Flashnote

Turkish Telcos
Pricing power yet to recover
Fixed line woes continue at Turk Telekom compounded by heightened competitive pressure in mobile Mobile competition to ease gradually but ability to monetise data and voice is critical We maintain our TP for TTKOM (UW) at TRY6.5 and TKC (N) at USD13.3 dividend approval is key catalyst for TKC
Competitive pressure intensified in Q1 2012, which saw aggressive offers and new tariff

Telecoms, Media & Technology Telecoms

Equity Turkey

structures with renewed intensity in the prepaid segment. So far, Turkcell and Avea have reported quarterly results, with subscribers flat q-o-q, an increased proportion of post-paid subscriptions and flat margins y-o-y. We believe that Turk Telekom will struggle to meet its full-year revenue growth guidance of 6-8%, organically, unless its mobile business grows much faster than in Q1. Hence, price-based competition might last another couple of quarters; however, with Vodafone Turkey firmly placed as the second-largest mobile 8 May 2012
Herve Drouet* Analyst HSBC Bank Plc +44 20 7991 6827 Herve.DROUET@hsbcib.com Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 4612 bulentyurdagul@hsbc.com.tr Rajat Narula* Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Bank plc

operator, we expect a gradual decline in competition by the end of 2012. Turkish mobile margins are finally showing signs of some stability, but are still far below CEEMEA peers.
Price it Right: We see attractive potential for mobile broadband and expect rapid data

growth driven by non-messaging data usage, pushed by the proliferation of smartphones. We believe that Turkcells superior network, spectrum and distribution advantage mean it will be best placed to capture this potential. The only missing link is the pricing power. Mobile data traffic is destined to grow exponentially going forward and pricing will get increasingly critical. The monetisation of growing traffic will depend particularly on the pricing power of the operators. As highlighted in our thematic piece, CEEMEA Telecoms, Voice versus Data: Price it Right, 19 March 2012, how operators manage the transition from voice to data, and how well they manage to monetise the data opportunity will be the key to profitability. Pricing power in both data and voice are crucial to a smooth transition, with capex an important competitive tool.
Turk Telekoms woes continue: PSTN is facing a secular decline in access lines, while

fixed broadband growth potential is capped by PC penetration. Superonline is also looking to eat into the high-end FTTx market and is growing well. Turk Telekoms EBITDA margin could come under pressure in the medium term due to inflation in general and wage inflation in particular. HSBC economists expect annual average inflation of 10.3% in Turkey in 2012, implying a revenue decline, in real terms for Turk Telekom.
Valuation: We revise our revenue and earnings estimates for both operators in light of Q1

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

2012 results and evolving competitive dynamics. We maintain our SOTP/DCF-based target price of TRY6.5 for Turk Telekom (Underweight) and our DCF-based target price of USD13.3 for Turkcell (Neutral). Dividend approval at Turkcell (for FY10 and FY2011) will be the key catalyst as it would imply a yield of c12%. Turk Telekom will trade ex-dividend by month-end; its FY2011 yield of c7% is below the sovereign bond yield of c9%.

Turkish Telcos Telecoms 8 May 2012

Financials & valuation: Turk Telekom

Financial statements Year to 12/2011a 12/2012e 12/2013e 12/2014e Key forecast drivers Year to Mobile penetration (%) Mobile revenue (TRYm) Mobile EBITDA (TRYm) Broadband HH penetration (%) Fixed line revenue (TRYm) Fixed line EBITDA (TRYm) 12/2011a 87.0 3,080 380 41.0 9,198 4,703 12/2012e 92.5 3,512 488 44.4 9,396 4,687

Underweight
12/2013e 98.3 4,011 682 46.9 9,617 4,770 12/2014e 103.4 4,547 859 49.2 9,794 4,832

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 3,970 -2,294 -2,060 -2,244 1,198 1,997 3,493 -2,409 -2,319 -1,897 454 1,748 4,435 -2,365 -2,365 -2,518 448 2,124 4,692 -2,355 -2,355 -2,424 86 2,313 11,941 5,077 -1,577 3,501 -107 2,609 3,052 -710 2,069 2,487 12,553 5,176 -1,667 3,509 -258 3,448 3,214 -727 2,798 2,539 13,254 5,451 -1,800 3,651 -289 3,362 3,362 -672 2,693 2,693 13,948 5,691 -1,884 3,808 -322 3,485 3,485 -697 2,781 2,781

Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 12/2011a 2.5 5.9 1.8 10.8 4.6 7.6 7.1 12/2012e 2.4 5.9 1.7 10.5 4.5 6.6 9.4 12/2013e 2.3 5.7 1.7 9.9 4.3 8.0 9.1 12/2014e 2.2 5.4 1.6 9.6 4.3 8.8 10.4

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

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 3,593 7,899 4,031 1,823 16,174 -3,313 5,310 3,487 5,769 17,013 3,527 8,696 3,557 1,338 16,419 -3,407 5,279 3,941 5,935 17,849 3,527 9,260 3,859 1,500 17,285 -3,398 5,889 4,389 6,205 18,544 3,527 9,731 3,998 1,500 17,895 -3,915 5,975 4,475 6,205 19,671 Issuer information Share price (TRY)7.64 TTKOM.IS 15,178 13 Turkey Herve Drouet Target price (TRY)6.50
1 4 . 9

Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst

Bloomberg (Equity) TTKOM TI Market cap (TRYm) 26,740 Enterprise value (TRYm) 30366 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 0.59 0.71 0.54 1.65 0.80 0.73 0.72 1.70 0.77 0.77 0.69 1.77 0.79 0.79 0.79 1.77 0.7 16.3 41.6 13.8 42.5 29.3 47.6 55.1 0.7 113.9 0.7 15.4 43.4 19.1 41.2 28.0 20.0 60.1 0.8 88.6 0.7 16.1 44.4 17.7 41.1 27.5 18.8 64.4 0.8 101.1 0.7 15.9 44.8 17.7 40.8 27.3 17.7 65.6 0.8 104.9 10.0 5.0 5.7 -16.6 15.7 5.1 2.0 0.3 32.2 2.1 5.6 5.3 4.0 -2.5 6.1 5.2 4.4 4.3 3.7 3.3 12/2011a 12/2012e 12/2013e 12/2014e
11 10 9 8 7 6 5 4 3 2010
Turk Telekom
Source: HSBC

11 10 9 8 7 6 5 4 3 2011
Rel to ISTANBUL COMP

2012

2013

Note: price at close of 03 May 2012

Turkish Telcos Telecoms 8 May 2012

Financials & valuation: Turkcell

Financial statements Year to 12/2011a 12/2012e 12/2013e 12/2014e Key forecast drivers Year to Turkcell market share (Turkey) Turkey ARPU (USD) Turkey service revenue (USDm) 12/2011a 52.8 11.8 4,809 12/2012e 51.2 11.7 4,936

Neutral
12/2013e 50.2 12.9 5,685 12/2014e 49.4 13.0 6,047

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 926 -866 -1,410 -4 -24 876 1,876 -999 -999 -1,382 734 831 2,055 -1,176 -1,176 -836 -43 860 2,232 -1,231 -1,231 -902 -98 972 5,610 1,762 -1,067 695 243 1,017 1,204 -292 752 927 5,881 1,834 -836 998 303 1,474 1,434 -285 1,217 1,169 6,760 2,180 -901 1,279 121 1,529 1,529 -304 1,203 1,203 7,216 2,388 -971 1,418 124 1,671 1,671 -332 1,315 1,315

Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%)** 12/2011a 1.4 4.4 1.2 12.0 1.9 9.4 12.4 12/2012e 1.4 4.6 1.3 9.5 1.7 9.1 7.5 12/2013e 1.2 3.8 1.1 9.3 1.6 9.4 8.1 12/2014e 1.1 3.5 1.0 8.5 1.6 10.6 8.9

Note: * = Based on HSBC EPS (fully diluted) ** FY2011 Dividend per share (DPS) and Dividend yield includes DPS of USD0.97 per ADS for FY2010 which is not yet approved but we expect to get approved and paid by end-2012.

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 1,489 2,710 4,464 3,354 9,099 -1,250 1,870 -1,483 5,792 6,559 1,591 3,042 4,155 2,721 9,334 -637 1,972 -749 6,542 6,705 1,591 3,318 4,339 2,764 9,922 -901 1,972 -792 6,843 7,385 1,591 3,578 4,511 2,862 10,482 -1,109 1,972 -891 7,172 7,927 Issuer information Share price (USD)12.65 TKC.N 11,132 35 Turkey Herve Drouet Target price (USD)13.30
5 . 1

Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst

Bloomberg (Equity) TKC US Market cap (USDm) 11,132 Enterprise value (USDm) 8394 Sector WIRELESS 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 (USD) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS ** Book value 0.85 1.05 1.57 6.58 1.38 1.33 0.95 7.43 1.37 1.37 1.03 7.78 1.49 1.49 1.12 8.15 0.8 8.8 15.4 8.4 31.4 12.4 -25.9 -0.8 0.9 12.0 19.0 13.6 31.2 17.0 -11.6 -0.4 1.0 14.6 18.0 13.3 32.3 18.9 -11.7 -0.4 0.9 14.8 18.8 13.7 33.1 19.6 -12.5 -0.4 -6.2 -10.4 -39.5 -29.7 -23.7 4.8 4.1 43.6 44.9 26.1 14.9 18.9 28.2 3.8 2.9 6.7 9.6 10.8 9.2 9.3 12/2011a 12/2012e 12/2013e 12/2014e
22 20 18 16 14 12 10 8 2010
Turkcell
Source: HSBC

22 20 18 16 14 12 10 8 2011
Rel to ISTANBUL COMP

2012

2013

Note: price at close of 03 May 2012

Turkish Telcos Telecoms 8 May 2012

Competition in mobile to ease gradually

Competition intensified in Q1 2012, despite the already aggressive competitive landscape in Q4 2011. In Q1 2012 MNP offers and new tariff structures were introduced by all operators. In the post-paid segment, all operators are now offering bundled and flat minute packages at reduced monthly fees of TRY9-15 levels. As a result of the continued focus on post-paid subscribers, mobile ARPUs for all the operators have converged, reducing the revenue market share gap between Turkcell and smaller operators (chart left below). Turkcell and Avea subs were largely flat q-o-q, with an increased proportion of post-paid subs. In the prepaid segment, however, competition has again intensified with a focus on bundled packages and increased incentives for higher denomination recharges. We expect competitive pressures to recede by year-end. With Vodafone Turkey firmly placed as the second-largest mobile operator, we expect a shift towards rational competition. EBITDA margin in the mobile segment has now started showing signs of stability after more than three tumultuous years of irrational competition (chart below right); but Turkish mobile margins remain far below CEEMEA peers. With subscriber additions not growing fast, all operators have more to lose than to gain by engaging in price competition, in our view. Instead, we believe these operators can gain more by growing margin than by growing revenue through subscriber additions and tariff reductions. We have already witnessed operators in Ukraine improve margins by rationalising their tariffs. Similarly, we expect reduced competitive intensity in the Turkish market and expect churn to fall going forward.

Smartphones driving data usage

We see attractive potential for mobile broadband in Turkey, since fixed broadband penetration is capped by PC penetration. We believe mobile internet is an important growth driver for mobile operators, particularly Turkcell, given its vast 3G coverage (88%). We believe that smartphones are becoming the main affordable means to have access to internet and data services. Smartphones on Turkcells network have reached 4.3m, representing c13% of its subscribers as of Q1-12. Turkcell estimates the data ARPU of a smartphone user to be five times that of a non-smartphone user. We find evidence of smartphones driving data usage and revenue growth in its performance as well. Non-voice revenue now contributes c27% to domestic revenue; up 360bps y-o-y. It is noteworthy that this increase was driven by pure data

Reduced service revenue market share gap

70% 60% 50%

Stabilising margins but at much lower than CEEMEA peers

40%

30%

20%

40% 30% 20% 10% Mar-10

10%

0% Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

Sep-10 Turkcell

Mar-11 Vodafone Turkey

Sep-11 Avea

Mar-12

-10% Turkcell Vodafone Turkey Avea

Source: Company data, HSBC estimates

Source: Company data, HSBC estimates

Turkish Telcos Telecoms 8 May 2012

usage as it increased by 330bps from c8% to c12% of revenue during the same period. We expect growth in data to be increasingly driven by non-messaging data usage, pushed by the proliferation of smartphones. We expect pure data to contribute more than 25% of domestic revenue by 2016. Mobile data traffic is destined to grow exponentially going forward and pricing will get increasingly critical. The monetisation will depend particularly onto the pricing power of the operators. Pricing power may again diminish significantly if data pricing remains irrational similar to the competition seen in the voice segment after the introduction of mobile number portability in November 2008. We have discussed this risk in detail in our recent thematic piece, CEEMEA Telecoms, Voice versus Data: Price it Right, March 2012. The key to operator profitability will increasingly become how operators manage the transition from voice to data; rebalance voice and data tariffs to limit cannibalisation of traditional services, and how well they manage to monetise the data opportunity. The speed of the transition will mostly depend on the extent of competition and regulation. Pricing power in both data and voice are key to a smooth transition, with capex a crucial competitive weapon.

Fixed segment: TTKOM struggles while Turkcell grows fast

Turk Telekoms revenue growth of 2.5% in Q1 was weaker than HSBC and market expectations. Its fixed-line margin was under pressure declining more than 2ppt y-o-y. Mobile margin was flat y-o-y at an anaemic c10% in an intensely competitive environment. Reported earnings were helped by net FX and hedging gain of TRY197m. Q1-12 results again highlight the structural headwinds that Turk Telekom faces resulting in absence of real growth. Now, in order to meet its revenue growth guidance of 6-8% in 2012, Turk Telekom will need to grow revenue by at least 7% in the next nine months to barely reach the low-end of its guidance. It is looking to get higher growth from xDSL by increasing ARPL from upselling plus inflationary adjustments (c7%) in pricing. Management is contemplating an inflationary price adjustment in PSTN too, but expects PSTN revenue decline in FY2012 to be worse than c3% decline seen in 2011. With Turk Telekom struggling to find sufficient avenues for revenue growth other than in mobile, it is likely that competitive pressures will continue for a while longer in the mobile market. On our revised estimates, we forecast 2012 revenue growth of c5% from c6% previously; below the company guidance of 6-8% growth. HSBC expects 10.3% inflation in Turkey, implying a revenue decline, in real terms, for Turk Telekom.
Turk Telekom is not well placed for growth in a high inflation environment

We believe Turk Telekom is not well placed for growth in the event of high inflation. Its main PSTN business is facing a secular decline in access lines, while fixed broadband growth in Turkey is now limited by slowing PC penetration. Turkcell and Vodafone Turkey could further hamper subscriber growth for Turk Telekoms fixed broadband owing to potential substitution by mobile broadband. A significant proportion (c90%) of Turk Telekoms EBITDA is currently generated by its fixed-line business. We believe 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 c20% of fixed-line revenue. Furthermore, there is not much scope for a significant headcount reduction as the government still owns c32% of Turk Telekom.

Turkish Telcos Telecoms 8 May 2012

Capex is a crucial competitive advantage

Conversely, Turkcells fixed line subsidiary (Superonline) is growing at a fast pace. Driven by its high quality fibre broadband infrastructure and increasing coverage, FTTx subs increased 91% y-o-y. Its homes passed are now in excess of 1.1m implying a take-up rate of c28%. We believe that capex is a crucial competitive tool in fixed broadband services, as in the mobile segment. Admittedly, it may be a bit early to start comparing; however, the trend is clearly evident in Turkcells implied ARPL in excess of cTRY48 for FTTx which is c30% higher than Turk Telekoms xDSL ARPL of cTRY36 in Q1-12. Currently, the residential segment contributes c29% to Superonline revenue, but it is increasing much faster than wholesale revenue and we expect it to become an important contributor to Superonline revenue; taking subscribers away from competition. Complementing an increasing contribution of nongroup revenue, its network also helps Turkcell reduce carrier costs; with Superonlines share in group transmission costs reaching 74% in Q1-12. Its margin too is improving, now reaching 20%+ levels. We expect an increasing share of corporate and residential revenue to further improve margins going forward.

Turkcells dividend approval possible by year-end

Turkeys Capital Markets Board new rules require that Turkcell appoints more independent directors to its Board. The deadline for compliance is 30 June, and the company needs 45 days notice to call an AGM. Hence it effectively has barely two weeks to resolve this issue; else the process may drag on a bit longer. A decision on the ongoing dispute between major shareholders (TeliaSonera, Cukurova and Altimo) is also likely by year end. We believe the appointment of more independent directors should pave the way for dividend approval, thereby also removing a significant overhang on the ADS price. We believe that shareholders agreement on dividend distribution will be a key trigger for investors. We also perceive positively the rejection of Turkcell bid on Vivacom, the Bulgarian telecom operator, by Vivacom credit holders. The acquisition would have added to the uncertainties on the use of cash at Turkcell and also it could have been challenging, in our view, for Turkcell to turnaround Vivacom, which is mostly a fixed line operator. We expect a potential dividend payment of USD1.4bn for FY2010 and FY2011 by end-2012.

Valuation and risks

Turk Telekom

We maintain our 12-month target price of TRY6.5 on Turk Telekom, based on an average of our DCFbased SOTP and DCF valuations. Our DCF valuation gives a fair value of TRY6.4 per share, while our SOTP fair value is TRY6.6. The DCF valuation is based on a cost of equity of 13.5%. 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. We reduce our revenue and earnings estimates in light of Q1-12 results and evolving competitive dynamics. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and below the hurdle rate of 13.5% for Turkey. Our target price implies a potential return of -8%, including a dividend yield of 7%. This is below the Neutral band; therefore, we are reiterating our Underweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.

Turkish Telcos Telecoms 8 May 2012

The key upside risks are positive developments in currency movements against the USD, the extent of competition in the mobile segment and the extent of regulatory interference. Other upside risks, in our view, include lower-than-expected inflation, higher-than- expected dividends, high growth in Turk Telekoms subscriber acquisitions, higher-than-expected mobile ARPU and broadband ARPL, brisk IPTV uptake, and a delay in the entry of competition in the fixed-line mass market.
Turkcell

We maintain our 12-month DCF-based target price of USD13.3 per ADS. We use the one-year average US 10-year treasury bond yield of 3.5% as the risk-free rate. We use a market risk premium of 10% and a beta of 1.2 to reflect heightened competitive risks in the mobile market, sparked by concern that irrational competition may also spill into the 3G and data segment. We value its associate (Fintur) using an EV/EBITDA multiple of 4.5x on 2012e, in line with the current average CEEMEA telcos multiple. On our estimates, the valuation of Turkcells stake is USD1.9bn, implying a value of approximately USD2.2 per ADS. We revise our revenue and earnings estimates in light of Q1 2012 results, higher than expected financial income and evolving competitive dynamics. Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppt above and below the hurdle rate of 13.5% for Turkey. Our target price implies a potential return of 17.5%, including dividend yield of 12.4% relating to dividends for FY2010 and FY2011. This is within the Neutral band; therefore, we are reiterating our Neutral rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Upside risks, we believe, include 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.

Revising estimates ________________ Turkcell _________________ 2012e 2013e 2014e USDm USDm USDm Old estimates Total Revenue EBITDA EBITDA Margins Net Profit New estimates Total Revenue EBITDA EBITDA Margins Net Profit Diff Total Revenue EBITDA EBITDA Margins (bps) Net Profit
Source: HSBC estimates

______________Turk Telekom ______________ 2012e 2013e 2014e TRYm TRYm TRYm 12,679 5,258 41.5% 2,761 12,553 5,176 41.2% 2,798 -1.0% -1.6% -24 1.3% 13,490 5,526 41.0% 2,804 13,254 5,451 41.1% 2,693 -1.7% -1.3% 17 -3.9% 14,269 5,793 40.6% 2,904 13,948 5,691 40.8% 2,781 -2.3% -1.8% 21 -4.2%

5,921 1,852 31.3% 1,137 5,881 1,834 31.2% 1,217 -0.7% -0.9% -8 7.0%

6,777 2,194 32.4% 1,232 6,760 2,180 32.3% 1,203 -0.3% -0.6% -13 -2.3%

7,222 2,402 33.3% 1,334 7,216 2,388 33.1% 1,315 -0.1% -0.6% -16 -1.4%

Turkish Telcos Telecoms 8 May 2012

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: Herve Drouet and Bulent Yurdagul

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 potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, 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.

Turkish Telcos Telecoms 8 May 2012

*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 May 2012, the distribution of all ratings published is as follows: Overweight (Buy) 48% (26% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 37% 15% (25% of these provided with Investment Banking Services) (16% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities

Turkcell (TKC.N) Share Price performance USD Vs HSBC rating history Recommendation & price target history From To Neutral Value 15.70 19.00 20.50 18.25 17.00 20.60 16.60 16.20 12.60 14.50 13.30 Date 10 May 2010 Date 12 May 2009 19 August 2009 17 November 2009 07 April 2010 10 May 2010 22 October 2010 04 March 2011 05 May 2011 08 September 2011 24 November 2011 19 March 2012 Neutral (V) Target Price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Price 10 Price 11
Source: HSBC Source: HSBC

29 24 19 14 9

Nov-07

Nov-08

Nov-09

Nov-10

May-07

May-08

May-09

May-10

May-11

Nov-11

May-12

Turk Telekom (TTKOM.IS) Share Price performance TRY Vs HSBC rating history

Recommendation & price target history From Neutral (V) Neutral Target Price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9
Source: HSBC

To Neutral Underweight Value 5.10 4.90 5.70 5.85 6.00 7.10 6.80 7.10 6.50

Date 23 October 2009 22 October 2010 Date 12 May 2009 23 July 2009 23 October 2009 17 February 2010 29 April 2010 22 October 2010 11 February 2011 24 November 2011 19 March 2012

10 9 8 7 6 5 4 3

Nov-07

Nov-08

Nov-09

Nov-10

May-07

May-08

May-09

May-10

May-11

Nov-11

Source: HSBC

May-12

Turkish Telcos Telecoms 8 May 2012

HSBC & Analyst disclosures

Disclosure checklist Company TURK TELEKOMUNIKASYON AS TURKCELL
Source: HSBC

Ticker TTKOM.IS TKC.N

Recent price 7.64 12.65

Price Date 03-May-2012 03-May-2012

Disclosure 2, 6 6

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 March 2012 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 March 2012, 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 March 2012, 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 March 2012, 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 08 May 2012. All market data included in this report are dated as at close 03 May 2012, 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.

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Turkish Telcos Telecoms 8 May 2012

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 HSBC Bank plc Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC Securities (Canada) 8 Canada Square Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; London, E14 5HQ, United Kingdom 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Telephone: +44 20 7991 8888 Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Fax: +44 20 7992 4880 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Website: www.research.hsbc.com Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC 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 In the UK this document has been issued and approved by HSBC Bank plc (HSBC) for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research 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 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 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 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 publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") 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. HBAP SLS is 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. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. 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. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. 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 Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. Copyright 2012, HSBC Bank plc, 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 Bank plc. MICA (P) 038/04/2012, MICA (P) 063/04/2012 and MICA (P) 206/01/2012

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