HSBC Report 2012

Turkey/Equity October 2011
In it to win it
Turkish equities: Facing a new competitive landscape
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 companys 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
By Bulent Yurdagul, Cenk Orcan and the HSBC Turkey Research Team
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
Equities Turkish Equities 5 October 2011
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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 companys 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
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 countrys 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
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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 lirabased 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 FXbased but a large share of the costs are in Turkish lira, the sectors 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 markets 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 sectors success has also been underpinned to date by its ability to attract new models owing to the qualities mentioned above a
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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 companys 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 companys 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) 2. Market share momentum (Strong=5, Weak=1) 3. Sustainable growth (DuPont formula) (Strong=5, Weak=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. 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. 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. 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. 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 companys financial income (losses) and operational profitability in low rate environments in the past few years, we rated companies from 1 to 5. 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.
4. Impact of industry fragmentation (High=5, Low=1) 5. Impact of low interest rates (Positive=5, Highly Negative=1)
6. Impact of weak Turkish lira (Positive=5, Highly Negative=1)

Source: HSBC estimates
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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
Market Share Momentum
Score 3
Score 4
Score 5
Score 6
Weak TRY impact on P&L (Positive=5, Highly Negative=1) 4 3 3 3 3 3 2 4 3 2 2 2 3 1 2 3 3 3 1 1 3 3 2 1 2 2 1 1 1 3 2 5 3 3 3 1 3 2 1 3 4 3 3 3 2 3 3 3
SCORECARD
Total Score Company
TRKCM BIMAS EKGYO HALKB SISE GARAN TUPRS PETKM BIZIM TOASO TAVHL GUBRF FROTO CCOLA AEFES AYGAZ ARCLK CIMSA MGROS DOAS ANHYT YKBNK TRCAS KILER HURGZ EREGL TTKOM TATKS AKSEN VAKBN TKC.N BAGFS AKCNS AKBNK ISCTR ZOREN SNGYO KRDMD THYAO TRGYO ISGYO ANACM ALBRK ASYAB AKENR ADANA ANSGR AKGRT
Profitable Market Share
28 25 25 24 23 23 23 23 23 22 22 22 22 22 22 21 21 21 21 21 21 20 20 20 20 19 19 19 19 19 19 19 19 19 18 18 18 18 17 17 17 17 17 16 15 15 15 12
Trakya Cam BIM Emlak Konut REIT Halkbank Sisecam Holding Garanti Bankasi Tupras Petkim Bizim Toptan Satis Tofas TAV Gubretas Ford Otosan Coca-Cola Icecek Anadolu Efes Aygaz Arcelik Cimsa Migros Dogus Otomotiv Anadolu Hayat Yapi Kredi Bankasi Turcas Kiler Alisveris Hurriyet Erdemir Turk Telekom Tat Konserve Aksa Enerji Vakifbank Turkcell Bagfas Akcansa Akbank Isbank Zorlu Enerji Sinpas REIC Kardemir Turkish Airlines Torunlar REIC Is Reit Anadolu Cam Albaraka Bank Asya Akenerji Adana Cimento Anadolu Sigorta Aksigorta
Low interest rate impact on P&L (Positive=5, Highly (High=5, Low=1) (Strong=5, Weak=1) (Strong=5, Weak=(High=5, Low=1) Negative=1) 5 5 5 5 5 5 5 4 4 5 5 3 5 4 4 4 5 3 5 4 5 5 3 4 5 1 5 5 4 1 5 4 3 5 5 4 4 5 5 2 4 4 4 5 5 5 5 3 5 4 5 2 5 4 5 4 5 3 5 4 5 1 5 4 3 5 3 4 3 5 4 2 2 5 5 3 5 4 5 2 5 3 4 4 4 2 3 4 5 3 3 4 2 5 5 2 4 1 5 4 4 1 5 3 5 1 5 4 4 3 5 2 3 5 4 3 2 3 3 4 5 1 5 4 3 1 5 2 3 4 4 2 2 3 3 4 3 2 2 4 1 5 4 3 2 5 4 1 2 1 5 4 2 5 4 2 2 4 2 2 2 1 4 2 2 1 3 4 2 5 3 2 2 5 2 2 3 1 3 3 3 1 4 2 3 5 1 1 2 3 1 1
Impact of Sustainable Industry Growth (Dupont) Fragmentation
4 3 5 4 4 4 5 5 3 4 3 2 3 4 3 3 4 4 5 5 2 4 4 5 4 4 3 4 4 4 2 3 4 4 4 4 3 4 3 4 4 4 2 2 4 3 2 2
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Theme winners with attractive potential returns

Winner 1: Trakya Cam is Turkeys leading flat glass producer with a 90% market share. Its monopolistic status is secured by two factors: (i) high entry costs owing to the sectors 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 Cams 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 firms 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 companys 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 Emlaks 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 Turkeys 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
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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 firms 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 BIMs 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 BIMs 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 conglomerates 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 companys 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
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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 Petkims 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 companys competitive muscle will strengthen further.
Thematic versus valuation: The winners with attractive valuation are Trakya Cam, Emlak REIT, Bizim, Tupras and Halkbank
Is Reit Sinpas REIC Bank As ya 5.0 Aksa Enerji Turcas Biz im
4.0 Torunlar REIT Kardemir Albarak a
Er demir Cimsa Migros Hurriyet Anadolu Hayat Tofas Emlak REIT YKB Tupras Arc elik Akcansa Akbank Vak ifbank Dogus Otomotiv Petkim TAV 3.5 Gubretas 4.0 Gar anti Bankasi Halk bank 4.5 5.0 Traky a Cam
Akenerji Valuation relative IS Bankasi Anadolu Cam 3.0 Adana Cimento Turkish Airlines 1.5 2.0 2.5 Anadolu Sigorta 2.0 3.0 Zorlu Enerji
Ford Otosan CCI
Bagfas Aksigor ta 1.0
Turkc ell Kiler Turk Telekom Ay gaz Sisec am
Tat Konserve Anadolu Efes
BIM
0.0 Thematic relative
Source: HSBC * sizes of bubbles represent market capitalisation
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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
Adana Cimento (A) Anadolu Efes Akbank Akansa Akenerji Aksa Enerji Aksigorta Albaraka Turk Anadolu Cam Anadolu Hayat Anadolu Sigorta Arelik Bank Asya Aygaz Bagfa Bizim Bim Coca-Cola ecek imsa Dogus Otomotiv Doan Holding Doan Yay.Holding Emlak Konut REIT Enka Insaat Erdemir Ford Otosan Garanti Bankas Gbreta Halkbank Hrriyet Bankas GYO Kardemir (D) Kiler Ko Holding Migros Petkim Sabanc Holding iecam Sinpa GMYO Tat Konserve TAV Havalimanlar Turkcell (USD) Trk Havayollar Tekfen Holding Tofa Turcas Torunlar REIC Trakya Cam Trk Telekom Tpra Vakfbank Yap Kredi Bankas Zorlu Enerji
RIC
ADANA.IS AEFES.IS AKBNK.IS AKCNS.IS AKENR.IS AKSEN.IS AKGRT.IS ALBRK.IS ANACM.IS ANHYT.IS ANSGR.IS ARCLK.IS ASYAB.IS AYGAZ.IS BAGFS.IS BIZIM.IS BIMAS.IS CCOLA.IS CIMSA.IS DOAS.IS DOHOL.IS DYHOL.IS EKGYO.IS ENKAI.IS EREGL.IS FROTO.IS GARAN.IS GUBRF.IS HALKB.IS HURGZ.IS ISCTR.IS ISGYO.IS KRDMD.IS KILER.IS KCHOL.IS MGROS.IS PETKM.IS SAHOL.IS SISE.IS SNGYO.IS TATKS.IS TAVHL.IS TKC.N THYAO.IS TKFEN.IS TOASO.IS TRCAS.IS TRGYO.IS TRKCM.IS TTKOM.IS TUPRS.IS VAKBN.IS YKBNK.IS ZOREN.IS
Current price
4.11 21.00 6.88 6.66 2.97 2.82 1.32 1.87 3.15 2.96 0.90 6.86 1.95 9.98 165.50 22.00 54.75 23.20 7.50 4.13 0.65 0.66 2.31 4.10 3.24 13.60 7.06 12.25 12.25 0.94 4.64 1.18 0.83 3.44 6.82 15.20 2.37 6.26 3.31 1.75 2.85 7.10 12.60 2.65 5.46 6.62 2.61 5.12 2.94 7.98 36.10 3.66 3.78 1.79
Old target price

6.50 23.40 7.60 9.70 5.00 7.00 1.94 2.80 4.10 5.33 1.32 10.00 2.75 11.90 164.00 39.60 59.00 24.30 12.80 5.40 1.07 1.15 3.70 6.42 5.25 16.00 8.10 15.40 17.40 2.00 5.85 1.75 1.25 6.50 8.15 26.80 3.30 10.00 3.52 2.50 4.00 9.50 12.60 4.17 8.10 10.00 5.10 7.40 4.60 6.80 47.00 4.75 5.40 3.00
New target price

5.75 21.80 7.60 8.50 4.60 5.80 1.30 2.80 4.50 4.50 1.05 9.00 2.75 10.80 170.50 37.30 59.00 21.80 11.00 5.00 0.78 0.77 3.70 5.60 4.95 15.50 8.10 15.40 17.40 1.50 5.85 1.75 1.25 3.10 8.15 22.80 3.00 10.00 3.85 2.50 3.10 9.50 8.80 3.20 8.10 9.00 4.50 7.40 4.30 6.80 47.00 4.75 5.40 2.10
Old rating
Neutral Underweight Underweight Overweight Overweight Overweight (V) Underweight Overweight Neutral Overweight Neutral Overweight (V) Overweight Underweight Neutral Overweight (V) Neutral Neutral Overweight Neutral Neutral (V) Neutral (V) Overweight (V) Overweight Overweight Neutral Neutral Overweight (V) Overweight Overweight (V) Overweight Overweight Overweight Underweight (V) Neutral Overweight (V) Overweight Overweight Neutral Overweight Neutral Overweight Neutral Neutral Overweight Overweight Overweight Overweight (V) Overweight Underweight Overweight Overweight Overweight Neutral
New rating
Overweight Underweight Underweight Overweight Overweight Overweight Underweight Overweight Overweight Overweight Neutral Overweight Overweight Underweight Underweight Overweight (V) Neutral Underweight Overweight Neutral (V)l Neutral (V) Neutral (V) Overweight (V) Overweight Overweight Neutral Neutral Overweight (V) Overweight Overweight (V) Overweight Overweight Overweight Underweight (V) Neutral Overweight (V) Overweight Overweight Neutral Overweight Neutral Overweight Neutral Neutral Overweight Overweight Overweight Overweight (V) Overweight Underweight Overweight Overweight Overweight Neutral
Source: HSBC estimates, ISE * Prices as of 27 Sep 11
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Contents
Sector review Sector profiles competition analysis Which corporates are competitive? Winners and losers Financials
Akbank Aksigorta Albaraka Turk Anadolu Hayat Anadolu Sigorta Bank Asya Garanti Bank Halkbank Isbank Vakifbank Yapi Kredi Bank
10 15 31 40 45
46 49 52 56 59 62 65 68 71 74 77
Erdemir Ford Otosan Gubretas Hurriyet Is REIT Kardemir Kiler Koc Holding Migros Petkim Sabanci Holding Sinpas REIC Sisecam Tat Konserve TAV Airports Tekfen Holding Tofas Torunlar REIT Trakya Cam Tupras Turcas Turkcell Turkish Airlines Turk Telekom Zorlu Enerji
143 146 149 152 155 158 162 166 169 172 175 178 181 185 188 191 194 197 200 203 207 210 213 217 220
Disclosure appendix Disclaimer
225 228
Industrials
Adana Cimento Akcansa Akenerji Aksa Enerji Anadolu Cam Anadolu Efes Arcelik Aygaz Bagfas BIM Bizim Cimsa Coca-Cola Icecek Dogan Holding Dogan Yayin Holding Dogus Otomotiv Emlak Konut REIT Enka Insaat
81
82 85 89 93 97 101 104 107 110 113 116 119 123 127 130 133 136 140
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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
Assessing the competitive position of Turkish industries

Measuring a sectors 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
sectors 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 sectors competitive ranking. These are:
10
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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 analysts 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
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 sectors 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
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
Asset turnover comparison (global peer average versus Turkey, x)

5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Automotive Beverages Fertilisers Airlines Airports Iron & Steel Utilities Retail B. Materials H. Durables Real Estate Oil & Gas
Adjusted gross margin comparison (global peer avg vs Turkey)

80% 70% 60% 50% 40% 30% 20% 10% 0% Automotiv e Fertilisers Utilit ies Banks Airlines Iron & Steel H. Durables Beverages B. Materials Oil & Gas Airports Retail
Sector
Source: Company data
Turkey
Sector
Turkey
11
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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 sectors 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
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
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
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)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% H. Durables Iron & Steel Fertilisers Oil & Gas Beverages Airports Airlines Utilities Retail Real Estate Automotive B. Materials Insurance Banks
Sector fragmentation (aggregate market share of top 5 players)

Retail Real Estate Insurance B. Materials Automotive Banks Airlines Iron & Steel Utilities Fertilisers Oil & Gas H. Durables Airports Beverages 0% Source: Company data 20% 40% 60% 80% 100%
Sector
Turkey
12
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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
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
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 states heavy involvement in the generation segment (although this will diminish with the planned privatisations of power generation assets).
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.
13
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A qualitative look at competitiveness Turkish industries relative to global/regional industries Vertical integration Airlines (4) Airports (4) Automotive (2) Banks (5) Beverages (2) B. Materials (3) Fertilisers (2) H. Durables (5) Insurance (2) Oil & Gas (3) Real Estate (3) Retail (3) Iron & Steel (3) Telecoms (4) Utilities (1)
Scale X N/A N/A X X X X X X X X
Regulatory framework X X X N/A X X X X X X X
Brand X X X
Technology X N/A X
Liberalisation level X X
N/A X N/A N/A X X N/A N/A X N/A N/A X N/A X
14
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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
15
Asset Turnover
ROE
Historical Growth of Industry Volume
16 Equities Turkish Equity 5 October 2011
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 aboveindustry-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: THYs 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 Istanbuls 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
1.5 Lufthansa 1.2 Easy Jet AF-KLM IAG
Strategy analysis: ROE vs market share (2010)
19% 17% 15% 13% 11% 9% Easy Jet THY 0% 5% 10% 15% 20% IAG AF-KLM Ryanair
Lufthansa
0.9 THY 0.6 Ryanair 0.3 30% 35% 40% Adj. Gross profit margin 45% 50%
7% 5%
25%
Market Share
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
90%
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 0%
Losing Share IAG AF-KLM Lufthansa Ryanair Easyjet Gaining Share 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% THY
80% 70% 60% 50% 40% 30% 20% 10%
abc
0% Top 1 Top 2 Top 3 Top 4 Today Top 5 5 yrs ago Top 6 Top 7 Top 8
Historical Growth of Sales Volume
Source: Company data, HSBC estimates
* Size of bubbles represents average sales volumes
Equities Turkish Equity 5 October 2011
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 TAVs rent expenses from the gross profit calculations while including air operation rights in the asset base. TAVs 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 Istanbuls second airport, Sabiha Gokcen, creates competition for TAVs Ataturk to some extent). TAVs 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. Turkeys airport passenger traffic posted 13% CAGR in 2005-11e and TAVs 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 TAVs 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 TAVs Izmir airport) create opportunity for potential newcomers. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) - 2010
0.6 TAV Asset Turnover
13% 12% 11% ADP Flughafen Zurich Flughafen Fraport TAV Wien
0.4
Fraport ADP
ROE
Flughafen Wien
10% 9% 8%
0.2
Flughafen Zurich
7% 6% 5%
0.0 65.0% 67.0% 69.0% 71.0% 73.0% 75.0%
25%
30%
35%
40%
45%
50%
55%
60%
Adj. Gross profit m argin
Market Share
* 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
110%
15% Losing Share 12% TAV 9% 6% 3% 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Flughafen Zurich Fraport ADP Flughafen Wien Gaining Share
100% 90% 80% 70% 60% 50% 40% Top 1 Top 2 Top 3 Today Top 4 3 y rs ago Top 5 Top 6
abc
17
Asset Turnover
1.5 1.0 0.5 0.0 10% 15% 20% 25% 30% 35% 40% BMW Fiat Renault Daimler
ROE
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 Turkeys being a production hub for the lower-valueadded 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. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) - 2010
3.0 2.5 2.0 Dogus Otom otiv Tofas PSA VW Group
34% Ford Otosan 29% 24% 19% 14% 9% 4% -1% 0% 5% 10% Market Share 15% 20% Fiat Auto BMW Daim ler Renault PSA VW Group Porsche Dogus Otomotiv Ford Otosan Tofas
Adj. Gross profit m argin
* Size of bubbles represents gross profit
Source: Company data * Size of bubbles represents net profit
Tofas clear market share gainer in 2005-11e

8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -1% 2%
Turkish vehicle market is not fragmented: Top 5 players have a 60% market share
100%
Losing Share VW Group
90% 80% 70% 60% 50% 40% 30%

Gaining Share Tofas
Fiat Auto PSA Dogus Oto Daimler Renault Ford Otosan 5%

8% 11%
BMW
20% 10% 0%
14%
abc
Top 1
Top 2
Top 3 Today
Top 4 5 yrs ago
Top 5
Top 6 15 yrs ago
Top 7
Top 8
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 wellestablished 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 sectors 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
8.0% 7.5% FinansDenizbank Asset turnover (revenues/assets) 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 35% 40% 45% 50% 55% 60% 65% 70% 75% Ziraat TEB Garanti Isbank Vakifbank Yapi

35%
30%
Halkbank
Ziraat
25% RoE
Halkbank Akbank
Yapi 20% TEB 15% Denizbank Vakifbank Finans
Garanti Akbank Isbank
10% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
Gross profit (1-cost/income)
Market share
Garanti a clear market share gainer (in terms of asset size) between 2004 and 2010
20% Losing share 15% 2004 market share Isbank Akbank 10% Halk Yapi Garanti Ziraat
Top 5 players have a 63% market share; sector less fragmented since 2001
100% 90% 80% 70% 60% 50% 40% 30% 20%
5% Deniz TEB 0% 0.0% 5.0% Finans
Vakif
Gaining market share
10% 0% Top 1 Top 2 Top 3 Top 4 2010 Top 5 2007 Top 6 Top 7 2004 Top 8 2001 Top 9 Top 10
abc
10.0% 2010 market share
15.0%
20.0%
Source: Company, HSBC estimates * Size of bubbles represents average sales volumes
19
Asset turnover
1.2 0.9 0.6
CCI CCE KOF
RoE
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. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) 2010 Strategy analysis: ROE vs market share (2010)
2.1 1.8 1.5
35%
CCH ThaiBev Anadolu Efes
30% 25% 20% 15%
CCE
Anadolu Efes ThaiBev CCH Hite

25% 35% 45% 55% 65% 75%
Modelo
KOF
CCI
Modelo Hite
10% 5%
0.3 20% 30% 40% 50% 60% 70%
Adj. gross profit margin
Market share
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
110%
10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
Losing Share
CCI
100% 90% 80%
Beer Soft drink
CCH CCE Modelo Hite KOF Anadolu Efes

Gaining Share
70% 60% 50%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
abc
Historical Growth of Sales Volum e
40% Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8
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 Boards close supervision of the sector particularly for the existing players in the market. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) 2010 Strategy analysis: ROE vs market share 2010
1.20
100% Cemex Traky a Cam Heidelberg Sisecam
1.00
Saint Gobain Sisecam Akcansa Cimsa
80%
Asset Turnover
0.80
60% Market share Saint Gobain Titan Cement 40%
Traky a Cam Titan Cement Heidelberg
0.60
0.40 Adana Cimento 0.20 Cemex
20% Cimsa Akcansa 0% -15% -10% -5% -20% 0% 5% 10% 15% Saudi Cement Adana Cimento 20% 25% 30%
Saudi Cement
0.00 0% 10% 20% 30% 40% Adj. Gross profit 50% 60% 70% 80%
RoE
Cimsa and Akcansa gained significant market share with acquisitions and organic growth
12.0% Losing Sales volume growth of the sector (2005-2011e) Share 10.0% Saudi Cement 8.0% 6.0% 4.0% 2.0% 0.0% -5.0% 0.0% -2.0% Titan Cement Cemex 5.0% 10.0% 15.0% 20.0% Adana Cimento Sisecam Traky a Cam Saint Gobain Heidelberg Akcansa Cimsa Gaining Share
Top 8 players claim 50% of the very fragmented market 2010
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
abc
Top 1
Sales volume growth of the company (2005-2011e)
Top 2 Top 3 Top 4 Top 5 T op 6 Turk is h Cement - market share breakdow n by brands Turk is h Cement - market share breakdow n (2005)
Top 7
T op 8
21
Asset turnover
Yara
0.8 0.4 0.0 0% 20% 40% 60% 80%
RoE
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
2.0
Strategy analysis: ROE vs market share in Turkey (2010)
Bagfas
1.6 1.2
40% 35% 30%
Tekfen Uralkali
Bagfas
Gubretas
25% 20% 15%
Ege Gubretas Arab Potash Gubre
Ege Gubre
10% 5% 0% 100% 0% 10% 20% Market share 30%
Tekfen
40%
Adj. gross profit m argin
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
100%
0.1%
Lo sing Sh are
0.1% 0.1% 0.1%
90% 80% 70% 60%
Bagfas
0.1% 0.0% 0.0% -12.0% -9.0% -6.0%
Ege Gubre
50%
Tekfen Gubretas
40% 30% 20% 10%
abc
-3.0%
0.0%
3.0%
6.0%
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 Vestels 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. Arceliks 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-BSHVestel-Indesit) in at least the next five years, despite the shift towards mass retail stores in big cities. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) - 2010
2.0 1.8 Asset Turnover 1.6 1.4 1.2 Arcelik 1.0 0.8 0.6 15% Vestel WG Whirlpool Electrolux Indesit BSH SEB SA De Longhi
24% 20% 16% 12% 8% 4%

20% 25% 30% 35% 40% 45% 50% 55%
SEB SA
Arcelik Electrolux Indesit BSH
ROE
De Longhi
Whirlpool
Vestel WG 0% 5% 10% 15% Market Share 20% 25% 30%
Adj. Gross profit margin
Arcelik the clear market share gainer in 2005-11e
Turkish white goods market is highly consolidated: Top 3 players have a 90% market share
100% 90% 80% 70% 60% 50%
2%
Electrolux
2% 1% 1%
Losing Share
SEB SA Arcelik Vestel WG
Whirlpool Gaining Share BSH De Longhi

8% 11%
Indesit
0% -4% -1% -1% -1% 2% 5%
abc
40% Top 1 Top 2 Today Top 3 Top 4 5 yrs ago Top 5 Top 6 Top 7 Top 8
15 yrs ago
Source: Company, HSBC estimates
Source: Company data * Size of bubbles represents average sales volumes
23
ROAE
2004 market share
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 nonlife 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)
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% 2006 2007 2008 ROAE 2009 -3.0% 2010 -65%
Ray Sigorta Market share

10.5% 35%
8.6% 15% 4.6% 2.5% 1.2% 0.4% 0.0%

Yapi Kredi Sigorta Anadolu Sigorta Anadolu Hayat
4.2% 2.8% -5%0.0% 2.0% 4.0% 6.0%
Aksigorta
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Gunes Sigorta
-25%
Aviva
-45%
Net technical profit / Premiums (non-life)
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
12% Losing share 10% Anadolu Axa
Top 5 players have a 40% market share; sector fragmented has always been fragmented
100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
8% Groupam a 6% Ergo 4% Gunes Yap Kredi Eureko 2% Gaining m arket share 0% 0.0% 2.0% Ziraat Hayat ve Em eklilik 4.0% 6.0% 2010 market share 8.0% 10.0% 12.0% Allianz Aksigorta
0% Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 2007 Top 7 2004 Top 8 Top 9 Top 10
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2010
Source: Association of Insurance and Reinsurance companies , HSBC estimates average sales volumes
* Size of bubbles represents
Source: Association of Insurance and Reinsurance companies
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 Erdemirs 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 companys 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
1.4 Salzgitter
45% 40%
1.2 Asset Turnover
35%
Thy ssenKrupp
CSN
30% ROE 25% 20%

China St
1.0
Maanshan Angang Kardemir ArcelorMittal Erdemir Jsw
Tata
0.8
China St Erdemir Maanshan
Jsw
15%
CSN
0.6
10% 5% 0% Kardemir
Angang
ArcelorMittal
0.4 15.0% 25.0% 35.0% 45.0% 55.0% 65.0% 75.0%
0%
10%
20%
30%
40%
50%
Relevant Market Share
* Size of bubbles represents gross profit
Erdemir has lost share in market despite decent growth in its sales volume 20052011e
15% Historical Growth of Industry Volume Losing Share 10% Erdemir
Turkish steel market is not fragmented: Top 5 players claim 71% market share
100% 80% 60%

Kardemir
5% CSN
40%
Posco China St Gaining Share
20% 0%
ArcelorMittal -5% -2%
0% Salzgitter 1% -5% Historical Growth of Sales Volume 4% 7% 10%
Top 1
Top 2 2011
Top 3
Top 4
Top 5
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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)
25
Asset Turnover
ERG
ROE
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 Strategy analysis: ROE vs market share (2010)
34%
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0%
29%
Aldrees Petroleum Tupras Turcas Oil R efineries
Tupras MOH Petrol Ofisi ORL Hellenic Pet

24%
Ay gaz Aldrees Neste PKN Orlen Lotos MOL
19% 14% 9%
Petkim
Ayga z Petkim
Neste Oil
MOL
5%
10%
15%
20%
25%
30%
4% -1% 0% -6% 20% 4 0% 60% 80% 100% Rel evant Mar ket Share
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
100%
8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -1%
Losing Share Petrol Ofisi Shell/Turcas BP Turkey Opet
90% 80% 70% 60% 50% 40%
Gaining Share
30% 20% 10% 0%
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2%
5%
8%
11%
14%
17%
20%
Top 1
Historical Growth of Sales Volum e
Top 2 2011
Top 3 5 y ears earlier
Top 4
Top 5
Source: Petder (data based on diesel market shares)
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 secondbest 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. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) 2010 Strategy analysis: ROE vs market share 2010
0.35 0.30 Asset Turnover 0.25 Sinpas REIC 0.20 0.15 0.10 Klepierre 0.05 Emaar Emlak REIT
100% 80% Emaar Market share 60% 40% 20%

Torunlar REIT
The Link REIT
Mabanee Klepierre Capitaland
Capitaland The Link REIT
Mabanee Is Reit
Torunlar REIT 0% -2% 3% -20% Is Reit Sinpas REIC 8% Emlak REIT 13% 18%
0.00 - 2% 0% 2% 4% 6% 8% 10% 12%
RoE
Capit al Yield
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
100.0% 80.0%
Losing Share
0.7% 0.6% 0.5% 0.4% 0.3% 0.2% Is Reit Torunlar REIT Sinpas REIC Emlak REIT Gaining Share
60.0% 40.0% 20.0%
0.1% 0.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
0.0% Top 1 Top 2 Top 3 Top 4 T op 5 Top 6 Top 7 Top 8
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Turkish premium house s ector - market share breakdow n
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Asset turnover
RoE
Historical Growth of Industry
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 BIMs to maintain its leading position in the sector and believe Bizims 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: BIMs 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 BIMs 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%. DuPont profitability matrix (ROA equation, asset turnover versus net profit margin) 2010 Strategy analysis: ROE vs market share (2010)
6.3 5.0 3.8 2.5
60%
Bizim
BIM
50% 40%
BIM Bizim Jeronimo

30% 20%
Jeronimo Wumart Wal-Mex
Magnit X5 Kiler
Magnit Wumart X5 Soriana Migros

3% 6% 9% Market share 12%
Wal-Mex
1.3
Soriana Migros
0.0 5% 10% 15% 20% 25% 30%
10%
Kiler
0% 0%
15%
18%
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
25%
20% Losing Share 15%
Magnit
X5
20% 15%
2010 2009 2008
10%
Jeronimo Wumart
10% 5%
2007 2006 2005
5%
Soriana
0% -5%
Wal-Mex Bizim Kiler Migros

15% 25%
BIM
35% 45%
Gaining Share
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5%
55%
65%
Historical Growth of Net Sales
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 singledigit 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
1.8 1.6 1.4 Asset Turnover 1.2 Turkcell 1.0 0.8 0.6 0.4 0.2 0.0 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% SK Telecom Tata Vodafone Qatar Telecom Turk Telekom Mobinil Vodacom Mobistar MTN

80% 70% 60% 50% ROE 40% 30% MTN 20% Turkcell 10% 0% 0% 20% Vodafone 40% 60% Relevant Mar ket Share 80% 1 00% Qatar Tel. Mobinil SK Telecom Tata Tel. Vodacom
Mobistar
Turk Telekom
Neither Turkcell nor Turk Telekom have gained shares in Turkish market since 2006
25% Historical Growth of Industry Volume 20% 15% Turkcell 10% 5% 0% -1% 0% 3% 6% 9% 12% 15% 18% 21% 24% Mobist ar Turk Telekom Vodafone Vodacom Mobinil Gaining Share Tat a
Turkish mobile market is dominated by 3 players and market leader lost 9% in last 6 years
100%
Losing Share
90% 80% 70% 60% 50%
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40% Top 1 2011

Source: Turkcell
Top 2 5 y ears earlie r
Top 3
Hist orical Growt h of Sales Volume

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes
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Asset Turnover
Aksa Enerji 0.30 0.20 0.10 SEC 0.00 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Adj. Gross profit Akenerji Zorlu Enerji CESP Verbund
Market share
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 wellestablished 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 Turkeys 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 governments privatisation programme is complete. DuPont profitability matrix (asset turnover versus gross profit margin) 2010 Strategy analysis: ROE vs market share (2010)
0.60 0.50 NTPC 0.40 CEZ
100% 80% 60% 40% 20% Zorlu Enerji 0% -15% -10% -5% -20% RoE 0% CESP 5% Verbund SEC CEZ
NTPC Aksa Enerji Akenerji 10% 15% 20% 25% 30%
Aksa Enerji has captured major market share in last five years
Top 5 players claim 80% market share sector will become fragmented via privatisation
100.0% 80.0%
Gaining Aksa Enerji Share
9.0% 8.0% 7.0%
Losing Share NTPC SEC Zorlu Enerji
6.0% Akenerji 5.0% 4.0% 3.0% 2.0% Verbund 1.0% 0.0% -10.0% -5.0% -1.0% 0.0% 5.0% CEZ
60.0% 40.0% 20.0%
CESP 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%
0.0%
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T op 1
Top 2
Top 3
Top 4
Top 5
Top 6
Top 7
T op 8
Turkish Utilities - market share breakdow n Turkish Utilities - market share breakdow n (2005)
Source: EMRA
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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
Competition analysis
We believe a companys 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.
Scorecard Factors 1. Profitable market share (High=5, Low=1): 2. Market share momentum (Strong=5, Weak=1): 3. Sustainable Growth (DuPont Formula) (Strong=5, Weak=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.
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. 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 Various factors may lead to fragmentation in the market and in many cases this lowers the profitability and growth prospects of the fragmentation (High=5, Low=1): sector. Analysts have scored the impact of industry fragmentation depending on sector- and company-specific conditions. 5. Impact of low interest rates We believe low interest rates have been the most important element used by Turkish policy makers over the past couple of years. We (Positive=5, Highly Negative=1): 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 companys financial income (losses) and operational profitability in low rate environments in the past few years, we rated companies from 1 to 5. 6Impact of weak Turkish lira assume that the Turkish central bank and government will maintain their policy of keeping the Turkish lira weak as a means of combating (Positive=5, Highly Negative=1): the rising current account deficit. This mainly looks positive for export companies and negative for importers.
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Profitable market share matrix (2010 ROE versus relevant market share): Upper-right-hand corner of the chart indicates better-positioned companies
60.0% BIMAS 50.0%
40.0%
BIZIM TTKOM
30.0% ROE
BAGFS
HALKB
FROTO DOAS TOASO
GUBRF
20.0% ALBRK
YKBNK
10.0%
KIL ER
SNGYO 0.0% 0%
ADANA VAKBN ASYAB ARCLK CIMSA EKGYO ANACM AKSEN AKCNS AKENR ISGYO ANSGR KRDMD TRGYO AKGRT MGROS ZOREN 20%
GARAN ISCTR AKBNK TRCAS ANHYT AYGAZ EREGL TATKS PETKM HURGZ 40%
SISE TUPRS TCELL AEFES CCOLA TRKCM
TAVHL
60%
80%
100%
-10.0 % Market Share
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.
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 Turkeys 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 countrys 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 Groups global partnerships in strategic markets with global peers, we see little probability of increasing competition.
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
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Tupras (19% ROE, 46% market share): Tupras meets more than 75% of Turkeys 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
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 fastgrowing 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 Enerjis 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
2. Market share momentum

Industry growth is a key variable in determining the intensity of rivalry in the industry, and sets the
Market share momentum matrix (2005-2011e market growth vs company growth in volumes): Right part indicates companies gaining share
25%
20%
ISCTR HALKB VAKBN YKBNK AKBNK GARAN
ASYAB
ALBRK
Market Growth Rate
15% TAVHL 10% AYG AZ PETKM EREGL ANHYT TTKO M TRCAS TKC.N CCOLA THYAO CIMSA AKSEN
-20%
BAGFS -10%
ANSGR AKCNS TATKS AKENR TUPRS SISE ZOREN 5% KRDMD ANACM TRKCM HURGZ AKGRT ADANA MGROS BIZIM AEFES DO AS ARCLK EKGYO ISGYO SNGYO KILER 0% G UBRF 0% 10% FROTO TOASO TRGYO -5% Company Growth Rate
BIMAS 20% 30% 40%
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sector. Given the banks 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, Cimsas 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 REITs 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 Istanbuls 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 companys 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.
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Sustainable growth DuPont matrix (asset turnover versus adjusted gross profit margin 2010): Upper-right corner indicates better positioned companies
7.00 BIZIM 6.00 BIMAS
5.00
Asset Turnover
4.00 TUPRS 3.00 FROTO 2.00 PETKM 1.00 ARCLK ANACM TRCAS 0.00 0% -1.00 Adjusted Gross Profit 10% 20% DOAS AYGAZ TATKS TOASO BAGFS KILER AKCNS THYAO MGROS SISE ENKAI GUBRF AKENR EREGL CIMSA AKSEN KRDMD ZOREN ADANA TRGYO 30% SNGYO 40% TKC.N CCOLA TRKCM EKG YO 50% 60% TTKOM AEFES TAVHL ISGYO 70% 80% 90% 100% HURGZ
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 Turkeys 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 Groups 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.
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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 lowcost 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 Cams 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 Cams marketleading 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
0.08 0.075 Finans Asset turnover (revenues/assets) 0.07 0.065 Garanti 0.06 0.055 0.05 0.045 0.04 0.45 0.5 0.55 0.6 Gross profit (1-cost/incom e)
Denizbank
Yapi
Isbank Vakifbank Akbank
Halkbank
Ziraat
0.65
0.7
0.75
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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 companyspecific 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, ICFraport, 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 Turkeys 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
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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 companys 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 Turkeys 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
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 CBRTs policy rate actions are important for the banking sectors 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: Enkas 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.
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 CBRTs 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
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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 REITs 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 banks 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 riskweighted assets, and results in a lower capital adequacy ratio.
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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
Market Share Momentum
Score 3
Score 4
Score 5
Score 6
Weak TRY impact on P&L (Positive=5, Highly Negative=1) 4 3 3 3 3 3 2 4 3 2 2 2 3 1 2 3 3 3 1 1 3 3 2 1 2 2 1 1 1 3 2 5 3 3 3 1 3 2 1 3 4 3 3 3 2 3 3 3
SCORECARD
Total Score Company
TRKCM BIMAS EKGYO HALKB SISE GARAN TUPRS PETKM BIZIM TOASO TAVHL GUBRF FROTO CCOLA AEFES AYGAZ ARCLK CIMSA MGROS DOAS ANHYT YKBNK TRCAS KILER HURGZ EREGL TTKOM TATKS AKSEN VAKBN TKC.N BAGFS AKCNS AKBNK ISCTR ZOREN SNGYO KRDMD THYAO TRGYO ISGYO ANACM ALBRK ASYAB AKENR ADANA ANSGR AKGRT 28 25 25 24 23 23 23 23 23 22 22 22 22 22 22 21 21 21 21 21 21 20 20 20 20 19 19 19 19 19 19 19 19 19 18 18 18 18 17 17 17 17 17 16 15 15 15 12 Trakya Cam BIM Emlak Konut REIT Halkbank Sisecam Holding Garanti Bankasi Tupras Petkim Bizim Toptan Satis Tofas TAV Gubretas Ford Otosan Coca-Cola Icecek Anadolu Efes Aygaz Arcelik Cimsa Migros Dogus Otomotiv Anadolu Hayat Yapi Kredi Bankasi Turcas Kiler Alisveris Hurriyet Erdemir Turk Telekom Tat Konserve Aksa Enerji Vakifbank Turkcell Bagfas Akcansa Akbank Isbank Zorlu Enerji Sinpas REIC Kardemir Turkish Airlines Torunlar REIC Is Reit Anadolu Cam Albaraka Bank Asya Akenerji Adana Cimento Anadolu Sigorta Aksigorta
Profitable Market Share
Low interest rate impact on P&L (Positive=5, Highly Negative=1) (High=5, Low=1) (Strong=5, Weak=1) (Strong=5, Weak=(High=5, Low=1) 5 5 5 5 5 5 5 4 4 5 5 3 5 4 4 4 5 3 5 4 5 5 3 4 5 1 5 5 4 1 5 4 3 5 5 4 4 5 5 2 4 4 4 5 5 5 5 3 5 4 5 2 5 4 5 4 5 3 5 4 5 1 5 4 3 5 3 4 3 5 4 2 2 5 5 3 5 4 5 2 5 3 4 4 4 2 3 4 5 3 3 4 2 5 5 2 4 1 5 4 4 1 5 3 5 1 5 4 4 3 5 2 3 5 4 3 2 3 3 4 5 1 5 4 3 1 5 2 3 4 4 2 2 3 3 4 3 2 2 4 1 5 4 3 2 5 4 1 2 1 5 4 2 5 4 2 2 4 2 2 2 1 4 2 2 1 3 4 2 5 3 2 2 5 2 2 3 1 3 3 3 1 4 2 3 5 1 1 2 3 1 1
Impact of Sustainable Industry Growth (Dupont) Fragmentation
4 3 5 4 4 4 5 5 3 4 3 2 3 4 3 3 4 4 5 5 2 4 4 5 4 4 3 4 4 4 2 3 4 4 4 4 3 4 3 4 4 4 2 2 4 3 2 2
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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.
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 revenuesharing mechanism; and (iii) a well-known brand name. Its privileged access to the treasury land bank strengthens the companys 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 companys 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 countrys 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
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 Cams 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
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Thematic vs valuation Winners with attractive valuation are Trakya Cam, Emlak REIT, Bizim, Tupras and Halkbank
Is Reit Sinpas REIC Bank Asya 5.0 Aksa Ener ji Turcas Biz im
4.0 Torunlar REIT Kardemir Albaraka
Erdemir Cimsa Migr Hurriyet os Anadolu Hayat Tofas Emlak REIT Tupras Trakya Cam
Valuation relative
Ak enerji IS Bankasi Anadolu Cam YKB 3.0 Adana Cimento Turkis h Airlines 1.5 2.0 2.5 Anadolu Sigor ta Akcansa Akbank
Arc elik TAV 3.5 Gubretas Petkim 4.0 Garanti Bank asi Halkbank 4.5 5.0
3.0 Zorlu Enerji Vak ifbank 2.0 Dogus Otomotiv
Ford Otosan CCI
Bagfas Ak sigorta 1.0
Turkc ell Kiler Turk Telekom Aygaz Sisecam
Tat Konserve Anadolu Efes
BIM
0.0 Thematic relative
Source: HSBC estimates * Size of bubbles represents market capitalisation
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
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business, the company faces no threats until end-2015 when the Socar and Turcas refinery is scheduled to come on stream.
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 conglomerates 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 companys 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,
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 BIMs 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 BIMs 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
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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 companys competitive power.
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Financials
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Akbank
Akbanks 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
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
steam in terms of asset growth, lagging slightly below the market.

Sustainable growth outlook is medium
Tamer Sengun* Analyst HSBC Yatrm Menkul Deerler A.. +90 212 376 4615 tamersengun@hsbc.com.tr *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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 Akbanks profitability could increase given its advantageous market share position.
Market share momentum is medium
Compared to its peers and the rest of the sector, Akbanks 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 Akbanks 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
After strong growth in 2004 and 2005, during the period between 2006 and 2010 the bank lost
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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
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.
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
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% riskfree 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
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.
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.
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Financials & valuation: Akbank

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 83,035 0.0 19.1 20.6 106,976 0.0 16.6 17.5 126,253 0.0 15.7 16.5 151,971 0.0 14.5 15.3 17,565 17,565 52,896 49,879 67,167 101,543 113,183 18,294 18,294 70,275 43,268 77,712 118,938 131,957 20,262 20,262 87,014 45,550 89,837 138,224 152,732 22,486 22,486 106,935 47,250 104,144 160,068 176,504 4,277 1,309 33 891 6,510 -2,417 -348 -171 3,574 0 3,574 -718 0 2,857 2,857 3,771 1,547 203 723 6,245 -2,516 -354 -367 3,008 0 3,008 -587 0 2,420 2,420 4,519 1,737 152 819 7,227 -2,739 -708 -433 3,348 0 3,348 -654 0 2,694 2,694 5,124 1,959 114 1,042 8,240 -2,914 -1,188 -369 3,769 0 3,769 -736 0 3,033 3,033 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 7.2 Target price (TRY) AKBNK.IS 14,929 25 Turkey Tamer Sengun 12/2010a 9.6 6.7 1.6 1.0 5.4 2.0 12/2011e 11.4 7.4 1.5 1.3 2.7 2.1 12/2010a 5.8 1.8 0.0 8.9 1.2 -3.3 5.6 -0.5 3.9 4.6 18.0 12/2011e 4.0 1.6 0.2 6.6 0.8 -2.6 3.9 -0.4 2.5 5.3 13.5
Underweight
12/2012e 3.9 1.5 0.1 6.2 0.7 -2.3 3.8 -0.6 2.3 6.0 14.0 12/2013e 3.7 1.4 0.1 5.9 0.7 -2.1 3.8 -0.9 2.2 6.5 14.2
12/2012e 10.2 6.1 1.4 1.2 4.9 2.6
12/2013e 9.1 5.2 1.2 1.1 4.5 2.9
7.60 Potent'l return (%)
5.5
Bloomberg (Equity) Market cap (TRYm) Sector Contact
AKBNK TI 27,520 Commercial Banks +90 212 376 4615
Notes: price at close of 27 Sep 2011
Stated accounts as of 31 Dec 2005 are IFRS compliant
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.71 0.71 0.14 4.39 4.39 0.61 0.61 0.14 4.57 4.57 0.67 0.67 0.18 5.07 5.07 0.76 0.76 0.20 5.62 5.62 37.1 0.8 78.8 2.4 1.5 1.5 0.0 100.0 18.0 40.3 0.6 90.4 1.7 1.2 1.2 0.0 100.0 13.5 37.9 0.9 96.9 1.8 1.3 1.3 0.0 100.0 14.0 35.4 1.2 102.7 2.1 1.5 1.5 0.0 100.0 14.2 -1.3 10.7 -7.2 4.8 4.8 12.5 -7.2 -4.1 4.1 -8.9 -15.3 -15.3 5.6 4.1 15.7 8.8 20.4 11.3 11.3 27.4 10.8 14.0 6.4 18.7 12.6 12.6 11.3 11.0 12/2010a 12/2011e 12/2012e 12/2013e
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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
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 increasedpenetration-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
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%.
Aksigortas 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
According to our ROE vs. market share matrix Aksigorta scores medium to weak. Although a
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.
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Low interest rate environment is negative for insurance companies

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 Aksigortas 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
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.
Weak TRY environment should be neutral to negative for Turkish insurers and Aksigorta
A weak TRY environment has almost no direct 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.
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.
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Financials & valuation: Aksigorta

Financial statements Year to P&L summary (TRYm) Gross written premium Net earned premium Other income PBT (operating) PBT (reported) Total tax Net operating profit Net reported profit Net earned primary life & health prem Net earned primary P&C prem Net earned life & health re-ins prem Net earned P&C re-ins prem Balance sheet summary (TRYm) Total investments Banking assets Tangible assets Value of in-force business Intangible & other assets Total assets Technical reserves Banking liabilities Other liabilities Debt capital Total liabilities Shareholders funds Average invested capital Equity Quasi equity Long-term debt & hybrid capital Short-term debt Third party assets under mgmt Total assets under mgmt 960 0 960 0 8 1,033 527 0 135 0 662 372 1,520 372 0 0 133 0 0 1,021 0 1,021 0 8 1,095 593 0 121 0 713 381 377 381 0 0 118 0 0 1,117 0 1,117 0 8 1,191 670 0 122 0 792 399 390 399 0 0 119 0 0 1,199 0 1,199 0 8 1,273 739 0 123 0 859 411 405 411 0 0 120 0 0 886 635 0 3 9 -7 1 1 0 0 0 996 714 0 8 11 -1 10 10 0 0 0 1,126 807 0 15 20 -2 18 18 0 0 0 1,242 890 0 24 29 -3 26 26 0 0 0 12/2010a 12/2011e 12/2012e 12/2013e EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV Embedded value Per share data (TRY) 12/2010a 0.00 0.00 0.00 1.21 0.00 12/2011e 0.03 0.02 0.00 1.25 0.00
Underweight
12/2012e 0.06 0.04 0.05 1.30 0.00 12/2013e 0.08 0.08 0.07 1.34 0.00
Valuation data Year to PE reported* PE (HSBC)* New business multiple Reported ROEV Dividend cover
Note: * = Based on fully diluted shares
12/2010a 271.6 844.1 1.1 0.0
12/2011e 39.8 55.2 1.1 0.0
12/2012e 22.7 29.6 1.0 0.0 1.0
12/2013e 15.5 15.5 1.0 0.0 1.3
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.31 Target price (TRY) AKGRT.IS 217 38 Turkey Tamer Sengun 1.30 Potent'l return (%) -0.8
AKGRT TI 401 INSURANCE +90 212 376 4615
Price relative
7 6 5 4 3 2 1 7 6 5 4 3 2 1 0 2010
Rel to ISTANBUL COMP
Ratios & growth 12/2010a 12/2011e 12/2012e 12/2013e Year-on-year % change Gross net earned life prem Gross net earned P&C prem Operating PBT Reported PBT EPS (operating) EPS (reported) DPS Total investments Third party asset managed Net asset value Ratios (%) Life new business margin P&C combined ratio P&C loss ratio P&C expense ratio P&C reserve ratio 0.0 101.6 74.5 27.1 34.2 0.0 100.9 70.3 30.7 32.3 0.0 100.3 71.0 29.3 32.3 0.0 99.4 71.5 27.9 32.3 16.0 -160.1 -74.4 -109.9 -95.8 -100.0 -70.0 12.4 180.4 25.0 1430.3 582.4 6.4 13.1 86.1 75.0 86.1 75.0 9.4 10.3 59.5 46.5 90.9 46.5 46.5 7.4
0 2009
Aksigorta
Source: HSBC
2011
2012
Note: price at close of 28 Sep 2011
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Albaraka Turk
Albaraka Turks 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

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 Turks profitability level is comparable to that of the conventional banks average, which is another positive.
Market share momentum is strong
During the period between 2006 and 2010 Albaraka Turks 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.
Albarakas 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 Albarakas sustainable growth outlook as medium.
Market fragmentation structure is medium to weak
According to our ROE vs. market share matrix 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.
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.
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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.
Low interest rate environment is negative for participation banks and Albaraka
Investment thesis
Albaraka Turk is a well-managed bank with decent profitability in a niche segment that offers significant growth. We believe the markets 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.
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.
Weak TRY environment should be neutral to negative for Turkish banks and Albaraka

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 (2011e13e), 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 12month 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.
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.
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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.
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Financials & valuation: Albaraka Turk

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 5,965 0.0 13.5 14.1 6,861 0.0 13.8 14.4 8,148 0.0 13.8 14.4 9,404 0.0 14.2 14.7 853 853 6,271 435 6,882 7,073 8,406 989 989 7,188 537 7,810 8,659 9,808 1,165 1,165 8,699 590 9,116 10,014 11,609 1,373 1,373 10,461 649 10,636 11,839 13,666 316 83 16 57 472 -201 -68 -37 166 0 166 -32 0 134 134 379 92 14 54 540 -244 -69 -37 190 0 190 -38 0 152 152 456 107 11 74 649 -284 -102 -43 219 0 219 -44 0 175 175 549 124 9 95 777 -327 -140 -50 260 0 260 -52 0 208 208 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.87 Target price (TRY) ALBRK.IS 547 42 Turkey Tamer Sengun 12/2010a 7.5 3.7 1.2 0.8 4.1 0.0 12/2011e 6.6 3.4 1.0 0.7 8.8 0.0 12/2010a 6.0 1.6 0.3 8.9 1.1 -3.8 5.1 -1.3 2.5 6.8 17.1 12/2011e 5.9 1.4 0.2 8.4 0.8 -3.8 4.6 -1.1 2.4 7.0 16.5
Overweight
12/2012e 6.1 1.4 0.2 8.6 1.0 -3.8 4.9 -1.4 2.3 7.0 16.3 12/2013e 6.3 1.4 0.1 8.9 1.1 -3.7 5.1 -1.6 2.4 6.9 16.4
12/2012e 5.7 2.8 0.9 0.6 8.5 0.0
12/2013e 4.8 2.2 0.7 0.5 11.9 0.0
2.80 Potent'l return (%) 49.7 ALBRK TI 1,008
COMMERCIAL BANKS +90 212 376 4615
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.25 0.25 0.00 1.58 1.58 0.28 0.28 0.00 1.84 1.84 0.33 0.33 0.00 2.16 2.16 0.39 0.39 0.00 2.55 2.55 42.7 1.2 91.1 3.0 3.2 2.7 0.3 85.7 17.1 45.2 1.0 92.0 3.0 3.3 2.9 0.1 89.0 16.5 43.8 1.3 95.4 3.3 3.6 3.2 0.0 89.0 16.3 42.1 1.5 98.4 3.6 4.2 3.7 0.0 89.0 16.4 7.1 13.6 2.8 27.3 27.3 20.0 14.3 21.1 9.2 13.1 13.1 16.0 20.2 16.4 23.3 15.7 15.7 17.7 19.9 15.3 23.4 18.7 18.7 17.9 12/2010a 12/2011e 12/2012e 12/2013e
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Anadolu Hayat
Anadolu Hayats 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

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
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.
According to our ROE vs. market share matrix Anadolu Hayat scores strong. Having the largest market share and an ROE above 15%, Anadolu Hayat scores quite well according to the criteria,
While the market is highly fragmented in the insurance sector, the private pension sector (with
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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.
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 TRYm Premiums Fund size Net income RoE ___ 2011e____ old New 391 3,540 74 16% 373 3,247 78 17% ___ 2012e ____ ___ 2013e____ Old new old new 411 4,570 87 18% 392 4,228 79 16% 431 5,586 127 21% 412 5,226 94 19%
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.
Weak TRY environment should be neutral to negative for Turkish insurers and Anadolu Hayat

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% riskfree 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
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
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.
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Financials & valuation: Anadolu Hayat

Financial statements Year to P&L summary (TRYm) Gross written premium Net earned premium Other income PBT (operating) PBT (reported) Total tax Net operating profit Net reported profit Net earned primary life & health prem Net earned primary P&C prem Net earned life & health re-ins prem Net earned P&C re-ins prem Balance sheet summary (TRYm) Total investments Banking assets Tangible assets Value of in-force business Intangible & other assets Total assets Technical reserves Banking liabilities Other liabilities Debt capital Total liabilities Shareholders funds Average invested capital Equity Quasi equity Long-term debt & hybrid capital Short-term debt Third party assets under mgmt Total assets under mgmt 5,269 0 5,269 0 2 5,299 2,155 0 2,693 0 4,848 451 440 451 0 0 2,688 2,671 2,671 5,979 0 5,979 0 3 6,014 2,222 0 3,310 0 5,532 482 466 482 0 0 3,305 3,286 3,286 7,293 0 7,293 0 3 7,330 2,561 0 4,270 0 6,826 498 490 498 0 0 4,265 4,245 4,245 8,713 0 8,713 0 3 8,751 2,979 0 5,266 0 8,239 506 502 506 0 0 5,260 5,239 5,239 551 356 56 79 87 -15 64 71 356 0 0 570 373 71 83 95 -16 67 78 373 0 0 602 392 88 86 98 -20 66 79 392 0 0 674 412 108 105 117 -23 105 94 412 0 0 12/2010a 12/2011e 12/2012e 12/2013e EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV Embedded value Per share data (TRY) 12/2010a 0.29 0.26 0.22 1.80 0.06 12/2011e 0.31 0.27 0.16 1.93 0.12
Overweight
12/2012e 0.31 0.26 0.25 1.99 0.12 12/2013e 0.38 0.42 0.28 2.02 0.13
Valuation data Year to PE reported* PE (HSBC)* Price / EV Price / NAV New business multiple Reported ROE Reported ROEV Dividend cover
12/2010a 10.4 11.6 53.4 53.4 1.7 0.0 1.2
12/2011e 9.5 11.2 25.2 25.2 1.5 0.0 1.7
12/2012e 9.5 11.3 24.9 24.9 1.5 0.0 1.1
12/2013e 7.9 7.1 23.4 23.4 1.5 0.0 1.5
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.98 Target price (TRY) ANHYT.IS 484 20 Turkey Tamer Sengun 4.50 Potent'l return (%) 51.0 ANHYT TI 894 INSURANCE +90 212 376 4615
Price relative
6 5 4 3 6 5 4 3 2 1 0 2010
Ratios & growth 12/2010a 12/2011e 12/2012e 12/2013e Year-on-year % change Gross net earned life prem Gross net earned P&C prem Operating PBT Reported PBT EPS (operating) EPS (reported) DPS Total investments Third party asset managed Net asset value Ratios (%) Life new business margin P&C combined ratio P&C loss ratio P&C expense ratio P&C reserve ratio 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -28.3 -13.8 -11.4 -12.9 -9.9 31.0 19.5 34.1 5.0 4.3 8.8 4.3 9.9 -27.3 13.5 23.0 5.0 3.4 3.9 -1.1 0.1 56.9 22.0 29.2 5.0 22.1 19.4 58.4 19.4 12.6 19.5 23.4
2 1 0 2009
Anadolu Hayat
Source: HSBC
2011
2012
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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

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 increasedpenetration-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
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.
According to our ROE vs. market share matrix Anadolu Sigorta scores medium. Despite having a market share of around 12% (within non-life insurers), which in a highly fragmented market
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.
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We value the company by using a sum-of-theparts 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
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.
Weak TRY environment should be neutral to negative for Turkish insurers and Anadolu Sigorta
A weak TRY environment has almost no direct 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).
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.
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Financials & valuation: Anadolu Sigorta

Financial statements Year to P&L summary (TRYm) Gross written premium Net earned premium Other income PBT (operating) PBT (reported) Total tax Net operating profit Net reported profit Net earned primary life & health prem Net earned primary P&C prem Net earned life & health re-ins prem Net earned P&C re-ins prem Balance sheet summary (TRYm) Total investments Banking assets Tangible assets Value of in-force business Intangible & other assets Total assets Technical reserves Banking liabilities Other liabilities Debt capital Total liabilities Shareholders funds Average invested capital Equity Quasi equity Long-term debt & hybrid capital Short-term debt Third party assets under mgmt Total assets under mgmt 1,638 0 1,638 0 26 1,951 933 0 170 0 1,103 849 827 849 0 0 129 0 0 1,779 0 1,779 0 26 2,109 1,064 0 172 0 1,236 873 861 873 0 0 131 0 0 1,925 0 1,925 0 26 2,271 1,187 0 179 0 1,367 905 889 905 0 0 138 0 0 2,065 0 2,065 0 26 2,429 1,293 0 189 0 1,440 947 926 947 0 0 147 0 0 1,420 1,112 0 44 44 -6 38 38 0 0 0 1,622 1,228 0 42 42 -8 34 34 0 0 0 1,810 1,369 0 56 56 -10 45 45 0 0 0 1,969 1,488 0 72 72 -13 59 59 0 0 0 12/2010a 12/2011e 12/2012e 12/2013e EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV Embedded value Per share data (TRY) 12/2010a 0.08 -0.07 0.02 1.70 0.00 12/2011e 0.07 -0.07 0.03 1.75 0.00 12/2012e 0.09 -0.06 0.03 1.81 0.00
Neutral
12/2013e 0.12 -0.05 0.04 1.89 0.00
Valuation data Year to PE reported* PE (HSBC)* Price / EV Price / NAV New business multiple Reported ROE Reported ROEV Dividend cover
12/2010a 11.9
12/2011e 12.9
12/2012e 9.9
12/2013e 7.6
0.5 0.0 3.8
0.5 0.0 -2.5
0.5 0.0 -1.8
0.5 0.0 2.6
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 0.89 Target price (TRY) ANSGR.IS 241 48 Turkey Tamer Sengun 1.05 Potent'l return (%) 18.0 ANSGR TI 445 INSURANCE +90 212 376 4615
Price relative
2.5 2 1.5 2.5 2 1.5 1 0.5 0 2010
Ratios & growth 12/2010a 12/2011e 12/2012e 12/2013e Year-on-year % change Gross net earned life prem Gross net earned P&C prem Operating PBT Reported PBT EPS (operating) EPS (reported) DPS Total investments Third party asset managed Net asset value Ratios (%) Life new business margin P&C combined ratio P&C loss ratio P&C expense ratio P&C reserve ratio 0.0 105.4 73.6 31.8 30.0 0.0 103.3 67.1 36.2 28.6 0.0 103.1 68.2 34.9 28.6 0.0 102.3 67.4 34.9 28.6 7.7 -26.1 -26.1 -39.5 -22.0 -60.0 12.3 10.5 -3.2 -3.2 -2.2 -8.3 32.1 8.7 11.5 31.2 31.2 -7.7 31.2 23.4 8.2 8.7 30.0 30.0 -24.8 30.0 36.6 7.3
1 0.5 0 2009
Anadolu Sigorta
Source: HSBC
2011
2012
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Bank Asya
Bank Asyas 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

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 Asyas profitability level is lower, which is a negative for the banks competitive outlook. However, the new management is taking steps to improve the profitability of the bank via better allocation of the limited capital.
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 banks 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-thanconventional-bank growth could be maintained.
Sustainable growth outlook is medium to weak
Bank Asyas 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 Asyas sustainable growth outlook as medium to weak.
According to our ROE vs. market share matrix Bank Asya scores weak compared to most
The top five players claimed 63% market share as of 2010, while the top 10 claimed 87%. Hence, the
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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. 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.
Low interest rate environment is negative for participation banks and Bank Asya
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 ISE100 y-t-d. We also believe that the new managements strategy for the bank is realistic.

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% riskfree rate and a 5.5% equity risk premium. We use a 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
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.
Weak TRY environment should be neutral to negative for Turkish banks and Bank Asya
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 in FX terms. Therefore, any weakness in TRY results in an
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.
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Financials & valuation: Bank Asya

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 14,420 0.0 12.8 13.3 16,444 0.0 12.7 13.2 18,708 0.0 12.7 13.2 21,616 0.0 12.6 13.1 1,942 1,942 10,955 474 11,167 10,862 14,513 2,159 2,159 12,961 601 12,726 14,029 17,475 2,442 2,442 15,324 662 14,917 16,981 20,596 2,789 2,789 17,887 728 17,473 20,185 24,488 594 249 45 134 1,022 -530 -108 -60 324 0 324 -64 0 260 260 620 267 46 91 1,024 -573 -114 -55 281 0 281 -56 0 225 225 775 305 50 98 1,228 -632 -196 -47 353 0 353 -71 0 282 282 913 347 55 111 1,426 -692 -249 -51 434 0 434 -87 0 347 347 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.95 Target price (TRY) ASYAB.IS 952 42 Turkey Tamer Sengun 12/2010a 6.8 3.6 0.9 0.7 3.7 0.0 12/2011e 7.8 3.9 0.8 0.9 4.7 0.0 12/2010a 4.6 1.9 0.3 7.8 1.0 -4.1 3.8 -0.8 2.0 7.1 14.2 12/2011e 4.0 1.7 0.3 6.6 0.6 -3.7 2.9 -0.7 1.5 7.5 11.0
Overweight
12/2012e 4.4 1.7 0.3 7.0 0.6 -3.6 3.4 -1.1 1.6 7.6 12.3 12/2013e 4.5 1.7 0.3 7.1 0.5 -3.4 3.6 -1.2 1.7 7.7 13.3
12/2012e 6.2 2.9 0.7 0.7 7.0 0.0
12/2013e 5.1 2.4 0.6 0.6 8.2 0.0
2.75 Potent'l return (%) 41.0 ASYAB TI 1,755
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.29 0.29 0.00 2.16 2.16 0.25 0.25 0.00 2.40 2.40 0.31 0.31 0.00 2.71 2.71 0.39 0.39 0.00 3.10 3.10 51.9 1.1 98.1 4.0 3.1 2.1 0.5 67.9 14.2 56.0 1.0 101.8 3.9 3.2 2.0 0.5 64.5 11.0 51.5 1.4 102.7 4.5 3.8 2.5 0.5 64.0 12.3 48.5 1.5 102.4 5.4 4.6 2.9 0.5 64.0 13.3 -3.1 15.5 -17.4 -13.7 -13.7 13.7 0.2 8.1 -8.4 -13.4 -13.4 11.2 20.0 10.4 32.2 25.4 25.4 13.1 16.1 9.4 23.3 23.1 23.1 14.2 12/2010a 12/2011e 12/2012e 12/2013e
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Garanti Bank
Garantis 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 Banks earning growth in 2012

Target price maintained at TRY8.1; maintained at Neutral
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.
According to our ROE vs. market share matrix 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.
Compared to its peers and the rest of the sector, Garantis 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 Garantis sustainable growth outlook as medium.
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
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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 sized banks are likely to consolidate in the 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 Garanti
Investment thesis
High trading gain and asset sale income in H1 2011 creates an unfavourable base for Garanti Banks 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.

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% riskfree rate and a 5.5% equity risk premium. We use beta of 1.12 for Garanti Bank. This implies a cost of equity of 14.2% until the end of our valuation 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 nonvolatile Turkish stocks. Therefore, we maintain our rating for Garanti at Neutral.
Risks
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 Garanti. 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 Garanti
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 a lower capital adequacy ratio.
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 Banks valuation. The main downside risk is further regulatory pressure relating to credit cards.
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Financials & valuation: Garanti Bankasi

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 64,501 0.0 18.2 21.2 85,810 0.0 16.9 19.6 110,315 0.0 15.5 17.7 128,647 0.0 15.4 17.5 13,316 13,316 49,733 36,356 62,808 93,311 105,462 16,475 16,475 64,827 39,210 72,658 110,152 123,974 18,093 18,093 83,370 37,420 84,908 132,483 153,990 20,806 20,806 101,699 38,633 97,317 156,805 176,383 5,080 1,772 881 358 8,091 -2,699 -1,212 -70 4,109 -330 3,779 -816 0 2,962 3,292 4,755 1,816 364 643 7,577 -3,041 -387 -198 3,952 0 3,952 -807 0 3,145 3,145 4,226 1,986 419 655 7,286 -3,015 -325 -436 3,509 176 3,685 -753 0 2,933 2,757 5,148 2,379 314 731 8,573 -3,241 -792 -416 4,124 0 4,124 -825 0 3,299 3,299 12/2009a 12/2010e 12/2011e 12/2012e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 7.06 Target price (TRY) GARAN.IS 16,086 49 Turkey Tamer Sengun 12/2009a 9.0 5.5 2.2 10.6 0.9 12/2010e 9.4 6.5 1.8 1.0 5.6 1.2 12/2011e 10.8 6.9 1.6 1.2 3.5 1.9 12/2009a 8.0 2.8 1.4 12.8 0.6 -4.3 8.5 -1.9 5.2 5.6 28.9 12/2010e 6.3 2.4 0.5 10.1 0.9 -4.0 6.0 -0.5 4.2 5.0 21.1 12/2011e 4.3 2.0 0.4 7.4 0.7 -3.1 4.4 -0.3 2.8 5.7 16.0
Neutral
12/2012e 4.3 2.0 0.3 7.2 0.6 -2.7 4.5 -0.7 2.8 6.1 17.0
12/2012e 9.0 5.6 1.4 1.0 6.8 2.0
8.10 Potent'l return (%) 14.7 GARAN TI 29,652
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.71 0.78 0.07 3.17 3.17 0.75 0.75 0.08 3.92 3.92 0.70 0.66 0.14 4.31 4.31 0.79 0.79 0.14 4.95 4.95 33.4 2.4 79.2 4.3 3.5 2.8 0.0 81.0 28.9 40.1 0.7 89.2 2.9 2.3 1.9 0.0 81.9 21.1 41.4 0.4 98.2 1.8 1.4 1.1 0.0 81.0 16.0 37.8 0.9 104.5 1.9 1.5 1.2 0.0 80.0 17.0 59.3 10.6 104.4 69.2 100.8 40.6 -6.3 12.6 -15.9 6.2 -4.5 27.3 23.7 -3.9 -0.8 -5.9 -6.8 -12.3 62.9 9.8 17.7 7.5 24.9 12.5 19.7 2.9 15.0 12/2009a 12/2010e 12/2011e 12/2012e
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Halkbank
Halkbanks overall competitive outlook is strong among both
Turkish equities and the banks

We believe the market is attaching a higher risk premium for
Halkbanks 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

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.
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.
Compared to its peers and the rest of the sector, Halkbanks 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.
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
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
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
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relatively lower profitability of the Turkish banking sector due to the low interest rate environment, we believe small size banks are likely to consolidate in the 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 Halkbank
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 Halkbanks long-expected potential secondary public offering. On a 2012e PE of 6.9x, Halkbank is one of the most attractively valued banking sector stocks.
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 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.
Weak TRY environment should be neutral to negative for Turkish banks and Halkbank

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 1.05 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
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 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
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.
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Financials & valuation: Halkbank

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 46,436 0.0 15.0 15.9 58,140 0.0 14.9 15.6 68,118 0.0 15.4 16.2 81,046 0.0 15.3 16.1 7,445 7,445 44,296 20,207 54,782 64,311 72,942 8,679 8,679 55,676 22,694 64,011 78,677 91,873 10,533 10,533 67,926 23,580 72,413 94,730 105,815 12,423 12,423 81,990 24,873 81,920 109,248 121,758 3,191 526 115 451 4,283 -1,495 -316 -142 2,329 180 2,509 -499 0 2,010 1,830 3,183 647 162 611 4,603 -1,730 -221 -293 2,358 0 2,358 -468 0 1,890 1,890 4,014 781 122 635 5,551 -1,944 -463 -353 2,791 0 2,791 -558 0 2,233 2,233 4,628 876 91 737 6,332 -2,183 -699 -251 3,199 0 3,199 -640 0 2,560 2,560 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 12.25 Target price (TRY) HALKB.IS 8,307 25 Turkey Tamer Sengun 12/2010a 8.4 5.5 2.1 0.8 7.0 1.9 12/2011e 8.1 5.3 1.8 0.8 7.0 2.6 12/2010a 7.8 1.3 0.3 10.4 1.1 -3.6 6.8 -0.8 4.5 6.2 27.7 12/2011e 6.1 1.2 0.3 8.8 1.2 -3.3 5.5 -0.4 3.6 6.5 23.4
Overweight
12/2012e 6.4 1.2 0.2 8.8 1.0 -3.1 5.7 -0.7 3.5 6.6 23.2 12/2013e 6.2 1.2 0.1 8.5 1.0 -2.9 5.6 -0.9 3.4 6.5 22.3
12/2012e 6.9 4.2 1.5 0.7 10.0 2.5
12/2013e 6.0 3.7 1.2 0.6 10.8 4.4
17.40 Potent'l return (%) 42.0 HALKB TI 15,313
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 1.61 1.46 0.24 5.96 5.96 1.51 1.51 0.32 6.94 6.94 1.79 1.79 0.30 8.43 8.43 2.05 2.05 0.54 9.94 9.94 34.9 0.8 80.9 3.8 3.8 3.2 0.0 83.3 27.7 37.6 0.4 87.0 2.9 2.8 2.4 0.0 84.0 23.4 35.0 0.7 93.8 2.7 2.8 2.3 0.0 83.0 23.2 34.5 0.9 100.1 2.8 2.9 2.4 0.0 82.0 22.3 11.0 25.3 4.7 23.3 12.2 15.4 29.3 7.5 15.7 3.1 -6.0 3.3 34.6 16.6 20.6 12.4 25.6 18.1 18.1 -4.4 21.4 14.1 12.3 15.0 14.6 14.6 77.2 17.9 12/2010a 12/2011e 12/2012e 12/2013e
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Isbank
Isbanks 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

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.
Therefore, we believe that the sustainable growth outlook of Isbank is medium to weak.
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 size banks are likely to consolidate in the future due to their relatively higher cost to income ratios. 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
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.
Compared to its peers and the rest of the sector, Isbanks cost to income ratio was slightly lower than that of most private bank peers in 2010, and its asset turnover was comparable to theirs.
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the employees pension fund), we see this as highly unlikely.

Low interest rate environment should be positive in the short term but negative in the long term for Turkish banks and Isbank
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 loanto-deposit ratios in the sector and a free provision level amounting to cTRY1bn.
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 Isbank. 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 Isbank

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% riskfree rate and a 5.5% equity risk premium. We use a 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
A weak TRY environment has almost no direct impacts 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 a lower capital adequacy ratio.
We believe Isbanks 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 banks pension fund is running a deficit, which is currently being financed by the bank.
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Financials & valuation: IS Bankasi

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 96,857 0.0 15.7 17.5 119,696 0.0 14.1 15.8 138,686 0.0 13.6 15.4 163,995 0.0 12.9 14.7 17,014 17,014 64,232 45,697 88,260 112,217 131,796 18,995 18,995 83,565 44,716 100,361 132,321 159,247 21,510 21,510 102,317 46,959 115,110 155,178 182,553 24,346 24,346 124,153 48,722 132,025 178,245 208,450 4,582 1,236 135 1,938 7,891 -3,203 -770 -366 3,553 0 3,553 -571 0 2,982 2,982 4,487 1,337 154 1,765 7,744 -3,551 -625 -611 2,957 0 2,957 -503 0 2,454 2,454 5,448 1,487 116 1,924 8,975 -3,896 -1,029 -648 3,401 0 3,401 -680 0 2,721 2,721 6,205 1,662 87 2,289 10,243 -4,250 -1,526 -601 3,865 0 3,865 -773 0 3,092 3,092 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 4.64 Target price (TRY) ISCTR.IS 11,327 30 Turkey Tamer Sengun 12/2010a 7.0 4.5 1.2 0.7 7.4 2.6 12/2011e 8.5 5.0 1.1 1.0 4.1 3.3 12/2010a 5.3 1.4 0.2 9.1 2.2 -3.7 5.4 -0.9 3.4 5.7 19.6 12/2011e 4.1 1.2 0.1 7.2 1.6 -3.3 3.9 -0.6 2.3 6.0 13.6
Overweight
12/2012e 4.2 1.2 0.1 6.9 1.5 -3.0 3.9 -0.8 2.1 6.4 13.4 12/2013e 4.1 1.1 0.1 6.8 1.5 -2.8 4.0 -1.0 2.0 6.6 13.5
12/2012e 7.7 4.1 1.0 0.9 6.7 3.5
12/2013e 6.8 3.5 0.9 0.8 6.3 3.9
5.85 Potent'l return (%) 26.1 ISCTR TI 20,880
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.66 0.66 0.12 3.78 3.78 0.55 0.55 0.15 4.22 4.22 0.60 0.60 0.16 4.78 4.78 0.69 0.69 0.18 5.41 5.41 40.6 1.4 72.8 3.6 2.5 2.5 0.0 100.0 19.6 45.9 0.8 83.3 2.7 1.9 1.9 0.0 100.0 13.6 43.4 1.1 88.9 2.5 1.9 1.9 0.0 100.0 13.4 41.5 1.3 94.0 2.6 2.0 2.0 0.0 100.0 13.5 0.7 18.9 -8.8 25.7 15.8 128.0 -13.7 -1.9 10.9 -10.6 -17.7 -17.7 25.4 11.6 15.9 9.7 21.1 10.9 10.9 6.5 13.2 14.1 9.1 18.0 13.6 13.6 10.9 13.2 12/2010a 12/2011e 12/2012e 12/2013e
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Vakifbank
Vakifbanks 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


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 banks CAR against weak TRY. Since the banks assets are more in TRY terms, it is less exposed to TRY weakness from a CAR perspective.
Compared to its peers and the rest of the sector, Vakifbanks 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 Vakifbanks sustainable growth outlook as medium to weak.
According to our ROE vs. market share matrix Vakifbank scores weaker than its large cap private peers.
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 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 sized banks are likely to consolidate in the future due to their relatively higher cost to income ratios.
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.
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Low interest rate environment should be positive in the short term but negative in thelong term for Turkish banks and Vakifbank
Turkish banks benefit from declining interest rates 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.
Weak TRY environment should be neutral to negative for Turkish banks and Vakifbank
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 banks 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.

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% riskfree rate and a 5.5% equity risk premium. We use beta of 1.05 for Vakifbank. This implies a cost of equity of 13.8% until the end of our valuation 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
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 risk 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 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 banks 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.
The main downside risk is related to a rapid rise in interest rates, as the banks level of hedges against long-term mortgages are among the lowest in the sector.
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Financials & valuation: Vakifbank

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 56,186 0.0 13.2 14.4 69,064 0.0 12.8 13.8 80,398 0.0 12.5 13.5 94,609 0.0 12.1 13.1 8,559 8,559 44,861 18,096 47,701 64,938 73,962 9,490 9,490 57,108 18,460 56,271 78,420 91,734 10,710 10,710 68,577 18,611 62,981 92,892 103,896 12,124 12,124 81,547 19,127 70,487 105,384 117,742 2,730 443 316 636 4,126 -1,690 -664 -309 1,463 0 1,463 -306 0 1,157 1,157 2,838 547 82 860 4,328 -1,952 -509 -447 1,419 0 1,419 -294 0 1,126 1,126 3,627 655 62 817 5,161 -2,178 -808 -509 1,666 0 1,666 -333 0 1,333 1,333 4,096 754 46 959 5,855 -2,371 -1,142 -408 1,934 0 1,934 -387 0 1,547 1,547 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.66 Target price (TRY) VAKBN.IS 4,964 25 Turkey Tamer Sengun 12/2010a 7.9 3.8 1.1 0.9 3.6 1.3 12/2011e 8.1 3.9 1.0 0.9 2.4 0.0 12/2010a 5.4 0.9 0.6 8.2 1.3 -3.4 4.8 -1.3 2.3 6.3 14.5 12/2011e 4.5 0.9 0.1 6.9 1.4 -3.1 3.8 -0.8 1.8 6.9 12.5
Overweight
12/2012e 4.9 0.9 0.1 6.9 1.1 -2.9 4.0 -1.1 1.8 7.4 13.2 12/2013e 4.7 0.9 0.1 6.7 1.1 -2.7 4.0 -1.3 1.8 7.7 13.5
12/2012e 6.9 3.1 0.9 0.8 5.9 1.2
12/2013e 5.9 2.6 0.8 6.0 1.5
4.75 Potent'l return (%) 29.8 VAKBN TI 9,150
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.46 0.46 0.05 3.42 3.42 0.45 0.45 0.00 3.80 3.80 0.53 0.53 0.05 4.28 4.28 0.62 0.62 0.05 4.85 4.85 41.0 1.7 94.0 4.8 4.0 4.0 0.0 98.9 14.5 45.1 1.0 101.5 3.7 3.2 3.2 0.0 99.6 12.5 42.2 1.3 108.9 3.5 3.1 3.1 0.0 100.0 13.2 40.5 1.5 115.7 3.6 3.2 3.2 0.0 100.0 13.5 1.7 10.2 -3.5 -7.5 -7.5 16.0 4.9 15.5 -2.5 -2.7 -2.7 -100.0 10.9 19.3 11.6 25.6 18.4 18.4 12.9 13.4 8.9 16.8 16.1 16.1 18.4 13.2 12/2010a 12/2011e 12/2012e 12/2013e
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Yapi Kredi Bank

Yapi Kredis 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

While the banks relatively higher-than-sectoraverage 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.
"Profitable market share" score 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 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 sized banks are likely to consolidate in the 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 Yapi Kredi
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 Kredis sustainable growth outlook as medium to strong.
Turkish banks benefit from declining interest rates due to the maturity mismatch between assets and liabilities (liabilities reprice faster than the assets). Hence, declining interest rate periods have historically resulted in widening margins for Turkish banks and Yapi Kredi. However, when
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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 Yapi Kredi

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% riskfree rate and a 5.5% equity risk premium. We use a beta of 1.0 for Vakifbank. This implies a cost of equity of 13.5% until the end of our valuation 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 weak TRY environment has almost no direct impacts 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 a 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 ISE100 indices y-t-d. Yapi Kredi is now trading at a 2012e PE and PBV of 6.8x and 1.1x.
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.
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Financials & valuation: Yapi Kredi Bankasi

Financial statements Year to P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 73,259 0.0 12.2 16.1 95,938 0.0 11.4 14.1 111,473 0.0 12.0 14.4 132,274 0.0 11.9 14.1 10,318 10,318 52,615 18,346 52,725 67,350 84,776 12,094 12,094 68,864 20,427 61,720 89,003 108,383 14,502 14,502 83,403 18,764 70,832 106,778 123,181 16,927 16,927 100,148 17,548 81,287 121,719 140,110 3,185 1,596 -67 1,361 6,076 -2,489 -881 -188 2,519 325 2,844 -459 0 2,384 2,059 3,215 1,821 -21 938 5,953 -2,653 -759 -196 2,345 0 2,345 -457 0 1,888 1,888 4,194 2,072 0 1,043 7,310 -2,940 -1,123 -236 3,010 0 3,010 -602 0 2,408 2,408 4,715 2,356 0 1,312 8,384 -3,211 -1,564 -276 3,332 0 3,332 -666 0 2,666 2,666 12/2010a 12/2011e 12/2012e 12/2013e Core profitability (% RWAs) and leverage Year to Net interest income Net fees/commissions Trading profits Total income Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average equity Valuation data Year to PE* Pre-provision multiple P/NAV REP multiple Equity cash flow yield (%) Dividend yield (%) Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.78 Target price (TRY) YKBNK.IS 8,914 18 Turkey Tamer Sengun 12/2010a 8.0 4.6 1.6 0.8 4.6 0.0 12/2011e 8.7 5.0 1.4 0.9 1.8 0.0 12/2010a 5.0 2.5 -0.1 9.5 2.1 -3.9 5.6 -1.4 3.2 6.9 22.2 12/2011e 3.8 2.2 0.0 7.0 1.1 -3.1 3.9 -0.9 2.2 7.5 16.8
Overweight
12/2012e 4.0 2.0 0.0 7.0 1.0 -2.8 4.2 -1.1 2.3 7.8 18.1 12/2013e 3.9 1.9 0.0 6.9 1.1 -2.6 4.2 -1.3 2.2 7.8 17.0
12/2012e 6.8 3.8 1.1 0.7 8.0 0.0
12/2013e 6.2 3.2 1.0 0.7 7.4 1.5
5.40 Potent'l return (%) 42.9 YKBNK TI 16,432
Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 0.55 0.47 0.00 2.37 2.37 0.43 0.43 0.00 2.78 2.78 0.55 0.55 0.00 3.34 3.34 0.61 0.61 0.06 3.89 3.89 41.0 1.9 99.8 3.4 2.5 2.0 0.0 77.1 22.2 44.6 1.3 111.6 2.8 2.0 1.5 0.0 75.0 16.8 40.2 1.5 117.7 3.0 2.3 1.6 0.0 70.0 18.1 38.3 1.7 123.2 3.5 2.7 1.8 0.0 67.0 17.0 9.2 7.6 10.3 76.0 52.0 24.8 -2.0 6.6 -8.0 -20.8 -8.3 17.2 22.8 10.8 32.4 27.6 27.6 19.9 14.7 9.2 18.4 10.7 10.7 16.7 12/2010a 12/2011e 12/2012e 12/2013e
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Industrials
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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)

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.
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.
Levent Bayar* Analyst HSBC Yatrm Menkul Deerler A.. +90 212 376 4617 leventbayar@hsbc.com.tr *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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
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.
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
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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.
Low interest rate environment should be positive for Adana Cimento
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 8.518.5%. Since our target price implies a 40% potential return, we upgrade our rating to Overweight from Neutral.
Risks
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
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.
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Financials & valuation: Adana Cimento

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to ASP - Domestic (TRY/t) Sales volume (m tonnes) Domestic market sales (m tonne Export sales (m tonnes) 12/2010a 76.0 3.2 2.3 0.9 12/2011e 78.3 3.3 2.4 0.9
Overweight
12/2012e 78.3 3.4 2.4 0.9 12/2013e 83.7 3.4 2.5 1.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 7 258 149 26 734 28 60 35 446 361 7 254 242 85 822 28 140 55 454 390 7 275 271 129 873 48 140 11 485 376 7 329 192 45 847 51 112 67 485 431 91 -17 -17 -63 92 135 108 -45 -45 -58 20 90 48 -80 -80 -40 -45 -17 74 -80 -80 -50 56 24 305 68 -22 46 74 116 116 -13 102 102 328 74 -18 56 41 80 80 -14 67 67 347 73 -20 53 40 85 85 -14 71 71 359 72 -23 49 40 59 59 -10 49 49
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.4 5.6 1.2 6.4 1.5 35.0 9.4 12/2011e 1.3 5.4 1.1 9.9 1.4 23.4 8.7 12/2012e 1.1 4.8 1.1 9.3 1.3 -4.4 6.0 12/2013e 1.3 5.7 1.0 13.4 1.3 6.2 7.4
Note: * = Based on HSBC EPS (fully diluted)
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 4.11 Target price (TRY) ADANA.IS 380 86 Turkey Levent Bayar 5.75 Potent'l return (%) 39.9
Bloomberg (Equity) ADANA TI Market cap (TRYm) 701 Enterprise value (TRYm) 441 Sector CONSTRUCTION MATERIALS Contact 90 212 376 46 17
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.24 1.16 0.38 2.83 0.13 0.76 0.36 2.89 0.12 0.80 0.24 3.08 0.07 0.56 0.30 3.08 0.9 11.4 21.0 14.9 22.3 15.1 7.8 0.5 261.7 0.9 11.2 14.8 8.6 22.5 16.9 12.2 0.7 194.4 0.9 10.5 15.1 8.3 21.1 15.3 2.2 0.1 452.2 0.9 9.1 10.1 5.7 20.0 13.7 13.7 0.9 110.6 4.2 -13.5 -28.5 23.7 29.9 7.6 9.0 21.0 -30.6 -34.8 5.8 -1.1 -4.3 6.1 6.1 3.4 -2.0 -7.8 -30.4 -30.4 12/2010a 12/2011e 12/2012e 12/2013e
7 6 5 4 3 2 1 2009
Adana Cimento Source: HSBC
7 6 5 4 3 2 1 2010
2011
2012
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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

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.
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.
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 companys overall profitable market share score is medium (3). We
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
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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.
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.
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.
Low interest rate environment should be positive for Akcansa

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.
A low interest environment should have a positive 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.
Weak TRY environment should be positive in the short term and negative in the long term for Akcansa
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Risks
The key downside risk to our rating is a strongerthan-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.
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Financials & valuation: Akcansa

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to ASP - Domestic (TRY/t) Total sales vol. (m tonnes) Domestic market sales (m tonne Export sales (m tonnes) 12/2010a 82.0 8.5 6.5 2.0 12/2011e 87.7 8.9 6.8 2.1
Overweight
12/2012e 93.0 9.8 7.6 2.2 12/2013e 97.7 9.8 7.5 2.3
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 129 642 312 40 1,232 188 201 161 640 855 129 638 222 -86 1,137 199 200 286 694 876 129 639 258 -103 1,175 220 160 263 750 910 129 619 334 -49 1,230 228 140 189 818 904 150 -52 -52 -39 12 121 183 -60 -60 -70 125 125 237 -40 -40 -95 -23 200 226 -20 -20 -122 -74 210 817 136 -64 72 -12 72 72 -13 59 59 942 193 -60 134 -12 114 114 -21 94 94 1,113 233 -61 171 -7 154 154 -28 126 126 1,183 257 -63 194 -5 198 198 -36 163 163
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.6 9.6 1.5 21.5 2.0 10.6 3.1 12/2011e 1.5 7.4 1.6 13.6 1.8 11.0 5.5 12/2012e 1.3 6.0 1.5 10.1 1.7 17.6 7.4 12/2013e 1.1 5.2 1.5 7.8 1.6 18.4 9.6
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 6.66 Target price (TRY) AKCNS.IS 692 20 Turkey Levent Bayar 8.50 Potent'l return (%) 27.6
Bloomberg (Equity) AKCNS TI Market cap (TRYm) 1,275 Enterprise value (TRYm) 1425 Sector CONSTRUCTION MATERIALS Contact 90 212 376 46 17
Price relative
10 9 8 7 6 5 4 3 2 1 2009
Akcansa Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.31 0.31 0.20 3.34 0.49 0.49 0.37 3.63 0.66 0.66 0.49 3.92 0.85 0.85 0.64 4.27 1.0 7.8 8.7 4.9 16.6 8.8 11.8 24.6 1.2 93.7 1.1 12.9 14.1 7.6 20.5 14.2 16.1 40.4 1.5 64.0 1.2 16.0 17.5 10.5 20.9 15.4 34.2 34.5 1.1 90.2 1.3 17.8 20.8 13.1 21.7 16.4 49.4 22.7 0.7 120.1 15.2 -20.7 -28.5 -19.1 -20.4 15.2 42.5 86.3 58.1 57.9 18.2 20.5 28.2 34.8 34.8 6.3 10.4 13.3 28.8 28.8 12/2010a 12/2011e 12/2012e 12/2013e
10 9 8 7 6 5 4 3 2 1 2010
2011
2012
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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
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 companys improving profitability leading to a medium score overall.
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 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.
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 companys profitability should improve.
Market fragmentation structure is medium
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
The States 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
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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.
Low interest rate environment should be positive for AKNR
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.
A low interest environment should have a positive 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

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
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 FXrelated 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.
Revision to forecasts (TRYmn) Sales EBITDA EBITDA margin Net profit ______________New ______________ FY11e FY12e FY13e 519 110 21% -6 582 139 24% 62 610 161 26% 78 ______________Old _______________ _________ Change (%) _________ FY11e FY12e FY13e FY11e FY12e FY13e 519 115 22% 61 582 144 25% 88 610 167 27% 89 0% -4% 1% -110% 0% -4% 1% -30% 0% -4% 1% -12%
Source: HSBC estimates, company data
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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.
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Financials & valuation: Akenerji

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Tariff prices (TRY/MWh) DUY (free market) prices (TRY/ Natural Gas prices (TRY/mcm) Power output (GWh) 12/2010a 151.1 122.5 491 2,811 12/2011e 155.2 131.1 511 3,079
Overweight
12/2012e 166.1 140.3 537 3,254 12/2013e 177.7 150.1 563 3,183
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 37 1,353 245 40 1,913 220 926 886 766 1,375 37 1,377 239 3 1,931 241 929 925 760 1,409 37 1,401 260 4 1,976 264 887 884 822 1,431 37 1,400 311 46 2,026 272 848 803 900 1,430 111 -570 -551 0 369 -589 29 -68 -68 0 39 -58 110 -68 -68 0 -42 -28 123 -43 -43 0 -81 26 428 28 -28 0 -57 -27 -27 1 -26 -26 519 110 -44 66 -70 -8 -8 2 -6 -6 582 139 -44 95 -70 79 79 -16 62 62 610 161 -44 117 -65 100 100 -20 78 78
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 4.0 60.8 1.3 1.5 -70.4 0.0 12/2011e 3.4 16.0 1.3 1.5 -6.9 0.0 12/2012e 3.0 12.4 1.2 18.0 1.4 -3.3 0.0 12/2013e 2.7 10.2 1.1 14.3 1.2 3.1 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.97 Target price (TRY) AKENR.IS 606 25 Turkey Levent Bayar 4.60 Potent'l return (%) 55.0
Bloomberg (Equity) AKENR TI Market cap (TRYm) 1,116 Enterprise value (TRYm) 1762 Sector INDEPENDENT POWER PRODUCERS Contact 90 212 376 46 17
Price relative
6 6 5 4 3 2 1 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value -0.10 -0.10 0.00 2.04 -0.02 -0.02 0.00 2.02 0.16 0.16 0.00 2.19 0.21 0.21 0.00 2.39 0.4 0.0 -3.6 1.6 6.6 0.0 0.5 115.8 31.2 12.5 0.4 3.8 -0.8 2.6 21.2 12.7 1.6 122.0 8.4 3.1 0.4 5.3 7.8 6.1 23.9 16.3 2.0 107.5 6.4 12.5 0.4 6.5 9.1 6.6 26.4 19.2 2.5 89.1 5.0 15.4 -7.6 -53.8 -100.4 -244.2 -126.1 21.2 288.4 12.1 26.1 43.7 4.7 15.9 23.3 26.4 26.4 12/2010a 12/2011e 12/2012e 12/2013e
5 4 3 2 1 0 2009
Akenerji Source: HSBC
2011
2012
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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

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.
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.
Aksa Enerjis 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.
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's market share momentum is strong, scoring level (5) on our score card, as the companys ambitious expansion plans have increased its capacity significantly in the last five years (CAGR 30% vs 5% for the market). We
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The States 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).
Low interest rate environment should be positive for Aksa Enerji
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 actual Sales EBITDA EBITDA m Net profit _____ 2011e _______ _____ 2012e _____ old new chg(%) old new chg(%) 0% 1,766 1,766 -15% 417 359 -3% 24% 20% -94% 204 154 0% -14% -3% -24%
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.
Weak TRY environment should be negative for 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.
911 1,492 1,492 190 330 281 21% 22% 19% 61 146 9
Investment thesis
Aksa Enerji is Turkeys 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 Enerjis 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
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.
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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).
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Financials & valuation: Aksa Enerji

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Tariff prices (TRY/MWh) DUY (spot) prices (TRY/MWh) Natural Gas prices (TRY/mcm) Power output (GWh) Blended PLF (%) Effective installed capacity 12/2010a 152.5 162.0 46.0 4,576 41 1,398
Overweight (V)
12/2011e 163.3 162.0 47.8 8,375 53 1,819 12/2012e 174.8 173.3 50.2 9,539 57 1,940 12/2013e 187.0 185.5 52.7 11,482 62 2,165
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 6 1,332 960 78 2,385 239 1,276 1,197 824 1,980 6 1,696 870 -345 2,659 549 1,276 1,621 833 2,369 6 1,796 870 -115 2,760 637 1,140 1,256 981 2,151 6 1,772 1,005 -166 2,869 776 965 1,130 1,127 2,172 -161 -405 -354 0 212 -613 47 -471 -471 -7 424 -264 578 -206 -206 -7 -366 382 237 -81 -81 -31 -125 156 911 190 -59 131 -82 85 85 -24 61 61 1,492 281 -106 176 -49 12 12 -2 9 9 1,766 359 -106 253 -50 193 193 -39 154 154 2,114 369 -106 263 -42 222 222 -44 177 177
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 3.0 14.4 1.4 26.8 2.0 -39.8 0.0 12/2011e 2.1 11.2 1.3 176.6 2.0 -17.1 0.4 12/2012e 1.6 7.8 1.3 10.5 1.7 24.8 1.9 12/2013e 1.3 7.2 1.2 9.2 1.4 10.1 2.2
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.82 Target price (TRY) AKSEN.IS 883 6 Turkey Levent Bayar 5.80 Potent'l return (%) 105.8
Bloomberg (Equity) AKSEN TI Market cap (TRYm) 1,629 Enterprise value (TRYm) 3163 Sector INDEPENDENT POWER PRODUCERS Contact 90 212 376 46 17
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.11 0.11 0.00 1.43 0.02 0.02 0.01 1.44 0.27 0.27 0.05 1.70 0.31 0.31 0.06 1.95 0.5 5.1 9.4 5.6 20.8 14.4 2.3 145.3 6.3 0.7 6.5 1.1 1.9 18.9 11.8 5.7 194.6 5.8 2.9 0.8 9.0 17.0 7.2 20.3 14.3 7.1 128.1 3.5 46.0 1.0 9.8 16.8 7.5 17.5 12.5 8.8 100.3 3.1 21.0 3.8 -16.4 -5.9 -20.0 -30.3 63.7 48.4 34.4 -86.4 -84.9 18.3 27.4 43.8 1573.9 1574.0 19.7 3.0 4.2 14.9 14.9 12/2010a 12/2011e 12/2012e 12/2013e
6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 2009
Aksa Enerji Source: HSBC
6.5 6 5.5 5 4.5 4 3.5 3 2.5 2 2010

2011
2012
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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

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 20082009 turmoil. However, we believe the outlook may improve for Anadolu Cam as consumer spending has now recovered substantially.
Anadolu Cam had an adjusted ROE of 11% in 2010. When we look at the individual regions, Turkey's ROE was 18% and Russias 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)
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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.
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 Cams 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
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
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.
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Revisions to forecasts (TRYm) Sales EBITDA margin Net Income 2010a actual _____ 2011e ______ _____2012e _____ old new chg(%) old new chg(%) 4% 1,267 1,345 12% 317 366 2ppt 25% 27% 20% 129 142 6% 15% 2ppt 10%
Risks
1,117 1,171 1,220 268 293 328 24% 25% 27% 102 111 133
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.

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.
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Financials & valuation: Anadolu Cam

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Turkey contain. sales grw. (%) Russia contain. sales grw. (%) USD/TRY - yearend 12/2010a 10.0 7.0 1.5112 12/2011e 6.0 7.0 1.7550
Overweight
12/2012e 6.0 7.0 1.6000 12/2013e 6.0 7.0 1.5500
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 3 909 685 253 1,744 153 658 406 788 1,191 3 869 833 446 1,785 159 609 163 871 1,100 3 984 849 422 1,916 171 613 191 987 1,243 3 1,008 937 466 2,028 183 593 127 1,106 1,298 352 -215 -215 26 -97 110 286 -276 -276 27 -243 -35 403 -198 -198 28 28 151 419 -461 -461 37 -65 -101 1,117 268 -140 128 -1 127 127 -26 102 102 1,220 328 -147 180 -10 170 170 -34 133 133 1,345 366 -167 199 -17 182 182 -36 142 142 1,483 391 -180 211 -21 189 189 -38 147 147
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.2 5.0 1.1 10.7 1.4 11.7 2.3 12/2011e 1.0 3.6 1.1 8.2 1.3 -3.4 2.4 12/2012e 0.9 3.3 1.0 7.7 1.1 15.0 2.6 12/2013e 0.8 2.9 0.9 7.4 1.0 -10.0 3.4
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.15 Target price (TRY) ANACM.IS 592 20 Turkey Levent Bayar 4.50 Potent'l return (%) 43.0
Bloomberg (Equity) ANACM TI Market cap (TRYm) 1,091 Enterprise value (TRYm) 1174 Sector CONTAINERS & PACKAGING Contact 90 212 376 46 17
Price relative
6 5 6 5 4 3 2 1 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 23.2 41.2 261.2 9472.5 556.6 9.2 22.2 40.8 33.7 30.1 10.2 11.6 10.6 6.9 6.8 10.2 6.9 5.8 4.1 3.9 12/2010a 12/2011e 12/2012e 12/2013e
4 3 2 1 0 2009
Anadolu Cam Source: HSBC
2011
2012
Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value
1.0 8.7 14.3 3.6 24.0 11.4 479.6 45.2 1.5 86.6
1.1 12.6 16.0 1.2 26.8 14.8 33.3 16.6 0.5 175.0
1.1 13.6 15.3 8.2 27.2 14.8 21.4 17.4 0.5 210.6
1.2 13.3 14.1 7.4 26.4 14.2 18.5 10.4 0.3 330.7
0.29 0.29 0.07 2.27
0.38 0.38 0.08 2.52
0.41 0.41 0.08 2.85
0.43 0.43 0.11 3.19
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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

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.
performance clearly shows the companys managerial skills.

Sustainable growth outlook is strong
Erol Hullu* Analyst HSBC Yatrm Menkul Deerler A.. +90 212 376 4616 erolhullu@hsbc.com.tr *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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.
Anadolu Efes has a similar ROE to that of its EM peers but ranks higher in terms of market share. We calculate the companys 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
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.
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Low interest rate environment should be neutral for Anadolu Efes

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 multiplesbased 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
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.
Weak TRY environment should be negative for 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.
The companys 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.
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Financials & valuation: Anadolu Efes

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Domestic Beer volume (ml) EBI volume (ml) Soft Drinks volume (m.uc) Beer export volume growth % 12/2010a 851 1,570 665 5 12/2011e 827 1,604 756 5
Underweight
12/2012e 852 1,706 840 5 12/2013e 877 1,812 936 5
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,233 2,178 2,141 994 5,589 905 1,764 770 2,767 3,652 1,357 2,052 2,713 1,078 6,163 934 1,999 921 3,052 4,111 1,357 1,934 3,258 1,129 6,594 1,007 2,009 879 3,496 4,412 1,357 1,791 3,943 1,582 7,142 1,043 2,071 489 3,926 4,467 893 -644 -644 -144 -13 172 1,450 -234 -234 -216 151 1,128 1,508 -250 -250 -200 -42 1,175 1,413 -271 -271 -258 -391 1,064 4,169 1,019 -316 703 -6 659 659 -140 504 504 4,609 1,049 -341 708 -13 656 656 -140 501 501 5,047 1,204 -375 829 -26 837 837 -173 645 645 5,624 1,336 -420 915 -14 893 893 -185 688 688
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 21.00 Target price (TRY) AEFES.IS 5,127 45 Turkey Erol Hullu 21.80 Potent'l return (%) 3.8
Bloomberg (Equity) AEFES TI Market cap (TRYm) 9,450 Enterprise value (TRYm) 10392 Sector BEVERAGES Contact 90 212 376 4616
Price relative
25 25 20 15 10 5 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 1.12 1.12 0.32 6.15 1.11 1.11 0.48 6.78 1.43 1.43 0.45 7.77 1.53 1.53 0.57 8.72 1.1 15.2 19.4 10.5 24.4 16.9 173.7 27.4 0.8 116.0 1.2 14.3 17.2 9.9 22.8 15.4 83.9 29.6 0.9 157.4 1.2 15.4 19.7 11.4 23.9 16.4 46.2 24.6 0.7 171.4 1.3 16.3 18.5 11.2 23.7 16.3 98.0 12.1 0.4 289.0 9.4 11.2 7.7 21.1 19.2 10.6 3.0 0.7 -0.4 -0.6 9.5 14.7 17.0 27.6 28.8 11.4 10.9 10.4 6.7 6.6 12/2010a 12/2011e 12/2012e 12/2013e
20 15 10 5 2009
Anadolu Efes Source: HSBC
2011
2012
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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)

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).
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.
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
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
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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

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 Revenue EBITDA margin Net profit 2011e old 7,744 910 11.8% 569 2011e new 7,627 859 11.3% 523 2012e old 8,363 988 11.8% 636 2012e new 8,147 945 11.6% 592 2013e old 9,077 1,071 11.8% 674 2013e new 8,695 1,028 11.8% 642
Arcelik operates with various currencies but its 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, Arceliks 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 Africas 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.
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 Arceliks TV segment.
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Financials & valuation: Arcelik

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Turkish GDP growth EUR/TRY - year end EUR/TRY - year avg. CBT Policy rates (year-end) Arcelik domestic unit sales gr Arcelik int'l unit sales gr. 12/2010a 9.0 2.01 2.00 6.5% 10% 7% 12/2011e 7.0 2.52 2.52 5.5% 10% 8%
Overweight
12/2012e 3.0 2.61 2.56 5.5% 6% 5% 12/2013e 5.1 2.69 2.65 5.0% 5% 6%
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 469 1,309 4,748 1,318 7,322 1,628 2,058 739 3,342 3,580 469 1,381 5,715 1,986 8,450 1,742 2,702 716 3,676 3,838 469 1,479 6,281 2,338 9,212 1,828 2,936 598 4,007 4,062 469 -2,436 6,708 2,544 5,834 1,967 3,027 483 4,293 230 653 -196 -196 -100 -464 377 913 -290 -290 -250 -23 621 939 -321 -321 -262 -119 615 962 -344 -344 -355 -114 611 6,936 758 -193 638 7 657 657 -107 517 479 7,627 859 -209 650 -5 658 658 -115 523 523 8,147 945 -223 722 2 737 737 -130 592 592 8,695 1,028 -238 790 13 818 818 -160 642 642
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 6.86 Target price (TRY) ARCLK.IS 2,515 21 Turkey Cenk Orcan 9.00 Potent'l return (%) 31.2
Bloomberg (Equity) ARCLK TI Market cap (TRYm) 4,635 Enterprise value (TRYm) 4540 Sector Household Durables Contact 90 212 376 46 14
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.77 0.71 0.37 4.95 0.77 0.77 0.39 5.44 0.88 0.88 0.53 5.93 0.95 0.95 0.66 6.35 1.9 13.2 15.9 11.4 10.9 9.2 21.7 1.0 88.3 2.1 14.5 14.9 10.9 11.3 8.5 177.7 19.1 0.8 127.4 2.1 15.1 15.4 11.1 11.6 8.9 14.6 0.6 157.1 4.1 29.6 15.5 13.7 11.8 9.1 11.0 0.5 199.1 5.2 -13.4 -14.8 13.9 15.4 10.0 13.4 2.0 0.2 9.1 6.8 10.0 11.0 12.0 13.2 6.7 8.8 9.5 11.0 8.3 12/2010a 12/2011e 12/2012e 12/2013e
10 9 8 7 6 5 4 3 2 1 0 2009
Arcelik Source: HSBC
10 9 8 7 6 5 4 3 2 1 0 2010
2011
2012
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Aygaz
Aygazs 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)

Aygaz has a strong brand and the highest market share in the Turkish LPG market. Excluding autoLPG, which includes the presence of large fuel retailers, it faces a lower competitive threat. AutoLPG is the fastest growing fuel in the domestic market, rapidly replacing gasoline, and the market offers higher competitive intensity than for other fuels.
Aygazs 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
Bulent Yurdagul* Analyst HSBC Yatrm Menkul Deerler A.. +90 212 376 4612 bulentyurdagul@hsbc.com.tr *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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.
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.
Low interest rate environment should be neutral
Aygazs 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.
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.
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However, since Aygazs product prices are linked to USD, a weaker TRY supports operational profitability which compensates for its negative impact on the P&L.

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 Aygazs Underweight rating.
Risks
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 EBIT Net profit 266 186 429 311 228 455 -14.5% -18.4% -5.7% 284 207 245 321 244 273 -11.5% -15.2% -10.3%
Better-than-expected LPG margins, lower-thanexpected competition in the market and higher growth in demand are the main upside risks to our valuation. Aygazs 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 LPG business valuation Electricity business valuation Valuation of core businesses Valuation of participations Total enterprise value Less: minority offset Less: net debt Equity value
Basis 50% DCF and 50% EV/EBITDA Based on AES deal a+b At HSBC target mcap with a conglomerate discount of 20% (excluding Opet which is valued at a 10.3x PE multiple) at transaction price
1,651 151 1,801 1,022 2,823 (25) 435 3,233
5.5 0.5 6.0 3.4 9.4 (0.1) 1.4 10.78
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Financials & valuation: Aygaz

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Turkish cylinder LPG market gr Turkish Auto LPG market growth Cylinder LPG sales margin Auto LPG sales margin 12/2010a -0.08 0.08 679 359 12/2011e -0.05 0.06 697 365
Underweight
12/2012e -0.05 0.04 670 339 12/2013e -0.05 0.04 671 336
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 8 529 1,246 262 2,804 679 111 -151 1,978 841 8 529 1,425 515 2,983 561 81 -435 2,263 886 8 531 1,476 569 3,037 561 51 -518 2,337 885 8 533 1,609 695 3,171 561 20 -675 2,515 894 388 -81 -54 -100 -231 280 202 -81 -81 -125 -283 37 325 -80 -80 -172 -84 174 347 -80 -80 -98 -156 190 4,658 306 -89 217 9 283 283 -43 239 239 5,114 266 -81 186 -6 472 472 -43 429 429 4,667 284 -77 207 -4 287 287 -40 245 245 4,549 317 -78 239 -6 323 323 -45 276 276
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 9.98 Target price (TRY) AYGAZ.IS 1,624 100 Turkey Bulent Yurdagul 10.80 Potent'l tot rtn (%) 8.2
Bloomberg (Equity) AYGAZ TI Market cap (TRYm) 2,994 Enterprise value (TRYm) 1574 Sector Oil & Gas Contact 90 212 376 46 12
Price relative
14 12 10 14 12 10 8 6 4 2 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.80 0.80 0.42 6.59 1.43 1.43 0.57 7.54 0.82 0.82 0.33 7.79 0.92 0.92 0.37 8.38 5.6 22.2 13.0 8.6 6.6 4.7 -7.5 -0.5 5.9 19.6 20.2 15.0 5.2 3.6 48.0 -18.9 -1.6 5.3 20.1 10.7 8.3 6.1 4.4 71.1 -21.9 -1.8 5.1 23.1 11.4 9.1 7.0 5.3 49.8 -26.4 -2.1 23.0 -21.6 -26.0 -24.3 -23.9 9.8 -12.9 -14.3 66.7 79.1 -8.7 6.8 11.4 -39.3 -42.9 -2.5 11.5 15.6 12.6 12.7 12/2010a 12/2011e 12/2012e 12/2013e
8 6 4 2 0 2009
Aygaz Source: HSBC
2011
2012
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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

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 domestic sales volume declined 52% versus a total market contraction of 4%.
The companys 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.
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
We dont 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.
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Low interest rate environment should be neutral for Bagfas
Forecast changes 2010 TRYm Net sales EBIT EBITDA EBITDA margin Net profit
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
____2011e ____ old new 350 73 84 24% 68 354 76 87 25% 79
____2012e ____ old new 307 22 34 11% 26 318 24 36 11% 23
280 53 63 23% 47
Bagfas is one of the winners when TRY depreciates. The companys 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 Bagfass net sales to fall 10% in the lower pricing environment.
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.
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Financials & valuation: Bagfas

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Average sales price TRY/ton Sales volume (kt) Production (kt) CUR % 12/2010a 545 514 472 72 12/2011e 772 458 436 67
Underweight
12/2012e 633 502 462 71 12/2013e 665 527 475 73
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 87 160 99 250 59 0 -99 186 89 0 84 238 150 325 75 5 -145 240 97 0 80 209 147 291 57 5 -142 224 84 0 77 249 166 329 67 5 -161 252 93 73 -7 -7 0 -55 56 77 -8 -8 -24 -46 48 45 -8 -8 -39 3 31 45 -11 -11 -12 -19 24 280 63 -10 53 0 58 58 -11 47 47 354 87 -12 76 0 98 98 -20 79 79 318 36 -12 24 0 29 29 -6 23 23 350 57 -13 43 0 49 49 -10 40 40
Issuer information Share price (TRY) 165.50 Target price (TRY) 170.50 Potent'l return (%) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst BAGFS.IS 269 60 Turkey Erol Hullu 3.0
Bloomberg (Equity) BAGFS TI Market cap (TRYm) 497 Enterprise value (TRYm) 350 Sector CHEMICALS Contact 90 212 376 4616
Price relative
201 181 161 141 121 101 81 61 41 21 2009
Bagfas Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 15.66 15.66 0.00 61.98 26.22 26.22 8.14 80.06 7.76 7.76 13.11 74.71 13.18 13.18 3.88 84.01 2.9 44.9 28.9 20.0 22.5 18.8 -53.1 -1.6 3.8 65.4 36.9 27.4 24.7 21.5 -60.4 -1.7 3.5 20.9 10.0 7.6 11.3 7.5 -63.4 -3.9 4.0 39.1 16.6 12.8 16.2 12.3 -63.8 -2.8 4.4 26.5 38.7 44.2 70.8 67.4 -10.3 -58.8 -68.8 -70.4 -70.4 10.4 57.3 82.7 69.8 69.8 12/2010a 12/2011e 12/2012e 12/2013e
201 181 161 141 121 101 81 61 41 21 2010

2011
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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

BIM scores high on our overall scorecard. The companys 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.
forward. We expect the company to grow by taking share from unorganised retailers.
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 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 BIMs 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.
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
BIMs 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.
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Low interest rate environment should be 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
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 BIMs 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.
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.

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
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. Were yet to see whether the company has made the right decision over the past years.
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.
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Financials & valuation: BIM

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Store Number GPM (%) Opex/Sales (%) Capex/Sales (%) 12/2010a 2,951 16.8 -12.4 2.2 12/2011e 3,326 16.4 -12.0 2.2
Neutral
12/2012e 3,676 16.1 -12.0 2.0 12/2013e 3,676 16.1 -12.0 2.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 3 555 815 258 1,372 832 8 -250 500 283 3 649 882 288 1,534 923 0 -288 611 324 3 741 1,064 361 1,808 1,102 0 -361 707 346 3 830 1,281 462 2,113 1,291 0 -462 822 360 397 -142 -142 -133 -83 205 465 -171 -171 -182 -38 234 557 -186 -186 -235 -73 302 641 -202 -202 -264 -101 358 6,574 356 -65 292 10 306 306 -60 246 246 7,912 425 -76 349 12 366 366 -73 293 293 9,420 487 -94 393 13 412 412 -82 330 330 11,010 567 -114 453 14 474 474 -95 379 379
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 54.75 Target price (TRY) BIMAS.IS 4,509 55 Turkey Erol Hullu 59.00 Potent'l return (%) 7.8
Bloomberg (Equity) BIMAS TI Market cap (TRYm) 8,311 Enterprise value (TRYm) 8023 Sector MULTILINE RETAIL Contact 90 212 376 4616
Price relative
69 59 69 59 49 39 29 19 9 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 1.62 1.62 0.88 3.30 1.93 1.93 1.20 4.03 2.17 2.17 1.54 4.65 2.50 2.50 1.74 5.42 24.6 87.6 55.3 19.2 5.4 4.4 -49.9 -0.7 26.1 92.1 52.7 19.5 5.4 4.4 -47.1 -0.7 28.2 94.0 50.0 19.1 5.2 4.2 -51.1 -0.7 31.2 102.7 49.6 18.8 5.1 4.1 -56.2 -0.8 23.5 13.4 12.7 14.0 15.4 20.3 19.3 19.8 19.7 19.3 19.1 14.6 12.6 12.5 12.5 16.9 16.3 15.3 15.0 15.0 12/2010a 12/2011e 12/2012e 12/2013e
49 39 29 19 9 2009
BIM Source: HSBC
2011
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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)

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 Bizims 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, 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 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 its 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 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 Bizims sustainable growth outlook is 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,
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Bizim, with strong financial backing from Yildiz Holdings, would likely not be affected in a negative manner. The companys 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.
Low interest rate environment should be positive for Bizim

Forecast changes TRYm Sales EBITDA EBIT Net profit
______ 2011e________ _______ 2012e _______ Old New Old New 1757 65 57 34 1751 62 53 31 2180 85 74 45 2177 81 70 42
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 Bizims customers which in turn will increase the traffic and basket sizes in its stores.
Weak TRY environment should be neutral for Bizim
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
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 Bizims 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.
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 companys 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.
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Financials & valuation: Bizim Toptan Satis

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Stores added Total number of stores Lfl sales growth % - tobacco Lfl sales growth % - non-tobac 12/2010a 12 109 3.0 16.0
Overweight (V)
12/2011e 16 125 1.0 13.9 12/2012e 20 145 -1.0 15.4 12/2013e 20 165 -1.0 14.4
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 43 232 34 280 194 0 -33 82 48 0 69 286 58 380 228 50 -8 100 69 0 76 353 66 454 281 50 -16 121 83 0 84 400 52 508 345 10 -42 151 86 36 -12 -10 -14 -24 24 43 -54 -54 -14 25 -10 47 -18 -18 -21 -8 29 77 -20 -20 -30 -27 57 1,452 55 -7 47 -10 36 36 -7 28 28 1,751 62 -8 53 -14 39 39 -8 31 31 2,177 81 -10 70 -17 53 53 -11 42 42 2,699 105 -12 93 -18 75 75 -15 60 60
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.6 15.5 17.7 31.0 10.7 2.8 1.6 12/2011e 0.5 13.8 12.3 28.1 8.8 -1.2 1.5 12/2012e 0.4 10.5 10.2 20.7 7.3 3.4 2.4 12/2013e 0.3 7.8 9.5 14.7 5.8 6.6 3.4
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 22.00 Target price (TRY) BIZIM.IS 477 40 Turkey Erol Hullu 37.30 Potent'l return (%) 69.6
Bloomberg (Equity) BIZIM TI Market cap (TRYm) 880 Enterprise value (TRYm) 852 Sector SPECIALTY RETAIL Contact 90 212 376 4616
Price relative
35 33 31 29 27 25 23 21 19 17 2009
Bizim Toptan Satis Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.71 0.71 0.35 2.05 0.78 0.78 0.34 2.50 1.06 1.06 0.53 3.03 1.49 1.49 0.75 3.78 31.0 80.7 41.7 11.5 3.8 3.3 5.2 -40.5 -0.6 29.9 72.8 34.4 9.5 3.5 3.0 4.4 -8.2 -0.1 28.6 74.0 38.4 10.2 3.7 3.2 4.7 -13.0 -0.2 31.9 87.5 43.9 12.4 3.9 3.4 5.9 -28.1 -0.4 17.4 22.8 29.0 50.3 -25.1 20.6 13.1 12.4 10.0 10.5 24.3 30.8 32.1 35.6 35.6 23.9 30.0 31.3 40.6 40.6 12/2010a 12/2011e 12/2012e 12/2013e
35 33 31 29 27 25 23 21 19 17 2010
2011
2012
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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

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.
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.
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
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
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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 TRY environment should be positive in the short term and negative in the long term for Cimsa
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.
Low interest rate environment should be positive for 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 valuation of TRY7.6 per share (from TRY10.5). 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 valuation of TRY12.6 per share (from TRY14.7). 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
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.
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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.
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Financials & valuation: Cimsa

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to ASP - Domestic (TRY/t) Sales volume (m tonnes) Domestic market sales (m tonne Export sales (m tonnes) 12/2010a 80.3 5.6 4.2 1.4 12/2011e 94.1 5.6 4.2 1.4
Overweight
12/2012e 99.7 5.6 4.2 1.4 12/2013e 105.7 5.6 4.2 1.4
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 137 500 252 11 1,136 95 114 104 875 784 137 442 597 349 1,329 93 299 -50 906 734 137 503 488 228 1,281 97 228 0 925 802 137 507 476 204 1,272 86 173 -32 982 828 126 -47 -47 -95 42 129 166 -101 -101 -116 -154 66 207 -45 -45 -124 50 136 234 -30 -30 -168 -31 167 708 183 -37 146 -7 130 130 -27 103 103 738 203 -38 165 -20 153 153 -28 126 126 775 212 -41 171 -10 164 164 -30 135 135 811 219 -43 176 -4 222 222 -40 182 182
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 7.50 Target price (TRY) CIMSA.IS 550 27 Turkey Levent Bayar 11.00 Potent'l return (%) 46.7
Bloomberg (Equity) CIMSA TI Market cap (TRYm) 1,013 Enterprise value (TRYm) 813 Sector CONSTRUCTION MATERIALS Contact 90 212 376 46 17
Price relative
13 13 11 9 7 5 3 1 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.76 0.76 0.70 6.48 0.93 0.93 0.86 6.71 1.00 1.00 0.92 6.85 1.34 1.34 1.24 7.27 1.0 15.5 11.4 9.6 25.8 20.5 24.5 11.9 0.6 121.8 1.0 17.8 14.1 11.8 27.5 22.3 10.2 -5.5 -0.2 1.0 18.3 14.7 11.2 27.4 22.1 21.9 0.0 0.0 1.0 17.7 19.1 14.6 27.0 21.7 56.2 -3.2 -0.1 15.2 2.6 0.1 -2.1 -4.5 4.1 11.3 13.3 17.6 21.9 5.0 4.5 3.8 7.1 7.1 4.6 2.9 2.8 34.7 34.7 12/2010a 12/2011e 12/2012e 12/2013e
11 9 7 5 3 1 2009
Cimsa Source: HSBC
2011
2012
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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

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.
international markets we expect the company to maintain/increase its market share going forward.
The companys 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 CCIs magnitude. A dominant position in Turkey, growing presence in international markets and comparable ROE level means CCI ranks well on this metric.
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 doesnt 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.
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 companys position is protected, in our view.
Low interest rate environment should be positive for CCI
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
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
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consumer confidence tends to improve which in turn improves the companys product mix.
Weak TRY environment should be negative for 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 CCIs bottom line, especially in Q3 11.
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
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 wed expect CCIs product mix to be hurt as consumers will likely trade down. During the downbeat market of 2009 the companys EBITDA margin contracted by 2.5pp y-o-y.
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.
Forecast changes TRYm Net sales EBIT EBITDA EBITDA margin Net profit
______ 2011e _______ Old New 3,336 339 523 15.7% 215 3,357 307 491 14.6% 172
_____ 2012e_______ Old New 3,865 408 629 16.3% 295 3,739 355 570 15.2% 276

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
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 nonvolatile Turkish stocks is 8.5% to 13.5%. As our
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target price implies a -6% potential return we downgrade our rating from Neutral to Underweight.
Risks
Stronger currencies versus USD would positively affect CCIs 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.
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Financials & valuation: Coca-Cola Icecek

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Sales volume-Turkey Sales volume-International Opex/sales % USD/TRY average CPI y-o-y 12/2010a 494 171 27.2 1.477 8.6 12/2011e 554 202 26.6 1.770 5.7
Underweight
12/2012e 608 233 26.6 1.700 7.4 12/2013e 668 267 27.1 1.700 7.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 459 1,203 1,294 599 3,014 332 1,246 647 1,417 2,025 448 1,449 1,341 514 3,300 377 1,380 865 1,520 2,346 437 1,589 1,439 522 3,533 421 1,344 822 1,744 2,522 427 1,766 1,640 624 3,907 470 1,429 805 1,983 2,739 304 -160 -184 -50 -57 144 345 -403 -410 -70 219 -57 426 -336 -363 -52 -44 89 573 -407 -467 -83 -16 165 2,753 445 -163 281 -9 255 255 -57 198 198 3,357 491 -184 307 -13 222 222 -50 172 172 3,739 570 -215 355 -22 351 351 -74 276 276 4,289 683 -249 434 -25 409 409 -86 322 322
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 23.20 Target price (TRY) CCOLA.IS 3,201 25 Turkey Erol Hullu 21.80 Potent'l return (%) -6.0
Bloomberg (Equity) CCOLA TI Market cap (TRYm) 5,901 Enterprise value (TRYm) 6767 Sector BEVERAGES Contact 90 212 376 4616
Price relative
27 27 22 17 12 7 2 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.78 0.78 0.20 5.57 0.68 0.68 0.28 5.97 1.08 1.08 0.20 6.86 1.27 1.27 0.33 7.80 1.4 11.0 14.8 7.0 16.1 10.2 48.7 45.1 1.5 47.0 1.5 10.9 11.7 5.8 14.6 9.1 37.6 56.3 1.8 39.9 1.5 11.5 16.9 8.6 15.2 9.5 25.9 46.6 1.4 51.8 1.6 13.0 17.3 9.2 15.9 10.1 27.5 40.2 1.2 71.1 14.4 30.8 35.5 18.5 16.6 21.9 10.3 9.1 -12.8 -12.8 11.4 16.1 15.6 57.6 60.2 14.7 20.0 22.3 16.7 16.7 12/2010a 12/2011e 12/2012e 12/2013e
22 17 12 7 2 2009
Coca-Cola Icecek Source: HSBC
2011
2012
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Dogan Holding
Dogan Holdings 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

A strong position in the ad market through its subsidiary Dogan Yayin and its large net cash position support Dogan Holdings competitive position and investment theme. However, slowing economic growth is a risk to its profitability in the short term.
over the last three years, we expect margins to return to normal over the next three years.
Dogan Holdings 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.
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
Dogan Holdings 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.
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
Dogans strong margins, higher asset turnover and higher financial leverage imply strong sustainable growth potential. Though margins have been volatile
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Dogan Holding NAV table TRYm Dogan yayin Holding Hurriyet Other listed Listed Companies Unlisted Companies Total Value from participations Net (Debt) / Cash Total NAV Total NAV per share (TRY) Holding Discount Target Price from NAV
Ticker DYHOL.IS HURGZ.IS
Direct Stake 75% 11%
Target price 0.77 1.5
Current Value 1,540 828 123
Value of Stake 1,148 92 50 1,289 0 1,289 1,900 3,189 1.30 40% 0.78
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.
Risks

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.
The groups 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: HSBC forecast changes (TRYm) Sales EBITDA Net profit
_____________ New _______________ ______________ Old _______________ 2011e 2012e 2013e 2011e 2012e 2013e 2,992 303 -728 3,440 352 47 3,899 419 118 3,175 294 -180 3,560 348 77 3,943 380 112
___________Difference____________ 2011e 2012e 2013e -6% 3% n.m. -3% 1% -39% -1% 10% 5%
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Financials & valuation: Dogan Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.3 3.0 0.3 2.4 0.4 -21.2 0.0 12/2011e 0.4 3.7 0.5 0.4 22.2 0.0
Neutral (V)
12/2012e 0.3 2.9 0.4 34.0 0.4 14.3 0.6 12/2013e 0.2 2.1 0.4 13.5 0.4 18.4 2.2
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 47 -544 1,298 0 -1,824 -468 372 -69 -251 0 454 428 241 -76 -258 -9 -113 274 285 -82 -264 -35 -169 356 2,850 321 -402 -81 -25 682 682 -75 656 656 2,992 303 -267 36 84 -847 -847 -137 -728 -728 3,440 352 -266 86 48 73 73 -15 47 47 3,899 419 -267 152 92 184 184 -37 118 118
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 0.65 Target price (TRY) DOHOL.IS 864 34 Turkey Bulent Yurdagul 0.78 Potent'l tot rtn (%) 20.2
Bloomberg (Equity) DOHOL TI Market cap (TRYm) 1,592 Enterprise value (TRYm) 1133 Sector Conglomerates Contact 90 212 376 46 12
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,756 929 4,780 3,663 8,033 972 2,415 -1,247 3,865 2,831 1,696 868 3,927 3,209 7,834 819 2,415 -793 4,073 2,463 1,643 808 4,108 3,322 7,915 852 2,415 -906 4,111 2,386 1,597 747 4,346 3,491 8,059 884 2,415 -1,075 4,193 2,315
Price relative
2.5 2 1.5 1 0.5 0 2009
Dogan Holding
2.5 2 1.5 1 0.5 0 2010

2011
2012
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.27 0.27 0.00 1.58 -0.30 -0.30 0.00 1.66 0.02 0.02 0.00 1.68 0.05 0.05 0.01 1.71 0.8 -1.9 17.9 10.3 11.2 -2.8 13.0 -27.0 -3.9 1.1 1.6 -18.3 -10.7 10.1 1.2 -17.3 -2.6 1.4 2.8 1.1 1.9 10.2 2.5 -19.6 -2.6 1.7 5.2 2.8 3.0 10.8 3.9 -22.7 -2.6 6.1 83.9 4.9 -5.3 -224.2 -210.9 15.0 16.0 137.2 13.3 19.2 77.6 150.9 150.9 12/2010a 12/2011e 12/2012e 12/2013e
Source: HSBC
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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)

A strong share of the growing Turkish ad market and the conclusion of long-running tax issues support Dogan Yayins 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 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 Yayins 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.
Dogan Yayin is the leader in broadcasting and print media in Turkey with brands like Hurriyet, Star TV and Kanal D. Dogan Yayins 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.
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 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
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USD305m, which should benefit from lower interest expenses when interest rates fall.

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) longterm 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
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
Turkeys domestic ad market continued its upward trend in H1 2011 with a y-o-y increase of 19%. Dogan Yayins 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.
Sale of its media assets, macroeconomic developments and the groups relationship with the government are the key potential risks, both downside and upside, to our valuation.
Dogan Yayin Holding: HSBC forecast changes (TRYm) Sales EBITDA Net profit
_____________ New _______________ ______________ Old _______________ 2011e 2012e 2013e 2011e 2012e 2013e 2,717 294 -1,163 3,139 363 47 3,584 435 112 2,914 296 -326 3,301 353 58 3,686 385 98
____________Change_____________ 2011e 2012e 2013e -7% -1% -256% -5% 3% -19% -3% 13% 14%
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Financials & valuation: Dogan Yayin Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Turkish ad spend (USDm) YTL/USD AVG. exchange rate YTL/USD year-end rate 12/2010a 2,371 2 2 12/2011e 3,098 1 1
Neutral (V)
12/2012e 3,531 2 2 12/2013e 0 0 0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,740 602 1,284 240 3,892 727 1,741 1,501 790 2,659 1,718 550 1,823 793 4,359 786 1,376 583 1,551 2,511 1,698 501 1,666 553 4,136 845 1,018 465 1,598 2,467 1,666 457 1,395 194 3,791 908 458 264 1,710 2,415 -25 -144 -81 0 29 -221 109 -126 -126 0 -918 94 289 -135 -135 0 -118 148 348 -127 -127 0 -201 226 2,620 229 -220 -128 -62 -219 -219 -62 -237 -237 2,717 294 -197 77 -64 -1,068 -1,068 -83 -1,163 -1,163 3,139 363 -199 154 -36 97 97 -19 47 47 3,584 435 -200 225 -20 188 188 -38 112 112
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.2 14.1 1.2 0.8 -12.8 0.0 12/2011e 0.9 7.9 0.9 0.4 5.4 0.0 12/2012e 0.7 6.2 0.9 28.3 0.4 8.4 0.0 12/2013e 0.6 4.8 0.9 11.8 0.4 12.5 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 0.66 Target price (TRY) DYHOL.IS 716 30 Turkey Bulent Yurdagul 0.77 Potent'l tot rtn (%) 16.2
Bloomberg (Equity) DYHOL TI Market cap (TRYm) 1,320 Enterprise value (TRYm) 2328 Sector Media Contact 90 212 376 46 12
Price relative
2.5 2 2.5 2 1.5 1 0.5 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 7.6 282.6 3.7 28.3 15.5 23.5 100.9 14.2 19.7 46.1 94.7 139.4 12/2010a 12/2011e 12/2012e 12/2013e
1.5 1 0.5 0 2009

Dogan Yayin Holding Source: HSBC
2011
2012
1.0 0.4 -27.7 -4.3 8.7 -4.9 3.7 119.6 6.5
1.1 4.0 -99.4 -25.9 10.8 2.8 4.6 28.7 2.0 18.7
1.3 5.3 3.0 2.9 11.6 4.9 10.1 22.1 1.3 62.3
1.5 7.7 6.8 4.5 12.1 6.3 21.4 11.7 0.6 131.7
-0.12 -0.12 0.00 0.79
-0.58 -0.58 0.00 1.55
0.02 0.02 0.00 1.60
0.06 0.06 0.00 1.71
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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)

Turkeys leading vehicle importer Dogus Otomotiv (DOAS) benefited strongly from the surge in domestic vehicle demand in 2010 and 2011 YTD. DOASs 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). DOASs strong distribution network in Turkey has also been an important driver behind the companys 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.
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 VWs 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.
Cenk Orcan* Analyst HSBC Yatrm Menkul Deerler A.. +90 212 376 4614 cenkorcan@hsbc.com.tr *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
DOASs 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.
DOASs 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.
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.
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Low interest rates are supportive of DOASs operations through access to cheaper financing by consumers.
Weak TRY has a negative impact
operation and stake value in parent Dogus Holding (and hence in Garanti Bank).
Dogus Otomotiv - Forecast changes TRYm Unit sales (000) Revenue EBITDA margin Net profit (adj.) 2011e 2011e 2012e 2012e 2013e 2013e old new old new old new 100 4,276 210 4.9% 153 105 4,386 229 5.8% 161 95 4,294 189 4.4% 119 98 4,339 200 4.6% 144 101 4,676 206 4.4% 161 104 4,726 217 4.6% 167
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 DOASs 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.
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 Core business Vehicle inspection Dogus Holding stake VDF Total
old 2.49 1.40 1.40 0.11 5.40
new 2.12 1.42 1.35 0.11 5.00
chg. -15% 1% -4% 0% -8%

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-ofthe-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 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.
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Financials & valuation: Dogus Otomotiv

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Domestic vehicle demand gr. DOAS unit vehicles sales gr. Turkish GDP growth EUR/TRY year average EUR/TRY year end EUR/USD year average 12/2010a 37% 75% 9.0% 1.99 2.05 1.33 12/2011e 8% 27% 7.0% 2.52 2.52 1.38
Neutral (V)
12/2012e -5% -6% 3.0% 2.56 2.61 1.40 12/2013e 5% 6% 5.1% 2.65 2.69 1.40
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) 116 -30 -30 0 -80 86 70 -123 -123 -27 43 -53 81 -28 -28 -48 -21 52 63 -29 -29 -58 -14 34 3,428 222 -21 202 -31 193 205 -43 149 161 4,386 229 -26 203 -12 201 227 -40 161 186 4,339 200 -26 174 -10 181 181 -36 144 144 4,726 217 -28 189 -18 209 209 -42 167 167
Issuer information Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 269 713 28 1,499 413 349 321 736 541 0 366 992 74 1,876 538 438 364 898 746 0 368 1,087 111 1,972 523 453 342 994 821 0 369 1,248 136 2,134 564 465 328 1,103 916 Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 4.13 Target price (TRY) DOAS.IS 493 35 Turkey Cenk Orcan 5.00 Potent'l return (%) 21.0
Bloomberg (Equity) DOAS TI Market cap (TRYm) 909 Enterprise value (TRYm) 910 Sector Autos Contact 90 212 376 46 14
Price relative
8 7 6 5 4 3 2 1 0 2009
Dogus Otomotiv Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.68 0.73 0.00 3.34 0.73 0.85 0.12 4.08 0.66 0.66 0.14 4.52 0.76 0.76 0.27 5.01 6.6 30.3 25.4 13.2 6.5 5.9 7.1 43.6 1.4 36.2 6.8 25.2 22.8 10.7 5.2 4.6 19.1 40.5 1.6 19.2 5.5 17.7 15.3 8.8 4.6 4.0 20.0 34.4 1.7 23.6 5.4 17.4 15.9 9.6 4.6 4.0 12.0 29.8 1.5 19.2 61.0 131.5 160.1 365.9 163.9 27.9 3.1 0.6 4.5 15.5 -1.1 -13.0 -14.5 -10.2 -22.5 8.9 8.9 8.9 15.5 15.5 12/2010a 12/2011e 12/2012e 12/2013e
8 7 6 5 4 3 2 1 0 2010
2011
2012
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Emlak Konut REIT

Emlak Konut REITs 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)

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 REITs competitive outlook change.
a decrease in RoE of the company. Although Emlak Konut REITs RoE is strong, it has very limited market share due to Turkeys 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 REITs 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 Turkeys 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 companys sales performance we believe there will be more developers attracted to this the sub contracting business model and Emlak Konut REITs market share will continue to grow faster than the sector.
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
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 REITs
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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.
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 Turkeys 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 (TRYm) 2010a Actual 1498 653 470 ____ 2011e______ Old New Chg(%) 894 393 376 811 307 270 ____2012e ____ Old New Chg(%) 3% 22% 22%
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, fixedreturn contracts and ability to utilise its competitors as developers on its own projects via revenue sharing agreements.
Low interest rate environment should be positive
Revenues EBITDA Net profit
-9% 1260 1297 -22% 457 557 -28% 459 559
A low interest environment should have a 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
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
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
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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 Turkeys 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 REITs 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.
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Financials & valuation: Emlak Konut REIT

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Housing loan rates (%, 5yr) NAV (TRYm) Unit sales (annual) 12/2010a 11.45 5,798 7,200
Overweight (V)
12/2011e 11.91 6,551 10,000 12/2012e 11.87 8,919 10,000 12/2013e 11.87 9,640 8,580
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 1,037 0 0 0 -1,372 470 508 0 0 -141 -381 270 1,101 0 0 -81 -993 559 860 0 0 -196 -700 620 1,498 653 0 653 -183 470 470 0 470 470 811 307 0 307 -37 270 270 0 270 270 1,297 557 0 557 2 559 559 0 559 559 2,239 680 0 680 -60 620 620 0 620 620
Issuer information Share price (TRY) 2.31 Target price (TRY) EKGYO.IS 3,133 25 Turkey Levent Bayar 3.70 Potent'l tot rtn (%) 60.4
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 6 7,110 1,813 7,115 2,243 1,256 -558 3,615 3,059 0 6 7,227 2,072 6,889 2,124 1,134 -938 3,630 3,036 0 6 9,021 2,965 8,357 3,215 1,034 -1,931 4,108 2,847 0 6 10,672 3,564 9,728 4,261 934 -2,630 4,533 2,852
Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst
Bloomberg (Equity) EKGYO TI Market cap (TRYm) 5,775 Enterprise value (TRYm) 5181 Sector Real Estate Contact 90 212 376 46 17
Price relative
4.5 4 3.5 4.5 4 3.5 3 2.5 2 1.5 1 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 73.2 39.6 39.5 5.3 5.3 -45.9 -53.1 -53.1 -42.6 -42.6 60.1 81.6 81.6 107.3 107.3 72.6 22.1 22.1 10.9 10.9 12/2010a 12/2011e 12/2012e 12/2013e
3 2.5 2 1.5 1 2009

Emlak Konut REIT Source: HSBC
2011
2012
0.5 21.9 16.5 10.7 43.6 43.6 3.6 -15.4 -0.9
0.3 10.1 7.4 5.3 37.8 37.8 8.3 -25.8 -3.1
0.4 18.9 14.4 8.6 42.9 42.9 -47.0 -3.5
0.8 23.9 14.3 8.0 30.4 30.4 11.3 -58.0 -3.9
0.19 0.19 0.00 1.45
0.11 0.11 0.06 1.45
0.22 0.22 0.03 1.64
0.25 0.25 0.08 1.81
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Enka Insaat
Enkas 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

Enka lnsaats 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.
margins. These provide Enka with a high ROE (which averaged 13% between 2005 and 2010).
In the energy market in Turkey, Enkas market share of generation capacity and output are likely to reduce as other players continue to invest (although this is not a threat for Enkas profits). In construction, Enkas backlog has seen considerable shrinkage but we believe may start growing again. And in Moscows office space market, Enka holds on to its existing premises.
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 takeor-pay scheme under the State guarantee and fixed
Enkas 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
Enkas Turkish exposure is limited to its power operations where the level of market interest rates is not relevant for the profitability of its business.
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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.
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 Revenue EBITDA Net profit 2011e old 7,406 1,218 876 2011e new 7,301 1,293 848 2012e old 7,727 1,224 887 2012e new 8,008 1,422 955 2013e old 8,336 1,373 994 2013e new 8,826 1,633 1,098
Investment thesis
The key change in Enkas 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 Moscows 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, Enkas 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.
NAV changes USDm Construction Energy Real estate Retail Trade & Manuf. Total Participation value Market cap Premium (disc.) to NAV Holding discount NAV per share 12m NAV per share (TRY)
Enka stake Enka stake old new 4,206 3,021 3,251 859 374 10,850 6,320 -42% 20% 3.47 6.42 3,568 3,022 3,130 932 232 9,993 6,320 -37% 20% 3.20 5.60
old / new -15% 0% -4% 8% -38% -8%
-8% -13%

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 teams new forecasts. As a
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.
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Financials & valuation: Enka Insaat

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Effective aggregate tax rate Construction EBITDA margin Energy EBITDA margin Real estate EBITDA margin Trade & Industry EBITDA margin Effective aggregate tax rate 12/2010a 18% 19.2% 9.8% 63.5% 7.0% 18% 12/2011e 18% 28.0% 9.2% 62.1% 7.6% 18%
Overweight
12/2012e 18% 20.0% 9.6% 63.5% 8.0% 18% 12/2013e 18% 18.3% 10.1% 65.0% 8.0% 18%
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 224 5,822 3,711 2,043 10,999 2,670 923 -1,120 6,368 5,044 270 7,122 5,001 3,171 13,887 3,115 1,013 -2,158 8,022 6,108 280 7,529 5,863 3,891 15,218 3,261 958 -2,933 9,165 6,520 288 7,983 6,806 4,678 16,672 3,403 903 -3,775 10,487 6,997 1,197 -97 -97 -120 -524 936 1,369 -111 -111 -140 -1,038 979 1,382 -150 -150 -158 -776 1,039 1,581 -209 -209 -163 -842 1,142 7,065 1,135 -192 942 14 1,018 1,018 -179 819 819 7,301 1,293 -229 1,064 -85 1,102 1,102 -194 848 848 8,008 1,422 -244 1,178 76 1,290 1,290 -269 955 955 8,826 1,633 -266 1,368 78 1,483 1,483 -309 1,098 1,098
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 4.10 Target price (TRY) ENKAI.IS 5,560 13 Turkey Cenk Orcan 5.60 Potent'l return (%) 36.6
Bloomberg (Equity) ENKAI TI Market cap (TRYm) 10,250 Enterprise value (TRYm) 7242 Sector Conglomerates Contact 90 212 376 46 14
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.33 0.33 0.05 2.55 0.34 0.34 0.06 3.21 0.38 0.38 0.06 3.67 0.44 0.44 0.07 4.19 1.4 15.5 13.7 7.7 16.1 13.3 -16.6 -1.0 1.3 15.7 11.8 7.9 17.7 14.6 15.3 -25.4 -1.7 1.3 14.8 11.1 6.6 17.8 14.7 -30.2 -2.1 1.3 16.0 11.2 7.0 18.5 15.5 -34.0 -2.3 -10.8 -17.3 -16.5 -9.4 0.3 3.3 13.9 12.9 8.3 3.6 9.7 10.0 10.7 17.1 12.5 10.2 14.9 16.1 15.0 15.0 12/2010a 12/2011e 12/2012e 12/2013e
7 6 5 4 3 2 1 2009
Enka Insaat Source: HSBC
7 6 5 4 3 2 1 2010
2011
2012
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Erdemir
Erdemirs 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

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
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.
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 companys 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.
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.
Erdemir has lost market share in the last 5-6 years period due to capacity constraints as it has been
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.
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Weak TRY has negative to medium impact
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 Erdemirs 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. Erdemirs 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 flatsteel investments by other companies in Turkey might threaten Erdemirs 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).
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 yearend 2011 net profit estimate for Erdemir.
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Financials & valuation: Erdemir

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Average TRY/USD Sales (mt) Average HRC price (USD/t) Average CRC price (USD/t) Average iron ore price (USD/t) Average Coal price (USD/t) 12/2010a 1.48 6.5 640 847 135 231 12/2011e 1.56 7.1 725 899 132 260
Overweight
12/2012e 1.50 7.9 748 908 126 255 12/2013e 1.50 8.3 750 895 120 226
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 144 6,780 6,325 2,878 13,541 705 5,883 3,005 6,511 9,665 165 6,726 5,067 1,948 12,238 794 3,912 1,964 7,033 9,215 165 6,691 5,342 1,478 12,479 928 3,407 1,929 7,599 9,792 165 6,657 5,649 1,732 12,752 930 2,855 1,123 8,366 9,809 912 -305 -288 -6 -202 -94 2,383 -260 -242 -444 -1,041 1,389 1,238 -278 -278 -570 -35 569 2,093 -278 -278 -618 -806 1,475 6,633 1,428 -299 1,130 -142 974 974 -178 766 766 8,442 1,632 -306 1,326 -76 1,229 1,229 -241 950 950 9,175 1,825 -313 1,512 -79 1,470 1,470 -288 1,136 1,136 9,630 2,236 -311 1,925 -82 1,792 1,792 -351 1,385 1,385
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.5 7.0 1.0 6.8 0.8 -1.4 6.5 12/2011e 1.1 5.5 1.0 7.3 1.0 19.9 8.2 12/2012e 1.0 4.9 0.9 6.1 0.9 8.2 8.9 12/2013e 0.8 3.6 0.8 5.0 0.8 21.2 11.4
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.24 Target price (TRY) EREGL.IS 3,779 48 Turkey Bulent Yurdagul 4.95 Potent'l return (%) 52.7
Bloomberg (Equity) EREGL TI Market cap (TRYm) 6,966 Enterprise value (TRYm) 8930 Sector METALS & MINING Contact 90 212 376 46 12
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.48 0.48 0.21 4.07 0.44 0.44 0.27 3.27 0.53 0.53 0.29 3.53 0.64 0.64 0.37 3.89 0.7 9.9 12.5 8.0 21.5 17.0 10.1 44.9 2.1 30.4 0.9 11.3 14.0 9.0 19.3 15.7 21.5 27.1 1.2 121.3 1.0 12.8 15.5 10.8 19.9 16.5 23.2 24.6 1.1 64.1 1.0 15.8 17.4 12.5 23.2 20.0 27.4 12.9 0.5 186.4 26.7 260.6 1611.0 27.3 14.3 17.4 26.2 -7.7 8.7 11.8 14.0 19.6 19.6 5.0 22.5 27.3 22.0 22.0 12/2010a 12/2011e 12/2012e 12/2013e
6 5 4 3 2 1 0 2009
Erdemir Source: HSBC
6 5 4 3 2 1 0 2010
2011
2012
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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

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 Otosans 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 Fords LCV market share with completion of new model investments in 2013-14 (new Transit and a new LCV).
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 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 companys 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.
Market fragmentation structure is medium to 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
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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 sectors 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.
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 Unit sales (000) Domestic Exports Revenue EBITDA margin Net profit
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.
2011e 2011e 2012e 2012e 2013e 2013e old new old new old new 347 346 135 134 212 212 9,055 10,222 885 916 9.8% 9.0% 604 627 351 333 370 351 130 129 134 133 221 204 236 218 9,136 10,115 9,835 11,018 866 906 981 1,152 9.5% 9.0% 10.0% 10.5% 524 592 565 667
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, Fords 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 Otosans 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 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

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
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.
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Financials & valuation: Ford Otosan

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Froto domestic unit sales gr. Froto export unit sales gr. Froto total unit sales gr. EBITDA margin Effective tax rate Capex (EURm) 12/2010a 47% 37% 41% 9.8% 18% 43 12/2011e 7% 20% 14% 9.0% 18% 217
Neutral
12/2012e -4% -4% -4% 9.0% 0% 318 12/2013e 3% 7% 5% 10.5% 0% 236
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 42 1,060 2,229 521 3,335 1,008 528 7 1,755 1,803 42 1,455 2,646 357 4,146 1,325 921 564 1,857 2,461 42 2,068 2,729 305 4,842 1,209 1,455 1,149 2,135 3,325 42 2,307 3,300 515 5,652 1,284 1,818 1,303 2,506 3,850 486 -86 -86 -400 -8 355 518 -548 -548 -525 556 -41 543 -815 -815 -313 586 -242 766 -624 -624 -296 154 137 7,649 751 -141 610 9 619 634 -114 505 520 10,222 916 -149 767 -2 764 801 -138 627 663 10,115 906 -198 708 -116 592 592 0 592 592 11,018 1,152 -381 771 -104 667 667 0 667 667
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.6 6.4 2.6 9.2 2.7 7.5 11.0 12/2011e 0.5 5.8 2.2 7.2 2.6 -0.9 6.6 12/2012e 0.6 6.5 1.8 8.1 2.2 -5.1 6.2 12/2013e 0.6 5.3 1.6 7.2 1.9 2.9 11.2
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 13.60 Target price (TRY) FROTO.IS 2,589 18 Turkey Cenk Orcan 15.50 Potent'l return (%) 14.0
Bloomberg (Equity) FROTO TI Market cap (TRYm) 4,772 Enterprise value (TRYm) 5333 Sector Autos Contact 90 212 376 46 14
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 1.44 1.48 1.50 5.00 1.79 1.89 0.89 5.29 1.69 1.69 0.84 6.08 1.90 1.90 1.52 7.14 4.4 26.8 30.5 19.4 9.8 8.0 0.4 0.0 6481.4 4.8 29.3 36.7 19.4 9.0 7.5 395.6 30.4 0.6 91.8 3.5 24.3 29.7 17.8 9.0 7.0 7.8 53.8 1.3 47.2 3.1 21.4 28.8 16.5 10.5 7.0 11.1 52.0 1.1 58.8 37.2 44.9 56.7 51.5 55.8 33.6 22.0 25.6 23.5 27.7 -1.0 -1.0 -7.6 -22.6 -10.8 8.9 27.1 8.9 12.8 12.8 12/2010a 12/2011e 12/2012e 12/2013e
18 16 14 12 10 8 6 4 2 2009
Ford Otosan Source: HSBC
18 16 14 12 10 8 6 4 2 2010
2011
2012
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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


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 companys 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.
have increased by 17%. We do not expect any significant deterioration in the companys 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.
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
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 companys 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.
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Low interest rate environment should be neutral to negative for Gubretas

We value the companys 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 Gubretass 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 HSBCs research model. We therefore maintain our rating at Overweight (V).
Risks
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.
Weak TRY environment should be negative for 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 governments 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 companys 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.
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.
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Financials & valuation: Gubretas

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Sales growth-Domestic % Sales growth-Razi % Sales - Domestic (kt) Sales - Razi (kt) EBITDA margin-Domestic % EBITDA margin-Razi % 12/2010a 11 82 1,449 1,486 6.7 59
Overweight (V)
12/2011e 38 38 1,605 1,713 2.9 48 12/2012e -6 1 1,677 1,800 -0.1 47 12/2013e 10 1 1,715 1,897 6.2 45
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 247 897 974 212 2,139 618 353 141 453 1,287 247 848 873 77 1,988 496 490 413 551 1,395 247 895 838 75 2,001 483 386 311 689 1,422 247 930 881 100 2,079 514 304 205 825 1,444 434 -20 -20 0 -206 345 126 -35 -35 0 272 48 387 -144 -144 0 -102 213 430 -146 -146 -28 -106 266 1,386 402 -73 329 -69 280 280 -35 120 120 2,013 469 -85 385 -43 290 290 -49 89 89 1,930 422 -97 325 -30 335 335 -57 139 139 2,048 474 -111 363 -18 350 350 -59 163 163
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 12.25 Target price (TRY) GUBRF.IS 555 25 Turkey Erol Hullu 15.40 Potent'l return (%) 25.7
Bloomberg (Equity) GUBRF TI Market cap (TRYm) 1,023 Enterprise value (TRYm) 1819 Sector CHEMICALS Contact 90 212 376 4616
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 1.44 1.44 0.00 5.42 1.07 1.07 0.00 6.59 1.66 1.66 0.00 8.26 1.95 1.95 0.33 9.88 1.1 22.2 31.9 15.7 29.0 23.8 5.8 17.2 0.4 307.8 1.5 23.8 17.8 13.4 23.3 19.1 10.9 43.8 0.9 30.5 1.4 19.2 22.4 15.2 21.8 16.8 14.0 29.1 0.7 124.7 1.4 21.0 21.5 15.0 23.1 17.7 26.2 17.2 0.4 210.2 32.6 280.1 810.6 45.3 16.7 16.9 3.7 -25.7 -4.1 -10.1 -15.5 15.3 55.9 6.1 12.4 11.6 4.6 17.5 12/2010a 12/2011e 12/2012e 12/2013e
21 19 17 15 13 11 9 7 5 3 1 2009
Gubretas Source: HSBC
21 19 17 15 13 11 9 7 5 3 1 2010
2011
2012
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Hurriyet
Hurriyets 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)

Strong ad market growth and strong market share had been supporting Hurriyets 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
However, we expect Hurriyets 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.
Hurriyets 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.
Hurriyets dominant market share in the Turkish ad space and parent Dogan Yayins strong media presence make it one of the best companies in media segment. Although Hurriyets 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.
The Turkish ad market is dominated by a very 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.
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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 multiplebased 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 3.523.5%; thus, we reiterate our Overweight (V) rating on Hurriyet.
Risks
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. Hurriyets 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 Hurriyets profitability in the short term.
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) Sales EBITDA Net Income

_____________ New _______________ ______________ Old _______________ 2011e 2012e 2013e 2011e 2012e 2013e 865 136 -21 970 163 54 1,081 187 63 875 142 33 982 172 62 1,094 198 76
___________Difference____________ 2011e 2012e 2013e -1% -5% -164% -1% -5% -13% -1% -6% -17%
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Financials & valuation:

Financial statements Year to 12/2010a 12/2011e
Hurriyet
Valuation data 12/2012e 12/2013e Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.2 7.1 0.7 0.8 16.5 0.0 12/2011e 1.0 7.0 0.7 0.8 21.3 -6.3
Overweight (V)
12/2012e 0.8 5.0 0.7 10.4 0.8 16.0 3.0 12/2013e 0.7 3.9 0.6 9.0 0.7 20.4 3.7
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 709 459 348 90 1,579 103 506 417 685 1,322 682 430 366 136 1,532 104 493 357 652 1,238 656 404 484 235 1,588 107 510 275 686 1,202 632 375 612 344 1,653 111 525 181 725 1,164 45 -14 -55 -59 45 82 156 -30 -30 32 -60 108 151 -34 -34 -16 -82 83 175 -32 -32 -19 -93 107 794 130 -84 -20 -9 -50 -50 -6 -40 -40 853 124 -86 42 -13 -33 -33 -1 -32 -32 965 158 -86 82 -12 65 65 -13 50 50 1,075 181 -86 105 -9 80 80 -16 58 58
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 0.94 Target price (TRY) HURGZ.IS 281 40 Turkey Bulent Yurdagul 1.50 Potent'l tot rtn (%) 59.8
Bloomberg (Equity) HURGZ TI Market cap (TRYm) 519 Enterprise value (TRYm) 865 Sector Media Contact 90 212 376 46 12
Price relative
3.5 3 2.5 2 1.5 1 0.5 0 2009
Hurriyet
3.5 3 2.5 2 1.5 1 0.5 0 2010

2011
2012
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value -0.07 -0.07 0.00 1.24 -0.06 -0.06 -0.06 1.18 0.09 0.09 0.03 1.24 0.10 0.10 0.03 1.31 0.6 3.7 -5.4 -2.1 16.3 -2.6 14.0 53.9 3.2 10.9 0.7 3.1 -4.9 -1.2 14.5 5.0 9.5 48.3 2.9 43.8 0.8 4.7 7.4 4.2 16.3 8.5 13.6 35.4 1.7 55.1 0.9 6.4 8.2 4.8 16.8 9.7 19.7 22.1 1.0 96.4 1.3 0.2 -187.2 7.4 -4.6 13.1 27.3 94.3 11.4 14.6 27.6 23.1 16.6 12/2010a 12/2011e 12/2012e 12/2013e
Source: HSBC
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Is REIT
Is REITs 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)

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.
Profitable market share score is medium to weak
launches its residential projects or its hotel project in Russia its RoE may improve.
Is REITs 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.
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
For the real estate companies, we have applied a 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 REITs score is 4 and it is placed in the middle segment of the peer set.
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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.
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
A low interest environment should boost retail consumption and consumer spending which would increase the demand for Is REITs 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 longterm impact of TRY weakness should be neutral on Is REIT.
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.
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.
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Financials & valuation: Is Reit

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Inflation (%) Rental income growth (USD, %) GDP growth (%) USD/TRY average 12/2010a 0.0 4.7 9.0 1.5112
Overweight (V)
12/2011e 10.2 2.9 5.1 1.6000 12/2012e 10.2 -2.0 3.0 1.7000 12/2013e 10.2 18.9 5.1 1.5500
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 866 145 132 1,012 21 0 -132 940 859 0 928 147 132 1,075 21 45 -87 971 922 0 928 128 113 1,056 21 45 -68 952 922 0 928 113 97 1,041 21 45 -52 937 923 84 -20 -20 30 0 66 79 -20 -20 31 45 70 87 -20 -20 31 19 71 92 -20 -20 34 16 78 96 82 -24 58 3 61 61 0 61 61 101 74 -24 50 12 61 61 0 61 61 105 83 -24 59 4 62 62 0 62 62 114 87 -25 62 6 67 67 0 67 67
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.18 Target price (TRY) ISGYO.IS 384 49 Turkey Levent Bayar 1.75 Potent'l tot rtn (%) 48.1
Bloomberg (Equity) ISGYO TI Market cap (TRYm) 708 Enterprise value (TRYm) 621 Sector Real Estate Contact 90 212 376 46 17
Price relative
3.5 3 3.5 3 2.5 2 1.5 1 0.5 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.10 0.10 0.05 1.57 0.10 0.10 0.05 1.62 0.10 0.10 0.05 1.59 0.11 0.11 0.06 1.56 0.1 6.8 6.4 4.4 85.5 60.8 -14.0 -1.6 0.1 5.6 6.4 3.9 73.3 49.5 -8.9 -1.2 0.1 6.4 6.5 4.6 79.3 56.0 -7.1 -0.8 0.1 6.7 7.1 5.5 76.2 54.3 -5.5 -0.6 7.4 10.8 15.5 1.0 1.0 5.5 -9.5 -14.2 0.6 0.7 4.1 12.6 17.8 1.4 1.4 8.4 4.2 5.2 8.1 8.1 12/2010a 12/2011e 12/2012e 12/2013e
2.5 2 1.5 1 0.5 0 2009

Is Reit Source: HSBC
2011
2012
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Kardemir
Kardemirs overall competitive outlook is medium. The competitive
position is set to improve in the coming years with growth achieved in less competitive segment
Rail steels 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

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
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.
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.
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.
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
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.
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Weak TRY environment should be negative

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 12month 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 Kardemirs 2011e-12e earnings and EBITDA. We apply a 15% discount (to reflect Kardemirs 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.
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 valueadded products further out. Kardemirs 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 segments share of revenues to pick up from 11% in 2010 to 19% in 2011 and 22% in 2012. Kardemirs 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.
Kardemir: HSBC forecast changes TRYm Revenue EBITDA EBIT Net income
_____________2011e ______________ _____________ 2012e ______________ old new change old new change 1,353 196 103 83 1,392 235 180 134 3% 20% 74% 61% 1,584 254 150 116 1,584 277 194 142 0% 9% 29% 23%
____________ 2013e______________ old new change 1,749 300 196 155 1,748 309 208 157 0% 3% 6% 1%
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Risks
Kardemirs 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 Kardemirs main export markets.
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Financials & valuation: Kardemir Karabuk Demir

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Average TL/USD Sales (mt) Average Rebar price (USD/t) Average Billet price (USD/t) Average Profile price (USD/t) Average iron ore price (USD/t) 12/2010a 1.51 1,150.7 509 552 678 135 12/2011e 1.54 1,266.7 634 678 824 113
Overweight
12/2012e 1.50 1,387.5 642 726 793 118 12/2013e 1.50 1,557.5 726 704 770 109
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 3 868 486 10 1,404 236 285 274 810 1,110 3 924 711 175 1,685 283 385 210 944 1,180 3 950 839 252 1,839 295 385 133 1,086 1,245 3 958 898 268 1,905 305 285 17 1,243 1,285 61 -157 -144 0 104 -114 245 -112 -112 0 -64 62 238 -109 -109 0 -77 75 276 -109 -109 0 -116 114 1,009 86 -75 12 -17 22 22 -1 21 21 1,392 235 -55 180 -33 149 149 -15 134 134 1,584 277 -83 194 -18 177 177 -35 142 142 1,748 309 -100 208 -14 196 196 -39 157 157
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.1 12.9 1.0 34.6 0.9 -13.6 0.0 12/2011e 0.8 4.4 0.9 5.4 0.8 7.5 0.0 12/2012e 0.6 3.5 0.8 5.1 0.7 9.0 0.0 12/2013e 0.5 2.8 0.7 4.7 0.6 13.6 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 0.83 Target price (TRY) KRDMD.IS 453 48 Turkey Bulent Yurdagul 1.25 Potent'l tot rtn (%) 50.6
Bloomberg (Equity) KRDMD TI Market cap (TRYm) 836 Enterprise value (TRYm) 1046 Sector Metals & Mining Contact 90 212 376 46 12
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.02 0.02 0.00 0.92 0.15 0.15 0.00 1.07 0.16 0.16 0.00 1.24 0.18 0.18 0.00 1.41 1.0 1.1 2.6 3.0 8.5 1.2 5.0 33.9 3.2 22.2 1.2 14.1 15.3 10.7 16.9 12.9 7.2 22.2 0.9 116.8 1.3 12.8 14.0 9.3 17.5 12.2 15.2 12.2 0.5 179.1 1.4 13.2 13.5 9.5 17.7 11.9 21.5 1.3 0.1 1646.3
Source: HSBC
2.5
2.5 2 1.5 1 0.5 0 2010 2011 2012

Kardemir Karabuk Demir Rel to ISTANBUL COMP
12/2010a
12/2011e
12/2012e
12/2013e
2 1.5
27.1
38.0 172.8 1447.1 578.7 535.7
13.8 17.7 7.7 19.2 5.9
10.4 11.5 7.5 10.4 10.4
1 0.5 0 2009
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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)

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.
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 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. Kilers 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 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.
Kiler has improved its market share among Turkish supermarkets from c2% in 2005 to c3.5%. The company has the second largest market share
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
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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.
Low interest rate environment should be positive for Kiler
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 Kilers growth and FCF generation prospects.
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.
Weak TRY environment should be negative for Kiler

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%).
Forecast changes TRYm Sales EBITDA EBIT Net profit
Kiler has a significant portion of its debt denominated in USD. As of Q2 2011, c70% of Kilers debt was USD denominated. In Q2 2011, Kiler posted cTRY8m of net FX losses. A weak TRY environment will negatively affect the companys 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, thats 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 companys 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
______ 2011e________ _______ 2012e _______ Old New Old New 921 71 50 20 807 52 32 -15 1118 86 60 30 917 61 36 10
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 volatility indicator, the Neutral band is 3.5% 23.5%. Our target price for Kiler implies a negative potential return of 10%, hence we maintain our Underweight (V) rating.
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Risks
The major upside risk to our valuation is a betterthan-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.
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Financials & valuation: Kiler Alisveris Hizmetler

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.9 11.5 2.0 42.0 3.0 -5.9 0.0 12/2011e 0.9 13.3 2.0 3.7 0.5 0.0
Underweight (V)
12/2012e 0.8 11.5 1.9 46.3 3.4 1.1 0.0 12/2013e 0.6 9.5 1.9 53.8 3.2 6.4 0.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 44 182 355 37 603 197 240 203 140 348 43 180 339 23 583 197 235 213 126 343 43 179 380 27 624 217 245 218 136 357 41 172 402 31 638 243 225 194 144 341 7 -7 -30 0 100 -28 8 -17 -18 0 10 2 17 -23 -23 0 5 5 45 -21 -21 0 -24 30 771 59 -19 40 -23 14 14 -4 10 10 807 52 -20 32 -46 -18 -18 4 -15 -15 917 61 -25 36 -18 13 13 -3 10 10 1,035 69 -29 40 -25 11 11 -2 9 9
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.44 Target price (TRY) KILER.IS 251 15 Turkey Erol Hullu 3.10 Potent'l return (%) -9.9
Bloomberg (Equity) KILER TI Market cap (TRYm) 463 Enterprise value (TRYm) 689 Sector MULTILINE RETAIL Contact 90 212 376 4616
Price relative
10 9 8 7 6 5 4 3 2 2009
Kiler Alisveris Hizmetler
10 9 8 7 6 5 4 3 2 2010
2011
2012
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.08 0.08 0.00 1.16 -0.11 -0.11 0.00 0.93 0.07 0.07 0.00 1.01 0.06 0.06 0.00 1.07 2.7 10.1 7.4 1.8 7.6 5.2 2.5 132.7 3.5 3.5 2.3 7.3 -11.0 -2.4 6.4 3.9 1.1 153.5 4.1 3.6 2.6 8.2 7.7 1.7 6.6 3.9 3.4 146.7 3.6 7.9 3.0 9.1 6.2 1.4 6.7 3.8 2.8 123.3 2.8 23.0 0.1 -3.3 -15.3 -20.0 10404.7 4.7 -11.6 -21.6 -232.0 -232.5 13.6 16.4 14.0 12.9 14.2 10.7 -13.7 -13.9 12/2010a 12/2011e 12/2012e 12/2013e
Source: HSBC
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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

Koc operates in Turkeys key industries with a top position. On the consumer side, its the clear domestic market and export leader in automotive and white goods. In the energy sector, its 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.
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.
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%.
Kocs 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 Kocs total revenues and c15% go to Europe. Therefore a slowdown in Europe may curb growth to some extent through the export leg.
The market shares that Koc has in various sectors are mostly mature. Yet, the groups keen interest in the power generation segment of the energy
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.
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Koc Holding - forecast changes TRYm Revenue EBITDA Net profit 2011e old 57,538 5,721 1,965 2011e new 64,763 6,164 2,005 2012e old 62,974 6,229 2,172 2012e new 67,093 6,248 2,008 2013e old 65,353 6,549 2,279 2013e new 69,599 6,791 2,222
Koc is the group thats 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 Tuprass SPV) while the groups vulnerability has declined considerably in recent years through deleveraging.
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 Value Value NAV % Value Stake Target Value NAV % 4,039 2,938 1,483 3,097 202 148 11,908 11,518 390 702 -638 11,972 9,057 -24.4% 10,775 4.46 8.15 33.7% 24.5% 12.4% 25.9% 1.7% 1.6% 99.5% 96.2% 3.3% 5.9% -5.3% 100.0%
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).
Finance 9,863 3,048 32.5% 13,091 Automotive 5,936 2,380 25.4% 7,408 Cons. Durables 2,681 1,086 11.6% 3,662 Energy 6,789 2,635 28.1% 7,974 Food & Retail 409 166 1.8% 493 Other 356 148 1.6% 356 TOTAL SOP 26,033 9,462 100.9% 32,982 Total Listed 9,073 96.8% Total unlisted 390 4.2% Net Cash (Koc Holding) 702 7.5% Net Cash (SPV/Energy) -788 -8.4% Current NAV 9,377 100.0% Current MCAP 9,057 Prem./(Disc.) -3.4% Targ. NAV @ 10% discount TP in USD per share TP in TRY per share
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Financials & valuation: Koc Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to GDP Growth (%) USD/TRY (Average) USD/TRY (Year-end) 12/2010a 9.0% 1.51 1.55 12/2011e 7.0% 1.76 1..85
Neutral
12/2012e 3.0% 1.88 1.91 12/2013e 4.0% 1.95 1.98
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity -1,729 -1,246 -961 -550 1,657 -2,993 2,148 -2,633 -2,457 -867 -3 -504 2,460 -3,200 -3,012 -1,002 -98 -761 2,873 -3,897 -3,702 -1,004 -6 -1,045 53,812 5,074 -969 4,105 -219 3,886 3,886 -748 1,734 1,734 64,763 6,164 -989 5,175 -545 4,630 0 -926 2,005 2,005 67,093 6,248 -1,040 5,208 -571 4,637 0 -927 2,008 2,008 69,599 6,791 -1,122 5,669 -538 5,131 0 -1,026 2,222 2,222
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.3 2.9 0.7 9.5 1.4 -33.1 3.3 12/2011e 0.3 2.7 0.7 8.2 1.2 -4.8 5.3 12/2012e 0.2 2.6 0.6 8.2 1.1 -7.3 6.1 12/2013e 0.2 2.4 0.6 7.4 1.1 -10.0 6.1
Issuer information Share price (TRY) 6.82 Target price (TRY) KCHOL.IS 8,935 20 Turkey Cenk Orcan 8.15 Potent'l return (%) 19.5
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 4,838 24,581 39,214 9,745 74,667 36,434 15,666 5,921 12,186 22,454 4,838 28,096 43,817 10,532 82,786 42,189 16,450 5,918 13,323 24,030 4,838 31,948 47,028 11,452 89,849 46,473 17,272 5,820 14,329 25,889 4,838 36,536 50,431 12,321 97,840 51,421 18,136 5,814 15,547 28,063
Bloomberg (Equity) KCHOL TI Market cap (TRYm) 16,471 Enterprise value (TRYm) 16354 Sector Conglomerates Contact 90 212 376 46 14
Price relative
10 9 8 7 6 5 4 3 2 1 0 2009
Koc Holding Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 20.0 15.4 18.3 23.0 21.4 20.3 21.5 26.1 19.1 15.6 3.6 1.4 0.6 0.1 0.1 3.7 8.7 8.9 10.7 10.7 12/2010a 12/2011e 12/2012e 12/2013e
10 9 8 7 6 5 4 3 2 1 0 2010
2011
2012
2.6 16.3 14.9 6.9 9.4 7.6 23.2 28.0 1.2
2.8 17.8 15.7 7.1 9.5 8.0 11.3 25.9 1.0 36.3
2.7 16.7 14.5 6.6 9.3 7.8 10.9 23.6 0.9 42.3
2.6 16.8 14.9 6.4 9.8 8.1 12.6 21.7 0.9 49.4
0.72 0.72 0.23 5.05
0.83 0.83 0.36 5.52
0.83 0.83 0.42 5.93
0.92 0.92 0.42 6.44
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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)

Migros scores medium on our overall scorecard. The companys 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.
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 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 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
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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.
Low interest rate environment should be positive for Migros

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 TRYm Net sales EBIT EBITDA NP
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.
Weak TRY environment should be negative for Migros
______ 2011e________ _______ 2012e _______ old New old new 5,628 200 328 -16 5,684 229 360 -387 6,265 258 393 70 6,326 265 402 107
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 companys bottom line.
Based on our revised forecasts, our new DCFbased 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 volatility indicator, the Neutral band is 3.5% 23.5%.. Our target price implies a potential return of 50%, hence we maintain our Overweight (V) rating.
Risks
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.
The major risk to our valuation is higher-thanexpected pressure on EBITDA margins owing to the increasing number of store openings. Second, Migros has a large proportion of EURdenominated debt, exposing the company to foreign exchange risk which could imply a lower IRR and hence lower EV for Migros.
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Financials & valuation: Migros

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Number of discounters Number of supermarkets Number of small supermarkets Number of hypermarkets 12/2010a 1,254 637 0 11
Overweight (V)
12/2011e 0 680 15 15 12/2012e 0 730 65 18 12/2013e 0 780 115 20
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 2,556 1,246 1,745 884 5,567 1,713 2,388 1,504 1,347 2,951 2,144 1,054 1,611 832 4,829 1,526 2,224 1,392 959 2,451 2,159 1,061 1,724 877 4,963 1,666 2,154 1,278 1,024 2,401 2,163 1,062 1,878 955 5,123 1,852 2,084 1,129 1,068 2,297 295 -230 -182 -196 207 -24 -361 -127 473 0 -112 -69 315 -158 -158 -43 -114 129 340 -162 -162 -29 -148 217 6,365 355 -130 226 -154 79 79 -36 43 28 5,684 360 -131 229 -168 -375 -375 -12 -387 38 6,326 402 -136 265 -159 133 133 -27 107 80 7,142 451 -157 294 -162 92 92 -18 74 114
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 15.20 Target price (TRY) MGROS.IS 1,468 19 Turkey Erol Hullu 22.80 Potent'l return (%) 50.0
Bloomberg (Equity) MGROS TI Market cap (TRYm) 2,706 Enterprise value (TRYm) 4096 Sector FOOD & STAPLES RETAILING Contact 90 212 376 4616
Price relative
41 36 31 26 21 16 11 6 1 2009
Migros Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.24 0.16 1.10 7.56 -2.17 0.21 0.00 5.39 0.60 0.45 0.24 5.75 0.41 0.64 0.17 6.00 2.2 4.2 1.9 0.8 5.6 3.5 2.3 111.7 4.2 19.6 2.1 8.7 3.3 -7.4 6.3 4.0 2.1 145.0 3.9 2.6 8.7 8.1 2.2 6.4 4.2 2.5 124.7 3.2 24.7 3.0 10.0 10.9 1.5 6.3 4.1 2.8 105.7 2.5 30.1 11.4 -9.8 -15.1 -41.4 -85.6 -10.7 1.3 1.2 -575.8 37.4 11.3 11.6 16.0 109.5 12.9 12.3 11.0 -31.0 43.1 12/2010a 12/2011e 12/2012e 12/2013e
41 36 31 26 21 16 11 6 1 2010
2011
2012
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Petkim
Petkims overall competitive outlook is strong. Its 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

Petkims monopoly in an under-served market enables it to continue with its strong domestic sales and rising exports. Petkims 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.
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 Petkims market share since Turkish thermoplastics consumption is growing at nearly double the GDP growth rate.
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.
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.
Petkim aims to become a regional power in the petrochemicals sector by 2018 and to attain a 40% domestic market share, through capacity
Petkim enjoys a monopolistic position in an under-served market. As imports are also subject
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to tariffs, we see the current market structure working in favour of Petkim with no foreseeable threat from new entrants.
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 Petkim EBITDA EBIT Net profit _________ 2011e ________ _________ 2012e ________ New Old change New Old change 306 235 282 365 287 235 -16.2% -18.1% 20.0% 332 249 199 382 307 245 -13.1% -18.9% -18.8%
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

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/EBITDAbased 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 Petkims 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.
Investment thesis
Petkims 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. Petkims 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 Azerbaijans 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
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Financials & valuation: Petkim

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to TRY/USD (Average) TRY/USD (period end) 12/2010a 1.51 1.55 12/2011e 1.59 1.50
Overweight
12/2012e 1.50 1.50 12/2013e 1.50 1.50
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 10 1,260 1,106 202 2,376 606 169 -33 1,600 1,568 10 1,286 1,191 170 2,487 373 297 127 1,882 1,943 10 1,381 1,337 316 2,728 373 297 -19 2,081 2,039 10 1,321 1,531 511 2,863 373 297 -214 2,176 1,979 75 -79 -79 0 -14 -3 -5 -107 -107 0 159 -254 282 -179 -179 -119 -146 104 300 -26 -26 -119 -194 274 2,909 194 -59 135 8 140 140 -10 130 130 3,610 306 -72 235 7 347 347 -66 282 282 3,691 332 -84 249 0 249 249 -50 199 199 3,934 354 -86 268 0 268 268 -54 214 214
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.37 Target price (TRY) PETKM.IS 1,286 39 Turkey Bulent Yurdagul 3.00 Potent'l return (%) 26.6
Bloomberg (Equity) PETKM TI Market cap (TRYm) 2,370 Enterprise value (TRYm) 2497 Sector CHEMICALS Contact 90 212 376 46 12
Price relative
3.5 3 2.5 2 3.5 3 2.5 2 1.5 1 0.5 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.13 0.13 0.00 1.60 0.28 0.28 0.00 1.88 0.20 0.20 0.12 2.08 0.21 0.21 0.17 2.18 1.9 8.3 8.5 5.8 6.7 4.6 -2.0 -0.2 2.1 10.8 16.2 11.6 8.5 6.5 6.7 0.4 1.9 10.0 10.0 7.6 9.0 6.7 -0.9 -0.1 2.0 10.7 10.1 7.7 9.0 6.8 -9.8 -0.6 41.4 34.4 196.1 116.2 -76.6 24.1 57.5 73.6 148.3 116.7 2.2 8.4 5.9 -28.5 -29.5 6.6 6.6 7.8 7.8 7.8 12/2010a 12/2011e 12/2012e 12/2013e
1.5 1 0.5 0 2009

Petkim Source: HSBC
2011
2012
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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

Sabancis 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.
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 Turkeys 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.
Sabancis 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 portfolios 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 nonfinance portfolio while visibility is low for the non-life insurance operation (despite the alliance with Ageas).
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 groups overall performance.
We give negative points for the insurance (nonlife) and retail sectors but positive points for cement, banking and energy.
Sabanci has established market shares in Turkey in banking (10% in credit cards), cement (27%), tyres (33%), life insurance and pensions (21%),
Given that Sabancis industrial portfolio is geared more towards intermediary goods, it benefits from a low interest rate environment. Sabanci benefits
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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 Sabancis 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).
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 nonvolatile Turkish stocks of 8.5-18.5%, we maintain our Overweight rating.
Sabanci Holding - Summary NAV Table (USDm) Segment Finance Auto, Tyres Textile Cement Retailing Energy Other TOTAL Total Stake Current Total Value Value NAV % Value Stake Target Value NAV%
16,964 7,035 52.8% 18,530 7,619 52.1% 1,167 719 5.4% 1,167 719 4.9% 160 136 1.0% 160 136 0.9% 1,266 556 4.2% 1,943 863 5.9% 1,436 674 5.1% 1,436 674 4.6% 4,479 2,239 16.8% 4,479 2,239 15.3% 5,005 1,275 9.6% 5,005 1,275 8.7% 30,477 12,634 94.8% 32,720 13,525 92.5%

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
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 segments 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 Revenue EBITDA Net profit 2011e old 21,242 4,710 1,563 2011e new 21,362 4,293 1,712 2012e old 24,337 5,295 1,714 2012e new 23,248 4,622 1,778 2013e old 27,511 6,246 2,005 2013e new 25,357 5,292 2,004
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Financials & valuation: Sabanci Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to GDP Growth (%) USD/TRY (Average) USD/TRY (Year-end) 12/2010a 9.0% 1.51 1.55 12/2011e 7.0% 1.76 1..85
Overweight
12/2012e 3.0% 1.88 1.91 12/2013e 4.0% 1.95 1.98
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 9,985 -1,110 -1,110 -576 12,450 8,865 16,303 -1,755 -1,755 -831 4,224 14,539 10,087 -1,882 -1,882 -856 3,526 8,195 12,992 -1,948 -1,948 -889 4,199 11,034 19,541 4,536 -422 4,114 -56 4,246 4,246 -839 1,583 1,583 21,362 4,293 -486 3,807 -97 3,891 3,891 -778 1,712 1,712 23,248 4,622 -547 4,075 -222 4,040 4,040 -808 1,778 1,778 25,357 5,292 -582 4,710 -351 4,554 4,554 -911 2,004 2,004
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a -2.9 -12.7 8.1 1.0 -15.5 4.5 12/2011e -2.5 -12.5 7.5 0.9 -25.4 6.5 12/2012e -2.5 -12.6 7.2 0.9 -12.5 6.7 12/2013e -2.5 -12.0 6.4 0.8 -14.7 7.0
Issuer information Share price (TRY) 6.26 Target price (TRY) SAHOL.IS 6,929 Turkey Cenk Orcan 10.00 Potent'l return (%) 59.7 SAHOL TI 12,773 Conglomerates 90 212 376 46 14
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 2,260 4,865 54,971 16,246 130,060 89,036 15,852 -394 13,069 -43,185 2,841 6,524 71,034 15,555 149,063 101,921 19,384 3,830 13,950 -37,077 3,516 8,302 83,885 15,905 172,682 118,450 23,261 7,356 14,871 -38,652 4,254 10,144 98,319 15,195 198,872 137,434 26,751 11,555 15,986 -39,912
Reuters (Equity) Market cap (USDm) Country Analyst
Price relative
10 9 8 7 6 5 4 3 2 1 2009
Sabanci Holding Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.78 0.78 0.28 6.41 0.84 0.84 0.41 6.84 0.87 0.87 0.42 7.29 0.98 0.98 0.44 7.83 -0.5 -7.9 13.2 3.1 23.2 21.1 80.6 -1.6 -0.1 -0.5 -7.6 12.7 2.5 20.1 17.8 44.3 14.1 0.9 425.7 -0.6 -8.6 12.3 2.3 19.9 17.5 20.8 24.3 1.6 137.1 -0.6 -9.6 13.0 2.3 20.9 18.6 15.1 34.3 2.2 112.4 3.7 13.2 14.2 16.4 24.4 9.3 -5.4 -7.5 -8.4 8.2 8.8 7.7 7.1 3.8 3.8 9.1 14.5 15.6 12.7 12.7 12/2010a 12/2011e 12/2012e 12/2013e
10 9 8 7 6 5 4 3 2 1 2010
2011
2012
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Sinpas REIC
Sinpas REICs 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

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 REICs market share will remain low for the foreseeable future.
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 REICs RoE is strong, it has a tiny market share due to Turkeys 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 REICs 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 Turkeys 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 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 REICs 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
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Investment thesis
Sinpas REIC is an attractive way of accessing Turkeys 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 companys 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.
For the real estate companies, we have applied a slightly different DuPont analysis and compared cap yield ( = Gross Profit / (5 * Revenues) ) instead of gross profit margin for the companies. On this scale Sinpas REICs 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.
Low interest rate environment should be neutral

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
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
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-thanexpected 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.
A weak TRY environment has no material impact on the company as it does not have USD- or EUR-based sales.
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Sinpas REIC
Key forecast drivers 12/2012e 12/2013e Year to Housing loan rates (m/%, YE) Avg. Cost per sqm (TRY/m2) Avg. Price per sqm (TRY/m2) 12/2010a 11.45 1,155 2,926 12/2011e 11.91 1,213 3,102
Overweight
12/2012e 11.87 1,273 3,288 12/2013e 11.20 1,337 3,485
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 14 1,499 65 1,592 675 40 -24 936 774 0 14 1,499 192 1,592 400 26 -166 1,174 921 0 14 1,611 247 1,704 373 26 -222 1,400 1,004 0 14 1,768 348 1,861 438 26 -322 1,661 996 45 0 1 0 34 35 10 0 1 -30 -142 22 32 0 1 -59 -56 144 222 0 1 -113 -100 361 353 52 0 52 9 61 61 0 61 61 600 211 0 211 -41 170 170 0 170 170 767 248 0 248 -21 227 227 0 227 227 728 374 0 374 -21 353 353 0 353 353
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.46 Target price (TRY) SNGYO.IS 475 49 Turkey Levent Bayar 2.50 Potent'l tot rtn (%) 71.5
Bloomberg (Equity) SNGYO TI Market cap (TRYm) 875 Enterprise value (TRYm) 630 Sector Real Estate Contact 90 212 376 46 17
Price relative
3.5 3 2.5 3.5 3 2.5 2 1.5 1 0.5 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 106.7 69.7 307.0 307.0 177.9 177.9 27.8 17.7 17.7 33.8 33.8 -5.0 50.7 50.7 55.4 55.4 12/2010a 12/2011e 12/2012e 12/2013e
2 1.5 1 0.5 0 2009

Sinpas REIC Source: HSBC
2011
2012
0.5 6.9 6.7 3.6 14.6 14.6 -2.6 -0.5
0.7 24.8 16.1 12.0 35.1 35.1 5.1 -14.1 -0.8
0.8 25.7 17.6 15.0 32.3 32.3 11.8 -15.8 -0.9
0.7 37.4 23.0 21.0 51.3 51.3 17.8 -19.4 -0.9
0.10 0.10 0.00 1.56
0.28 0.28 0.05 1.96
0.38 0.38 0.10 2.33
0.59 0.59 0.19 2.77
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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

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.
(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 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
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
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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.

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.
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.
Low interest rate environment should be positive for Sisecam
A low interest environment should have a positive 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
Similar to other exporters, a weak TRY would 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 valueunlocking corporate restructuring story. However, we believe that this is now largely priced in following the strong outperformance of the shares in 2011 so far.
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Sisecam NAV Participation Name Listed Trakya Cam Anadolu Cam Soda Sanayi Denizli Cam Unlisted Pasabahce Cam (& land) Other Packaging Other flat glass Recently acquired (Cayirova, Camis) Other (Fibre, Avea, Elect.) Listed participations Unlisted participations Cash (Debt) on Holding level Total Enterprise Value Sisecam Current MCAP Prem./(Disc) to NAV Sisecam NAV (@20% discount) No. of shares (m) Target price (TRY) Closing price (TRY) Potential return
Method
Effective Stake (%)
Current Value (TRYm) 1,792 1,108 831 71 1,537 166 269 369 4,008
Stake value current (TRYm) 1,256 877 682 34 1,467 25 40 347 375 2,848 2,272 140 5,261 4,329 -18%
Target Value (TRYm) 2,594 1,558 831 71 1,537 166 269 369 4,008
Stake value - target (TRYm) 1,819 1,233 682 34 1,467 25 40 347 375 3,767 2,272 140 6,179 4,329 -30%
DCF & Multiples DCF & Multiples Market Value Market Value Market multiples Market multiples Market multiples Sales price Misc.
70% 79% 82% 48% 95% 15% 15% 92%
1,300 3.85 3.31 16%
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Financials & valuation: Sisecam Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to PPI (%) GDP growth (%) Average USD/TRY Average USD/RUB 12/2010a 0.0 9.0 1.5112 31.7 12/2011e 10.2 5.1 1.7550 35.3
Neutral
12/2012e 7.7 3.0 1.6000 0.0 12/2013e 0.1 0.1 1.5500 0.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 9 3,464 3,024 1,505 6,731 446 1,897 392 3,275 4,546 9 3,374 2,750 1,129 6,366 462 1,193 65 3,621 4,542 9 3,387 3,135 1,383 6,764 490 1,151 -232 4,034 4,658 9 3,405 3,272 1,415 6,920 516 1,062 -353 4,253 4,756 868 -381 -381 0 -521 334 989 -513 -513 0 -327 325 1,094 -548 -548 -206 -296 380 1,118 -774 -774 -213 -121 182 4,206 983 -450 532 -51 586 586 -101 412 412 4,521 1,102 -471 631 -66 511 511 -87 346 346 4,900 1,207 -500 707 -62 600 600 -103 412 412 5,159 1,206 -530 676 -56 621 621 -106 425 425
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 3.31 Target price (TRY) SISE.IS 2,334 30 Turkey Levent Bayar 3.85 Potent'l return (%) 16.3
Bloomberg (Equity) SISE TI Market cap (TRYm) 4,303 Enterprise value (TRYm) 4134 Sector CONGLOMERATES Contact 90 212 376 46 17
Price relative
6 5 6 5 4 3 2 1 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.37 0.37 0.00 2.98 0.31 0.31 0.00 3.29 0.37 0.37 0.19 3.67 0.39 0.39 0.19 3.87 0.9 9.6 13.5 -0.3 23.4 12.7 19.2 9.6 0.4 221.4 1.0 11.5 10.0 6.5 24.4 14.0 16.8 1.5 0.1 1532.7 1.1 12.7 10.8 7.6 24.6 14.4 19.4 -4.8 -0.2 1.1 11.9 10.3 7.5 23.4 13.1 21.7 -7.0 -0.3 15.4 42.1 150.1 278.8 268.3 7.5 12.2 18.6 -12.8 -16.0 8.4 9.5 12.1 17.5 19.2 5.3 -0.1 -4.4 3.4 3.1 12/2010a 12/2011e 12/2012e 12/2013e
4 3 2 1 0 2009
Sisecam Holding Source: HSBC
2011
2012
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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

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.
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.
Tats ROE has not been high during the past years mainly because of high cost pressures and indebtedness. Its 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.
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 dont think Tat will be immune to rising threats.
Low interest rate environment should be positive for Tat
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.
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.
Weak TRY environment should be negative for Tat
The company holds cUSD80m financial debt in USD and thereby has a large short FX position on
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its balance sheet. Hence, when the TRY/USD rate depreciates the bottom line is substantially hurt.
Investment thesis
Although Turkeys 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).
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. Under our research model, for stocks without a volatility indicator, the Neutral band is 8.5% 18.5%. Our target price implies a potential return of 9%, hence we maintain our Neutral rating.
Risks

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 TRYm Net sales EBITDA EBIT Net profit
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.
_______2011e _______ old new 828 64 46 23 763 47 28 6
______ 2012e ________ old new 944 80 60 33 880 65 46 29
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Financials & valuation: Tat Konserve

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Total production Gross margin % 12/2010a 306 18.3 12/2011e 328 19.2
Neutral
12/2012e 351 19.6 12/2013e 375 20.1
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 160 372 7 556 61 253 246 185 465 0 100 402 54 519 50 220 166 191 398 0 102 406 7 526 70 175 168 220 431 0 104 446 7 571 81 170 163 256 464 2 -19 -19 0 -10 -27 35 -18 -18 0 -80 13 20 -21 -21 0 2 -19 41 -24 -24 0 -5 -7 787 58 -16 42 -20 27 27 -10 16 16 763 47 -18 28 -18 12 12 -4 6 6 880 65 -20 46 -15 50 50 -18 29 29 1,000 86 -21 64 -14 65 65 -23 37 37
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.9 11.8 1.5 23.9 2.1 -6.2 0.0 12/2011e 0.8 12.9 1.5 61.6 2.0 3.0 0.0 12/2012e 0.7 9.3 1.4 13.5 1.8 -4.3 0.0 12/2013e 0.6 7.0 1.3 10.5 1.5 -1.5 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.85 Target price (TRY) TATKS.IS 210 41 Turkey Erol Hullu 3.10 Potent'l return (%) 8.8
Bloomberg (Equity) TATKS TI Market cap (TRYm) 388 Enterprise value (TRYm) 601 Sector FOOD PRODUCTS Contact 90 212 376 4616
Price relative
6 5 4 6 5 4 3 2 1 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.12 0.12 0.00 1.36 0.05 0.05 0.00 1.40 0.21 0.21 0.00 1.61 0.27 0.27 0.00 1.89 1.8 6.0 9.2 5.5 7.4 5.3 2.9 105.7 4.3 0.7 1.8 4.2 3.4 3.5 6.1 3.7 2.7 69.0 3.6 21.4 2.1 7.1 14.0 7.9 7.4 5.2 4.5 61.6 2.6 11.9 2.2 9.2 15.5 9.3 8.6 6.4 5.9 52.5 1.9 25.0 13.4 -17.4 -24.5 -26.6 -51.7 -3.1 -19.3 -32.3 -57.3 -61.2 15.4 40.1 61.0 322.4 357.0 13.6 31.0 40.6 32.0 28.4 12/2010a 12/2011e 12/2012e 12/2013e
3 2 1 0 2009
Tat Konserve Source: HSBC
2011
2012
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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

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.
give credit to TAV on this metric for two reasons: 1) TAVs 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.
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 generates a higher asset turnover than European peers with compatible margins. TAVs 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.
TAVs passenger traffic growth in Turkish airports was slightly below the markets growth in the 2005-10 period (CAGR 11% vs 13%). But we
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 TAVs Izmir airport) create opportunities for potential newcomers.
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We value TAV using 50% peer comparison and 50% DCF. We utilise DCF in calculating a sumof-the-parts value for TAVs underlying airport and services assets. We apply no conglomerate discount on the SOTP value as these are interrelated businesses. Incorporating into our estimates our macro teams 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 Revenue* EBITDA* Net profit 2011e-old 2011e-new 889 258 76 888 256 49 2012e-old 2012e-new 996 307 100 1014 304 76
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 TAVs operational profitability. However, a volatile currency environment also creates volatility for bottom-line earnings (translation gains/losses), especially weak EUR/USD.
Investment thesis
TAVs 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 shortterm are: 1) Signing of the contract for the Medina Intl 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 Tepes, 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 Medinas 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 TAVs 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 airports 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.
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) lowerthan-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.
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Financials & valuation: TAV

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Istanbul total pax traffic gr. Ankara total pax traffic gr. Izmir total pax traffic gr. Tblisi total pax traffic gr. Tunisia total pax traffic gr. 12/2010a 8% 28% 28% 16% 4% 12/2011e 12% 11% 16% 25% -40%
Overweight
12/2012e 9% 10% 12% 15% 12% 12/2013e 7% 10% 8% 15% 12%
Profit & loss summary (EURm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (EURm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (EURm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 192 1,303 545 415 2,039 252 1,233 819 437 1,373 187 1,402 482 328 2,071 261 1,148 821 531 1,483 182 1,420 461 285 2,063 283 1,033 748 582 1,495 178 1,375 512 318 2,065 301 938 620 648 1,446 125 -93 -93 0 -120 62 143 -110 -110 0 2 65 167 -75 -75 -15 -73 125 224 -50 -50 -38 -128 209 785 212 -60 120 -57 63 0 -12 50 50 888 256 -68 155 -52 68 0 -14 49 49 1,014 304 -72 198 -82 111 0 -22 76 76 1,084 356 -77 243 -62 174 0 -35 111 111
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 7.10 Target price (TRY) TAVHL.IS 1,399 18 Turkey Cenk Orcan 9.50 Potent'l return (%) 33.8
Bloomberg (Equity) TAVHL TI Market cap (TRYm) 2,579 Enterprise value (EURm) 1847 Sector Transport Infrastructure Contact 90 212 376 46 14
Price relative
10 9 8 7 6 5 4 3 2 1 2009
TAV Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (EUR) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.14 0.14 0.00 1.20 0.13 0.13 0.00 1.46 0.21 0.21 0.09 1.60 0.31 0.31 0.23 1.78 0.6 9.1 12.2 6.3 27.0 15.3 3.7 151.5 3.9 15.3 0.6 10.6 10.1 5.7 28.8 17.5 4.9 125.0 3.2 17.4 0.7 12.5 13.6 8.4 30.0 19.5 3.7 104.0 2.5 22.3 0.7 15.2 18.1 10.0 32.9 22.5 5.8 77.4 1.7 36.1 22.7 26.7 21.1 18.9 -2.1 13.1 20.6 28.7 7.4 -1.3 14.2 18.9 27.5 64.2 55.1 6.8 17.0 23.1 55.7 46.6 12/2010a 12/2011e 12/2012e 12/2013e
10 9 8 7 6 5 4 3 2 1 2010
2011
2012
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Tekfen Holding
Tekfen Holding's overall competitive outlook is medium Due to a tough competitive landscape in the contracting markets
of MENA-CIS, Tekfens desire to increase exposure to Turkey has increased

Target price kept at TRY8.1, maintain Overweight

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, Tekfens specialisation in infrastructure projects only (and particularly oil related) helps it escape the more competitive residential and commercial market, giving it a competitive edge.
while in contracting, we expect its Turkey exposure to increase.

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.
Tekfens 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.
The Turkish fertiliser market is dominated by two players - Tekfens Toros and Gubretas. Therefore, the market is fairly consolidated although pricing power is not that strong due to global links.
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 companys market share to remain in the historic 30-35% range
Operationally, a low interest rate favours Tekfen indirectly through an increase in farmers 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,
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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).
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.

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
Summary NAV Table Business Tekfen Construction Agriculture & fertilisers Real estate Others (Eurobank-Tekfen) Total participation value Holding Cash (net) Tekfen Holding target NAV Tekfen Holding current MCAP Prem./(Disc) to NAV Target NAV per share (USD) @ 20% congl. disc. Target NAV per share (TRY)
Valuation Method DCF, Peer Comp. DCF, Peer Comp. DCF Put option value
Effective Stake 100% 100% 29%
Target value 795 921 714 617 3,053
Value to Tekfen 795 872 210 179 2,055 212 2,268 1,068 -53% 4.9 8.1
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Financials & valuation: Tekfen Holding

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Backlog outlook (USDm) New project awards (USDm) Oil prices (Brent, USD/bbl) Fertilizer prices (avg. USD/t) USD/TRY (avg.) 12/2010a 1,830 1,013 79.5 339 1.50 12/2011e 2,018 1,000 109.4 391 1.76
Overweight
12/2012e 2,047 1,000 90.0 368 1.82 12/2013e 1,975 1,000 90.0 361 1.87
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 3 696 1,957 759 3,066 805 475 -283 1,660 1,092 3 766 2,448 904 3,627 979 570 -334 1,890 1,334 3 862 2,781 925 4,056 1,101 588 -338 2,102 1,619 3 973 3,143 1,018 4,529 1,192 617 -401 2,358 1,909 287 -54 -54 -19 -234 232 186 -84 -84 -53 -51 91 192 -96 -96 -81 -3 83 251 -106 -106 -84 -63 131 2,262 299 -73 217 14 240 240 -62 179 179 3,084 381 -89 292 39 342 342 -73 269 269 3,515 392 -104 288 48 349 349 -72 277 277 3,890 445 -109 336 54 404 404 -83 321 321
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 5.46 Target price (TRY) TKFEN.IS 1,096 34 Turkey Cenk Orcan 8.10 Potent'l return (%) 48.4
Bloomberg (Equity) TKFEN TI Market cap (TRYm) 2,020 Enterprise value (TRYm) 1579 Sector Conglomerates Contact 90 212 376 46 14
Price relative
9 8 7 6 5 4 3 2 1 2009
Tekfen Holding Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.48 0.48 0.05 4.49 0.73 0.73 0.14 5.11 0.75 0.75 0.22 5.68 0.87 0.87 0.23 6.37 2.0 14.9 11.6 10.4 13.2 9.6 -16.9 -0.9 2.5 18.9 15.2 11.9 12.4 9.5 -17.5 -0.9 2.4 15.5 13.9 10.7 11.2 8.2 -15.9 -0.9 2.2 15.1 14.4 10.8 11.4 8.6 -16.8 -0.9 -3.8 47.8 88.5 144.1 157.5 36.4 27.7 34.5 42.4 50.9 14.0 2.9 -1.2 2.0 3.0 10.7 13.4 16.5 15.8 15.8 12/2010a 12/2011e 12/2012e 12/2013e
9 8 7 6 5 4 3 2 1 2010
2011
2012
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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

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.
Tofass 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 20122013 (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.
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 subsegment 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.
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.
The top 3 brands control c45% of the Turkish LV market but there is tough competition with c60
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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 sectors 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 Tofass export revenues reported in TRY and has very limited adverse impact on profits as Tofas is hedged through takeor-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.
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 Unit sales (000) Domestic Exports Revenue EBITDA margin Net profit (adj.)
2011e 2011e 2012e 2012e 2013e 2013e old new old new old new 351 144 206 7,193 712 9.9% 457 340 144 195 7,566 744 9.8% 426 380 141 240 7,709 748 9.7% 530 351 393 369 140 146 146 210 247 224 7,960 8,136 8,681 760 830 907 9.5% 10.2% 10.4% 462 634 597
Investment thesis
We believe that despite concerns of a slow down in the European economy and Tofass 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 companys 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 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 8.518.5%. Since our target price implies a 36% potential return, we maintain Overweight rating.
Risks

We expect Turkish automotive demand to grow 8% in 2011, reaching 860k units (light vehicles
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.
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Financials & valuation: Tofas

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Local demand growth for PCVs Local demand growth for LCVs Tofas domestic unit sales gr Tofas exports unit sales gro Effective tax rate 12/2010a 38% 34% 44% 15% 0% 12/2011e 9% 8% 7% 1% 10%
Overweight
12/2012e -7% 0% -3% 8% 10% 12/2013e 5% 5% 4% 6% 10%
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 255 1,930 2,772 1,185 5,284 1,658 1,841 656 1,706 2,114 266 1,674 3,885 1,747 5,982 1,923 2,090 343 1,882 2,155 279 1,455 4,183 1,832 6,074 2,004 1,953 120 2,025 2,081 292 1,245 4,576 1,910 6,269 2,104 1,791 -119 2,274 2,098 451 -266 -266 -130 -147 183 606 -371 -371 -250 -313 228 588 -302 -302 -320 -223 279 634 -313 -313 -347 -239 314 6,410 658 -266 388 4 392 392 -8 384 384 7,566 744 -287 457 17 474 510 -47 426 462 7,960 760 -252 508 5 514 514 -51 462 462 8,681 907 -245 662 0 662 662 -66 597 597
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 6.62 Target price (TRY) TOASO.IS 1,796 24 Turkey Cenk Orcan 9.00 Potent'l return (%) 36.0
Bloomberg (Equity) TOASO TI Market cap (TRYm) 3,310 Enterprise value (TRYm) 3653 Sector Autos Contact 90 212 376 46 14
Price relative
12 12 10 8 6 4 2 0 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.77 0.77 0.25 3.41 0.85 0.92 0.25 3.76 0.92 0.92 0.27 4.05 1.19 1.19 0.45 4.55 3.0 18.0 24.6 10.4 10.3 6.1 38.4 1.0 68.8 3.5 19.2 25.8 10.6 9.8 6.0 18.2 0.5 176.7 3.8 21.6 23.7 10.9 9.5 6.4 5.9 0.2 488.0 4.2 28.5 27.8 12.4 10.4 7.6 -5.2 -0.1 25.4 38.2 32.6 45.1 6.6 18.0 13.0 17.6 20.9 20.3 5.2 2.2 11.4 8.4 0.0 9.1 19.3 30.2 28.9 29.1 12/2010a 12/2011e 12/2012e 12/2013e
10 8 6 4 2 0 2009
Tofas Source: HSBC
2011
2012
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Torunlar REIT
Torunlar REITs 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

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.
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 REITs 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.
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.
For the real estate companies, we have applied a 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 REITs score is 2 and it is placed in the lower segment of the peer set.
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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.
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
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.
We expect Torunlar REITs 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 managements 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
The low interest environment should boost retail consumption and consumer spending which would increase the demand for Torunlar REITs retail space and rents. Low interest mortgages would also boost demand for Torunlars 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 shortterm 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-
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 companys failure to complete or a significant delay to its biggest project, Mall of Istanbul.
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Financials & valuation: Torunlar REIT

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to NAV (TRYm) GDP per capita (USD) PPI (%) Weighted Avg. Rental yield (%) 12/2010a 2,505 10,048 6.4 4.8
Overweight (V)
12/2011e 2,526 10,525 7.4 7.0 12/2012e 2,874 10,675 6.4 6.0 12/2013e 3,183 12,676 6.4 6.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1 2,389 580 439 3,204 51 783 345 2,369 2,480 1 2,409 305 163 2,949 14 525 363 2,431 2,538 1 2,756 250 119 3,241 13 423 304 2,826 2,875 1 3,064 447 88 3,746 54 415 327 3,299 3,370 45 0 -81 -13 -203 23 15 0 0 -13 18 17 85 0 0 -27 -58 60 14 0 0 -37 23 14 233 51 14 65 -39 48 48 -1 47 47 162 82 9 91 -26 53 53 0 53 53 144 71 9 80 -21 74 74 0 74 74 497 231 9 240 -30 200 200 0 200 200
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 5.14 Target price (TRY) TRGYO.IS 622 25 Turkey Levent Bayar 7.40 Potentl return (%) 44.0
Bloomberg (Equity) TRGYO TI Market cap (TRYm) 1,151 Enterprise value (TRYm) 1280 Sector Real Estate Contact 90 212 376 46 17
Price relative
9 8 9 8 7 6 5 4 3 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC RoE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.21 0.21 0.06 10.58 0.24 0.24 0.12 10.85 0.33 0.33 0.16 12.62 0.89 0.89 0.45 14.73 0.1 2.1 2.2 3.0 21.9 28.0 1.3 14.5 6.8 13.0 0.1 3.2 2.2 2.6 50.9 56.4 3.1 14.9 4.4 4.3 0.1 2.6 2.8 3.1 49.3 55.6 3.4 10.8 4.3 27.9 0.2 7.4 6.5 6.6 46.6 48.4 7.7 9.9 1.4 4.4 93.9 -23.9 -12.0 3.0 0.2 -30.4 61.8 40.1 11.2 14.3 -11.1 -13.9 -12.5 38.7 38.7 244.8 225.5 200.1 171.0 171.0 12/2010a 12/2011e 12/2012e 12/2013e
7 6 5 4 3 2009
Torunlar REIT Source: HSBC
2011
2012
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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

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'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 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 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
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entry barriers and regulatory protection) and monopolistic market structure.

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.
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.
Low interest rate environment should be positive for Trakya Cam

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 Neutral band of 8.5-18.5% for non-volatile Turkish stocks. We therefore maintain our Overweight rating.
Risks
A low interest environment should have a positive 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
Similar to other exporters, a weak TRY would boost Trakya Cam's exports in the short term.
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.
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
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Financials & valuation: Trakya Cam

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Construction growth (%) Flat glass sales growth (n, %) Flat glass price (USD/tonnes) 12/2010a 17.1 12.00 404.3 12/2011e 15.0 7.50 365.6
Overweight
12/2012e 15.0 5.00 423.0 12/2013e 10.0 5.00 459.4
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 2 988 887 454 2,047 148 270 -184 1,499 1,274 2 946 850 374 1,975 156 240 -134 1,450 1,268 2 897 1,033 499 2,118 166 230 -269 1,609 1,265 2 967 948 397 2,111 174 230 -167 1,595 1,345 312 -88 -88 -45 -287 249 314 -86 -86 -43 50 215 350 -220 -220 -51 -136 81 343 -214 -214 -8 102 -26 1,047 306 -130 176 51 250 250 -27 211 211 1,157 350 -135 214 37 276 276 -50 213 213 1,303 397 -141 256 -2 264 264 -47 202 202 1,312 352 -155 197 -147 60 60 -9 36 36
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 1.4 4.7 1.1 8.4 1.2 15.4 2.6 12/2011e 1.3 4.2 1.2 8.3 1.2 13.3 2.4 12/2012e 1.0 3.4 1.1 8.8 1.1 5.1 2.8 12/2013e 1.1 4.1 1.1 48.7 1.1 -1.6 0.5
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.94 Target price (TRY) TRKCM.IS 962 31 Turkey Levent Bayar 4.30 Potent'l return (%) 46.3
Bloomberg (Equity) TRKCM TI Market cap (TRYm) 1,773 Enterprise value (TRYm) 1476 Sector BUILDING PRODUCTS Contact 90 212 376 46 17
Price relative
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2009
Trakya Cam Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 18.1 73.6 214.2 230.6 239.0 10.5 14.4 21.7 10.5 0.8 12.7 13.6 19.5 -4.2 -5.0 0.7 -11.4 -23.2 -77.3 -82.0 12/2010a 12/2011e 12/2012e 12/2013e
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2010

2011
2012
0.8 12.0 14.9 15.6 29.2 16.8 -11.9 -0.6
0.9 13.8 14.4 11.8 30.2 18.5 -8.9 -0.4
1.0 16.6 13.2 11.8 30.5 19.6 220.7 -16.4 -0.7
1.0 12.9 2.3 9.5 26.8 15.0 2.4 -10.3 -0.5
0.35 0.35 0.08 2.48
0.35 0.35 0.07 2.40
0.33 0.33 0.08 2.67
0.06 0.06 0.01 2.64
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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

A strong domestic position provides a safeguard for the companys 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 Tuprass 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.
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 hasnt 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'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
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 Tuprass 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
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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 Tuprass decline in market share to the companys 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.
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 USDbased 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 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.
Low interest rate environment should be positive for Tupras

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
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.
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3%. At the sector average PE of 7.5x and EV/EBITDA of 4.5x for 2012e, our multiplesbased 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 12month target price of TRY47.0. This implies a potential return of 28%, which is above the Neutral band of 8.5-18.5% for non-volatile 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.
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Financials & valuation: Tupras

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Med-Urals refining margin (USD Tupras Refining Margin(USD/bbl GDP growth (%) USD/TRY (Average) 12/2010a 2.9 11.2 8.0 1.51 12/2011e 1.8 9.8 4.2 1.57
Overweight
12/2012e 4.0 9.8 4.3 1.65 12/2013e 4.5 9.8 4.3 1.65
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 2,752 -298 -273 -626 -2,028 2,532 935 -550 -550 -737 720 250 1,314 -1,594 -1,594 -617 910 -280 1,421 -1,756 -1,756 -661 928 -335 26,219 1,372 -221 1,151 -105 929 929 -188 737 737 35,511 1,630 -225 1,405 -71 1,294 1,294 -260 1,029 1,029 36,905 1,738 -206 1,532 -147 1,385 1,385 -277 1,102 1,102 38,534 1,909 -271 1,638 -201 1,437 1,437 -287 1,144 1,144
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.2 4.5 4.3 12.5 2.4 27.6 8.0 12/2011e 0.2 4.2 2.9 9.0 2.2 2.7 6.7 12/2012e 0.2 4.5 2.1 8.4 2.0 -3.1 7.2 12/2013e 0.2 4.6 1.7 8.1 1.8 -3.7 7.4
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 301 4,238 9,289 5,958 13,918 6,437 2,936 -3,023 3,868 1,432 301 4,562 9,069 5,239 14,023 6,318 2,936 -2,303 4,280 2,376 301 5,950 8,160 4,329 14,501 6,362 2,936 -1,393 4,721 3,720 301 7,435 7,232 3,401 15,058 6,387 2,936 -466 5,178 5,180
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 36.80 Target price (TRY) TUPRS.IS 4,986 49 Turkey Bulent Yurdagul 47.00 Potent'l return (%) 27.7
Bloomberg (Equity) TUPRS TI Market cap (TRYm) 9,215 Enterprise value (TRYm) 6860 Sector OIL & GAS Contact 90 212 376 46 12
Price relative
56 46 56 46 36 26 16 6 2010
Ratio, growth and per share analysis

36
Year to Y-o-y % change
12/2010a
12/2011e
12/2012e
12/2013e
26 16
Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value
28.6 19.8 21.0 -8.5 -9.1
35.4 18.8 22.1 39.3 39.5
3.9 6.6 9.0 7.0 7.1
4.4 9.8 6.9 3.8 3.8
6 2009
Tupras Source: HSBC
2011
2012
11.1 39.0 19.4 6.8 5.2 4.4 13.1 -77.5 -2.2
18.7 59.0 25.3 7.8 4.6 4.0 23.1 -53.3 -1.4
12.1 40.2 24.5 8.6 4.7 4.2 11.8 -29.2 -0.8
8.7 29.4 23.1 8.9 5.0 4.3 9.5 -8.9 -0.2
2.94 2.94 2.94 15.45
4.11 4.11 2.47 17.09
4.40 4.40 2.64 18.85
4.57 4.57 2.74 20.68
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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)

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. Petkims 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.
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
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.
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.
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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 companys 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 companys 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.
the companys 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 companys 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 TRYm EBITDA EBIT Net profit _________ 2011e ________ _________ 2012e ________ New Old Change New Old Change -10 -10 63 -9 -9 94 -5.6% -12.2% -33.3% -10 -10 7 -9 -9 98 -14.4% -20.0% -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

Our estimates are reduced due to lower TRY estimates and weak H1 2011 performance. We use an SOTP method to value Turcas. We value
Turcas: SOTP valuation Valuation TRYm Turcas 30% stake in STAS 30% STAS stake - DCF valuation 30% STAS stake - EV/EBITDA valuation Petkim stake 5% stake in ATAS terminal 800 MW Natural gas power project Total enterprise value Less: net (debt) / Cash Equity value
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.
New Per share 3.77 3.66 3.89 0.00 0.21 0.41 4.39 0.10 4.49
Old Per share Basis 4.15 60% DCF and 40% EV/EBITDA 3.34 uplifted by CoE 4.96 uplifted by CoE; valued at 10% discount to sector multiple (5.0x on 2011e) 0.00 Petkim SPV valuation taken as zero due to net debt position higher than Petkims Mcap 0.21 Transaction value 0.3 risk based DCF for power plant 4.66 0.41 5.1
848 822 874 0 47 93 988 22 1,010
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Financials & valuation: Turcas

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 10.3 109.8 10.4 1.1 -2.3 0.0 12/2011e 44.1 15.1 9.4 1.0 -2.0 0.0
Overweight
12/2012e 32.5 16.5 7.7 0.9 -1.8 0.0 12/2013e 25.5 17.7 6.0 0.8 -1.7 0.0
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 6 58 46 64 13 0 -46 548 5 0 61 135 65 196 97 4 -61 590 35 0 61 208 137 269 104 4 -134 655 27 0 60 306 236 367 111 4 -232 740 20 55 -1 -59 -13 17 -14 55 0 -8 0 -16 -12 73 0 0 0 -73 -10 93 0 5 0 -98 -10 52 -10 -1 -10 0 60 60 -3 56 56 12 -10 -1 -10 0 65 65 -2 63 63 14 -10 0 -11 0 77 77 0 76 76 14 -10 0 -10 0 98 98 0 98 98
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.61 Target price (TRY) TRCAS.IS 319 100 Turkey Bulent Yurdagul 4.50 Potent'l tot rtn (%) 72.4
Bloomberg (Equity) TRCAS TI Market cap (TRYm) 587 Enterprise value (TRYm) 526 Sector Oil & Gas Contact 90 212 376 46 12
Price relative
6 5 4 3 2 1 0 2009
Turcas
6 5 4 3 2 1 0 2010
2011
2012
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.25 0.25 0.00 2.43 0.28 0.28 0.00 2.62 0.34 0.34 0.00 2.91 0.44 0.44 0.00 3.29 9.8 -182.3 10.7 77.4 -18.3 -19.8 -8.3 4.8 0.6 -48.8 11.0 48.3 -79.6 -84.1 -10.4 6.4 0.4 -34.5 12.3 33.0 -73.7 -77.1 -20.4 13.0 0.6 -43.6 14.0 31.0 -71.3 -74.2 -31.3 23.3 16.2 -77.2 17.0 0.0 12/2010a 12/2011e 12/2012e 12/2013e
Source: HSBC
91.7 104.0
8.8 11.1
18.0 21.8
28.3 28.3
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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

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.
competitors. Therefore, it scores medium on market share momentum, as expected.

Herve Drouet* Analyst HSBC Bank plc (London) + 44 20 7991 6827 Herve.Drouet@hsbcib.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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.
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.
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
As the dominant market player, Turkcell has lost 9 points of market share in the last 6 years to its
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.
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Weak TRY has a negative to neutral impact

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 10year 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 Turkcells 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 Turkcells margins and growth prospects.
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.
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Financials & valuation: Turkcell

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Turkcell market share (Turkey) Turkey ARPU (USD) Turkey service revenue (USDm) 12/2010a 54.2 12.9 5,315 12/2011e 53.0 12.0 4,854
Neutral
12/2012e 52.4 11.7 4,977 12/2013e 51.9 11.9 5,391
Profit & loss summary (USDm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (USDm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 1,282 -1,079 -705 -591 120 760 1,071 -914 -767 -855 648 750 1,660 -1,041 -1,041 -792 172 616 1,959 -1,112 -1,112 -725 -122 815 5,982 1,959 -810 1,149 188 1,446 1,510 -321 1,169 1,216 5,709 1,794 -963 831 144 957 1,250 -260 719 1,028 5,914 1,924 -796 1,129 57 1,319 1,319 -264 1,036 1,036 6,448 2,156 -852 1,303 45 1,482 1,482 -296 1,166 1,166
Issuer information Share price (USD) 12.16 Target price (USD) TKC.N 10,701 35 Turkey Herve Drouet 12.60 Potent'l return (%) 3.6
Balance sheet summary (USDm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 1,856 3,068 4,438 3,302 9,795 -1,377 1,843 -1,459 6,258 7,436 1,584 2,999 2,933 1,628 8,062 -1,113 818 -811 5,901 7,001 1,584 3,244 2,793 1,456 8,302 -1,023 818 -638 6,212 7,189 1,584 3,503 3,000 1,578 8,902 -1,254 818 -760 6,562 7,765
Bloomberg (Equity) TKC US Market cap (USDm) 10,701 Enterprise value (USDm) 8000 Sector Wireless Telecoms Contact 44 20 7991 6827
Price relative
21 19 17 15 13 11 9 7 5 3 2009
Turkcell Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) 3.3 1.4 -6.1 0.1 -19.1 -4.6 -8.4 -27.7 -33.8 -15.4 3.6 7.3 35.8 37.9 0.8 9.0 12.0 15.5 12.3 12.5 12/2010a 12/2011e 12/2012e 12/2013e
21 19 17 15 13 11 9 7 5 3 2010
2011
2012
Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (USD) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value
0.8 12.6 20.1 12.5 32.8 19.2 -23.4 -0.7
0.8 10.8 16.9 8.9 31.4 14.6 -13.9 -0.5
0.8 12.7 17.1 13.5 32.5 19.1 -10.3 -0.3
0.9 13.9 18.3 14.3 33.4 20.2 -11.6 -0.4
1.33 1.38 0.97 7.11
0.82 1.17 0.90 6.71
1.18 1.18 0.82 7.06
1.33 1.33 0.93 7.46
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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

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 Turkeys 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.
THYs 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 Istanbuls 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.
THYs 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 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
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decade. There is more consolidation activity to take place, in our view, with THY potentially taking a consolidator role.
Turkish Airlines - forecast changes TRYm Revenue EBITDAR margin EBITDA margin Net profit 2011e old 2011e new 2012e old 2012e new 2013e old 2013e new
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
10,699 11,234 12,863 13,816 14,740 15,781 1,357 1,102 1,768 1,589 2,234 2,268 12.8% 9.8% 13.8% 11.5% 15.2% 14.4% 994 733 1,382 1,179 1,768 1,756 9.3% 6.5% 10.7% 8.5% 12.0% 11.1% 223 -130 327 155 535 432
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).
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-thanexpected 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
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 THYs costs. All in all, we are optimistic about THYs 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.
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SPO of the State's stake (51%) being put back on the agenda by the Privatisation Administration. Key upside risks include (i) stronger-thanexpected passenger traffic and yields, (ii) a significant decline in oil prices, (iii) lower-thanexpected pressure on LF and margins from increased supply, (iv) major EUR strength.
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Financials & valuation: Turkish Airlines

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to No of aircraft (year-end) Load factor total (%) Total passenger yield (EURc) Oil price (Brent - USD/bbl) RASK (EURc) CASK (EURc) 12/2010a 153 73.7 15.4 80 6.47 6.12 12/2011e 189 71.6 16.6 110 5.36 5.30
Neutral
12/2012e 202 71.6 17.0 115 5.44 5.29 12/2013e 207 73.0 18.3 120 5.60 5.29
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 33 6,443 3,492 898 10,649 2,224 4,242 3,344 3,747 6,846 33 11,433 4,464 1,242 16,697 2,680 7,860 6,618 3,617 12,008 33 13,496 3,477 826 17,584 2,993 9,205 8,379 3,773 13,186 33 14,688 2,995 519 18,213 3,216 9,720 9,202 4,189 13,981 856 -629 -479 0 1,622 212 1,032 -193 198 0 3,274 429 1,353 -213 149 0 1,762 765 1,881 -239 47 -16 822 1,079 8,423 936 -453 461 -80 366 366 -79 286 292 11,234 733 -573 137 -326 -153 -153 23 -130 -130 13,816 1,179 -757 399 -260 183 183 -27 155 155 15,781 1,756 -867 876 -418 508 508 -76 432 432
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2010a 0.5 4.8 0.7 9.1 0.7 18.3 0.0 12/2011e 0.7 10.1 0.6 0.9 57.2 0.0 12/2012e 0.7 8.4 0.8 20.5 0.8 49.7 0.0 12/2013e 0.7 6.3 0.8 7.4 0.8 57.5 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 2.74 Target price (TRY) THYAO.IS 1,725 100 Turkey Cenk Orcan 3.20 Potent'l return (%) 17
Bloomberg (Equity) THYAO TI Market cap (TRYm) 3,180 Enterprise value (TRYm) 7368 Sector Airlines Contact 90 212 376 46 14
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.29 0.29 0.00 3.75 -0.11 -0.11 0.00 3.01 0.13 0.13 0.00 3.14 0.36 0.36 0.00 3.49 1.5 7.0 8.1 4.2 11.1 5.5 11.7 89.2 3.6 25.6 1.2 1.9 -3.5 2.3 6.5 1.2 2.3 183.0 9.0 15.6 1.1 3.3 4.2 2.9 8.5 2.9 4.5 222.1 7.1 16.2 1.2 6.2 10.9 4.6 11.1 5.6 4.2 219.7 5.2 20.4 19.7 -23.7 -39.6 -50.4 -61.8 33.4 -21.7 -70.3 -141.9 -137.2 23.0 60.9 191.3 14.2 49.0 119.6 178.4 178.4 12/2010a 12/2011e 12/2012e 12/2013e
7 6 5 4 3 2 1 0 2009
Turkish Airlines Source: HSBC
7 6 5 4 3 2 1 0 2010
2011
2012
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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

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.
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.
Herve Drouet* Analyst HSBC Bank plc (London) + 44 20 7991 6827 Herve.Drouet@hsbcib.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations
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.
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.
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.
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
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components. Also, a cTRY3.5bn FX short position on the balance sheet makes Turk Telekom's P&L highly sensitive to a weaker TRY.

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. Under our research model, for stocks without a 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.
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 Telekoms 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 Telekoms 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.
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, higherthan-expected dividends, high growth in Turk Telekoms subscriber acquisitions, higher-thanexpected mobile ARPU and broadband ARPL, brisk IPTV uptake, and a delay in the entry of competition in the fixed-line mass market.
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Financials & valuation: Turk Telekom

Financial statements Year to 12/2010a 12/2011e 12/2012e 12/2013e Key forecast drivers Year to Mobile penetration (%) Mobile revenue (TRYm) Mobile EBITDA (TRYm) Broadband HH penetration (%) Fixed line revenue (TRYm) Fixed line EBITDA (TRYm) 12/2010a 85.0 2,646 332 38.0 8,511 4,507 12/2011e 87.8 3,064 411 40.7 9,126 4,748
Underweight
12/2012e 94.0 3,493 734 43.5 9,265 4,765 12/2013e 99.6 3,985 889 46.0 9,374 4,770
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 3,844 -1,733 -1,523 -1,590 -382 2,165 3,681 -1,979 -1,733 -2,244 775 2,306 4,528 -1,984 -2,708 -2,292 471 2,514 4,673 -2,006 -2,006 -2,585 -82 2,649 10,852 4,835 -1,524 3,311 -97 3,127 2,750 -799 2,451 2,107 11,854 5,154 -1,570 3,584 -157 3,063 3,297 -688 2,546 2,753 12,406 5,498 -1,633 3,865 -275 3,590 3,590 -718 2,872 2,872 12,991 5,659 -1,669 3,990 -313 3,677 3,677 -735 2,941 2,941
Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 3,570 7,161 3,712 1,875 15,100 -2,957 4,164 2,289 6,175 15,525 3,493 7,678 3,523 1,500 15,358 -3,799 4,564 3,064 5,236 16,993 3,779 8,030 3,611 1,500 16,085 -4,204 5,035 3,535 5,523 18,124 3,779 8,366 3,705 1,500 16,515 -4,422 4,953 3,453 5,817 18,772 Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 7.98 Target price (TRY) TTKOM.IS 15,152 13 Turkey Herve Drouet 6.80 Potent'l return (%) -14.8
Bloomberg (Equity) TTKOM TI Market cap (TRYm) 27,930 Enterprise value (TRYm) 31053 Sector Diversified Telecoms Contact 44 20 7991 6827
Price relative Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.70 0.60 0.64 1.76 0.73 0.79 0.65 1.50 0.82 0.82 0.74 1.58 0.84 0.84 0.76 1.66 0.7 16.2 36.3 18.0 44.5 30.5 50.1 34.2 0.5 167.9 0.7 17.3 48.3 18.2 43.5 30.2 32.9 54.0 0.6 120.1 0.7 17.6 53.4 20.1 44.3 31.2 20.0 64.0 0.6 128.1 0.7 17.3 51.9 20.0 43.6 30.7 18.1 59.4 0.6 135.3 2.7 11.0 18.3 32.5 23.5 9.2 6.6 8.2 -2.1 30.7 4.7 6.7 7.8 17.2 4.3 4.7 2.9 3.2 2.4 2.4 12/2010a 12/2011e 12/2012e 12/2013e
11 10 9 8 7 6 5 4 3 2 1 2009
Turk Telekom Source: HSBC
11 10 9 8 7 6 5 4 3 2 1 2010
2011
2012
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Zorlu Enerji
Zorlu Enerjis 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

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 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.
Zorlu Enerjis 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 industrys 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.
The State currently plans to privatise 70% of its generation portfolio which currently comprises 50% of Turkeys 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 Turkeys power sector, we see Zorlu Enerji as well placed to benefit from the better pricing environment.
A low interest environment should have a positive impact on Zorlu Enerji and the Turkey utility sector as a major portion of capex is financed through debt.
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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

Our DCF, peer multiples comparison and costdriven 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 costdriven SOTP methodology is based on a replacement value of Zorlu Enerjis 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
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 FXrelated 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.
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) Sales EBITDA EBITDA m Net profit _____________ New _______________ ______________ Old ______________ FY11e FY12e FY13e FY11e FY12e FY13e 513 105 20% -94 615 171 28% 3 639 191 30% 19 635 186 29% 23 675 200 30% 25.0 702 210 30% 38 __________ Change (%) ___________ FY11e FY12e FY13e -19% -44% -9% -504% -9% -15% -2% -87% -9% -9% 0% -49%
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Zorlu Enerji
Key forecast drivers 12/2011e 12/2012e Year to Spot power prices (DUY,TRY/MWh Tariff power prices (TRY/MWh) Power output (GWh) 12/2009a 162.0 143.3 2,334 12/2010e 152.3 151.1 3,299
Neutral
12/2011e 165.4 164.1 2,689 12/2012e 176.9 175.6 3,092
Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 2,049 360 43 2,414 743 1,381 1,338 220 1,623 0 2,065 374 82 2,445 756 1,337 1,255 280 1,601 0 2,082 225 -78 2,313 751 1,301 1,380 186 1,634 0 2,101 193 -152 2,300 763 1,271 1,423 189 1,683 193 132 132 0 -451 220 172 -89 -89 0 -83 -72 -35 -90 -90 0 125 -85 46 -89 -89 0 43 -42 547 146 -56 91 -99 109 109 -5 98 -82 486 70 -72 -2 -90 -33 -33 0 -35 -20 513 105 -72 33 -85 -90 -90 0 -92 -94 615 171 -70 100 -90 10 10 -2 5 3
Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2009a 3.4 12.6 1.1 2.3 42.8 0.0 12/2010e 3.6 25.2 1.1 1.8 -13.9 0.0 12/2011e 3.7 18.1 1.2 2.7 -16.4 0.0 12/2012e 3.2 11.4 1.2 154.0 2.7 -8.1 0.0
Issuer information Share price (TRY) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst 1.79 Target price (TRY) ZOREN.IS 274 32 Turkey Levent Bayar 2.10 Potent'l tot rtn (%) 17.3
Bloomberg (Equity) ZOREN TI Market cap (TRYm) 504 Enterprise value (TRYm) 1770 Sector Independent Power Producers Contact 90 212 376 46 17
Price relative
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2009
Zorlu Enerji Source: HSBC
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 0.35 -0.29 0.00 0.78 -0.12 -0.07 0.00 0.99 -0.33 -0.33 0.00 0.66 0.02 0.01 0.00 0.67 0.3 5.0 -74.8 7.9 26.8 16.5 1.5 583.7 9.1 14.4 0.3 -0.1 -7.9 2.4 14.5 -0.5 0.8 431.1 17.9 13.7 0.3 2.0 -40.3 -0.2 20.4 6.4 1.2 693.6 13.2 0.4 4.5 1.7 3.3 27.7 16.3 1.9 695.0 8.3 3.2 -17.9 58.5 94.0 -11.3 -52.1 -102.5 -130.4 5.6 49.0 19.9 63.0 206.6 12/2009a 12/2010e 12/2011e 12/2012e
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2010

2011
2012
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Notes
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Notes
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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 stocks 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.
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*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) Underweight (Sell) 35% 11% (22% of these provided with Investment Banking Services) (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 longterm investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist Company AK ENERJI AKBANK ANADOLU EFES ANADOLU HAYAT ARCELIK BIZIM TOPTAN SATIS DOGUS OTOMOTIV ENKA INSAAT ERDEMIR FORD OTOSAN GARANTI BANKASI HALKBANK HURRIYET GAZETEC. IS BANKASI KOC HOLDING MIGROS SABANCI HOLDING SISECAM TOFAS TRAKYA CAM TUPRAS VAKIFBANK YAPI KREDI BANKASI ZORLU ENERJI
Source: HSBC
Ticker AKENR.IS AKBNK.IS AEFES.IS ANHYT.IS ARCLK.IS BIZIM.IS DOAS.IS ENKAI.IS EREGL.IS FROTO.IS GARAN.IS HALKB.IS HURGZ.IS ISCTR.IS KCHOL.IS MGROS.IS SAHOL.IS SISE.IS TOASO.IS TRKCM.IS TUPRS.IS VAKBN.IS YKBNK.IS ZOREN.IS
Recent price 2.92 7.20 21.50 2.98 7.24 21.50 4.33 4.27 3.25 13.10 7.12 13.00 0.98 4.75 6.90 15.05 6.62 3.57 6.46 2.99 39.30 3.67 4.09 1.78
Price Date 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011 04-Oct-2011
Disclosure 2, 5 1, 2, 5, 6, 7 6 2, 5 6 6 5 4, 6 2, 5, 6 6 7 7 6 2, 5 6 6, 7 6 7 6 6 2, 5 7 6, 7 2, 5
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1 2 3 4 5 6 7 8 9 10 11
HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 31 August 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 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. 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. 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. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 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. 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 2 3 This report is dated as at 05 October 2011. All market data included in this report are dated as at close 27 September 2011, unless otherwise indicated in the report. 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. 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 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%.
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Disclaimer
* Legal entities as at 04 March 2011 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, HSBC Yatrm Menkul Deerler A.. Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC Securities (Canada) Inc, Toronto; Bykdere Caddesi No: 122 / D Kat:9 HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank Esentepe/Sisli 34394 Istanbul, Turkey (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, Telephone: +90 212 376 46 00 Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Fax: +90 212 376 49 13 Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai www.research.hsbc.com Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC www.hsbcyatirim.com.tr 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 Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch This document has been issued by HSBC Yatrm 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 made only 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 the exchange 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 Yatrm 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
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Cenk Orcan* Analyst, Co-Head of Turkey Research HSBC Yatirim Menkul Degerler A.S. +90 212 376 4614 cenkorcan@hsbc.com.tr 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 HSBCs 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* Analyst, Co-Head of Turkey Research HSBC Yatirim Menkul Degerler A.S. +90 212 376 4612 bulentyurdagul@hsbc.com.tr Bulent is an Oil & Gas, Steel and Media sector analyst for HSBCs 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 Turkeys leading financial institutions. Bulent holds an MBA degree from the University of California Irvine. Tamer Sengun* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 4615 tamersengun@hsbc.com.tr 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 HSBC Yatirim Menkul Degerler A.S. +90 212 376 4617 leventbayar@hsbc.com.tr 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 HSBC Yatirim Menkul Degerler A.S. +90 212 376 4616 erolhullu@hsbc.com.tr 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.
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations

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Turkey/Equity October 2011

Equities Turkish Equities 5 October 2011

Implications for sectors

Equities Turkish Equities 5 October 2011

Winners: airports, retail, oil & gas, autos

Equities Turkish Equities 5 October 2011

Insurance, utilities, airlines the least attractive

Companies: the leaders of the pack

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

Equities Turkish Equities 5 October 2011

Profitable Market Share

Impact of Sustainable Industry Growth (Dupont) Fragmentation

Equities Turkish Equities 5 October 2011

Theme winners with attractive potential returns

Equities Turkish Equities 5 October 2011

Theme winners with limited potential returns

Equities Turkish Equities 5 October 2011

Is Reit Sinpas REIC Bank As ya 5.0 Aksa Enerji Turcas Biz im

4.0 Torunlar REIT Kardemir Albarak a

Ford Otosan CCI

Bagfas Aksigor ta 1.0

Turkc ell Kiler Turk Telekom Ay gaz Sisec am

Tat Konserve Anadolu Efes

0.0 Thematic relative

Source: HSBC * sizes of bubbles represent market capitalisation

Equities Turkish Equities 5 October 2011

Forecast and target price changes in this report

Old target price

New target price

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

Equities Turkish Equities 5 October 2011

Disclosure appendix Disclaimer

Equities Turkish Equities 5 October 2011

Assessing the competitive position of Turkish industries

Equities Turkish Equities 5 October 2011

Quantitative approach results

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

Adjusted gross margin comparison (global peer avg vs Turkey)

Equities Turkish Equities 5 October 2011

Qualitative approach results

Sector ROE comparison (global peer avg vs Turkey)

Sector fragmentation (aggregate market share of top 5 players)

Source: Company data

Equities Turkish Equities 5 October 2011

Equities Turkish Equities 5 October 2011

Scale X N/A N/A X X X X X X X X

Regulatory framework X X X N/A X X X X X X X

N/A X N/A N/A X X N/A N/A X N/A N/A X N/A X

Equities Turkish Equities 5 October 2011

Sector profiles competition analysis

Historical Growth of Industry Volume

16 Equities Turkish Equity 5 October 2011

Competition analysis Airlines

Strategy analysis: ROE vs market share (2010)

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

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

Historical Growth of Sales Volume

Source: Company data, HSBC estimates

* Size of bubbles represents average sales volumes

Source: Company data

Equities Turkish Equity 5 October 2011