Shareholders funds 1,660 1,890 2,102 2,358Invested capital 1,092 1,334 1,619 1,909


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue -3.8 36.4 14.0 10.7EBITDA 47.8 27.7 2.9 13.4Operating profit 88.5 34.5 -1.2 16.5PBT 144.1 42.4 2.0 15.8HSBC EPS 157.5 50.9 3.0 15.8

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Backlog outlook (USDm) 1,830 2,018 2,047 1,975New project awards (USDm) 1,013 1,000 1,000 1,000Oil prices (Brent, USD/bbl) 79.5 109.4 90.0 90.0Fertilizer prices (avg. USD/t) 339 391 368 361USD/TRY (avg.) 1.50 1.76 1.82 1.87

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) TKFEN.IS Bloomberg (Equity) TKFEN TIMarket cap (USDm) 1,096 Market cap (TRYm) 2,020Free float (%) 34 Enterprise value (TRYm) 1579Country Turkey Sector ConglomeratesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

123456789

2009 2010 2011 2012

123456789

Tekfen Holding Rel to ISTANBUL COMP


194


abc


Turkish LCV manufacturers benefit from

economies of scale in production, tax advantages,

a well educated labour force, and a developed

parts industry. The ability to attract new models is

one of the key drivers for the sector which we

expect to be the case in upcoming years. Tofas

has transformed into a LCV production hub for

multiple brands (Fiat, PSA, Opel) and is a good

example of the new model story as the leader of

the domestic LCV market.


strong

Tofas has generated an average ROE of 19%

during the past five years, lower than that of its

closest peer ,Ford Otosan, but a high performance

in the ISE universe. It leads the minivan sub-

segment of the LCV market in Turkey via its very

successful Minicargo model. Together with its

Doblo model, it leads the overall LCV market in

Turkey with a 26% market share. Thanks to

completion of big scale investments and new and

very competitive products as well as new OEM

deals, we expect improvement in Tofas' ROE in

upcoming years.


Tofas’s LV market share in Turkey grew

remarkably from c11% in 2006 to 15.3% as of the

end of H1 2011. New and competitive LCV

models as well as passenger cars (Linea and a

wider spectrum of imports) have provided the

company with a growth well above the market

growth level while also boosting export volumes.

We expect further market share gains in 2012-

2013 (albeit at a decelerating pace) in Turkey

since Tofas has a relatively lower import ratio

than most other big sector players (hence suffers

less damage from weak TRY) and no major

competitors in the minivan market.


The start of new exports for Opel/Vauxhall brands

from Q4 onwards this year (at 40k units p.a.) and

the start of Doblo LCV model exports to North

America (from H1 2013 onwards, 190k units in

the following 7 years) should propel growth and

limit volume pressure from a slowdown in

European vehicle markets (especially Italy and

France) in our view.


weak

The top 3 brands control c45% of the Turkish LV

market but there is tough competition with c60

Tofas

Tofas' overall competitive outlook is medium compared to its


Strong LCV models , take-or-pay contracts for exports and new

export projects (Opel, USA) are the core competencies

Cutting target price to TRY9.0 (from TRY10), maintain Overweight



195


abc

global brands operating (either as manufacturers

and/or importers). Compared to the last 10-15 years,

we expect no major changes in market structure.


A low interest rate environment triggers

consumption through access to cheaper financing

and supports auto sales. Nevertheless, the sector’s

response to a low interest rate environment may

be more limited than normal due the surge in

demand already seen in 2010 and YTD 2011.


A weak TRY supports Tofas’s export revenues

reported in TRY and has very limited adverse

impact on profits as Tofas is hedged through take-

or-pay contracts in exports. A 10% depreciation in

TRY against EUR and USD cumulatively drags

profits down by TRY23m, despite EUR debt on

the balance sheet.

Investment thesis

We believe that despite concerns of a slow down in

the European economy and Tofas’s large Italian and

French exposure in terms of exports (the two

accounting for 50-55% of total exports), the

company is well equipped to shoulder the difficult

environment and grow sales and profits in 2012. The

diversity of its export markets will improve with the

Opel/Vauxhall deal (increasing the shares of the UK

and Germany) in 2012 and with the Chrysler deal

(North America) in 2013, supporting growth. In the

case of major declines in European demand, there is

the unique take-or-pay contract that covers 73% of

the company’s total capacity. Our volume forecasts

suggest only the Linea passenger car model will

qualify for take-or-pay compensation in both 2012

and 2013 (at c10k units). We believe that Tofas still

offers a compelling story with strong LCV products

in a slowing Turkish market and new projects in

export markets.


We expect Turkish automotive demand to grow

8% in 2011, reaching 860k units (light vehicles

825k). This implies a c15% demand contraction in

the second half y-o-y. For 2012, we are cautious

on our market expectations considering the

economic slow-down and the strength of the

market in the last three years (auto sales were up

63% cumulatively in 2009-11e). We expect a 5%

decline in total market sales next year; a 7%

decline for cars but flat demand for LCVs. Under

these sector assumptions, we lower our unit sales

forecasts for Tofas, particularly for exports but

under new FX assumptions (weaker TRY)

revenues are adjusted up. We also trim our margin

forecasts slightly considering a more competitive

environment in the remainder of 2011 and

throughout 2012, in the face of slowing demand.

Tofas - Forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Unit sales (000) 351 340 380 351 393 369 Domestic 144 144 141 140 146 146 Exports 206 195 240 210 247 224 Revenue 7,193 7,566 7,709 7,960 8,136 8,681 EBITDA 712 744 748 760 830 907 margin 9.9% 9.8% 9.7% 9.5% 10.2% 10.4%

Net profit (adj.) 457 426 530 462 634 597


We continue to value Tofas using DCF with the

following parameters; 8.5% risk free rate, 5.5%

equity risk premium, 0.95 beta (previously 0.91),

3% terminal growth and an 11.2% WACC

(previously 10.9%). Due to the increase in the

WACC our target price declines to TRY9.0 from

TRY 10.0. Under our research methodology, the

hurdle rate for non-volatile Turkish stocks is 8.5-

18.5%. Since our target price implies a 36%

potential return, we maintain Overweight rating.

Risks

We view the key downside risks as i) weaker than

expected Turkish and European vehicle markets,

especially for LCVs ii) surge in raw material

prices pressurising domestic margins iii) any tax

hikes for auto sales (i.e. passenger cars) and iv)

major euro weakness.

196


abc

Financials & valuation: Tofas Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e






Intangible fixed assets 255 266 279 292Tangible fixed assets 1,930 1,674 1,455 1,245Current assets 2,772 3,885 4,183 4,576Cash & others 1,185 1,747 1,832 1,910Total assets 5,284 5,982 6,074 6,269Operating liabilities 1,658 1,923 2,004 2,104Gross debt 1,841 2,090 1,953 1,791Net debt 656 343 120 -119Shareholders funds 1,706 1,882 2,025 2,274Invested capital 2,114 2,155 2,081 2,098


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change


Ratios (%)

Revenue/IC (x) 3.0 3.5 3.8 4.2ROIC 18.0 19.2 21.6 28.5ROE 24.6 25.8 23.7 27.8ROA 10.4 10.6 10.9 12.4EBITDA margin 10.3 9.8 9.5 10.4Operating profit margin 6.1 6.0 6.4 7.6EBITDA/net interest (x) Net debt/equity 38.4 18.2 5.9 -5.2Net debt/EBITDA (x) 1.0 0.5 0.2 -0.1CF from operations/net debt 68.8 176.7 488.0




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Local demand growth for PCVs 38% 9% -7% 5%Local demand growth for LCVs 34% 8% 0% 5%Tofas – domestic unit sales gr 44% 7% -3% 4%Tofas – exports unit sales gro 15% 1% 8% 6%Effective tax rate 0% 10% 10% 10%

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) TOASO.IS Bloomberg (Equity) TOASO TIMarket cap (USDm) 1,796 Market cap (TRYm) 3,310Free float (%) 24 Enterprise value (TRYm) 3653Country Turkey Sector AutosAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

0

2

4

6

8

10

12

2009 2010 2011 2012

0

2

4

6

8

10

12

Tofas Rel to ISTANBUL COMP


197


abc


The Turkish retail property market is highly

fragmented as there are a significant number of

commercial property developers. However, due to

sharp segmentation of the property types (A,

A+,B, etc) the impact of competition is not severe

on single-segment companies. In addition to that,

Torunlar REIT also has regional diversification

which grants it monopolistic status in some

regions. Yet the company scored weak on our

scorecard for competitive analysis mainly due to

its profitable but overall low market share in

rental property. We believe that despite the strong

growth outlook, particularly in the next two years,

this will not change in the foreseeable future.


weak

Torunlar REIT had an RoE of 2% in 2010, which

is the lowest in its Turkish peer group and lower

than most of its EM peers as well. The reason for

that is that 2010 was the ramp up period for the

Torium shopping mall, which increased the equity

but did not contribute to EPS.

The company also has a small market share due to

the fragmented market structure in Turkey in the

retail market.

We believe RoE will increase once the company

completes its investment in the Mall of Istanbul

and Torun Tower.


Torunlar REIT’s market share momentum has been

medium in the last five years due to a rate of

additions to its portfolio (10% per annum) which has

caused slight market share loss when compared to

the sector growth rate of 12% per annum.

We believe the market share will improve as the

company is yet to deliver its biggest project to

date which will increase its total leasable area by

by 25% in 2013.



slightly different DuPont analysis and compared

cap yield ( = Annual Rental Income / Asset value )

instead of gross profit margin for the companies.

On this scale Torunlar REIT’s score is 2 and it is

placed in the lower segment of the peer set.

Torunlar REIT

Torunlar REIT’s overall competitive outlook is weak among its


However we see the 55% NAV discount as excessive given the

FX-based income and strong growth trajectory in EPS from 2011

to 2013




198


abc

While the cap yield of the company is strong at 8%

its asset turnover has been low due to the ramp up

period of its recently opened shopping malls. We

believe the outlook will be much more supportive

for the company once the commissioning of the two

upcoming projects completes.


weak

The rental property market is very fragmented in

Turkey as the top five players constitute 50% of

the retail space. The main reason for this is the

large number of players in the market (as almost

every construction company develops its own

retail centre to tap lucrative yields).

We do not expect to see a consolidation in the

short term as the market is not yet saturated in

terms of retail and commercial space.


positive

The low interest environment should boost retail

consumption and consumer spending which would

increase the demand for Torunlar REIT’s retail space

and rents. Low interest mortgages would also boost

demand for Torunlar’s residential units by making

payments more affordable.

Since Torunlar REIT has a TRY275m net debt

position it would benefit from the low rate

environment in terms of financing.

Weak TRY environment has mixed impact in

the short term, neutral in the longer term

A weak TRY environment has a positive effect on

Torunlar REIT as 85% of the total rental income

is FX denominated. However this is only a short-

term effect; if TRY does not appreciate for some

time tenants usually pressure property operators

for rental discounts (or higher turnover rent ratios

instead of fixed rents) which would cancel out the

depreciation impact. Hence we believe the long-

term impact of TRY weakness should be neutral

on Torunlar REIT.

On the other hand, weak TRY would have a

negative impact on Torunlar REIT as the

company has a TRY1bn FX short position

Investment thesis

We expect Torunlar REIT’s NAV to double by

2015e resulting in a 30% CAGR in EPS over the

next four years. This will be achieved by adding

two new shopping malls to the current five. This

growth in NAV offers a sizeable return to

investors with management’s minimum 50%

dividend policy, implying an 8% average dividend

yield for the next four years.

Torunlar REIT currently trades at a 55% discount

to its NAV which we find excessive given this

growth outlook.


We have used a DCF-based SOP for the valuation

of Torunlar REIT. The parameters for our DCF

valuation are: 13.5% CoE, 1 beta and 10% CoD.

Along with a 75/25 equity/debt model this

provides a 12.6% WACC.

We have divided our DCF model into an explicit

period (2011e-2020e) and an implicit period

(terminal value). We have used the 3% terminal

growth rate we use for all property operating REITs.

Our target price for the company is TRY7.4

(unchanged) which implies a 44% potential return

which is above the Neutral band for volatile

Turkish stocks of 3.5% - 23.5%. Hence we

maintain our Overweight (V) rating.

Risks

Risks to our rating are: a deterioration in the

economic environment (increase in

unemployment, TRY depreciation, loss in

consumer confidence) which would curb the

demand for retail spaces; the company’s failure to

complete or a significant delay to its biggest

project, Mall of Istanbul.

199


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 233 162 144 497EBITDA 51 82 71 231Depreciation & amortisation 14 9 9 9Operating profit/EBIT 65 91 80 240Net interest -39 -26 -21 -30PBT 48 53 74 200HSBC PBT 48 53 74 200Taxation -1 0 0 0Net profit 47 53 74 200HSBC net profit 47 53 74 200


Cash flow from operations 45 15 85 14Capex 0 0 0 0Cash flow from investment -81 0 0 0Dividends -13 -13 -27 -37Change in net debt -203 18 -58 23FCF equity 23 17 60 14


Intangible fixed assets 1 1 1 1Tangible fixed assets 2,389 2,409 2,756 3,064Current assets 580 305 250 447Cash & others 439 163 119 88Total assets 3,204 2,949 3,241 3,746Operating liabilities 51 14 13 54Gross debt 783 525 423 415Net debt 345 363 304 327Shareholders funds 2,369 2,431 2,826 3,299Invested capital 2,480 2,538 2,875 3,370


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 93.9 -30.4 -11.1 244.8EBITDA -23.9 61.8 -13.9 225.5Operating profit -12.0 40.1 -12.5 200.1PBT 3.0 11.2 38.7 171.0HSBC EPS 0.2 14.3 38.7 171.0

Ratios (%)

Revenue/IC (x) 0.1 0.1 0.1 0.2ROIC 2.1 3.2 2.6 7.4RoE 2.2 2.2 2.8 6.5ROA 3.0 2.6 3.1 6.6EBITDA margin 21.9 50.9 49.3 46.6Operating profit margin 28.0 56.4 55.6 48.4EBITDA/net interest (x) 1.3 3.1 3.4 7.7Net debt/equity 14.5 14.9 10.8 9.9Net debt/EBITDA (x) 6.8 4.4 4.3 1.4CF from operations/net debt 13.0 4.3 27.9 4.4




Year to 12/2010a 12/2011e 12/2012e 12/2013e

NAV (TRYm) 2,505 2,526 2,874 3,183GDP per capita (USD) 10,048 10,525 10,675 12,676PPI (%) 6.4 7.4 6.4 6.4Weighted Avg. Rental yield (%) 4.8 7.0 6.0 6.0

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information

Share price (TRY) 5.14 Target price (TRY) 7.40 Potent’l return (%) 44.0

Reuters (Equity) TRGYO.IS Bloomberg (Equity) TRGYO TIMarket cap (USDm) 622 Market cap (TRYm) 1,151Free float (%) 25 Enterprise value (TRYm) 1280Country Turkey Sector Real EstateAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

3

4

5

6

7

8

9

2009 2010 2011 2012

3

4

5

6

7

8

9

Torunlar REIT Rel to ISTANBUL COMP


Financials & valuation: Torunlar REIT Overweight (V)

200


abc


Trakya Cam scored highest in our scorecard for

competitive analysis. The main reason is that the

company is the market leader in the flat glass

industry Turkey with a 90% share. In addition,

there is a special tariff applied to flat glass imports

from Russia, Iran and China which creates a

protected environment for the company. These

factors, combined with high investment costs,

mean that we do not expect any change in Trakya

Cam's competitive outlook.


Trakya Cam had an ROE of 15% in 2010, which

puts the company in the highest position on this

metric when compared with other building

material stocks in Turkey. In addition to that, the

company is the market leader in its segment in

Turkey which makes for a profitable combination.

Since the company has better pricing power

compared to that available in competitive and

oligopolistic markets we do not expect to see a

contraction in ROE due to price falls for the

foreseeable future. However, since the company is

subject to fuel cost risks, ROE has a downside

risk from the COGS side.


Trakya Cam's market share has posted higher growth

compared to the industry average mainly due to the

company's new capacity in Turkey and Bulgaria.

The company tapped into the EU automotive market

with its exclusive sales deal with BMW in 2010 and

has gained direct market share in the EU. We expect

the strong market share momentum to continue as

the company's capacity in Egypt is now operational

and it is building a new capacity with Saint Gobain

in Russia.

The company is also the market leader in

photovoltaic glass manufacturing which is

positive for the longer-term market share

momentum as solar power capacities with locally

manufactured components receive a higher

guaranteed price from the government.


Trakya Cam's DuPont scoring is 5. The company's

adjusted gross profit is the highest among

Turkey's building material companies. In addition,

the company has a high asset turnover. This

combination results in a high DuPont rating and

we do not expect this to change in the foreseeable

future due to the protected (both via economic

Trakya Cam

Trakya Cam is the winner in our competitive analysis with a very

strong competitive setting and outlook

The company is the best way to tap Turkey's strong construction,

automotive and durables sectors in a single stock


valuations, maintain Overweight



201


abc

entry barriers and regulatory protection) and

monopolistic market structure.


As mentioned before, the flat glass market is not

fragmented in Turkey and Trakya Cam is the

monopolistic market leader. This is similar to the

situation in developed markets as glass

manufacturers are giant entities in both developed

and EM markets. Due to high investment costs we

do not expect to see any new entrants in

foreseeable future.


positive for Trakya Cam


impact on Trakya Cam as it will boost the

construction and automotive markets. The impact

on the construction market would be twofold; (i)

due to more affordable mortgages, residential

property demand would increase. (ii) due to

higher consumer spending, retail space demand

would increase.

Trakya Cam would not benefit from a financing

perspective as the company has a strong net cash

position.

Weak TRY environment should be positive for

Trakya Cam


boost Trakya Cam's exports in the short term.

Investment thesis

Trakya Cam is a vehicle to capture growth in the

construction, autos and durables markets in

Turkey. We see a solid and sustainable growth

outlook for the aforementioned sectors over the

next decade and believe that Trakya Cam will be a

beneficiary of this.

For 2012, we look for 15% output growth in

construction, 9% growth in auto manufacturing

and 8% growth in durable goods. That should

produce 13% revenue growth for Trakya Cam in

2012. This would lead to 14% growth in EBITDA

y-o-y. We also expect to see a contribution from

energy glass sales in 2012.


We derive our target price from the equal

weighted average of our DCF and market

multiples-based valuations. Our DCF assumptions

are 8.5% RFR and 5.5% ERP, 0.85 beta and

12.1% WACC (3% terminal growth rate).

Our DCF suggests a value of TRY4.7 per share

(previously TRY4.9). On the multiples side,

Trakya Cam currently trades at an 8.9x 2012e PE

compared with our peer set's average of 10.7x. On

tEV/EBITDA, the company is trading at 3.4x in

2012e compared with a peer average of 4.5x.

When we apply peer set multiples to Trakya Cam

we arrive at a valuation of TRY3.9 per share

(from TRY4.3).

Our new target price of TRY4.3 (from TRY4.6)

implies a 46% potential return, which is above the


Turkish stocks. We therefore maintain our

Overweight rating.

Risks

The key downside risk to our rating is a

contraction in Turkey's construction growth due to

the ongoing slowdown in the economy. If CBRT

and other regulators actions to combat recession

fail this would be another downside risk.

Weaker consumer confidence is also a downside

risk, since the automotive and durables sectors are

linked to it.

The key catalyst for Trakya Cam is the

performance of the underlying sectors. If

automotive production and construction output

growth is strong it may act as a positive trigger for

the shares.

202


abc

Financials & valuation: Trakya Cam Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 1,047 1,157 1,303 1,312EBITDA 306 350 397 352Depreciation & amortisation -130 -135 -141 -155Operating profit/EBIT 176 214 256 197Net interest 51 37 -2 -147PBT 250 276 264 60HSBC PBT 250 276 264 60Taxation -27 -50 -47 -9Net profit 211 213 202 36HSBC net profit 211 213 202 36


Cash flow from operations 312 314 350 343Capex -88 -86 -220 -214Cash flow from investment -88 -86 -220 -214Dividends -45 -43 -51 -8Change in net debt -287 50 -136 102FCF equity 249 215 81 -26


Intangible fixed assets 2 2 2 2Tangible fixed assets 988 946 897 967Current assets 887 850 1,033 948Cash & others 454 374 499 397Total assets 2,047 1,975 2,118 2,111Operating liabilities 148 156 166 174Gross debt 270 240 230 230Net debt -184 -134 -269 -167Shareholders funds 1,499 1,450 1,609 1,595Invested capital 1,274 1,268 1,265 1,345


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 18.1 10.5 12.7 0.7EBITDA 73.6 14.4 13.6 -11.4Operating profit 214.2 21.7 19.5 -23.2PBT 230.6 10.5 -4.2 -77.3HSBC EPS 239.0 0.8 -5.0 -82.0

Ratios (%)

Revenue/IC (x) 0.8 0.9 1.0 1.0ROIC 12.0 13.8 16.6 12.9ROE 14.9 14.4 13.2 2.3ROA 15.6 11.8 11.8 9.5EBITDA margin 29.2 30.2 30.5 26.8Operating profit margin 16.8 18.5 19.6 15.0EBITDA/net interest (x) 220.7 2.4Net debt/equity -11.9 -8.9 -16.4 -10.3Net debt/EBITDA (x) -0.6 -0.4 -0.7 -0.5CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Construction growth (%) 17.1 15.0 15.0 10.0Flat glass sales growth (n, %) 12.00 7.50 5.00 5.00Flat glass price (USD/tonnes) 404.3 365.6 423.0 459.4

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 1.4 1.3 1.0 1.1EV/EBITDA 4.7 4.2 3.4 4.1EV/IC 1.1 1.2 1.1 1.1PE* 8.4 8.3 8.8 48.7P/Book value 1.2 1.2 1.1 1.1FCF yield (%) 15.4 13.3 5.1 -1.6Dividend yield (%) 2.6 2.4 2.8 0.5


Issuer information


Reuters (Equity) TRKCM.IS Bloomberg (Equity) TRKCM TIMarket cap (USDm) 962 Market cap (TRYm) 1,773Free float (%) 31 Enterprise value (TRYm) 1476Country Turkey Sector BUILDING PRODUCTSAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

00.5

11.5

22.5

33.5

44.5

2009 2010 2011 2012

00.511.522.533.544.5

Trakya Cam Rel to ISTANBUL COMP


203


abc


A strong domestic position provides a safeguard

for the company’s profitability in the long term.

Tupras enjoys a monopolistic position in the

domestic market with significant control over the

oil infrastructure, resulting in strong pricing

power. The main benefit from Tupras’s sole

refiner status is its ability to enjoy a c3% mark-up

on its product pricing to fuel distributors/retailers

relative to international prices, which we think

comes from the natural benefit of serving

hinterland markets and having a strong storage

and pipeline infrastructure providing a deeper

reach at lower cost. In its core refining business,

the company does not face any threat up until the

end of 2015 when the Socar & Turcas refinery is

scheduled to come on stream.


Tupras's strong market share in the Turkish

market and above average ROE make it as one of

the best positioned companies in the Turkish

universe. We expect the high ROE to be sustained

in the long term due to its dominant position in

the domestic refining sector. However, the sector

has faced strong headwinds and a sharp demand

fall during the recent recession which has made

downstream business in the OECD virtually

completely non-profitable. However, Tupras

represents a pocket of strength buoyed by its

strategy of maximising profits over volumes and

its situation in a attractively placed market within

the OECD with strong dominant position. Having

said this, in the current environment we do see a

risk of refining margins coming under further

pressure putting downside earnings risk on

Tupras. The consensus hasn’t factored in this

downside, we believe, and therefore any valuation

based on consensus estimates is bound to look

cheap. Even so, we think Tupras represents a

good investment opportunity at current prices if

the macroeconomic environment starts to

stabilise. Our economists do not expect world

growth to collapse in 2012, and expect GDP

growth for Turkey of 3.0% against -4.8% in 2009.


Tupras has lost market share in diesel to importers as

Turkish diesel demand has increased by 12.5% from

12MMtpa in 2006 to 13.5 MMtpa in 2009 while

Tupras’s gross refining capacity has stayed the same.

However, Tupras did take active steps to increase its

diesel output and has conformed to the strictest Ultra

Tupras

The overall competitive outlook is strong. Tupras offers an

opportunity despite volatile macro conditions given its strong

domestic position

The current valuation does not reflect the contribution from the

Residuum project

Target price kept at TRY47, maintain Overweight



204


abc

Low Sulfur diesel requirements in Turkey well

ahead of time (2008). Buoyant diesel demand in the

domestic market has led to net imports nearly

doubling from 4.86MMtpa in 2006 to 9.15MMTpa

in 2009. We attribute Tupras’s decline in market

share to the company’s pricing strategy focusing on

profitability rather than volume. On the other hand,

Tupras enjoys a strong hold over the import

infrastructure and is a significant importer of diesel

itself. Tupras has continued its strategy of keeping its

operating rates at low levels and importing

intermediate products in order to run its conversion

units at full capacity.


We believe Tupras enjoys being the only refiner

in a relatively attractive Turkish market and its

earnings should grow significantly in the medium

term due to its Residuum Upgrade Project. The

Residuum project will allow the company to

lower the import of diesel and similar white

products for which there is an excess demand in

the domestic market.


Tupras is a monopoly in the Turkish refining

market and the market is therefore fully

consolidated. That said, we do not estimate any

great advantage to Tupras from this monopoly

position given the presence of multinationals in

the domestic petroleum retail market (BP, Shell,

Total and OMV) since the global oil market

affords no arbitrage opportunities from which to

make extraordinary gains.


positive for Tupras

The USD2.38bn Residuum Upgrade Project (RUP)

has reportedly secured USD1.7bn in financing from

Italian and Spanish banks (Reuters 28th July). The

lower interest rate environment should help the

company keep its funding costs low.

The weakness in the Turkish lira could create

FX losses

Tupras had a TRY2.3bn net FX short position as

of the end of 1H 2011 mostly as a result of USD-

based crude oil purchases. Even though sales

prices are linked to global prices in USD, if TRY

loses value sharply this may lead to a significant

FX loss for Tupras.

Investment thesis

We expect Tupras' profitability to come under

pressure should economic conditions worsen.

However, Tupras has already taken a large hit on

its operations (running at below 80% operating

rate since 2009) and the regional refining markets

never really recovered from the turbulence caused

by the last recession. Therefore, we see limited

downside in earnings from lower margins,

although volumes may be affected, in such event,

due to lower domestic demand.

The progress on the Residuum Upgrade Project

looks in line with the start-up schedule for the

second half of 2014, and in line with earlier

market expectations. Our base case assumes an

EBITDA of USD440m by 2014 from the project

but the current environment may generate an

EBITDA upwards of USD500m on our estimates.

RUP will enable Tupras to enhance white product

yields, especially of diesel, reducing the

vulnerability that arises from its status as a poorly

integrated producer that has high costs but offers

an inferior yield.


We use three approaches to value Tupras. Our

target price is the weighted average of our DCF

valuation (50% weight) and two multiple-based

approaches, PE and EV/EBITDA (25% each).

Our DCF valuation yields a higher fair value of

TRY50.6 per share. Our DCF model uses a CoE

of 13.5%, cost of debt of 8.0%, a risk-free rate of

8.5%, equity risk premium of 5.5% and beta of

0.91. It also assumes a terminal growth rate of

205


abc

3%. At the sector average PE of 7.5x and

EV/EBITDA of 4.5x for 2012e, our multiples-

based valuations are TRY33.0 and TRY31.2 per

share, respectively. The weighted average of our

three valuation methodologies, raised by the CoE,

yields a 12- month target price of TRY47.0. The

weighted average of our three valuation

methodologies, raised by the CoE, yields a 12-

month target price of TRY47.0. This implies a

potential return of 28%, which is above the


Turkish stocks, hence we maintain our

Overweight rating.

Worse-than-expected global macro economic

conditions and lower refining margins present key

downside risks to our rating. The weakness in

TRY could create FX losses and a drop in oil

prices could lead to inventory losses, placing

pressure on bottom-line profitability.

206


abc

Financials & valuation: Tupras Overweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 26,219 35,511 36,905 38,534EBITDA 1,372 1,630 1,738 1,909Depreciation & amortisation -221 -225 -206 -271Operating profit/EBIT 1,151 1,405 1,532 1,638Net interest -105 -71 -147 -201PBT 929 1,294 1,385 1,437HSBC PBT 929 1,294 1,385 1,437Taxation -188 -260 -277 -287Net profit 737 1,029 1,102 1,144HSBC net profit 737 1,029 1,102 1,144


Cash flow from operations 2,752 935 1,314 1,421Capex -298 -550 -1,594 -1,756Cash flow from investment -273 -550 -1,594 -1,756Dividends -626 -737 -617 -661Change in net debt -2,028 720 910 928FCF equity 2,532 250 -280 -335


Intangible fixed assets 301 301 301 301Tangible fixed assets 4,238 4,562 5,950 7,435Current assets 9,289 9,069 8,160 7,232Cash & others 5,958 5,239 4,329 3,401Total assets 13,918 14,023 14,501 15,058Operating liabilities 6,437 6,318 6,362 6,387Gross debt 2,936 2,936 2,936 2,936Net debt -3,023 -2,303 -1,393 -466Shareholders funds 3,868 4,280 4,721 5,178Invested capital 1,432 2,376 3,720 5,180


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 28.6 35.4 3.9 4.4EBITDA 19.8 18.8 6.6 9.8Operating profit 21.0 22.1 9.0 6.9PBT -8.5 39.3 7.0 3.8HSBC EPS -9.1 39.5 7.1 3.8

Ratios (%)

Revenue/IC (x) 11.1 18.7 12.1 8.7ROIC 39.0 59.0 40.2 29.4ROE 19.4 25.3 24.5 23.1ROA 6.8 7.8 8.6 8.9EBITDA margin 5.2 4.6 4.7 5.0Operating profit margin 4.4 4.0 4.2 4.3EBITDA/net interest (x) 13.1 23.1 11.8 9.5Net debt/equity -77.5 -53.3 -29.2 -8.9Net debt/EBITDA (x) -2.2 -1.4 -0.8 -0.2CF from operations/net debt




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Med-Urals refining margin (USD 2.9 1.8 4.0 4.5Tupras Refining Margin(USD/bbl 11.2 9.8 9.8 9.8GDP growth (%) 8.0 4.2 4.3 4.3USD/TRY (Average) 1.51 1.57 1.65 1.65

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.2 0.2 0.2 0.2EV/EBITDA 4.5 4.2 4.5 4.6EV/IC 4.3 2.9 2.1 1.7PE* 12.5 9.0 8.4 8.1P/Book value 2.4 2.2 2.0 1.8FCF yield (%) 27.6 2.7 -3.1 -3.7Dividend yield (%) 8.0 6.7 7.2 7.4


Issuer information


Reuters (Equity) TUPRS.IS Bloomberg (Equity) TUPRS TIMarket cap (USDm) 4,986 Market cap (TRYm) 9,215Free float (%) 49 Enterprise value (TRYm) 6860Country Turkey Sector OIL & GASAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

6

16

26

36

46

56

2009 2010 2011 2012

6

16

26

36

46

56

Tupras Rel to ISTANBUL COMP


207


abc


Turcas’ mainly operates in petroleum retail (in a

30:70 JV with Shell) and petrochemicals (through

an indirect 25% stake in Petkim). In Turkish

petroleum retail the top 5 retailers account for

over 90% market share, effectively limiting the

competition. Petkim’s capacity is enough to serve

only about 25% of the fast-growing domestic

petrochemicals demand, which limits competitive

threats (through import tariffs). When its refining

and energy production investments are completed

Turcas will have better competitive power as the

new businesses will begin creating synergies and

cost efficiencies.


The Turkish petroleum retail market has attractive

distribution margins; margins soared after the

market deregulation in 2005. The desire to

preserve the market structure by the incumbents is

therefore strong. Petrochemicals pricing is driven

by global trends and is highly dependent on sector

and macro dynamics.


Though Turkey is seeing strong growth in diesel

consumption (which accounts for about 45% of

total petroleum demand), its demand for other

products, mainly gasoline and fuel oil, is

decreasing. Petkim is losing market share as its

capacity has stayed almost the same in the face of

fast-rising domestic demand.


Turkish retail market is dependent on domestic

economic growth to propel fuel consumption, and

is therefore somewhat restricted to the products’

growth. Petkim has smaller capacity addition

plans in the near term.

Market fragmentation is medium to strong

As both existing and future businesses have low

fragmentation (major market players dominate

most of the market), Turcas’ overall market

structure works in favour of its subsidiaries.

Low interest rate is positive

The lower interest rate environment should help

the company keep its funding costs low. In terms

of consumer demand, we do not think that Turcas

is very sensitive to interest rates.

Turcas

Overall competitive outlook is medium. Turcas improves its

competitive power through expansion into refining and energy

production businesses

Turcas is an attractive growth story in the medium term and a

compelling play on the attractive Turkish energy market

We maintain our Overweight rating with a revised target of

TRY4.5 (from TRY5.1)



208


abc

Weak TRY should be negative

Even though Turcas does not have a major short

FX position on its balance sheet, its subsidiaries;

Shell-Turcas and Petkim SPV, have considerable

short positions. Large off-balance-sheet debt may

weaken the company’s financial position in a

weak TRY environment. As product prices are

mostly linked to USD in petrochemicals and fuel

distribution, this impact is slightly reduced by

higher operational profit.

Investment thesis

Turcas has ambitious plans to diversify and grow

in refining (together with Socar) and the

electricity production business (in partnership

with German RWE). While the refining project is

a cornerstone of its growth plans, as it will create

synergies between existing businesses, the

electricity production business is also critical as

ongoing construction of a gas fire power plant is

only the first of a series of power plants to be

constructed according to the company’s long-term

strategies. Gas supply to these businesses, as well

as to third parties directly from Socar, will be

another key business segment that has the

potential to lift Turcas into the "super league" of

energy players in Turkey when all plans are

completed in 2015.


Our estimates are reduced due to lower TRY

estimates and weak H1 2011 performance. We

use an SOTP method to value Turcas. We value

the company’s 30% stake in Shell-Turcas (STAS)

using DCF (60% weight) and EV/EBITDA (40%

weight) methodologies. All our target prices are

based on a 12-month time frame and are,

therefore, boosted by the company’s CoE. Our

DCF model for STAS uses a WACC of 12.8%

and a terminal growth rate assumption of 3%. Our

WACC is derived using a risk-free rate

assumption of 8.0%, an equity risk premium of

5.5%, beta of 0.88 and cost of debt of 8.0%. The

table at the bottom of this page provides the SOTP

valuation snapshot used for arriving at our target

price of TRY4.5.

Turcas: HSBC forecasts

_________ 2011e ________ _________ 2012e ________TRYm New Old Change New Old Change

EBITDA -10 -9 -5.6% -10 -9 -14.4% EBIT -10 -9 -12.2% -10 -9 -20.0% Net profit 63 94 -33.3% 7 98 -22.1%


Under our research model, for Turkish stocks

without a volatility indicator, the Neutral band is

8.5%-18.5%. Our target price implies a potential

return of 72%, which is above the Neutral band;

thus we maintain our Overweight rating.

Risks

A possible rise in funding costs, a negative macro

economic environment, and a possible delay in

projects are the key risks to our valuation and rating.

Turcas: SOTP valuation

Valuation New Old TRYm Per share Per share Basis

Turcas 30% stake in STAS 848 3.77 4.15 60% DCF and 40% EV/EBITDA 30% STAS stake - DCF valuation 822 3.66 3.34 uplifted by CoE 30% STAS stake - EV/EBITDA valuation 874 3.89 4.96 uplifted by CoE; valued at 10% discount to sector multiple

(5.0x on 2011e) Petkim stake 0 0.00 0.00 Petkim SPV valuation taken as zero due to net debt

position higher than Petkim’s Mcap 5% stake in ATAS terminal 47 0.21 0.21 Transaction value 800 MW Natural gas power project 93 0.41 0.3 risk based DCF for power plant Total enterprise value 988 4.39 4.66 Less: net (debt) / Cash 22 0.10 0.41 Equity value 1,010 4.49 5.1


209


abc


Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 52 12 14 14EBITDA -10 -10 -10 -10Depreciation & amortisation -1 -1 0 0Operating profit/EBIT -10 -10 -11 -10Net interest 0 0 0 0PBT 60 65 77 98HSBC PBT 60 65 77 98Taxation -3 -2 0 0Net profit 56 63 76 98HSBC net profit 56 63 76 98


Cash flow from operations 55 55 73 93Capex -1 0 0 0Cash flow from investment -59 -8 0 5Dividends -13 0 0 0Change in net debt 17 -16 -73 -98FCF equity -14 -12 -10 -10




Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 16.2 -77.2 17.0 0.0EBITDA Operating profit PBT 91.7 8.8 18.0 28.3HSBC EPS 104.0 11.1 21.8 28.3

Ratios (%)

Revenue/IC (x) 9.8 0.6 0.4 0.6ROIC -182.3 -48.8 -34.5 -43.6ROE 10.7 11.0 12.3 14.0ROA 77.4 48.3 33.0 31.0EBITDA margin -18.3 -79.6 -73.7 -71.3Operating profit margin -19.8 -84.1 -77.1 -74.2EBITDA/net interest (x) Net debt/equity -8.3 -10.4 -20.4 -31.3Net debt/EBITDA (x) 4.8 6.4 13.0 23.3CF from operations/net debt



Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 10.3 44.1 32.5 25.5EV/EBITDA EV/IC 109.8 15.1 16.5 17.7PE* 10.4 9.4 7.7 6.0P/Book value 1.1 1.0 0.9 0.8FCF yield (%) -2.3 -2.0 -1.8 -1.7Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) TRCAS.IS Bloomberg (Equity) TRCAS TIMarket cap (USDm) 319 Market cap (TRYm) 587Free float (%) 100 Enterprise value (TRYm) 526Country Turkey Sector Oil & GasAnalyst Bulent Yurdagul Contact 90 212 376 46 12

Price relative

0

1

2

3

4

5

6

2009 2010 2011 2012

0

1

2

3

4

5

6

Turcas Rel to ISTANBUL COMP


Financials & valuation: Turcas Overweight

210


abc


As the leader in the Turkish mobile market, Turkcell

has the highest EBITDA margin in the segment.

However, its margin is much lower than that of other

emerging market operators owing to a plethora of

taxes. Although we view additional taxation as

unlikely, deterioration in the domestic economy

would delay the removal of the higher taxation

burden. Compared to other corporates in Turkey,

Turkcell is in an advantageous position with its high

market share, above average profitability and strong

asset turnover. It is likely that Turkell may

strengthen its position going forward given high

entry barriers to entry in the mobile market and

reduced intensity of the competition.


Turkcell posted above a 20% ROE together with a

54% market share in 2010 and these are well

above the averages for our coverage universe.

This situation looks sustainable in our view, as

weak profitability of other mobile players

prevents the removal of entry barriers in the

foreseeable future.


As the dominant market player, Turkcell has lost

9 points of market share in the last 6 years to its

competitors. Therefore, it scores medium on

market share momentum, as expected.


strong

With strong asset turnover and a high adjusted

profit margin, Turkcell ranks at the highest levels

compared to our Turkish coverage universe and

slightly higher than telecoms sector averages

globally. We believe Turkcell has seen most of

the pressures on its margins in the last couple of

years (ie due to cuts in mobile termination rates

and cut-throat price competition), therefore

downside risks look limited at this stage.


strong

Three players commanding the entire mobile

market is a promising structure for Turkcell even

though there are some competitors still willing to

invest in growing market share. A major risk will

be entry of a fourth player with a new license.

Low interest rate environment is medium to

negative

Turkcell's operations are not very sensitive to interest

rates, and its balance sheet structure, and with a large

cash position, also means that Turkcell is not a

beneficiary of a low interest rate environment.

Turkcell

Turkcell's overall competitive outlook is medium compared to its


Turkcell may strengthen its position further going forward given

reduced intensity of the competition

We have a target price of USD12.6 and a Neutral rating

Herve Drouet* Analyst HSBC Bank plc (London) + 44 20 7991 6827 [email protected]


211


abc

Weak TRY has a negative to neutral impact

Having a limited short position on the balance

sheet, a sharp depreciation of TRY would not lead

to major FX losses on the P&L. However, the

business is based mostly on TRY revenues and

USD costs (due to capital expenditures),

therefore, weakness in TRY has a medium to

negative impact on Turkcell.

Investment thesis

We believe mobile internet is an important growth

driver for Turkcell. Data and VAS revenues now

contribute 23% of domestic revenue, and we

expect data to contribute almost half the domestic

revenue by 2016e. The Ukraine market is

stabilising, with reduced churn, stable ARPU and

margin improvement for all operators.

Despite its solid FCF generation and a net cash

position, Turkcell is a high-beta stock owing to FX

fluctuations and shareholder disputes, aggravated by

the recent dividend stalemate. We apply a 10%

discount to our DCF-based fair value to arrive at our

target price as the company is not returning cash to

shareholders. Although the stock lacks a catalyst at

the moment, it could rally when the shareholders

agree on the dividend distribution.


We have a 12-month target price of USD12.6 per

ADS. We apply a 10% discount to our fair value

of USD14 per share, derived using a DCF model,

as the company is not returning cash to

shareholders. We use the one-year average US 10-

year treasury bond yield (currently 3.5%) as the

risk-free rate. We calculate a market risk premium

of 10% using the relative US dollar volatility of

the local equity market to the US equity market

(time-weighted average over the past 10 years).

We use a beta of 1.2 to reflect heightened

competitive risks in the mobile market, sparked

by concern that irrational competition may also

come into the 3G and data segments.

We value its associate (Fintur) using an

EV/EBITDA multiple of 5x on 2011e, in line with

the current average CEEMEA telcos multiple. On

our estimates, the valuation of Turkcell’s stake is

USD1.8bn, implying a value of approximately

USD2.1 per ADS. We have a Neutral rating on

Turkcell.

Upside risks, we believe, less competition than

expected; better macroeconomic prospects for

Turkey and Ukraine; the successful resolution of

ownership disputes; and higher-than-expected

dividends. Downside risks, in our view, relate to

regulatory and domestic competitive risks, which

may put further pressure on Turkcell’s margins

and growth prospects.

212


abc

Financials & valuation: Turkcell Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e

Profit & loss summary (USDm)

Revenue 5,982 5,709 5,914 6,448EBITDA 1,959 1,794 1,924 2,156Depreciation & amortisation -810 -963 -796 -852Operating profit/EBIT 1,149 831 1,129 1,303Net interest 188 144 57 45PBT 1,446 957 1,319 1,482HSBC PBT 1,510 1,250 1,319 1,482Taxation -321 -260 -264 -296Net profit 1,169 719 1,036 1,166HSBC net profit 1,216 1,028 1,036 1,166

Cash flow summary (USDm)

Cash flow from operations 1,282 1,071 1,660 1,959Capex -1,079 -914 -1,041 -1,112Cash flow from investment -705 -767 -1,041 -1,112Dividends -591 -855 -792 -725Change in net debt 120 648 172 -122FCF equity 760 750 616 815

Balance sheet summary (USDm)

Intangible fixed assets 1,856 1,584 1,584 1,584Tangible fixed assets 3,068 2,999 3,244 3,503Current assets 4,438 2,933 2,793 3,000Cash & others 3,302 1,628 1,456 1,578Total assets 9,795 8,062 8,302 8,902Operating liabilities -1,377 -1,113 -1,023 -1,254Gross debt 1,843 818 818 818Net debt -1,459 -811 -638 -760Shareholders funds 6,258 5,901 6,212 6,562Invested capital 7,436 7,001 7,189 7,765


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 3.3 -4.6 3.6 9.0EBITDA 1.4 -8.4 7.3 12.0Operating profit -6.1 -27.7 35.8 15.5PBT 0.1 -33.8 37.9 12.3HSBC EPS -19.1 -15.4 0.8 12.5

Ratios (%)


Per share data (USD)



Year to 12/2010a 12/2011e 12/2012e 12/2013e

Turkcell market share (Turkey) 54.2 53.0 52.4 51.9Turkey ARPU (USD) 12.9 12.0 11.7 11.9Turkey service revenue (USDm) 5,315 4,854 4,977 5,391

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information

Share price (USD) 12.16 Target price (USD) 12.60 Potent'l return (%) 3.6

Reuters (Equity) TKC.N Bloomberg (Equity) TKC USMarket cap (USDm) 10,701 Market cap (USDm) 10,701Free float (%) 35 Enterprise value (USDm) 8000Country Turkey Sector Wireless TelecomsAnalyst Herve Drouet Contact 44 20 7991 6827

Price relative

3579

111315171921

2009 2010 2011 2012

3579111315171921

Turkcell Rel to ISTANBUL COMP


213


abc


The airline industry is one of the most competitive

on a global scale. High oil prices are a big burden

on industry profits, especially for companies with

low hedging ratios such as Turkish Airlines

(THY). The industry has started to add capacity

since mid-2010, thanks to strong demand, but the

chronic overcapacity problem may resurface

unless oil prices continue to fall and global

economic growth remains intact. THY is a high

growth company benefiting from Turkey’s

geographical location advantage but its aggressive

fleet expansion is fraught with the risk of a global

downturn in industry dynamics, leading to low

yields and load factors.


weak

THY’s ROE is lower than the average of peers

although the adjusted gross margin is compatible

with the European sector average. As THY

continues to grow aggressively, its market share

should climb as well as its profitability once new

aircraft and the routes it operates mature.


THY’s market share (in terms of RPK) among

AEA Airlines went up from 2.9% in 2005 to 6.4%

as of H1 2011 thanks to an aggressive growth

strategy as well as Istanbul’s emerging status as a

regional hub for air passenger traffic between East

and West. We expect THY to gain further market

share in years to come thanks to continued fleet

expansion and Turkish air travel demand growth.


strong

THY has a low asset turnover ratio and one that is

below the European sector average. We attribute

the low sales to assets and ROE metrics largely to

the fast capacity growth mode of Turkish Airlines,

which should gradually improve towards sector

averages as new aircraft are utilised more

efficiently and the “ramp up” stage is passed.

Market fragmentation is medium to weak

The top five airlines in Europe account for 70% of

total traffic (RPK), therefore the market is not very

fragmented. That said, there are still too many

players sharing the remaining 30% market share and

the industry is extremely competitive despite a

considerable merger / alliance process during the last

Turkish Airlines

Turkish Airlines' overall competitive outlook is medium compared

to its peers and other industrials in Turkey

High oil prices and capacity additions by competitors, plus a

global slowdown, put pressure on earnings despite rising market

share

Cutting target price to TRY3.20 (from TRY4.17), remain Neutral



214


abc

decade. There is more consolidation activity to take

place, in our view, with THY potentially taking a

“consolidator “ role.


The airline sector is not directly exposed to the

general level of interest rates but lower rates

would mean a lower cost of financing in principle

for THY.

Weak TRY has neutral impact

THY generates c85% of revenues in FX while

c60% of costs are FX related. Therefore, a weak

TRY is positive for operating margins as well as a

weak USD against EUR (EUR 34% of revenues,

11% of costs, USD 15% of revenues, 43% of

costs). On the other hand, due to the high FX

short position originating from fleet expansion,

weak TRY has an adverse impact on profitability

through a surge in FX costs (10% weaker TRY

against FX curbs profits by TRY285m).

Investment thesis

THY's biggest fleet expansion program in history

seems to have coincided with high oil prices,

capacity upgrades by competitors worldwide and

the risk of global economic slowdown. Passenger

yields and especially load factors are under

pressure from increased competition and big fleet

expansion. Weak TRY supports operating

margins but boosts THY’s costs. All in all, we are

optimistic about THY’s passenger growth outlook

but cautious on its profitability until there is solid

evidence of sustainable yield and load factor

improvement and better control of costs.


We have revised our estimates in consideration of

new FX assumptions (i.e. weaker TRY than before)

leading to higher revenues but lower profits. We

now expect a net loss of TRY130m in 2011 (vs a

TRY544m loss in H1) and a small profit in 2012,

clearly dependent on the course of oil price.

Turkish Airlines - forecast changes

TRYm 2011e old

2011e new

2012e old

2012e new

2013e old

2013e new

Revenue 10,699 11,234 12,863 13,816 14,740 15,781 EBITDAR 1,357 1,102 1,768 1,589 2,234 2,268 margin 12.8% 9.8% 13.8% 11.5% 15.2% 14.4% EBITDA 994 733 1,382 1,179 1,768 1,756 margin 9.3% 6.5% 10.7% 8.5% 12.0% 11.1% Net profit 223 -130 327 155 535 432

Source: HSBC estimates Our valuation is based on a combination of DCF

and peer group multiples (2012e EV/EBITDAR

and P/BV), used at respective weights of 25%,

37.5% and 37.5%. The weight for the multiples is

higher to focus more on the short-term investment

phase and less on the longer-term DCF. We

switch to 2012 multiples from 2011. Our key DCF

model parameters are: 8.5% risk-free rate (in

TRY), 5.5% equity risk premium, 0.97 beta, 3%

terminal growth rate (from 2%) 13.8% CoE and

9.4% WACC.

Of the three methods, DCF yields the highest fair

value of TRY4.92 per share (previously TRY5.43)

followed by 2012e P/BV (TRY3.00 per share, from

TRY5.00) and EV/EBITDAR (TRY2.26 per share,

from TRY4.46). THY is currently trading at 2012e

multiples of 8.5x EV/EBITDAR and 0.8x P/BV

versus global industry average multiples of 7.2x and

1.0x, respectively. Based on the 17% potential return

offered by our new TRY3.2 target price, which is

within the Neutral band f 8.5-18.5% for non-volatile

Turkish stocks, we maintain our Neutral rating.

Key downside risks include (1) weaker-than-

expected domestic and international passenger

traffic, (2) lower-than-expected passenger yields,

(3) a surge in oil prices above the HSBC Oil

team's forecasts, (4) greater-than-expected

pressure on LF and margins from increased

supply, (5) external events (pandemic, epidemic,

terror event, accident, volcano eruption, etc), (6)

political risks (serious disputes hampering

tourism), (7) major EUR weakness and (8) an

215


abc

SPO of the State's stake (51%) being put back on

the agenda by the Privatisation Administration.

Key upside risks include (i) stronger-than-

expected passenger traffic and yields, (ii) a

significant decline in oil prices, (iii) lower-than-

expected pressure on LF and margins from

increased supply, (iv) major EUR strength.

216


abc

Financials & valuation: Turkish Airlines Neutral Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 8,423 11,234 13,816 15,781EBITDA 936 733 1,179 1,756Depreciation & amortisation -453 -573 -757 -867Operating profit/EBIT 461 137 399 876Net interest -80 -326 -260 -418PBT 366 -153 183 508HSBC PBT 366 -153 183 508Taxation -79 23 -27 -76Net profit 286 -130 155 432HSBC net profit 292 -130 155 432


Cash flow from operations 856 1,032 1,353 1,881Capex -629 -193 -213 -239Cash flow from investment -479 198 149 47Dividends 0 0 0 -16Change in net debt 1,622 3,274 1,762 822FCF equity 212 429 765 1,079


Intangible fixed assets 33 33 33 33Tangible fixed assets 6,443 11,433 13,496 14,688Current assets 3,492 4,464 3,477 2,995Cash & others 898 1,242 826 519Total assets 10,649 16,697 17,584 18,213Operating liabilities 2,224 2,680 2,993 3,216Gross debt 4,242 7,860 9,205 9,720Net debt 3,344 6,618 8,379 9,202Shareholders funds 3,747 3,617 3,773 4,189Invested capital 6,846 12,008 13,186 13,981


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 19.7 33.4 23.0 14.2EBITDA -23.7 -21.7 60.9 49.0Operating profit -39.6 -70.3 191.3 119.6PBT -50.4 -141.9 178.4HSBC EPS -61.8 -137.2 178.4

Ratios (%)

Revenue/IC (x) 1.5 1.2 1.1 1.2ROIC 7.0 1.9 3.3 6.2ROE 8.1 -3.5 4.2 10.9ROA 4.2 2.3 2.9 4.6EBITDA margin 11.1 6.5 8.5 11.1Operating profit margin 5.5 1.2 2.9 5.6EBITDA/net interest (x) 11.7 2.3 4.5 4.2Net debt/equity 89.2 183.0 222.1 219.7Net debt/EBITDA (x) 3.6 9.0 7.1 5.2CF from operations/net debt 25.6 15.6 16.2 20.4




Year to 12/2010a 12/2011e 12/2012e 12/2013e

No of aircraft (year-end) 153 189 202 207Load factor total (%) 73.7 71.6 71.6 73.0Total passenger yield (EURc) 15.4 16.6 17.0 18.3Oil price (Brent - USD/bbl) 80 110 115 120RASK (EURc) 6.47 5.36 5.44 5.60CASK (EURc) 6.12 5.30 5.29 5.29

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e

EV/sales 0.5 0.7 0.7 0.7EV/EBITDA 4.8 10.1 8.4 6.3EV/IC 0.7 0.6 0.8 0.8PE* 9.1 20.5 7.4P/Book value 0.7 0.9 0.8 0.8FCF yield (%) 18.3 57.2 49.7 57.5Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information

Share price (TRY) 2.74 Target price (TRY) 3.20 Potent'l return (%) 17

Reuters (Equity) THYAO.IS Bloomberg (Equity) THYAO TIMarket cap (USDm) 1,725 Market cap (TRYm) 3,180Free float (%) 100 Enterprise value (TRYm) 7368Country Turkey Sector AirlinesAnalyst Cenk Orcan Contact 90 212 376 46 14

Price relative

0

1

2

3

4

5

6

7

2009 2010 2011 2012

0

1

2

3

4

5

6

7

Turkish Airlines Rel to ISTANBUL COMP


217


abc


Being the incumbent fixed-line operator, Turk

Telekom enjoys high market share and high

profitability in the fixed line voice and ADSL

segments despite an unpromising positioning in

the mobile segment. An inevitable loss of market

share in the overall Turkish telecoms market in

the last 6 years coupled with weak TRY seem to

be the weakest links in Turk Telekom's

competitive position.


With a very strong market share and ROE of 36%

as of 2010, Turk Telekom is well positioned in

terms of competitive power. Risks remain with

regard to a possible loss of market share in the

fixed line and ADSL segments in the long term

while a recovery in mobile segment market share

and profitability is possible.


Turk Telekom has been negatively affected by

loss of traffic to the mobile segment, where its

market share growth has been limited (from 15%

in 2005 to 19% in 2011). We think weak

momentum may persist going forward.


Turk Telekom has strong asset turnover and profit

(adjusted) margin compared to our Turkish

coverage while it also ranks slightly above the

telecoms sector averages. This is supported by the

current dominant position in the fixed line

segment and looks like being sustainable in the

short to medium term while there are certain risks

in the long term.


The current structure, with limited competition in

fixed line voice and ADSL and three players in

the mobile market, implies that the Turkish

telecoms market is extremely consolidated.

However, competition in the mobile market has

been tough over the last few years, which has

pulled down profit margins.


As Turk Telekom's balance sheet is leveraged, a low

interest rate environment should lower its interest

expenses. The impact on operations is limited as

demand has a low sensitivity to interest rates.

Weak TRY has a negative impact

While revenues are mostly TRY driven, the cost

structure (especially on the capex side) has USD

Turk Telekom

Turk Telekom's overall competitive outlook is medium compared

to its peers and other industrials in Turkey

Being the incumbent fixed-line operator, Turk Telekom enjoys

high market share and profitability but aggressive competition and

TRY weakness distorts the competitive position slightly

Target price kept at TRY6.80, maintain Underweight

Herve Drouet* Analyst HSBC Bank plc (London) + 44 20 7991 6827 [email protected]


218


abc

components. Also, a cTRY3.5bn FX short

position on the balance sheet makes Turk

Telekom's P&L highly sensitive to a weaker TRY.

Investment thesis

Turk Telekom's main PSTN business is facing a

secular decline in access lines, while fixed

broadband growth in Turkey is now limited by

slowing PC penetration. We believe it will be

constrained by the small gap between PC and

broadband penetration (households with a PC but

no broadband). Turkcell and Vodafone Turkey are

increasingly pushing wireless data with improved

3G coverage. This could further hamper

subscriber growth for Turk Telekom’s fixed

broadband offerings owing to potential

substitution by mobile broadband.

We expect its mobile operations to show good

revenue growth but generate margins lower than

the sector average. A significant proportion

(around 90%) of Turk Telekom’s EBITDA is

generated by its fixed-line business. We fear its

EBITDA margin could be under threat in the

medium term because of inflation in general and

wage inflation in particular. In our view, wage

inflation could be a serious threat to its EBITDA

margin as personnel costs still account for around

20% of fixed-line revenue. Furthermore, there is

not much scope for a significant headcount

reduction as the government still owns c32% of

Turk Telekom. Further MTR cuts would also have

little incremental benefit.


We maintain our 12-month target price of TRY6.8

on Turk Telekom. We value Turk Telekom using

an average of our SOTP and DCF valuations. Our

DCF valuation gives a fair value of TRY6.7 per

share, while our SOTP fair value is TRY6.9.

The DCF valuation is based on a cost of equity of

13.5%. We use the one-year average US 10-year

treasury bond yield (currently 3.5%) as the

riskfree rate. We arrive at a market risk premium

of 10%, calculated using the relative USD

volatility of the local equity market to the US

equity market (time-weighted average over the

last 10 years). We use a beta of 1.0. The SOTP

uses a WACC of 13.5% for the fixed-line business

and 13.2% for the mobile business.


volatility indicator, the Neutral band is 8.5-18.5%.

Our 12-month target price implies a potential

return of -15%. As this is below the Neutral band,

we maintain our Underweight rating.

Risks:

The key upside risks are positive developments in

currency movements against the USD, the extent of

competition in the mobile segment and the extent of

regulatory interference. Other upside risks, in our

view, include lower-than-expected inflation, higher-

than-expected dividends, high growth in Turk

Telekom’s subscriber acquisitions, higher-than-

expected mobile ARPU and broadband ARPL, brisk

IPTV uptake, and a delay in the entry of competition

in the fixed-line mass market.

219


abc

Financials & valuation: Turk Telekom Underweight Financial statements

Year to 12/2010a 12/2011e 12/2012e 12/2013e


Revenue 10,852 11,854 12,406 12,991EBITDA 4,835 5,154 5,498 5,659Depreciation & amortisation -1,524 -1,570 -1,633 -1,669Operating profit/EBIT 3,311 3,584 3,865 3,990Net interest -97 -157 -275 -313PBT 3,127 3,063 3,590 3,677HSBC PBT 2,750 3,297 3,590 3,677Taxation -799 -688 -718 -735Net profit 2,451 2,546 2,872 2,941HSBC net profit 2,107 2,753 2,872 2,941


Cash flow from operations 3,844 3,681 4,528 4,673Capex -1,733 -1,979 -1,984 -2,006Cash flow from investment -1,523 -1,733 -2,708 -2,006Dividends -1,590 -2,244 -2,292 -2,585Change in net debt -382 775 471 -82FCF equity 2,165 2,306 2,514 2,649


Intangible fixed assets 3,570 3,493 3,779 3,779Tangible fixed assets 7,161 7,678 8,030 8,366Current assets 3,712 3,523 3,611 3,705Cash & others 1,875 1,500 1,500 1,500Total assets 15,100 15,358 16,085 16,515Operating liabilities -2,957 -3,799 -4,204 -4,422Gross debt 4,164 4,564 5,035 4,953Net debt 2,289 3,064 3,535 3,453Shareholders funds 6,175 5,236 5,523 5,817Invested capital 15,525 16,993 18,124 18,772


Year to 12/2010a 12/2011e 12/2012e 12/2013e

Y-o-y % change

Revenue 2.7 9.2 4.7 4.7EBITDA 11.0 6.6 6.7 2.9Operating profit 18.3 8.2 7.8 3.2PBT 32.5 -2.1 17.2 2.4HSBC EPS 23.5 30.7 4.3 2.4

Ratios (%)





Year to 12/2010a 12/2011e 12/2012e 12/2013e

Mobile penetration (%) 85.0 87.8 94.0 99.6Mobile revenue (TRYm) 2,646 3,064 3,493 3,985Mobile EBITDA (TRYm) 332 411 734 889Broadband HH penetration (%) 38.0 40.7 43.5 46.0Fixed line revenue (TRYm) 8,511 9,126 9,265 9,374Fixed line EBITDA (TRYm) 4,507 4,748 4,765 4,770

Valuation data

Year to 12/2010a 12/2011e 12/2012e 12/2013e



Issuer information


Reuters (Equity) TTKOM.IS Bloomberg (Equity) TTKOM TIMarket cap (USDm) 15,152 Market cap (TRYm) 27,930Free float (%) 13 Enterprise value (TRYm) 31053Country Turkey Sector Diversified TelecomsAnalyst Herve Drouet Contact 44 20 7991 6827

Price relative

123456789

1011

2009 2010 2011 2012

1234567891011

Turk Telekom Rel to ISTANBUL COMP


220


abc


Strong market share momentum along with a

sustainable growth outlook in a low interest rate

environment makes Zorlu Enerji a competitive

proposition; however its negative RoE makes it

score medium on our competitive score card.

"Profitable market share" score is weak

Zorlu Enerji has the lowest score on our profitable

market share scorecard at level (1). It offers

negative RoE making it the least profitable

company in its peer group domestically as well as

internationally.

With the improvement in power prices in Turkey

we expect to see positive RoE from Zorlu Enerji.


Zorlu Enerji’s market share momentum is strong

scoring (5) in our score card as it has managed to

post 11% CAGR growth over the last five years

compared to the industry’s 5%.

We expect the company to increase its market

share in Turkey via organic growth while it may

also bid for privatisation assets. Zorlu Enerji also

plans to build power stations in Russia, Israel and

Pakistan, which will positively affect this score

when they become operational.


strong

Zorlu Enerji is the weakest utilities company on

DuPont scoring due to its weak gross profit and

low asset turnover ratio. With an improving

pricing environment in Turkey, we expect to see

improvement in gross profit, yet asset turnover

improvement depends on the commissioning of

power generation in Russia.


The State currently plans to privatise 70% of its

generation portfolio which currently comprises

50% of Turkey’s power generation capacity. The

privatisation programme will create opportunities

for Turkish utilities to grab more market share,

resulting in fragmentation in the Turkey energy

market. With the liberalisation of Turkey’s power

sector, we see Zorlu Enerji as well placed to

benefit from the better pricing environment.


positive


impact on Zorlu Enerji and the Turkey utility

sector as a major portion of capex is financed

through debt.

Zorlu Enerji

Zorlu Enerji’s overall competitive outlook is medium

We believe the low valuation is justified given the heavy debt

position and uncertainties in overseas investments

Target price decreased to TRY2.1 (from TRY3.0) on the gas price

hike assumption in Q3, maintain Neutral



221


abc

Zorlu is high leveraged (TRY1.5bn net debt as of

Q2 2011) and lower interest rates will reduce the

interest burden on the P&L helping to boost its

bottom line.

Weak TRY environment should be negative

Zorlu Enerji will be negatively impacted by a weak

TRY due to both its short FX position of TRY1.5bn,

arising from its debt position, and a potential FX-

related rise in natural gas prices, although the impact

will be less than for peers thanks to a higher share of

renewable generation. The company will also

become vulnerable to the parity between TRY and

RUB as the Russian capacity is expected to become

operational in Q4 2011.

Investment thesis

Zorlu Enerji offers geographically diversified and

profitable power generation exposure at a low

valuation. However, given the negative RoE in the

Turkey operations, prolonged investment in

Russia and legal problems attached to the project,

and the uncertain outlook for investments in

Israel, we believe the underperformance by the

share price is justified.

In addition to operational challenges, the company

also sits on a sizeable debt position which threatens

EPS via interest payments and FX loss risk.

We believe the outlook will become more optimistic

if the company manages to start generation in Russia

in Q4 2011, as guided by the management.


Our DCF, peer multiples comparison and cost-

driven SOTP based valuation provides a target

price of TRY2.1 (from TRY3.0) for Zorlu Enerji.

Our parameters for the DCF are: 8.5% RFR, 5.5%

ERP and 0.87 beta, 3% terminal growth rate. Our

DCF methodology provides a valuation of

TRY2.9 per share (from TRY4.5). Our cost-

driven SOTP methodology is based on a

replacement value of Zorlu Enerji’s current

generation assets after subtracting its net debt

position. Our SOTP methodology provides a

valuation of TRY1.2 (from TRY1.5) per share.

Zorlu Enerji trades at EUR1.5x in 2012e in terms of

EV/MW vs the peer set average of EUR1.3x. When

we take the peer set average multiple, it implies a

TRY2.2 per share valuation for the company.

Taking the average of the three methodologies we

reach our target price of TRY2.1 per share. Since

our target price implies 17% potential return,

which is within the 8.5%-18.5% Neutral band for

non-volatile Turkish stocks, we maintain our

Neutral rating for the company.

Risks

Any prolongation of the Russian issues (beyond Q4

2011) is a downside risk. Zorlu Enerji has started an

evaluation of its 135 MW wind farm ROTOR. If the

company manages to sell this at a good price, that

could act as a positive risk for the shares.

Revision to the forecasts

(TRYmn) _____________ New _______________ ______________ Old ______________ __________ Change (%) ___________ FY11e FY12e FY13e FY11e FY12e FY13e FY11e FY12e FY13e

Sales 513 615 639 635 675 702 -19% -9% -9% EBITDA 105 171 191 186 200 210 -44% -15% -9% EBITDA m 20% 28% 30% 29% 30% 30% -9% -2% 0% Net profit -94 3 19 23 25.0 38 -504% -87% -49%


222


abc


Year to 12/2009a 12/2010e 12/2011e 12/2012e


Revenue 547 486 513 615EBITDA 146 70 105 171Depreciation & amortisation -56 -72 -72 -70Operating profit/EBIT 91 -2 33 100Net interest -99 -90 -85 -90PBT 109 -33 -90 10HSBC PBT 109 -33 -90 10Taxation -5 0 0 -2Net profit 98 -35 -92 5HSBC net profit -82 -20 -94 3


Cash flow from operations 193 172 -35 46Capex 132 -89 -90 -89Cash flow from investment 132 -89 -90 -89Dividends 0 0 0 0Change in net debt -451 -83 125 43FCF equity 220 -72 -85 -42


Intangible fixed assets 0 0 0 0Tangible fixed assets 2,049 2,065 2,082 2,101Current assets 360 374 225 193Cash & others 43 82 -78 -152Total assets 2,414 2,445 2,313 2,300Operating liabilities 743 756 751 763Gross debt 1,381 1,337 1,301 1,271Net debt 1,338 1,255 1,380 1,423Shareholders funds 220 280 186 189Invested capital 1,623 1,601 1,634 1,683


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Y-o-y % change

Revenue -17.9 -11.3 5.6 19.9EBITDA 58.5 -52.1 49.0 63.0Operating profit 94.0 -102.5 206.6PBT -130.4 HSBC EPS

Ratios (%)

Revenue/IC (x) 0.3 0.3 0.3 0.4ROIC 5.0 -0.1 2.0 4.5ROE -74.8 -7.9 -40.3 1.7ROA 7.9 2.4 -0.2 3.3EBITDA margin 26.8 14.5 20.4 27.7Operating profit margin 16.5 -0.5 6.4 16.3EBITDA/net interest (x) 1.5 0.8 1.2 1.9Net debt/equity 583.7 431.1 693.6 695.0Net debt/EBITDA (x) 9.1 17.9 13.2 8.3CF from operations/net debt 14.4 13.7 3.2


EPS Rep (fully diluted) 0.35 -0.12 -0.33 0.02HSBC EPS (fully diluted) -0.29 -0.07 -0.33 0.01DPS 0.00 0.00 0.00 0.00Book value 0.78 0.99 0.66 0.67


Year to 12/2009a 12/2010e 12/2011e 12/2012e

Spot power prices (DUY,TRY/MWh

162.0 152.3 165.4 176.9

Tariff power prices (TRY/MWh) 143.3 151.1 164.1 175.6Power output (GWh) 2,334 3,299 2,689 3,092

Valuation data

Year to 12/2009a 12/2010e 12/2011e 12/2012e

EV/sales 3.4 3.6 3.7 3.2EV/EBITDA 12.6 25.2 18.1 11.4EV/IC 1.1 1.1 1.2 1.2PE* 154.0P/Book value 2.3 1.8 2.7 2.7FCF yield (%) 42.8 -13.9 -16.4 -8.1Dividend yield (%) 0.0 0.0 0.0 0.0


Issuer information


Reuters (Equity) ZOREN.IS Bloomberg (Equity) ZOREN TIMarket cap (USDm) 274 Market cap (TRYm) 504Free float (%) 32 Enterprise value (TRYm) 1770Country Turkey Sector Independent Power ProducersAnalyst Levent Bayar Contact 90 212 376 46 17

Price relative

00.5

11.5

22.5

33.5

44.5

2009 2010 2011 2012

00.511.522.533.544.5

Zorlu Enerji Rel to ISTANBUL COMP


Financials & valuation: Zorlu Enerji Neutral

223


abc

Notes

224


abc

Notes

225


abc

Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Bulent Yurdagul, Cenk Orcan, Tamer Sengun, Levent Bayar and Erol Hullu

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

226


abc

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 04 October 2011, the distribution of all ratings published is as follows: Overweight (Buy) 54% (26% of these provided with Investment Banking Services)

Neutral (Hold) 35% (22% of these provided with Investment Banking Services)

Underweight (Sell) 11% (16% of these provided with Investment Banking Services)

Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.

HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

AK ENERJI AKENR.IS 2.92 04-Oct-2011 2, 5AKBANK AKBNK.IS 7.20 04-Oct-2011 1, 2, 5, 6, 7ANADOLU EFES AEFES.IS 21.50 04-Oct-2011 6ANADOLU HAYAT ANHYT.IS 2.98 04-Oct-2011 2, 5ARCELIK ARCLK.IS 7.24 04-Oct-2011 6BIZIM TOPTAN SATIS BIZIM.IS 21.50 04-Oct-2011 6DOGUS OTOMOTIV DOAS.IS 4.33 04-Oct-2011 5ENKA INSAAT ENKAI.IS 4.27 04-Oct-2011 4, 6ERDEMIR EREGL.IS 3.25 04-Oct-2011 2, 5, 6FORD OTOSAN FROTO.IS 13.10 04-Oct-2011 6GARANTI BANKASI GARAN.IS 7.12 04-Oct-2011 7HALKBANK HALKB.IS 13.00 04-Oct-2011 7HURRIYET GAZETEC. HURGZ.IS 0.98 04-Oct-2011 6IS BANKASI ISCTR.IS 4.75 04-Oct-2011 2, 5KOC HOLDING KCHOL.IS 6.90 04-Oct-2011 6MIGROS MGROS.IS 15.05 04-Oct-2011 6, 7SABANCI HOLDING SAHOL.IS 6.62 04-Oct-2011 6SISECAM SISE.IS 3.57 04-Oct-2011 7TOFAS TOASO.IS 6.46 04-Oct-2011 6TRAKYA CAM TRKCM.IS 2.99 04-Oct-2011 6TUPRAS TUPRS.IS 39.30 04-Oct-2011 2, 5VAKIFBANK VAKBN.IS 3.67 04-Oct-2011 7YAPI KREDI BANKASI YKBNK.IS 4.09 04-Oct-2011 6, 7ZORLU ENERJI ZOREN.IS 1.78 04-Oct-2011 2, 5

Source: HSBC

227


abc

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 31 August 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 August 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 August 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 31 August 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 05 October 2011. 2 All market data included in this report are dated as at close 27 September 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4 As of 31 August 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more of the total capital of the subject companies securities in the market for the following Company(ies): ENKA INSAAT

5 HSBC Principal Investments, through HSBC Investment Bank Holdings plc, has a 28.3% stake in a company that owns 100% of Havas, a ground handling services company. The other shareholders are TAV Airports, 65%, and Is PE, 6.7%.

228


abc

Disclaimer * Legal entities as at 04 March 2011 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch

Issuer of report HSBC Yatırım Menkul Değerler A.Ş. Büyükdere Caddesi No: 122 / D Kat:9

Esentepe/Sisli 34394 Istanbul, Turkey

Telephone: +90 212 376 46 00

Fax: +90 212 376 49 13

www.research.hsbc.com

www.hsbcyatirim.com.tr

This document has been issued by HSBC Yatırım Menkul Degerler A.S. (HSBC) for the information of its customers only. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Department of HSBC only and are subject to change without notice. The information, comments and recommendations involved here are not within the scope of investment consultancy. Investment consultancy services are only provided within the framework of the investment consultancy agreement as agreed between brokerage companies, portfolio management companies, banks not accepting deposits, and the customer. The conclusions arrived at here are based upon the preferred calculation method and/or the personal opinions of the individuals responsible for the comments and recommendations, so they may not be appropriate for your financial situation and risk and return preferences. Therefore, any investment decision madeonly on the basis of the information involved here may not lead to the optimum results. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or any other committee of those companies. The information and opinions contained within the research reports are based upon rates of taxation applicable at the time of publication but which are subject to change from time to time. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in theexchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Canada, this publication may be distributed by HSBC Securities (Canada) Inc for the information of its customers only. All inquiries by such recipients must be directed to HSBC Securities (Canada) Inc. In Australia, this publication may be distributed by HSBC Stockbroking (Australia) Pty Limited. In Malaysia, this publication may be distributed by HSBC Research (Malaysia) Sdn Bhd. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. In Japan, this publication may be distributed by HSBC Securities (Japan) Limited. It may not be reproduced or further distributed in whole or in part for any purpose. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This communication is only intended for investment professionals within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. Persons who do not have professional experience in matters relating to investments should not rely on it. HSBC Yatırım Menkul Degerler A.S. is regulated and authorised by the Central Bank of Turkey, Capital Markets Board, Ministry of Finance, Takasbank and is a member of Istanbul Stock Exchange, Takasbank (Turkish Custodian Bank) and the Association of Capital Market Intermediary Institutions of Turkey. © Copyright. HSBC 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC. MICA (P) 208/04/2011 and MICA (P) 040/04/2011

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations

In it to

win

it

By Bulent Yurdagul, Cenk Orcan and

the HSBC Turkey Research Team

The Turkish government and the central bank have opted to cope with slowing global growth

and a high current account deficit by adopting a policy that combines low interest rates

and a weaker Turkish lira. In our view this establishes a new operating environment

for Turkish industries and corporates

A company’s competitive position is among the key factors underlying long-term investment

views in equity markets. The competitive landscape is not only influenced by macro conditions,

but also by micro factors such as the individual companies’ market share, growth and

profitability. To assess how different sectors and corporates in Turkey are positioned to cope

with changes in the competitive environment, we have designed a scorecard system and

analysed the sectors and companies under HSBC coverage

The winners based on the scorecard introduced in this report include Trakya Cam,

Emlak REIT, Bizim, Halkbank and Tupras (all rated Overweight); all of them also

offer attractive potential returns in the next 12 months

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Tu

rkey/E

qu

ity

Octo

ber 2

011

In it to win it Turkish equities: Facing a new competitive landscape

Turkey/Equity

October 2011

Cenk Orcan*



+90 212 376 4614

[email protected]

Cenk joined the HSBC Turkey Research Team in 2000, focusing on the automotive, durable goods, conglomerates, airlines and airports

sectors. He has 13 years of experience as an equity research analyst and, before joining HSBC, worked in the research departments

of some leading investment houses in Istanbul. Since 2005, he has been co-head of HSBC’s Turkey Research Team, making it one of

the top three in the Extel Survey (in both 2007 and 2008). Cenk holds an MBA degree from the University of San Francisco.

Bulent Yurdagul*



+90 212 376 4612

[email protected]

Bulent is an Oil & Gas, Steel and Media sector analyst for HSBC’s Turkey coverage. He joined the HSBC Turkey Research Team in 2001.

Since 2005, he has been co-head of the team, making it one of the top three in the Extel Surveys (2007 and 2008). Before joining HSBC,

he worked in the research departments of some of Turkey’s leading financial institutions. Bulent holds an MBA degree from the

University of California Irvine.

Tamer Sengun*

Analyst


+90 212 376 4615

[email protected]

Tamer is the banking analyst for HSBC in Turkey. He joined the HSBC Turkey Research Team in 2007. Prior to joining HSBC, Tamer has

worked in the research departments of several leading financial institutions in Turkey.

Levent Bayar*

Analyst


+90 212 376 4617

[email protected]

Levent joined the HSBC Turkey Research Team in 2006, focusing on the cement, glass, real estate and energy sectors. Before joining

HSBC, he worked as a credit analysis officer for a number of domestic banks.

Erol Hullu*

Analyst


+90 212 376 4616

[email protected]

Erol joined the HSBC Turkey Research Team in 2007, focusing on the consumer staples, retail and fertiliser sectors. He is also

responsible for the coverage of Russian retailers. Before joining HSBC, he worked as a senior auditor for a leading global audit firm.

111004_28253_Turkish top picks_F:Normal Cover 2011 10/5/2011 12:38 AM Page 1

HSBC Report 2012

Documents

Transcript of HSBC Report 2012