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111004_28253_Turkish top picks_F:Normal Cover 2011 10/5/2011 12:38 AM Page 1

Turkey/Equity
October 2011

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

Turkey/Equity
The Turkish government and the central bank have opted to cope with slowing global growth
Tamer Sengun*
Analyst and a high current account deficit by adopting a policy that combines low interest rates
HSBC Yatirim Menkul Degerler A.S.
+90 212 376 4615
and a weaker Turkish lira. In our view this establishes a new operating environment
tamersengun@hsbc.com.tr for Turkish industries and corporates
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.
A companys competitive position is among the key factors underlying long-term investment
Levent Bayar* views in equity markets. The competitive landscape is not only influenced by macro conditions,
Analyst
HSBC Yatirim Menkul Degerler A.S. but also by micro factors such as the individual companies market share, growth and
+90 212 376 4617
leventbayar@hsbc.com.tr profitability. To assess how different sectors and corporates in Turkey are positioned to cope
Levent joined the HSBC Turkey Research Team in 2006, focusing on the cement, glass, real estate and energy sectors. Before joining
with changes in the competitive environment, we have designed a scorecard system and
HSBC, he worked as a credit analysis officer for a number of domestic banks. analysed the sectors and companies under HSBC coverage
Erol Hullu*
Analyst The winners based on the scorecard introduced in this report include Trakya Cam,
HSBC Yatirim Menkul Degerler A.S.
+90 212 376 4616 Emlak REIT, Bizim, Halkbank and Tupras (all rated Overweight); all of them also
erolhullu@hsbc.com.tr
offer attractive potential returns in the next 12 months
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 By Bulent Yurdagul, Cenk Orcan and
the HSBC Turkey Research Team
October 2011

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
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5 October 2011

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 lira-
based funding).

Winners: airports, retail, oil & gas, autos


In this report we analyse 14 industries, seeking to identify those that stand out from the crowd for their
competitive position in other words, the ones we think are more capable of adapting to deal with the
potential challenges we mentioned above. The qualities we are looking for are: vertical integration (the
higher it is, the greater the value added and competitive capacity); market structure (fragmented versus
consolidated); regulatory environment (clear and transparent) and track record for numerical competitive
metrics such as asset turnover, profitability, relative growth and ROE. In a later section, we combine
these quantitative and qualitative factors to analyse the different sectors. Our finding is that retail,
airports, oil & gas and the automotive industries appear better positioned than other industries to operate
successfully under the new macro environment. Insurance, utilities and airlines, on the other hand, look
weaker to us.

Airports rank highly owing to the supportive regulatory framework, which combines simplicity and
visibility, and is concession-based, removing new-entrant risks until the expiry of the concessions.
Moreover, market fragmentation is low (the market leader has a 45% share), revenue streams are FX-
based but a large share of the costs are in Turkish lira, the 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 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
(High=5, Low=1) sector (a score of 5 is assigned). Lower market share can be justified for shareholders by above-average ROE. We have assigned the lowest
score of 1 to companies which have posted the lowest ROEs and also have a low market share in their markets.
2. Market share momentum Industry growth is a key variable in determining the intensity of rivalry in an industry, and sets the pace of expansion required to maintain
(Strong=5, Weak=1) share. We have ranked Turkish companies in this analysis based on industry and company growth rates for the past five years.
3. Sustainable growth (DuPont The DuPont formula suggests that a higher asset turnover ratio (sales revenues over assets excluding cash) and gross profit margin (excluding
formula) (Strong=5, Weak=1) 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.
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
(Positive=5, Highly Negative=1) combating the rising current account deficit. This mainly looks positive for export companies and negative for importers.
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 Score 3 Score 4 Score 5 Score 6
Impact of
SCORECARD Profitable Market Share Sustainable Industry Low interest rate Weak TRY impact on
Market Share Momentum Growth (Dupont) Fragmentation impact on P&L P&L
(Positive=5, Highly (Positive=5, Highly
Total Score Company (High=5, Low=1) (Strong=5, Weak=1) (Strong=5, Weak=(High=5, Low=1) Negative=1) Negative=1)
TRKCM 28 Trakya Cam 5 5 5 5 4 4
BIMAS 25 BIM 5 5 5 4 3 3
EKGYO 25 Emlak Konut REIT 4 5 5 3 5 3
HALKB 24 Halkbank 5 4 4 4 4 3
SISE 23 Sisecam Holding 5 3 5 4 4 3
GARAN 23 Garanti Bankasi 5 5 3 4 4 3
TUPRS 23 Tupras 5 1 5 5 5 2
PETKM 23 Petkim 4 1 5 4 5 4
BIZIM 23 Bizim Toptan Satis 3 5 5 4 3 3
TOASO 22 Tofas 4 5 5 2 4 2
TAVHL 22 TAV 4 4 4 5 3 2
GUBRF 22 Gubretas 5 5 5 3 2 2
FROTO 22 Ford Otosan 5 4 5 2 3 3
CCOLA 22 Coca-Cola Icecek 5 4 5 4 4 1
AEFES 22 Anadolu Efes 5 3 5 4 3 2
AYGAZ 21 Aygaz 5 1 5 4 3 3
ARCLK 21 Arcelik 3 5 3 4 4 3
CIMSA 21 Cimsa 3 5 4 2 4 3
MGROS 21 Migros 2 5 5 3 5 1
DOAS 21 Dogus Otomotiv 5 4 5 2 5 1
ANHYT 21 Anadolu Hayat 5 3 4 4 2 3
YKBNK 20 Yapi Kredi Bankasi 4 2 3 4 4 3
TRCAS 20 Turcas 5 3 3 4 4 2
KILER 20 Kiler Alisveris 2 5 5 2 5 1
HURGZ 20 Hurriyet 4 1 5 4 4 2
EREGL 19 Erdemir 4 1 5 3 4 2
TTKOM 19 Turk Telekom 5 1 5 4 3 1
TATKS 19 Tat Konserve 4 3 5 2 4 1
AKSEN 19 Aksa Enerji 3 5 4 3 4 1
VAKBN 19 Vakifbank 2 3 3 4 4 3
TKC.N 19 Turkcell 5 1 5 4 2 2
BAGFS 19 Bagfas 3 1 5 2 3 5
AKCNS 19 Akcansa 3 4 4 2 4 3
AKBNK 19 Akbank 2 3 3 4 4 3
ISCTR 18 Isbank 3 2 2 4 4 3
ZOREN 18 Zorlu Enerji 1 5 4 3 4 1
SNGYO 18 Sinpas REIC 2 5 4 1 3 3
KRDMD 18 Kardemir 2 1 5 4 4 2
THYAO 17 Turkish Airlines 2 5 4 2 3 1
TRGYO 17 Torunlar REIC 2 4 2 2 4 3
ISGYO 17 Is Reit 2 1 4 2 4 4
ANACM 17 Anadolu Cam 2 1 3 4 4 3
ALBRK 17 Albaraka 2 5 3 2 2 3
ASYAB 16 Bank Asya 2 5 2 2 2 3
AKENR 15 Akenerji 3 1 3 3 4 2
ADANA 15 Adana Cimento 3 1 4 2 3 3
ANSGR 15 Anadolu Sigorta 3 5 1 1 2 3
AKGRT 12 Aksigorta 2 3 1 1 2 3
Source: HSBC estimates

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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
Er demir
Torunlar REIT Cimsa
Kardemir Anadolu Hayat Traky a Cam
Albarak a
Migros
Hurriyet Tofas
Akenerji
IS Bankasi Emlak REIT
Valuation relative

Anadolu3.0
Cam YKB
Adana Cimento Tupras
Turkish Airlines Arc elik
Akcansa Halk bank
Petkim
Akbank TAV
1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Zorlu Enerji Vak ifbank Gubretas Gar anti Bankasi
Anadolu Sigorta 2.0
Dogus Otomotiv
Ford Otosan

CCI
Turkc ell
Bagfas
Aksigor ta Kiler Ay gaz Sisec am
Turk Telekom
1.0

Tat Konserve
BIM
Anadolu Efes

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 RIC Current price Old target price New target price Old rating New rating
Adana Cimento (A) ADANA.IS 4.11 6.50 5.75 Neutral Overweight
Anadolu Efes AEFES.IS 21.00 23.40 21.80 Underweight Underweight
Akbank AKBNK.IS 6.88 7.60 7.60 Underweight Underweight
Akansa AKCNS.IS 6.66 9.70 8.50 Overweight Overweight
Akenerji AKENR.IS 2.97 5.00 4.60 Overweight Overweight
Aksa Enerji AKSEN.IS 2.82 7.00 5.80 Overweight (V) Overweight
Aksigorta AKGRT.IS 1.32 1.94 1.30 Underweight Underweight
Albaraka Turk ALBRK.IS 1.87 2.80 2.80 Overweight Overweight
Anadolu Cam ANACM.IS 3.15 4.10 4.50 Neutral Overweight
Anadolu Hayat ANHYT.IS 2.96 5.33 4.50 Overweight Overweight
Anadolu Sigorta ANSGR.IS 0.90 1.32 1.05 Neutral Neutral
Arelik ARCLK.IS 6.86 10.00 9.00 Overweight (V) Overweight
Bank Asya ASYAB.IS 1.95 2.75 2.75 Overweight Overweight
Aygaz AYGAZ.IS 9.98 11.90 10.80 Underweight Underweight
Bagfa BAGFS.IS 165.50 164.00 170.50 Neutral Underweight
Bizim BIZIM.IS 22.00 39.60 37.30 Overweight (V) Overweight (V)
Bim BIMAS.IS 54.75 59.00 59.00 Neutral Neutral
Coca-Cola ecek CCOLA.IS 23.20 24.30 21.80 Neutral Underweight
imsa CIMSA.IS 7.50 12.80 11.00 Overweight Overweight
Dogus Otomotiv DOAS.IS 4.13 5.40 5.00 Neutral Neutral (V)l
Doan Holding DOHOL.IS 0.65 1.07 0.78 Neutral (V) Neutral (V)
Doan Yay.Holding DYHOL.IS 0.66 1.15 0.77 Neutral (V) Neutral (V)
Emlak Konut REIT EKGYO.IS 2.31 3.70 3.70 Overweight (V) Overweight (V)
Enka Insaat ENKAI.IS 4.10 6.42 5.60 Overweight Overweight
Erdemir EREGL.IS 3.24 5.25 4.95 Overweight Overweight
Ford Otosan FROTO.IS 13.60 16.00 15.50 Neutral Neutral
Garanti Bankas GARAN.IS 7.06 8.10 8.10 Neutral Neutral
Gbreta GUBRF.IS 12.25 15.40 15.40 Overweight (V) Overweight (V)
Halkbank HALKB.IS 12.25 17.40 17.40 Overweight Overweight
Hrriyet HURGZ.IS 0.94 2.00 1.50 Overweight (V) Overweight (V)
Bankas ISCTR.IS 4.64 5.85 5.85 Overweight Overweight
GYO ISGYO.IS 1.18 1.75 1.75 Overweight Overweight
Kardemir (D) KRDMD.IS 0.83 1.25 1.25 Overweight Overweight
Kiler KILER.IS 3.44 6.50 3.10 Underweight (V) Underweight (V)
Ko Holding KCHOL.IS 6.82 8.15 8.15 Neutral Neutral
Migros MGROS.IS 15.20 26.80 22.80 Overweight (V) Overweight (V)
Petkim PETKM.IS 2.37 3.30 3.00 Overweight Overweight
Sabanc Holding SAHOL.IS 6.26 10.00 10.00 Overweight Overweight
iecam SISE.IS 3.31 3.52 3.85 Neutral Neutral
Sinpa GMYO SNGYO.IS 1.75 2.50 2.50 Overweight Overweight
Tat Konserve TATKS.IS 2.85 4.00 3.10 Neutral Neutral
TAV Havalimanlar TAVHL.IS 7.10 9.50 9.50 Overweight Overweight
Turkcell (USD) TKC.N 12.60 12.60 8.80 Neutral Neutral
Trk Havayollar THYAO.IS 2.65 4.17 3.20 Neutral Neutral
Tekfen Holding TKFEN.IS 5.46 8.10 8.10 Overweight Overweight
Tofa TOASO.IS 6.62 10.00 9.00 Overweight Overweight
Turcas TRCAS.IS 2.61 5.10 4.50 Overweight Overweight
Torunlar REIC TRGYO.IS 5.12 7.40 7.40 Overweight (V) Overweight (V)
Trakya Cam TRKCM.IS 2.94 4.60 4.30 Overweight Overweight
Trk Telekom TTKOM.IS 7.98 6.80 6.80 Underweight Underweight
Tpra TUPRS.IS 36.10 47.00 47.00 Overweight Overweight
Vakfbank VAKBN.IS 3.66 4.75 4.75 Overweight Overweight
Yap Kredi Bankas YKBNK.IS 3.78 5.40 5.40 Overweight Overweight
Zorlu Enerji ZOREN.IS 1.79 3.00 2.10 Neutral Neutral
Source: HSBC estimates, ISE * Prices as of 27 Sep 11

8
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5 October 2011

Contents
Erdemir 143
Sector review 10 Ford Otosan 146
Gubretas 149
Sector profiles competition Hurriyet 152
Is REIT 155
analysis 15 Kardemir 158
Kiler 162
Koc Holding 166
Which corporates are Migros 169
competitive? 31 Petkim 172
Sabanci Holding 175
Sinpas REIC 178
Winners and losers 40 Sisecam 181
Tat Konserve 185
TAV Airports 188
Financials 45 Tekfen Holding 191
Akbank 46 Tofas 194
Aksigorta 49 Torunlar REIT 197
Albaraka Turk 52 Trakya Cam 200
Anadolu Hayat 56 Tupras 203
Anadolu Sigorta 59 Turcas 207
Bank Asya 62 Turkcell 210
Garanti Bank 65 Turkish Airlines 213
Halkbank 68 Turk Telekom 217
Isbank 71 Zorlu Enerji 220
Vakifbank 74
Yapi Kredi Bank 77
Disclosure appendix 225
Industrials 81
Adana Cimento 82 Disclaimer 228
Akcansa 85
Akenerji 89
Aksa Enerji 93
Anadolu Cam 97
Anadolu Efes 101
Arcelik 104
Aygaz 107
Bagfas 110
BIM 113
Bizim 116
Cimsa 119
Coca-Cola Icecek 123
Dogan Holding 127
Dogan Yayin Holding 130
Dogus Otomotiv 133
Emlak Konut REIT 136
Enka Insaat 140

9
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Turkish Equities abc
5 October 2011

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 sectors performance over the past six years
Turkish industries (2005-11e). The DuPont matrix is defined as asset
Measuring a sectors competitive position is a turnover versus gross margin for a particular
very complicated process. It involves many angles business or industry. It shows how efficiently
and parameters that are difficult to measure, and assets are used to generate business (ie sales)
has been the subject of much research and versus how much core profit is made. Two
academic work. Despite the complexities, though, crucial factors come into play in order to make the
we view it as vital, from an investment different sectors comparable: (1) adjustment of
perspective, to identify the most competitive assets: when calculating asset turnover (ie the
sectors, as these would have the potential for sales to assets ratio) only non-cash assets are
sustainable and above-average growth and thereby taken into account in other words, cash and
create value. In this report, we attempt to illustrate securities are excluded; and (2) adjustment of
the competitive landscape for the 15 Turkish costs in gross profit calculations: only the
industries under our coverage using two outsourced costs of a business are considered,
approaches: quantitative and qualitative. but all own costs are excluded. Examples of
outsourced costs include raw materials,
Quantitative approach: Our quantitative consumables and supplies, purchased merchandise
approach uses three metrics: (1) the DuPont and services. Own costs include labour,
formula (asset turnover versus gross profit depreciation and amortisation.
margin), profitability (ROE) and the level of
industry fragmentation. We construct data for Qualitative approach: In this approach, we use
each sector using data for the individual stocks six factors that we identify as critical to a sectors
under coverage to obtain information about each competitive ranking. These are:

10
Equities
Turkish Equities abc
5 October 2011

Vertical integration: full, partial or very the most relevant peers for Turkish counterparts
limited access to the value chain? (or for which data are most widely available). In
this way, we try to assess whether a Turkish
Scale: big enough to provide economies of
sector is competitive on a global scale or not.
scale in purchasing, production, network
distribution?) Quantitative approach results
Retail, autos and oil & gas stand out among
Regulatory framework: regulated or free
others
pricing tariffs? Protection against imports via
duties/quotas? Based on our analysis, these three sectors have
high asset turnover and generate above-average
Brand: does the sector operate with strong returns on equity by comparison with other
brand(s) or function entirely as an OEM? Turkish industries. They also rank favourably on
Technology: latest or outdated? global comparisons.

Liberalisation level: state controlled or fully Sales revenues in the retail sector (which, as we
private? have noted, is strongly driven by BIM) are 4.3x
total adjusted assets and well above global sector
We feed these six factors into our analysis based average of 2.2x. Although the sectors adjusted
on the analysts judgment of how a particular gross margin was below that of the global
industry scores in each. We do not attach industry, ROE was a solid 41% versus the global
numerical scores but assign a tick to denote a average of 22%. The retail market is highly
positive score, a cross for a negative position fragmented with the top 5 players accounting for
and N/A if the metric is not applicable (see only 20% but we do not deem this to be a risk for
table on page 13). the current players for now. The penetration of
A further dimension: Regional/global peer organised retailers is still low at around 45% in
comparisons We also provide comparisons for Turkey. We would be more concerned if
Turkish industries operating in regional/global penetration levels approach the DM average of
sectors on the quantitative metrics. Similarly, over 70%.
we construct the global (or regional) industry The automotive sector is highly competitive, with 60
averages using the individual companies that are global brands operating. However, light commercial

Asset turnover comparison (global peer average versus Adjusted gross margin comparison (global peer avg vs
Turkey, x) Turkey)
5.0 80%
4.5 70%
4.0
60%
3.5
3.0 50%
2.5 40%
2.0 30%
1.5 20%
1.0
10%
0.5
0.0 0%
Automotiv e
Fertilisers

Banks

Utilit ies

Airlines

Oil & Gas


Iron & Steel
Airports

Beverages

B. Materials

H. Durables

Retail
Beverages
Automotive

Airlines

Fertilisers

Airports

Utilities
Retail

Iron & Steel

Real Estate
Oil & Gas

H. Durables

B. Materials

Sector Turkey Sector Turkey

Source: Company data Source: Company data

11
Equities
Turkish Equities abc
5 October 2011

manufacturers in particular benefit from tax overcrowded while insurance penetration in Turkey
advantages, scale in production, a well-educated is low and irrational pricing is hurting profitability.
work force, and a developed parts industry, all of
The Turkish utility market has become an
which helps it generate high sales (over assets) and
attractive investment area for the private sector in
profitability. The ability to attract new models as a
recent years. Its attraction lies in the strong
result of the qualities mentioned above is one of the
pricing potential as demand growth is outstripping
keys to success in this sector, and we expect it to
capacity growth. Large-scale investments have
persist in the next few years.
already been launched by the private sector and
Competition in the oil & gas market is relatively much more privatisation activity is scheduled for
low in Turkey, owing to a supply/demand the next few years. However, scale and returns are
imbalance and high entry barriers that result from still low, there is little vertical integration and
high capex requirements. The sectors quantitative there is little clarity over potential changes in the
competitive metrics are favourable, with high asset long-term regulatory environment although this is
turnover and high ROE (despite a lack of vertical a heavily regulated industry.
integration, which pushes operating margins below
Qualitative approach results
the global industry average).
Airports, banks and durable goods: strong
Airlines, insurance and utilities score lower After analysing the sectors on qualitative
Airlines (basically Turkish Airlines) still have low competition criteria we found airports, banks and
asset turnover ratios that are below the European durable goods to be strongly positioned.
sector average. ROE is also lower than the peer
average although the adjusted gross margin is in line. Airports (basically TAV Airports) offer good
We attribute the low sales to asset and ROE metrics vertical integration, providing terminal services that
largely to Turkish Airlines rapid capacity growth, include all related activities (ground handling, duty
and believe they should gradually improve towards free and f&b), a clear and transparent regulatory
sector averages as new aircraft are used more framework despite fixed passenger fees a
efficiently and the ramp-up stage is passed. regionally strong brand name that makes it eligible
to participate in all new concessions globally and a
The challenges to the insurance sector seem much strong local market share.
stronger and more persistent as the market is

Sector ROE comparison (global peer avg vs Turkey) Sector fragmentation (aggregate market share of top 5 players)
45% Retail
40% Real Estate
35% Insurance
30% B. Materials
Automotive
25%
Banks
20%
Airlines
15%
Iron & Steel
10%
Utilities
5%
Fertilisers
0%
Oil & Gas
Iron & Steel
Fertilisers

H. Durables

Beverages

Oil & Gas

Airlines

Utilities

Airports
Retail

Automotive

Real Estate

Insurance
Banks

B. Materials

H. Durables
Airports
Beverages
Sector Turkey 0% 20% 40% 60% 80% 100%

Source: Company data Source: Company data

12
Equities
Turkish Equities abc
5 October 2011

Similarly, Turkish banks operate on a scale Fertiliser companies lack vertical integration, and
commensurate with most EM peers, enabling them their need to import basic fertiliser nutrients reduces
to operate branches efficiently and keep cost to their added value. Moreover, their production is on a
income ratios low, at around 40%. The sound lesser scale than some EM peers owing to limited
regulatory framework (designed after the 2001 consumption in Turkey (a question of farmer
crisis) is a big positive for the sector, ensuring economics), and they do not have access to the same
compliance with international standards, the brands technology as fully integrated fertiliser producers,
are strong and the technology is up-to-date. which leads to a simper production process but
lower value creation.
The durable goods sector ranks favourably in our
qualitative analysis; the industry, led by Arcelik, has As we mentioned earlier insurance gets a
high production capacity, providing scale and technical tick on the liberalisation factor in
efficiency in production, and a relatively low tax our table below (the market in Turkey is fully
burden (6.7% consumer tax rate versus 37% to 84% liberalised with insignificant state involvement);
for cars). It also benefits from a strong Turkish brand however, it still suffers from intense competition,
regionally (Beko), one of the most advanced curbing sector profitability. It also lacks scale, the
technologies in the industry in energy-efficient regulatory environment is more subject to change
products, and a fully liberalised industry that has than in most other sectors and insurance need
been open to competition since 1996 (when Turkey awareness (among consumers) is significantly
became a member of EU Customs Union). lower than in developed geographies.

Utilities, fertilisers and insurance: weak Overall assessment


Utilities score weakly in our qualitative analysis Top four sectors: airports, retail, oil & gas and
because they are still in the ramp-up stage, lack autos
the size to achieve economies of scale in By combining the two approaches, we identify the
production and sales, operate in a regulatory four sectors we consider offer a stronger overall
environment where long-term changes in competitive position than others: retail, airports,
particular are not evident and where liberalisation oil & gas and autos.
is still low, given the states heavy involvement in
the generation segment (although this will Insurance, utilities and airlines, on the other hand,
diminish with the planned privatisations of power emerge as the least attractive on the combination
generation assets). of the two approaches.

13
Equities
Turkish Equities abc
5 October 2011

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


Vertical integration Scale Regulatory framework Brand Technology Liberalisation level
Airlines (4) N/A X

Airports (4) N/A X

Automotive (2) X X X X

Banks (5) N/A

Beverages (2) N/A N/A X N/A

B. Materials (3) X X X

Fertilisers (2) X X N/A X

H. Durables (5) N/A

Insurance (2) N/A X X X

Oil & Gas (3) X X X

Real Estate (3) N/A X X

Retail (3) N/A X X

Iron & Steel (3) X X X

Telecoms (4) N/A X

Utilities (1) X X X X X
Source: HSBC estimates

14
Equities
Turkish Equities abc
5 October 2011

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
16

5 October 2011
Turkish Equity
Equities
Competition analysis Airlines
The DuPont profitability matrix (ROA
equation, asset turnover versus net profit DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) 2010
margin) for European airlines suggests that
legacy (network) carriers, including Turkish
Airlines, are in a relatively better competitive 1.5
position than low-cost carriers (LCC). Despite 19%
Lufthansa Lufthansa
having a higher cost structure than LCCs, the
17%
legacy carriers seem to generate incremental 1.2 Easy Jet
AF-KLM

Asset Turnover
value added via more differentiated IAG 15% Ryanair
product/service (long-haul and business

ROE
13%
flights). Turkish Airlines offers the potential to 0.9
move in a favourable direction as it expands 11% IAG
the portion of long-haul of flights with new THY
aircraft 0.6 9%
Easy Jet AF-KLM
Strategy analysis: THY still scores poorly Ryanair 7%
among major European airlines on market THY
share and profitability. Lufthansa benefits from 0.3 5%
its scale, which allows it to deliver above- 30% 35% 40% 45% 50% 0% 5% 10% 15% 20% 25%
industry-average profits. As THY continues to
grow aggressively, its market share should Adj. Gross profit margin Market Share
climb, as should profitability once the new
aircraft and routes it is operating mature.
Turkish Airlines has captured major market Source: Company data * Size of bubbles represents gross profit Source: Company * Sizes of bubbles represent net profit
share in last five years: THYs market share
within the Association of European Airlines
(AEA) group, measured by RPK, rose from Turkish Airlines a clear market share gainer in 2005-11e Turkish airline market is highly consolidated: Top 3 players claim 90% market
2.9% in 2005 to 6.4% as at H1 2011 thanks to share
its ongoing aggressive growth strategy, as well
as Istanbuls emerging status as a regional hub 10% 90%
Historical Growth of Industry Volume

for air passenger traffic between East and 9% Losing Share 80%
West. We expect THY to maintain its far-right
position in this diagram in the years to come. 8% 70%
7% IAG THY
Is the market fragmented? The top five 60%
airlines in Europe account for 70% of total 6% AF-KLM
traffic (RPK), which means the market is not 5% Lufthansa 50%
very fragmented. There are still too many 4% Ryanair 40%
players accounting for the remaining 30%
3% Easyjet 30%
market share, but the industry has undergone a
substantial process of mergers and alliances in 2% 20%
the past decade, creating big groups such as 1% Gaining Share 10%
the Lufthansa Group, IAG (the International 0%

abc
Airline Group, led by BA) and the AF-KLM 0%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
Group. More consolidation activity lies ahead, Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8
in our view, with THY potentially taking a Historical Growth of Sales Volume
consolidator role. Today 5 yrs ago

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
5 October 2011
Turkish Equity
Equities
Competition analysis Airports
The DuPont profitability matrix places TAV in a
favourable position in relation to European airports; DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) - 2010
TAV generates high profits on the assets it
operates. When conducting like-for-like
comparisons, we exclude TAVs rent expenses 0.6 13%
from the gross profit calculations while including TAV 12%
air operation rights in the asset base. TAVs
integrated structure (including ground handling, 11% ADP

Asset Turnover
duty free and f&b) provide it with an efficient 0.4 Fraport Flughafen Wien 10%
structure in our view. As its foreign airport Flughafen

ROE
operations mature, we expect TAV to improve its 9%
Zurich
asset turnover and profit margins further through ADP Flughafen
8%
improved scale and operational leverage. 0.2 Flughafen Fraport Wien
Strategy analysis: TAV has a c46% market share 7%
Zurich TAV
(passengers) in Turkey, although this is based on 6%
concession agreements won via tenders.
Opportunities for entry by other players are virtually 0.0 5%
non-existent until the renewal of operating rights 65.0% 67.0% 69.0% 71.0% 73.0% 75.0% 25% 30% 35% 40% 45% 50% 55% 60%
tenders, and competition arises instead from
competition between regional airports for Adj. Gross profit m argin Market Share
passenger and aircraft traffic (eg Istanbuls second
airport, Sabiha Gokcen, creates competition for
TAVs Ataturk to some extent). TAVs growth Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
strategy to date has relied heavily on external
financing, requiring minimum equity. This business
model offers improvement in the ROE in upcoming TAV Airports operates in a high-growth market (2005-11e) Turkish airport market is highly consolidated: Top 3 players claim 90% market
years in line with growing passenger volumes. share
TAV Airports benefits from operating in a high
growth market. Turkeys airport passenger traffic 15% 110%
Historical Growth of Industry Volume

posted 13% CAGR in 2005-11e and TAVs


Losing Share
passenger traffic in Turkish airports grew by 11.4% 100%
CAGR in the same period. These are remarkable 12%
TAV 90%
growth figures compared to European airports. If
capacity constraints at TAVs main operation, 9% 80%
Istanbul Ataturk, are solved, the company may
continue to post strong growth. Flughafen 70%
6%
Is the market fragmented? No: the top three Zurich
Flughafen Wien 60%
players (all private) constitute +80% of the Fraport ADP
airport market (passengers) in Turkey. While 3%
50%
there are 46 airports in total in the country, and Gaining Share
38 are operated by the state, scope for further 0% 40%

abc
privatisations is limited given the low
0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Top 1 Top 2 Top 3 Top 4 Top 5 Top 6
commercial profile of these inland airports.
That said, tenders for operating rights renewals Historical Growth of Sales Volume
(such as for TAVs Izmir airport) create Today 3 y rs ago
opportunity for potential newcomers.
Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
17
18

5 October 2011
Turkish Equity
Equities
Competition analysis Automotive
The DuPont profitability matrix puts Turkish
vehicle manufacturers in a relatively weaker DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) - 2010
competitive position than most European
mainstream OEMs. The Turkish car industry
has a high sales to asset ratio but low gross 3.0 34%
profits. This could be the result of Turkeys Ford Otosan Porsche Ford Otosan
being a production hub for the lower-value- 2.5 Dogus 29%
added LCVs rather than more sophisticated Otom otiv Dogus Tofas
24%

Asset Turnover
passenger cars. Moreover, the Turkish industry 2.0
Tofas PSA Otomotiv
operates almost fully under licence to produce VW Group 19% BMW

ROE
global brands and still relies heavily on imports 1.5
of key parts for production (engines, gear BMW 14% Daim ler Renault VW Group
boxes, chips and transmission parts). 1.0
Fiat
Strategy analysis: On the market share versus Daimler 9% PSA
0.5 Renault
ROE metric, the picture changes in favour of Fiat Auto
4%
Turkish vehicle industry. Both Ford Otosan and 0.0
Tofas generate strong returns on their solid market -1%
positions, in particular their dominance of the LCV 10% 15% 20% 25% 30% 35% 40%
0% 5% 10% 15% 20%
segment in Turkey. They export on a cost-plus-fee
basis, where all marketing and selling expenses Adj. Gross profit m argin Market Share
are assumed by their global counterparts,
minimising their opex. We presume that labour
union issues and related burdens are also lower in Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
Turkey than in Europe.
A market share comparison suggests that
Tofas has made substantial progress towards Tofas clear market share gainer in 2005-11e Turkish vehicle market is not fragmented: Top 5 players have a 60% market share
improving its market position in recent years.
Tofas sales grew at a rate above the weighted 8% 100%
average growth in the geographies where it sells its Losing Share
Historical Growth of Industry Volume

7% 90%
products, owing to its success in attracting new VW Group
products and the large resultant turnaround in 80%
6%
capacity, output and scale benefits. Ford Otosan 70%
and DOAS also did well compared with their 5%
Fiat Auto 60%
relevant sales geographies, while PSA Group 4%
appears to have been the only one with meaningful PSA 50%
market share loss during the period analysed. 3% 40%
Dogus Oto
Is the market fragmented? Although the top 3 2% 30%
Daimler
brands control c45% of the Turkish light vehicle BMW Gaining Share
1% 20%
market and the top 5 control 60%, the market is Renault Tofas
more fragmented than consolidated in our view. 10%
0% Ford Otosan
There is tough competition, with c60 global 0%
-1%
-1% 2% 5% 8% 11% 14%

abc
brands operating in the market (either as Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8
manufacturers and/or importers). We expect no
Historical Growth of Sales Volume Today 5 yrs ago 15 yrs ago
major changes in market fragmentation from
the levels seen in the last 10-15 years.
Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
5 October 2011
Turkish Equity
Equities
Competition analysis Banks
The DuPont profitability matrix puts
Halkbank in a favourable position: Large DuPont profitability matrix (asset turnover versus gross profit margin) 2010 Strategy analysis: ROE vs market share (2010)
banks score better under this analysis, owing to 8.0% 35%
their better scale advantages and well-
established franchises. Halkbank and Yapi 7.5%
Ziraat
Kredi score much better than the rest with FinansDenizbank Yapi Halkbank
30%

Asset turnover (revenues/assets)


higher-yielding products. 7.0%
Strategy analysis: Entry barriers are high:
6.5% TEB
As shown by the ROE versus market share 25%
Garanti
matrix, the banks with higher market share Isbank Halkbank

RoE
6.0%
achieve higher ROAE than peers. This means Yapi
Garanti
Akbank
that the entry barriers are quite high for new 5.5%
Vakifbank
20%
Finans
entrants, so it makes more sense to achieve Akbank Isbank
size through acquisitions and mergers and this 5.0% TEB
Denizbank
is highly likely to occur as sector profitability 15%
Ziraat Vakifbank
continues to fall. For H1 2011, Ziraat did not 4.5%
score as well as it did in 2010 on ROAE, but
4.0%
Halkbank is still the best player in terms of a 10%
blend of market share and ROAE. 35% 40% 45% 50% 55% 60% 65% 70% 75%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
Private banks have captured major market Gross profit (1-cost/income) Market share
share in the last six years: A comparison of
the market share performance of the different Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
Turkish banks clearly shows that private banks
have gained on this measure at the expense of
state-owned bank. Garanti has made the most Garanti a clear market share gainer (in terms of asset size) between 2004 and Top 5 players have a 63% market share; sector less fragmented since 2001
substantial market share gain (4.3pp) while 2010
Ziraat (the largest state-owned bank) lost the
most market share (2.9pp). 20%
100%
Is the market fragmented? No: The top 5 Losing Ziraat
90%
players accounted for 63% of market share as share
at end-2010, and the top 10 for 87%. This 80%
15%
means that the remaining banks (around 30) 70%
constitute only 13% of the sector. From that
2004 market share

Isbank 60%
perspective, the Turkish banking sector is not Akbank
50%
very fragmented. In addition, the sectors 10%
40%
fragmentation has diminished since 2001. In Halk Yapi
Garanti
terms of asset size, the top 5 banks have 30%
market shares of 83%, 67% and 42% in the 5%
20%
Vakif Gaining market
UK, France and Germany. This suggests that Deniz 10%
share
the fragmentation of the Turkish banking sector Finans
0%
is not high by global standards, either. TEB
Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8 Top 9 Top 10

abc
0%
0.0% 5.0% 10.0% 15.0% 20.0%
2010 market share
2010 2007 2004 2001

Source: Company, HSBC estimates * Size of bubbles represents average sales volumes ] Source: Company data
19
20

5 October 2011
Turkish Equity
Equities
Competition analysis Beverages
The DuPont profitability matrix shows that
both Anadolu Efes and CCI rank highly, DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) 2010
comparing very well with global peers. In
our view, both companies monopolistic power
in Turkey has helped them achieve strong RoA.
2.1 35%
Strategy analysis: Anadolu Efes stand out
for market power and RoE: Anadolu Efes CCE
1.8 CCH 30%
looks like an outlier compared to the peer
universe given the lack of serious competition ThaiBev
25%

Asset turnover
1.5
and a strong business model in its core market
Turkey. CCI faces higher competitive pressures Anadolu Anadolu Efes

RoE
1.2 CCI 20%
and therefore operates with lower RoE than Efes ThaiBev
Anadolu Efes. 0.9
KOF 15% CCI
CCE CCH KOF
Anadolu Efes and CCI are among the few to Modelo
have gained market share: Strong business 0.6 Modelo 10%
models, high-quality management and the Hite
Hite
efficient use of marketing tools allowed Anadolu 0.3 5%
Efes and CCI to gain higher market share in 25% 35% 45% 55% 65% 75%
20% 30% 40% 50% 60% 70%
their core market. Anadolu Efes has a c90%
market share in the Turkish beer market and Market share
Adj. gross profit margin
CCI has c70% share of soft drinks. We believe
companies are comfortable with their current
market shares and doubt that they will make Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents represent net profit
efforts to increase them.
Is the market fragmented? No, single
players dominate the markets: The beer and 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
sparkling beverages markets are not at all account for 99% of beer market and 96% of soft drinks market
fragmented. The top 2 companies have nearly
all beer sales and the top 3 in sparkling 10.0% 110%
Historical Growth of Industry Volume

beverages dominated 96% of the market in Losing Share Beer


CCI
Turkey in 2010. We do not think the market 8.0% 100%
leaders Anadolu Efes in beer and CCI in Soft drink
sparkling beverages will lose significant 6.0% 90%
market share. However, given their currently CCH
high levels, slight losses on this measure would 4.0% KOF 80%
not surprise us. CCE
2.0% Anadolu Efes 70%
Modelo Gaining Share
0.0%
60%
Hite
-2.0%
50%

abc
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
40%
Historical Growth of Sales Volum e
Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
5 October 2011
Turkish Equity
Equities
Competition analysis Building materials
On the DuPont profitability matrix, Sisecam
and Trakya Cam are the best performers in DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share 2010
margin) 2010
Turkish building materials, as both operate with
higher gross profit margins than peers owing to
their monopolistic or oligopolistic status in the 100%
1.20
market; both also have a high turnover rate.
Turkish cements have lower gross profit Cemex Traky a Cam
1.00 80%
margins than international peers owing to their Saint Gobain
Heidelberg
lower price power and higher manufacturing Sisecam
0.80 Sisecam 60%
costs.

Asset Turnover
Saint Gobain

Market share
Strategy analysis: Trakya Cam is the only Akcansa
Cimsa
Traky a Cam Titan Cement
0.60 40%
company in the Turkish building materials Titan Cement
sector with high ROE and high market share. Heidelberg
0.40 20%
Although this indicates that flat glass is an Adana Cimento Cemex Saudi Cement Cimsa
Saudi Cement
attractive sector, the entry barriers are also Akcansa
Adana Cimento
0.20 0%
high, given substantial set-up costs and import
-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
duties on flat glass. While Turkish cement 0.00 -20%
companies have higher ROEs than developed 0% 10% 20% 30% 40% 50% 60% 70% 80% RoE
peers owing to their better demand and price
Adj. Gross profit
environment, they are hampered by low market
share, which, unless remedied, implies limited
growth in ROE.
Cimsa and Akcansa gained significant Source: Company data Source: Company data
market share in the last five years: Cimsa
has gained substantial market share in the last
five years via both organic and inorganic Cimsa and Akcansa gained significant market share with acquisitions and organic Top 8 players claim 50% of the very fragmented market 2010
expansion that increased capacity by 70% from growth
2005 to 2010. Akcansa has also raised its
market share via a 75% capacity increase in 60.0%
12.0%
Losing
the last five years. However, ongoing
Sales volume growth of the sector (2005-2011e)

Share
overcapacity in the cement market leads us to 10.0% 50.0%
expect limited market share growth without Saudi Cement
Gaining
consolidation. Since the Competition Board 8.0% Share 40.0%
supervises the sector closely, consolidation
Adana Cimento
efforts may also be challenged. 6.0% 30.0%
Cimsa
Is the cement market fragmented? Yes: the Sisecam Traky a Cam
4.0% 20.0%
top 8 players constitute only half of the Saint Gobain
Heidelberg Akcansa
industry: The market has 20 mid-sized players 2.0%
with vast regional diversification. Although this 10.0%
Titan Cement
suggests that consolidation action by Turkish 0.0% Cemex 0.0%
cements is plausible, it could in fact prove -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

abc
difficult owing to the Competition Boards close -2.0% Top 1 Top 2 Top 3 Top 4 Top 5 T op 6 Top 7 T op 8
supervision of the sector particularly for the Sales volume growth of the company (2005-2011e)
Turk is h Cement - market share breakdow n by brands
existing players in the market. Turk is h Cement - market share breakdow n (2005)

Source: Company data Source: Company data


21
22

5 October 2011
Turkish Equity
Equities
Competition analysis Fertilisers
The DuPont profitability matrix shows
Bagfas in a favourable position: Turkish DuPont profitability matrix (ROA equation, asset turnover versus profit margin) - Strategy analysis: ROE vs market share in Turkey (2010)
2010
companies with limited access to raw materials
rank lower than fully integrated companies like
Uralkali. Among the Turks, Bagfas looks better, 2.0
Bagfas 40%
on a high asset turnover ratio. Unless the
Turkish companies expand abroad and acquire 1.6 35%
factories in countries where raw materials are 30% Gubretas
abundant, they will remain less profitable. Bagfas

Asset turnover
Tekfen 25%
Strategy analysis: Gubretas stands out thanks 1.2
to its Iranian operations. In Turkey, Bagfas and Uralkali

RoE
Yara 20%
Tekfen demonstrate the trade-off between market 0.8
share and RoE, although the two have different 15%
Ege Gubre
strategies. Gubretas looks to be the winner but Ege Gubretas 10% Tekfen
only on a consolidated basis since over 90% of the 0.4 Arab Potash
Gubre 5%
EBITDA is driven by Iranian rather than Turkish
operations. It is clear that Gubretas moved up a 0%
0.0
league when it acquired fully integrated production 0% 10% 20% 30% 40%
facilities in Iran in 2008. 0% 20% 40% 60% 80% 100%
Gubretas and Tekfen further strengthened Market share
Adj. gross profit m argin
their market shares in the past six years:
The trend in market share gains shows that
Gubretas and Tekfen have been gaining Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
market share over recent years. One important
factor here is that, because global fertiliser
demand was also soaring during this period, Gubretas and Tekfen saw market share gains in Turkey in 2005-11e Turkish fertiliser market has a duopolistic structure: Tekfen and Gubretas
the share of exports in Bagfas total sales combined command 60% of the market
increased. It is the most profitable domestic
company and it would be no surprise to see it 0.1% 100%
gain market share when demand from the Lo sing Sh are
Historical Growth of Industry Volume

export markets slows. 90%


0.1%
Is the market fragmented? No: the two main 80%
players dominate the market: Gubretas and 0.1% 70%
Tekfen have similar market share, followed by
a handful of regional players and various 0.1% 60%
individual importers. We see little chance of Bagfas Ege Gubre 50%
market consolidation or any threat to the 0.1% Tekfen Gubretas
40%
leaders, nor do we expect any change in the
duopoly. 0.0% 30%
20%
0.0%
10%

abc
-12.0% -9.0% -6.0% -3.0% 0.0% 3.0% 6.0%
0%
Historical Growth of Sales Volume
Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
5 October 2011
Turkish Equity
Equities
Competition analysis Household durables
The DuPont profitability matrix shows a mixed
picture for Turkish (listed) white goods DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) - 2010
manufacturers: Arcelik ranks at around the
European sector average, while Vestel ranks
poorly. Other than scale, we think the difference 2.0 24%
lies in Vestels predominantly OEM nature: Arcelik,
by contrast, operates with its own brands. 1.8 SEB SA Arcelik
BSH 20%
Strategy analysis: The same situation applies Whirlpool
1.6 SEB SA

Asset Turnover
here as in the DuPont analysis: Arcelik is in the
Electrolux
mid-range of ROE rankings in Europe while Vestel 1.4 Electrolux De Longhi 16%
Indesit

ROE
is at the bottom. In our view, Arcelik makes up for BSH
its scale disadvantage compared with bigger 1.2 De Longhi
Arcelik Indesit 12% Whirlpool
European competitors via its highly efficient plants
which house large capacities under a single roof. 1.0
BSH and Electrolux emerge as the two dominant 0.8 Vestel WG 8%
players in the European white goods market.
Turkish white goods companies have shown 0.6 Vestel WG
4%
strong growth since 2005. Both Arcelik and 15% 20% 25% 30% 35% 40% 45% 50% 55%
Vestel White Goods posted notably higher growth 0% 5% 10% 15% 20% 25% 30%
than their relevant sales markets (for which we Adj. Gross profit margin Market Share
calculate weighted average growth). In the case of
Arcelik, we view its successful penetration of
European markets and new sales channels Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
especially during the 2008-09 crisis as the driving
factor. For Vestel, the vital factors were increased
production for European brands and some market Arcelik the clear market share gainer in 2005-11e Turkish white goods market is highly consolidated: Top 3 players have a 90%
share gains in Turkey. market share
Is the market fragmented? No: the top 3
players account for almost 90% of the market. 2% 100%
The picture has not changed much since 1996 Losing Share SEB SA
Historical Growth of Industry Volume

Electrolux
when Turkey became a member of Customs Arcelik 90%
2%
Union and opened its protected industries to
competition from European companies. Arceliks Vestel WG 80%
market share fell only slightly from around 60% 1%
Whirlpool
then to around 50% today. A unique distribution
Gaining Share 70%
system operates in Turkey, whereby products are 1%
sold through manufacturer-owned retail stores; this Indesit BSH De Longhi
sets a high barrier to entry and keeps the share of 60%
0%
imports low. Consequently, we expect no great
change in the existing rankings (Arcelik-BSH- -4% -1% 2% 5% 8% 11% 50%
-1%
Vestel-Indesit) in at least the next five years,

abc
despite the shift towards mass retail stores in big 40%
-1%
cities. Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8
Historical Growth of Sales Volume Today 5 yrs ago 15 yrs ago

Source: Company, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data * Size of bubbles represents average sales volumes
23
24

5 October 2011
Turkish Equity
Equities
Competition analysis Insurance
The DuPont profitability matrix is not
applicable for the insurance sector (we use net Sector historical profitability (non-life) Strategy analysis: ROE vs market share (2010)
technical profits to premiums ratio instead of 12.0% 35%
gross margin). Profitability in the Turkish non- 10.5%

life insurance sector is low, hit by high 10.0% 8.6%


fragmentation, and competition is too strong. Of Anadolu Hayat
8.0% 15% Yapi Kredi Sigorta
all the sectors listed in the ISE, we view
insurance as the one hardest hit by high 6.0% Anadolu Sigorta
4.6% Aksigorta
fragmentation and resultant weak profitability. 4.2%
As at end-2010, 57 insurers were sharing 4.0% -5%0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%
2.5% 2.8%

ROAE
annual total premium generation of TRY14bn Gunes Sigorta
2.0% 1.2%
(1.26% of GDP). Shareholders equity held by 0.4% 0.0%
the banks totals TRY5bn; given the low 0.0%
-25%
penetration of insurance products ROE must be Aviva
very high to exceed CoE. We therefore believe -2.0%
the sector is a potential candidate for -45%
-4.0% -3.0%
consolidation and a recovery in profit via
increased penetration over the long term. If 2006 2007 2008 2009 2010
fragmentation does not diminish, we believe the Ray Sigorta
-65%
profitability levels will continue to be lower than Net technical profit / Premiums (non-life) ROAE
Market share
most other sectors in Turkey.
Strategy analysis: Entry barriers are high: Source: Association of Insurance and Reinsurance companies * Size of bubbles represents premiums Source: Company data, Association of Insurance and Reinsurance companies
As shown in the ROE versus market share
matrix, the insurers with higher market share
are more profitable. Anadolu Hayat seems to Axa is a clear market share gainer (in terms of asset size) between 2004 and 2010 Top 5 players have a 40% market share; sector fragmented has always been
be the most profitable player, but this is more fragmented
related to its pension business exposure than
directly to its life exposure. 12%
Losing share 100%
Shifts have occurred in the ranking of the
90%
large insurers since 2004: Substantial 10% Anadolu
Axa
acquisitions and ownership changes have 80%
caused the names in the Turkish insurance 70%
8%
market top ten to change quite rapidly over the
2004 market share

Groupam a 60%
past few years. The two clear winners of the Allianz
Aksigorta 50%
past six years in terms of market share are Axa 6%
Ergo 40%
and Eureko Insurance.
Is the market fragmented? Highly: The top 5 Gunes Yap Kredi 30%
4%
players account for only 40% of market share, 20%
and the top 10 for only 63%. We view Eureko
10%
2%
consolidation as a must given these figures. 0%
Gaining m arket share
Ziraat Hayat ve Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8 Top 9 Top 10

abc
0%
Em eklilik
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%
2010 market share
2010 2007 2004

Source: Association of Insurance and Reinsurance companies , HSBC estimates * Size of bubbles represents Source: Association of Insurance and Reinsurance companies
average sales volumes
5 October 2011
Turkish Equity
Equities
Competition analysis Iron & steel
The DuPont profitability matrix rates Erdemir
and Kardemir below the sector averages as at DuPont profitability matrix (ROA equation, asset turnover versus adjusted gross Strategy analysis: ROE vs market share (2010)
profit margin) 2010
FY 2010. Although both Turkish steel companies
have strong margins, their asset turnover ratios
remain below average owing to insufficient 1.4 45%
integration, which implies relatively lower
40%
sustainable growth potential. However, we believe Salzgitter
1.2 CSN
that the increase in high-value-added rail steel 35%
sales at Kardemir and the higher utilisation of new Thy ssenKrupp
30%

Asset Turnover
capacities at Erdemir should push both into the 1.0
Maanshan Tata
upper-right of the chart in the next one to five 25%

ROE
years. 20%
0.8 Angang China St
Strategy analysis: Erdemir is well Jsw
positioned, with a strong margin in a Kardemir China St 15%
ArcelorMittal Erdemir
profitable segment: Although the entry of new 0.6 Erdemir CSN 10%
Angang
Maanshan
players into the Turkish flat steel sector has Jsw Kardemir
5% ArcelorMittal
reduced Erdemirs dominance in the market, it
still has an above-average return and a strong 0.4
0%
market share. Kardemir, on the other hand, 15.0% 25.0% 35.0% 45.0% 55.0% 65.0% 75.0% 0% 10% 20% 30% 40% 50%
posted weak profits in 2010; however, this Adj. gross profit margin Relevant Market Share
should change significantly in 2011 and 2012
given the high share of value-added products.
Market share momentum chart: None of the Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
listed companies are winners: Capacity
constraints have caused both Erdemir and
Kardemir to lose market share in Turkey at a Erdemir has lost share in market despite decent growth in its sales volume 2005- Turkish steel market is not fragmented: Top 5 players claim 71% market share
time when the market was growing fast. With 2011e
recent additions in capacity, we expect them to
regain market share in 2012. 15% 100%
Is the market fragmented? No: the top
Historical Growth of Industry Volume

players constitute major part of the Losing Share


Erdemir
industry: Despite a rise in the number of 80%
players, Erdemir still has room for manoeuvre 10%
in the flat steel segment as it does not foresee 60%
major competition in some value-added Kardemir
products. For Kardemir, growth in rail steel is 5%
40%
something of a safeguard as there are no other Posco
manufacturers producing this Turkey and the CSN Gaining Share 20%
China St
companys production facility is also one of the ArcelorMittal 0%
few in the surrounding region. Kardemir has Salzgitter 0%
offset threats from tough competition in the long -5% -2% 1% 4% 7% 10%
Top 1 Top 2 Top 3 Top 4 Top 5

abc
steel segment by expanding its business into
the less competitive profile and rail steel -5%
segments. Historical Growth of Sales Volume 2011 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
26

5 October 2011
Turkish Equity
Equities
Competition analysis Oil, Gas and Consumable Fuels
DuPont profitability matrix puts Tupras and
Aygaz in a favourable competitive position: DuPont profitability matrix (ROA equation, asset turnover versus adjusted gross Strategy analysis: ROE vs market share (2010)
profit margin) 2010
Tupras and Aygaz ROA ratios of 0.26 and
0.27 are much higher than the peer average of 34%
0.18 for FY 2010, thanks to strong market
positions in the refining and LPG sectors, 4.0
29% Aldrees
respectively. Petkim and Petrol Ofisi remain 3.5
Tupras Petroleum Tupras
Oil R efineries
slightly below this level owing to low margins 3.0

Asset Turnover
MOH 24%
specific to the time period analysed. Recovery 2.5 Petrol Ofisi Ay gaz Turcas
in their sectors should push both companies 19%
into the upper-right section of the chart in the 2.0 ORL Hellenic Pet Aldrees
Neste PKN Orlen
coming years. 1.5

ROE
ERG Petkim Lotos 14% Ayga z
Strategy analysis: Tupras has a strong 1.0 MOL Neste Oil
position in a profitable segment: Tupras has 0.5
9% Petkim
substantial market share (as high as c75% for 0.0 MOL
refining, c40% for diesel refining) and strong
ROE at 19%, helped by lack of intense 0% 5% 10% 15% 20% 25% 30% 4%
competition in the market. Although Aygaz has
a relatively favourable position, other sector -1%
Adj. gross profit m argin 0% 20% 4 0% 60% 80% 100%
companies score poorly in this analysis.
Market share momentum chart: None of the -6% Rel evant Mar ket Share
listed companies are winners: Tupras has
lost market share in refining to imports in the Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
past six years despite a significant share
increase in its retail fuel operations. Turcas
almost maintained its share in fuel retail while 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
Petrol Ofisi lost share. Petkim lost market share share
in petrochemicals to imports owing to its
capacity constraints, although its plans to grow 100%
in tandem with a refining investment may help it 8% Losing Share 90%
regain the lost share.
Historical Growth of Industry Volume

Is the market fragmented? No: the top 7% 80%


Petrol Ofisi BP Turkey Opet
players constitute a major part of the 6% 70%
industry: Tupras and Petkim are the only local 5% Shell/Turcas 60%
players in refining and petrochemicals, 50%
4%
respectively. Tupras will continue to dominate 40%
the refining industry as the only player for the 3%
30%
next four years until Turcas refinery is built on 2%
Petkim land. Gaining Share 20%
1%
10%
0%
0%

abc
-1%
-1% 2% 5% 8% 11% 14% 17% 20%
Top 1 Top 2 Top 3 Top 4 Top 5
Historical Growth of Sales Volum e
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)
5 October 2011
Turkish Equity
Equities
Competition analysis Real Estate
DuPont profitability matrix (ROA equation,
asset turnover versus net profit margin): DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share 2010
margin) 2010
Although Emlak Konut REIT is a property
developer, it manages to outperform its property
operator peers thanks to strong average returns
100%
and higher yields. Torunlar REIT is the second- 0.35
best performer on a yield comparison owing to its
0.30 80%
high-yielding retail centres. Emlak REIT
Emaar
Strategy analysis: As mentioned above, Emlak 0.25
60%

Asset Turnover

Market share
Konut REIT has superior profitability, which makes Sinpas REIC
0.20 Emaar Mabanee
it the market leader in Turkey in terms of ROE. The Link REIT
Klepierre
40%
Thanks to high ROEs in property development 0.15
Sinpas REIC follows Emlak REIT on this metric, Capitaland Mabanee
20% Capitaland
while property operators Is REIT and Torunlar 0.10 The Link REIT
Is Reit Torunlar REIT
Torunlar REIT
REIC trail the property developers with a gap as Klepierre Is Reit
Emlak REIT
0.05 0%
returns are low relative to their assets. All players Sinpas REIC
-2% 3% 8% 13% 18%
have very limited market share owing to the very 0.00 -20%
fragmented structure of the real estate market in
- 2% 0% 2% 4% 6% 8% 10% 12% RoE
Turkey, in both the property development and
operations segments. Capit al Yield

Emlak Konut REIT has gained substantial


market share in the past five years:
Following its recovery in 2002 Emlak Konut Source: Company data Source: Company data
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 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
the company has managed to outpace peers
and the market average with on growth thanks 100.0%
0.7%
to its revenue-sharing mechanism. We expect Losing
Emlak Konut REIT to lead the market in future. Share 0.6%
We may also see some consolidation if the 80.0%
Is Reit Torunlar REIT Sinpas REIC Emlak REIT
regulator starts to apply development law 0.5%
Gaining
effectively. 60.0%
0.4% Share
Is the real estate market fragmented? Yes:
the top 8 players account for only 20% of 0.3% 40.0%
the industry: The real estate market in Turkey
0.2%
is very fragmented owing to a poor regulatory 20.0%
framework for supervising construction, which 0.1%
results in many unregistered developers. We
0.0%
expect consolidation to come with the tighter 0.0%
application of regulations. -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% Top 1 Top 2 Top 3 Top 4 T op 5 Top 6 Top 7 Top 8

abc
Turkish premium house s ector - market share breakdow n

Source: Company data Source: Company data


27
28

5 October 2011
Turkish Equity
Equities
Competition analysis Retail
On the DuPont profitability matrix, BIM
leads the way: Players with low capex DuPont profitability matrix (ROA equation, asset turnover versus net profit Strategy analysis: ROE vs market share (2010)
margin) 2010
intensity, headed by BIM, look much better
placed than peers on this analysis. Bizim is
another player that stands out for its high asset 60%
turnover. We expect BIMs to maintain its 6.3
Bizim BIM BIM
leading position in the sector and believe 50%
Bizims asset turnover will gradually improve in 5.0
the following years with higher gains in scale. 40% Bizim

Asset turnover
Supermarket operators Migros and Kiler have 3.8 Jeronimo
similar asset turnover levels to the peer group

RoE
30%
but much lower than those of BIM or Bizim. Jeronimo
2.5 Magnit
Strategy analysis: BIMs high RoE is 20% Magnit
protected by its business model, and in the
Wumart Wal-Mex Wal-Mex
Kiler Wumart X5
short term we see no risks at this level. 1.3 X5
10% Soriana
However, the entry barriers are low in the retail Soriana Migros Kiler
sector, especially in the discount segment, and 0.0 Migros
0%
BIMs market share may come under pressure 5% 10% 15% 20% 25% 30%
from new entrants, possibly threatening its RoE 0% 3% 6% 9% 12% 15% 18%
level in the longer term. Bizim, on the other Adj. gross profit m argin Market share
hand, operates in a much more benign
competitive environment and there is some
potential for higher RoE in our view. We expect Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
Migros RoE to improve in the short term,
parallel to lower indebtedness.
BIM is the leader in market share gains: All 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
players in the retail sector have been eroding share
the unorganised share of the sector. BIM has
been instrumental in capturing market share via
20% 25%
its small stores located on secondary streets,
which are replacing traditional-sized outlets. Losing Share
Magnit X5 2010
Historical Growth of Industry

Is the market fragmented? Yes: the top five 20% 2009


15%
players have a 20% market share in the
overall food retail sector. We do not see the 2008
fragmented nature of the retail space as a risk 15% 2007
10% 2006
to the current players for now. The penetration Jeronimo
of organised retailers is still low, at around Wumart 10% 2005
45%, in Turkey. We will be more concerned if
5%
market share remains this low when Soriana Wal-Mex
penetration levels come closer to the DM Gaining Share 5%
average of over 70%. Kiler Bizim BIM
0% Migros

abc
-5% 5% 15% 25% 35% 45% 55% 65% 0%
Historical Growth of Net Sales Top 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 Top 8

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Company data
5 October 2011
Turkish Equity
Equities
Competition analysis Telecoms
DuPont Profitability Matrix puts Turkcell
above average of peer group: Turkcell has DuPont Profitability Matrix (ROA equation, asset turnover versus adjusted gross Strategy analysis: ROE vs market share (2010)
profit margin) 2010
above-average asset turnover (0.92) and
adjusted profit margin (57%) based on FY10 80%
data, making it one of the best positioned 1.8
Tata Tel. Vodacom
telecoms names according to DuPont analysis. 70%
1.6
Turk Telekom, on the other hand, is slightly
Vodacom Mobistar 60%
above the average of the sample universe. We 1.4 Mobistar
believe both companies may improve this ratio 1.2 50%

Asset Turnover
in the coming years if competition rationalises Turkcell MTN
in the sector. 1.0 Mobinil

ROE
40%
Strategy analysis: Turk Telekom is very well 0.8
Turk Telekom SK Telecom
positioned: Turk Telekom's monopoly in fixed 30% Turk Telekom
0.6 Mobinil
line and dominance in ADSL business together SK Telecom MTN
Tata
with a high overall ROE of 36% (FY10) places 0.4 20%
Vodafone
the company at the top of the universe. Even 0.2 Qatar Telecom
Turkcell
Qatar Tel.
though it is leading the mobile market in 10%
Turkey, Turkcell has a lower overall market 0.0
Vodafone
share and lower profitability compared to Turk 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 0%
Telekom. But Turkcell remains in the mid-range Adj. gross profit margin 0% 20% 40% 60% 80% 1 00%
of sample universe. Relevant Mar ket Share
Market share momentum chart: Share loss
has been inevitable: As both Turk Telekom Source: Company data * Size of bubbles represents gross profit Source: Company data * Size of bubbles represents net profit
and Turkcell dominate their own segments,
upside in terms of market share has been
limited in the last six years. We see high single- Neither Turkcell nor Turk Telekom have gained shares in Turkish market since Turkish mobile market is dominated by 3 players and market leader lost 9% in last
digit growth being posted by both companies 2006 6 years
during this period, slightly below the market
growth in Turkey. 25% 100%
Is the market fragmented? It is a Losing Share
Historical Growth of Industry Volume

consolidated market already: While fixed line 90%


and ADSL markets are almost under a Turk 20%
Telekom monopoly, mobile market is also 80%
consolidated with only three licences available. 15% Tat a
Entry barriers (lack of licence and high level of Vodacom 70%
capex) prevent a further destruction in Turkcell
competition in the market. However, market 10% Turk Telekom Mobinil 60%
leader Turkcell have lost 9 points of market Gaining Share
share in last two years to its competitors, Mobist ar
5% Vodafone 50%
Vodafone Turkey and Turk Telekom's Avea,

abc
after an intense competition based on mainly 40%
0%
price. We think rationalisation of the market
may be possible in the coming one to three -1% 0% 3% 6% 9% 12% 15% 18% 21% 24% Top 1 Top 2 Top 3
years.
Hist orical Growt h of Sales Volume 2011 5 y ears earlie r

Source: Company data, HSBC estimates * Size of bubbles represents average sales volumes Source: Turkcell
29
30

5 October 2011
Turkish Equity
Equities
Competition analysis Utilities
The DuPont Profitability Matrix (ROA
equation, asset turnover versus net profit DuPont profitability matrix (asset turnover versus gross profit margin) 2010 Strategy analysis: ROE vs market share (2010)
margin) shows Aksa Enerji to have higher
asset turnover than peers owing to its newer
technology. Turkish power generators posted 0.60 100%
lower gross profit than both developed and
emerging peers in 2010 owing to high gas 0.50 80% SEC
prices and a weak power price environment. NTPC CEZ

Asset Turnover
Looking forward we expect power prices in 0.40 CEZ
60%

Market share
Turkey to rise based on strong demand and Aksa Enerji
potential gas price hikes. 0.30 Verbund Verbund
40%
Strategy analysis: Given the weak operational Akenerji
environment in 2010, Turkish utilities have shown 0.20 Zorlu Enerji
20% NTPC
CESP Aksa Enerji
weak ROEs. Companies that operate with a well- CESP Akenerji
established price mechanism (forward and futures) 0.10 Zorlu Enerji
SEC 0%
in a liberalised market usually have higher ROEs -15% -10% -5% 0% 5% 10% 15% 20% 25% 30%
than Turkish companies (eg Verbund, NTPC, CEZ) 0.00
-20%
whereas companies that operate with fixed tariffs 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
RoE
or are operated by state have lower ROEs (eg Adj. Gross profit
SEC). As a result, the relationship between ROE
and market share does not necessarily indicate
any correlation for the utilities in terms of Source: Company data Source: Company data
profitability, as the regulatory structure is also
important. Looking forward, we expect the ROE of
Turkish utilities to increase as the market becomes Aksa Enerji has captured major market share in last five years Top 5 players claim 80% market share sector will become fragmented via
more liberal such as with the expected initiation privatisation
of power futures market in Q4 2011.
Utilities gain market share with organic 100.0%
growth and privatisations: Turkish utilities are 9.0% Losing
gaining market share at a rate above the pace 8.0% Share
of growth in the Turkish market owing to the NTPC 80.0%
7.0%
ongoing investment phase and privatisation SEC
6.0%
programme. We expect this to continue, as Gaining
Aksa Enerji 60.0%
5.0%Akenerji Zorlu Enerji
Share
70% of all state-owned generation assets are
up for privatisation. State assets overall 4.0% 40.0%
currently comprise 50% of Turkeys total power 3.0%
generation capacity. 2.0% 20.0%
Verbund CEZ
Is the market fragmented? No: The state-run
1.0%
power generator accounts for 50% of the CESP
0.0% 0.0%
market, which is another key factor to consider

abc
when analysing Turkey. We expect the market -10.0% -5.0% -1.0%0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% T op 1 Top 2 Top 3 Top 4 Top 5 Top 6 Top 7 T op 8
to become much more fragmented once the Turkish Utilities - market share breakdow n
governments privatisation programme is Turkish Utilities - market share breakdow n (2005)
complete.

Source: Company data Source: EMRA


Equities
Turkish Equities abc
5 October 2011

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 performance of individual companies as well as


sector and macro conditions. In order to reach a
We believe a companys competitive position is
general view of how competition may vary across
one of the key factors underlying long-term
the different sectors in Turkey, we have designed
investment views in equity markets. Competitive
a scorecard system and used it to analyse the
outlook is dependent on some micro factors such
companies under HSBC coverage.
as the market share, growth and profitability

Scorecard Factors
1. Profitable market share 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
(High=5, Low=1): sector (a score of 5 is assigned). Lower market share can be justified for shareholders by above-average ROE. We have assigned the lowest
score of 1 to companies which have posted the lowest ROEs and also have a low market share in their markets.
2. Market share momentum Industry growth is a key variable in determining the intensity of rivalry in an industry, and sets the pace of expansion required to maintain
(Strong=5, Weak=1): share. We have ranked Turkish companies in this analysis based on industry and company growth rates for the past five years.
3. Sustainable Growth (DuPont The DuPont formula suggests that a higher asset turnover ratio (sales revenues over assets excluding cash) and gross profit margin (excluding
Formula) (Strong=5, Weak=1): 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.
6- Impact 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.
Source: HSBC estimates

31
Equities
Turkish Equities abc
5 October 2011

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%

BIZIM
40.0%

TTKOM
GUBRF
30.0% HALKB FROTO
BAGFS
ROE

DOAS TOASO
SISE
YKBNK GARAN
20.0% ISCTR TUPRS TCELL
AKBNK AEFES
ALBRK TRCAS
ANHYT
ADANA VAKBN CCOLA TRKCM
ASYAB AYGAZ
ARCLK CIMSA
10.0% KIL ER ANACM EKGYO EREGL
AKCNS AKSEN TATKS PETKM
TAVHL
AKENR
ISGYO ANSGR
KRDMD HURGZ
SNGYO TRGYO
0.0% AKGRT
MGROS
0% 20% 40% 60% 80% 100%
ZOREN
-10.0 %
Market Share

Source: HSBC estimates

Scorecard introduction ADSL businesses and the lack of competition in


Below we identify six factors to help us gain a these segments lead to an unbeatable market
broader view of the current competitive outlook position for Turk Telekom, despite weakness in
for companies from different sectors, and used it its mobile business arm.
to analyse which companies in Turkey are poorly
Trakya Cam (15% ROE and 85% market
or well positioned to face problems and/or seize
share): Trakya Cam controls over 90% of the flat
opportunities in their relevant markets in the next
glass market in Turkey, which is protected from
one to five years.
imports via customs tariffs. The company is well
Scorecard details positioned to benefit from Turkeys strong
industrial growth in the real estate and automotive
1. Profitable market share
sectors. Given the substantial capex needed to
We believe a higher return on equity (ROE) and
build new capacity in Turkey we see few
higher market share indicate that a company is
prospects of a competitor investing in the
very well positioned in a profitable sector (a score
countrys flat glass segment.
of 5 is assigned). Lower market share can be
justified to shareholders by above-average ROE Sisecam Holding (13% ROE and 66% market
while lower ROE can be supported by high share): Sisecam controls 90% of the glass market
market share. We have assigned the lowest score in Turkey and 50% of the glass packaging market
of 1 to companies that have posted the lowest in Russia, as well as having less significant
ROEs and low market share in their markets. As market shares in Egypt, Georgia and Bulgaria.
shown in the graph below, the following names Given heavy capex requirement and Sisecam
emerge as winners based on this factor, appearing Groups global partnerships in strategic markets
in the (desirable) upper-right-hand corner. with global peers, we see little probability of
increasing competition.
Turk Telekom ( 36% ROE and 90% market
share): Strong market share in its fixed-line and

32
Equities
Turkish Equities abc
5 October 2011

Tupras (19% ROE, 46% market share): pace of expansion required to maintain share. This
Tupras meets more than 75% of Turkeys refinery also influences the supply and demand balance
product needs. Its share in diesel supply is c40% and the incentive offered to new entrants. A
while its retail arm has an 18% share. Its company increasing its market share in a fast-
dominant position in refining business and the growing industry is a winner (scored at 5) as is
absence of competition make the company a company maintaining/increasing its share in a
strongly profitable. low growth market, as it will be a cash cow.
Based on industry and company growth rates for
Turkcell (12% ROE, 53% market share):
the past five years we have ranked Turkish
Despite a loss of market share in the past few
companies under this analysis. As demonstrated in
years, Turkcell still commands a share of more
the graph below, the following names appear as
than 50% in the Turkish mobile market. We see
winners based on this factor.
limited downside risks of further loss in share or a
sharp increase in competition. Aksa Enerji (5% market growth vs 31%
company growth in the past five years): Aksa
Ford Otosan (31% ROE, 16% market share):
Enerjis market share has increased significantly
Ford Otosan is the leader in the Turkish vehicle
in the past five years, owing to its aggressive
market and dominates the MCV (medium
investment programme, which has increased its
commercial vehicle) segment in particular, with a
installed capacity from 250 MW in 2006 to 2,000
c36% market share. It operates one of the most
efficient Ford plants worldwide, benefiting from a MW in Q3 2011. This growth rate is well above
strong local market position, economies of scale the 5% CAGR for the industry in the same period.
in production, a strong supply chain in Turkey and Bank Asya (19% market growth vs 37%
a cost-plus-fee scheme in exports to Europe company growth in the past five years):
2. Market share momentum Operating in a niche segment of participation
banking, Bank Asya has achieved rapid asset
Industry growth is a key variable in determining
growth since 2004, outperforming the banking
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%

ISCTR HALKB ASYAB


20%
VAKBN GARAN
YKBNK AKBNK ALBRK

15%
Market Growth Rate

TAVHL
TTKO M TRCAS
10% AYG AZ
PETKM
EREGL TKC.N CCOLA
AKCNS ANSGR
ANHYT TUPRSAKENR TATKS THYAO
SISE ZOREN AKSEN
5% KRDMD CIMSA
ANACM TRKCM
ADANA HURGZ
AKGRT
AEFES MGROS BIZIM
DO AS ARCLK
ISGYO SNGYO KILER EKGYO BIMAS
BAGFS 0% G UBRF
-20% -10% 0% FROTO 10% TOASO 20% 30% 40%
TRGYO

-5%
Company Growth Rate

Source: HSBC estimates

33
Equities
Turkish Equities abc
5 October 2011

sector. Given the banks size, its rapid branch for Fiat, and the commissioning of new models
openings have also helped it reach a wider (Doblo, Minicargo) has led to a turnaround in its
customer base. production, capacity usage and sales. The
company is becoming an LCV OEM for multiple
BIM (1% market growth versus 30% company
brands (Fiat, PSA, Opel), and leads the LCV
growth in the past five years): BIM has
segment in Turkey with a c38% market share.
achieved the fastest market share gains from the
unorganised part of the sector. It has steadily Turkish Airlines (7% market growth versus
increased its market share, eventually becoming 18% company growth in the past five years):
the market leader. Turkish Airlines has pursued an aggressive
growth strategy in the past five years, capitalising
Bizim (1% market growth versus 14% company
on Istanbuls growing hub status and the solid
growth in the past five years): Bizim Toptan is
Turkish tourism sector. As a result it has far
operating in a niche and severely under-penetrated
outperformed major European competitors on
part of the retail sector. This has resulted in faster
traffic growth during this period.
growth than for the overall market.
3. Sustainable growth (DuPont)
Cimsa (5% market growth versus 17%
company growth in the past five years): The The DuPont formula offers an integrated approach
acquisition of the Eskisehir and Nigde plants and for defining a companys sustainable growth
capacity investments in Eskisehir plant increased potential. A higher asset turnover ratio (sales
overall capacity by 70% from 2005 to 2011. revenues over asset excluding cash ) and gross
While some peers have also increased their profit margin (excluding own costs such as
capacity in the same period, Cimsas strategy to depreciation and labour) leads to a higher return
expand in Central Anatolia has given it greater on assets, which implies strong potential for
momentum, allowing it to obtain better market sustainable growth. Lower profit margins point
share at the end of investment period. towards a lower market position, weak demand or
poor cost control. Lower asset turnover implies
Emlak Konut REIT (1% market growth versus
weak operational management of working capital,
14% company growth in the past five years):
lower sales or high capital asset intensity.
Emlak Konut REITs operational activity has
Certainly, higher leverage should increase this
increased significantly in the past five years
ratio for a company assuming that risk limits are
thanks to its new revenue methodology, which
not exceeded. Based on asset turnover and gross
enabled it to undertake several projects
profit margin performances, we ranked the stocks
simultaneously. Peers have lower growth rates.
under coverage and assigned scores ranging from
Migros (1% market growth versus 13% 1 (weak) to 5 (strong) to each stock on the
company growth in the past years): Like most scorecard system. As demonstrated in the graph
of the food retailers, Migros has been capturing below, the following names appear as winners in
market share from the unorganised retailers and the desirable upper-right-hand section, based on
has also used acquisitions to support its growth. this factor.

Tofas (0% market growth versus 13%


company growth in the past five years): During
the past five years, Tofas has become an LCV hub

34
Equities
Turkish Equities abc
5 October 2011

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

4.00
Asset Turnover

TUPRS
3.00
FROTO
DOAS
AYGAZ
2.00
BAGFS
PETKM TATKS KILER
TOASO AKCNS TKC.N
ARCLK MGROS THYAO
SISE CCOLA
1.00 AEFES
ENKAI TTKOM HURGZ
AKENR GUBRF TRKCM
EREGL
ANACM AKSEN CIMSA TAVHL
TRCAS KRDMD ZOREN EKG YO
TRGYO ADANA ISGYO
0.00
0% 10% 20% 30%
SNGYO 40% 50% 60% 70% 80% 90% 100%

-1.00
Adjusted Gross Profit

Source: HSBC estimates

Bagfas (asset turnover: 1.85; adjusted gross Turkish Airlines (asset turnover: 0.86; adjusted
profit margins: 36%): Bagfas is a regional gross profit margins: 43%): Turkish Airlines
fertiliser company that focuses on profitability. It capitalised on a strong recovery in global airline
achieves high asset turnover and profit margins industry in 2010 on top of solid airline passenger
during up-cycles in fertiliser prices, such as 2010. traffic trends in Turkey driven by fleet expansion,
new routes, tourism and Turkeys foreign policy
Ford Otosan (asset turnover: 2.72; adjusted
initiatives (eg visa removal agreements). As a
gross profit margins: 22%): With highly
result the company posted solid asset turnover
efficient commercial vehicle plants and a strong
with high margins.
LCV market position in Turkey, Ford Otosan
generates above-industry asset turnover and good Sisecam Holding (asset turnover: 0.8; adjusted
margins as an OEM. gross profit margins: 31%): A significant
recovery in capacity utilisation in H2 2009 and
Hurriyet (asset turnover: 0.5; adjusted gross
2010 caused Sisecam Groups asset turnover to
profit margins: 76%): Hurriyet, with a c40%
increase substantially in 2010. This, combined
share in the Turkish newspaper ad business, offers
with low fuel costs (natural gas prices were flat)
sustainable growth potential with solid asset
and strong price growth (c10%) in 2010 allowed
turnover and a high gross profit margin. The lack
the gross profit margin to improve substantially
of intense competition in the market is a plus
and made Sisecam one of our winners in the
although the falling share of newspapers in total
DuPont scoring.
ad spending is a concern.

35
Equities
Turkish Equities abc
5 October 2011

TAV (asset turnover: 0.48; adjusted gross Tofas (asset turnover: 1.55; adjusted gross
profit margins: 71%): TAV generates high profit margins: 19%): Tofas has benefited from
margins on its concession-based airport continued upward momentum in the Turkish
operations, offering an integrated product (ground vehicle market as well as the strong export
handling, duty free and f&b), which creates a performance of its LCV models in 2010, which
business model that is highly efficient and low- enabled it to achieve high sales and margins.
cost compared with major European peers.
DuPont profitability matrix for banks (asset
Dogus Otomotiv (asset turnover: 1.33; adjusted turnover versus cost to income):
gross profit margins: 14%): DOAS has been Large banks score better than players in other
one of the main beneficiaries of robust vehicle sectors under DuPont Profitability Matrix analysis
demand in Turkey throughout 2010 (and y-t-d (as shown in the below chart), thanks to their
2011) with high asset turnover and high margins greater scale advantages and well established
as an importer. franchises. Halkbank and Yapi Kredi score much
better than the rest as they have higher-yielding
Trakya Cam (asset turnover: 0.66; adjusted
products.
gross profit margins: 48%): Trakya Cams gross
profit was strong in 2010, with substantial 4. Impact of industry fragmentation
demand growth coming from strong construction It is a well-known theory that industries tend to
demand and record-breaking automotive consolidate over time but this is often untrue of
manufacturing numbers. The government kept many sectors in many countries, owing to their
natural gas prices flat in 2010, which boosted its specific dynamics. The likelihood or otherwise of
gross profit margin. Given Trakya Cams market- industry consolidation is among the most
leading position in Turkey we expect this important elements of industry structure when
profitability to be maintained so its DuPont considering competition. Various factors may lead
scoring should remain high in the longer term. 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 Denizbank
Yapi
0.07
Asset turnover (revenues/assets)

0.065
Garanti
Isbank Halkbank
0.06
Akbank
Vakifbank
0.055

0.05

0.045 Ziraat

0.04
0.45 0.5 0.55 0.6 0.65 0.7 0.75

Gross profit (1-cost/incom e)

Source: HSBC estimates

36
Equities
Turkish Equities abc
5 October 2011

this is considered as an end to growth story in this Trakya Cam (Industry fragmentation score:
sector. These may include low barriers to entry, 5): Trakya Cam controls over 90% of the flat
the absence of economies of scale, lack of glass market in Turkey, which is protected from
experience, high transport costs, high inventory cheap imports from Russia, Iran and China via a
costs, erratic sales fluctuations, diverse market special customs tariff. Given, in addition, the
needs, high product differentiation and strong exit substantial capex required to build new capacity
barriers. Moreover, lower fragmentation ie a in Turkey, we see limited possibility for a
more consolidated market does not necessarily competitor to invest in Turkeys flat glass
bring higher profitability for every company, segment. We expect the monopolistic structure of
especially if government entities control a major the flat glass market to persist in the long term,
stake. Analysts have scored the impact of industry making Trakya Cam a winner under our Industry
fragmentation depending on sector and company- fragmentation analysis.
specific conditions. The winners according to this
Tupras (Industry fragmentation score: 5):
analysis are detailed below.
Tupras is the only refiner in Turkey with a c75%
Anadolu Efes (Industry fragmentation score: market share, and faces limited competition from
5): Anadolu Efes has a dominant c90% share in imports. This is likely to change after 2015 when
the Turkey beer market with no immediate or a second refiner comes on to the scene.
long-term risks from competition.
Market fragmentation in the banking sector:
Coca-Cola Icecek (Industry fragmentation The top five banking players in Turkey had a 63%
score: 5): CCI has a c70% market share in the market share as at 2010, and the top 10, 87%. The
Turkey sparkling beverages market, where it remaining banks around 30 account for only
generates the majority of its EBITDA. We see the 13% of the sector. The Turkish banking sector is,
chances of competition arising from therefore, not very fragmented and has become
fragmentation as very unlikely. less so since 2001. By asset size, the top 5 banks
in the UK, France and Germany have market
Petkim (Industry fragmentation score: 5):
shares of 83%, 67% and 42%, respectively,
Petkim is the only naphtha-based petrochemical
indicating to us that fragmentation in the Turkish
producer in Turkey, and there are no major
banking sector can be deemed not high by
competitive risks other than from imports. The
global standards, as well.
current structure works in favour of Petkim as,
being the only local player, it has close 5. Impact of low interest rates
relationships with the customers. Potential We believe low interest rates have been the most
integration benefits from its shareholders refining important tool Turkish policy makers have used in
investment are another plus. the past couple of years. We assume that this will
TAV (Industry fragmentation score: 5): The continue to be the case in the years ahead and also
top three airport operators in Turkey (TAV, IC- believe the impact of low real interest rates will be
Fraport, Limak-GMR-MA) control more than a key factor in shaping the competitive outlook.
80% of total airport passenger traffic and TAV is We rated companies from 1 to 5 based on our
the clear market leader with a c45% share through analysis of how falling rates affected their
the three main airports it operates. financial income (losses) and operational
profitability in low rate environments in the past

37
Equities
Turkish Equities abc
5 October 2011

few years. The winners according to this score change in sector NIM and the change in policy rates
are listed below. was at its highest (0.95) in H1 2009, when the CBRT
was cutting rates very rapidly and the banks were
Aksa Enerji: Aksa Enerji has a sizeable net debt
passing the lower interest rates directly to the deposit
position of TRY1.4bn, which distorts the
rates that they offer. Historically, the correlation
companys operational profit in a high interest
between the change in NIM and the change in TRY
rate environment. We think the company would
deposit rates since the beginning of 2005 has been
benefit from low interest rates, which would
much higher (-0.38) than the correlation between
enable it to roll over its debt position and incur
NIM and the change in central bank policy rates
lower interest expenses.
(-0.13). The analysis supports our view that CBRTs
Dogus Otomotiv: As Turkeys number one policy rate actions are important for the banking
vehicle importer, DOAS benefits from a low sectors NIM profile, as long as the central bank
interest rates environment, which triggers loan actions are reflected in deposit costs or, in other
demand and thereby supports vehicle sales. words, as long as competition allows the banks to
reflect the change in the policy rates. For example,
Migros: The rise in consumer confidence and
since the beginning of 2010, Turkish banking sector
economic activity supported by a low interest
loan to time deposit spreads have declined owing to
environment positively affects top-line growth. As of
competitive pressures, resulting in a declining NIM.
Q2 2011, Migros had gross debt of TRY2.7bn. We
(regulatory pressures are also hurting the NIM in
believe that a low interest rate environment will
addition to declining loan-to-deposit spreads).
certainly help Migros in reducing its interest cost
burden and should be a positive for the company. 6. Impact of weak Turkish lira
Low interest rates positive for Turkish banks in We assume that the Turkish Central Bank and
the short term but negative in the long term
government will maintain their policy of keeping the
Turkish banks initially benefit from diminishing Turkish lira weak as a means of combating the rising
interest rates owing to the maturity mismatch current account deficit. This mainly looks positive
between their assets and liabilities (liabilities for export companies and negative for importers.
reprice faster than assets). Hence, periods of Enka: Enkas revenues are almost fully generated
declining interest rates have historically resulted in FX or pegged to FX (as in energy operations)
in widening margins for Turkish banks. However, and the company is sitting on a solid net cash
once the interest rates stabilise at lower levels, the position of USD2.43bn (end-H1 2011), most of
income on free funds (such as free equity and which is invested in FX-denominated assets (euro
demand deposits) declines, resulting in a lower and US dollars).
NIM but stronger loan growth.
Sisecam: Sisecam would benefit from a weaker
It is widely known that Turkish banking sector Turkish lira owing to the sizeable share of exports
margins are sensitive to the CBRTs policy rate denominated in euro and US dollars (30-40% of
decisions. Historically, in periods of interest rate cuts revenues). In addition, the company has a long FX
(hikes), the sector loan to time deposit spread has position worth TRY230m which shields its
increased (decreased) owing to the maturity earnings against FX-related losses in a scenario
mismatch between the assets and liabilities, which where the Turkish lira is weak.
has caused the NIM to increase (decrease). For
Turkish banks, the negative correlation between the

38
Equities
Turkish Equities abc
5 October 2011

Trakya Cam: Trakya Cam exports 20% of its Weak environment for Turkish lira should be
output directly to the Eurozone and 30% of the neutral to negative for Turkish banks
remainder is also indirectly exported through the A weak Turkish currency environment has almost
automotive sector. This makes the company a no direct impact on the Turkish banks as they do
beneficiary of a weak TRY environment. In not carry any significant FX positions. However,
addition the company has a TRY200m long FX there are two main indirect effects. The first one is
position. an increase in asset quality risks as the SMEs or
commercial companies that the banks lend to may
Is REIT: 70% of Is REITs revenues are
have difficulty paying their FX debts if they do
denominated in US dollars and euro while 95% of
not have sustainable FX revenue streams. The
costs are in Turkish lira, which creates an
second one relates to the banks capital adequacy
advantage in a weak lira environment.
ratio: almost one-third of the risk weighted assets
are denominated in FX, so any weakness in the
Turkish lira causes inflation of the FX risk-
weighted assets, and results in a lower capital
adequacy ratio.

39
Equities
Turkish Equities abc
5 October 2011

Winners and losers


Among the Turkish banks, Halkbank scores the best despite tough
competition in the banking sector as a whole
Among the industrials; Trakya Cam and Tupras seem well
positioned
Retail company Bizim and real estate giant Emlak REIT are also
among the winners, with attractive potential returns

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

Source: HSBC estimates

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Scorecard results profitability, strong balance sheet and


geographically diversified operations the
As the table above details, industrial names
company is the winner under our analysis.
dominate the upper ranks under our theme,
showing that the banking sector is relatively more Winner 2: Although real estate is one of the
competitive. Of the top 10 in this list, we identify most fragmented sectors in Turkey owing to
5 as winning names, because they also offer sizeable unregistered construction firms and a
higher-than-average potential return according our bleak regulatory framework, Emlak Konut
target prices. These are: Trakya Cam, Emlak REIT has key advantages such as: (i) ease of
REIT, Halkbank, Bizim and Tupras. The other 5 access to treasury land thanks to its position
names in top 10 of this list show up as offering as a state-run company; (ii) limited risk and
high quality according to our theme but, operational workload thanks to its revenue-
according to our target prices, the market is sharing mechanism; and (iii) a well-known
already valuing them appropriately. The theme brand name. Its privileged access to the
winners with limited potential returns are BIM, treasury land bank strengthens the companys
Tofas, Sisecam, Garanti and Petkim. profitability as its land costs are lower than
those of its peers. The revenue-sharing
Theme winners with attractive
methodology has the advantage of limiting
potential returns
risks and workload while also making the
Winner 1: Trakya Cam is the dominant flat
companys direct peers work for Emlak,
glass producer in Turkey with a 90% market
thereby eliminating direct competition. Emlak
share. Its monopolistic status is secured by
Konut REIT was established in the 1950s and
two factors: (i) high entry costs owing to the
its long history makes the company one of the
capital-intensive investment requirements for
most trusted brands in Turkey. We believe
the sector; (ii) the flat glass import tariffs
these advantages will persist in the long term,
applied to cheap glass manufacturers (Iran,
making Emlak Konut REIT one of the
China, Ukraine). As a result we expect the
winners in our competitive strength analysis.
company to maintain its large market share
for the foreseeable future. We believe that the Winner 3: Among the Turkish banks,
proximity of Trakya Cams plants to Halkbank scores the best within our
industrial sites also gives the company an competition analysis, having been one of the
edge in terms via the resultant logistics cost countrys most profitable banks for years.
advantage. Although Trakya Cam is Having analysed the sources of its superior
vulnerable to fuel cost increases (such as profitability we find that they lie primarily in
natural gas, which Turkey imports) we expect better product pricing, a relatively lower cost to
the company to sustain RoE levels in the revenue ratio and higher leverage. We believe
years ahead thanks to its efficient production Halkbank will maintain its relatively more
facilities and strong pricing power. The profitable structure, which gives it the means it
company also has existing and planned needs for sustainable growth. Halkbank scores
investments outside Turkey, which strengthen better than banking peers on our competitive
its presence in the region along with its outlook analysis owing to its stronger
partner Saint Gobain. As a result of its profitability, its size sufficient to achieve
sustainable competitive advantage, high

41
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5 October 2011

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

Is Reit
Bank Asya 5.0Sinpas REIC
Aksa Ener ji

Turcas Biz im

4.0
Erdemir
Torunlar REIT Cimsa
Kardemir Anadolu Hayat Trakya Cam
Albaraka
HurriyetMigr os Tofas
Ak enerji
Valuation relative

IS Bankasi Emlak REIT


Anadolu3.0Cam YKB
Adana Cimento Tupras
Arc elik
Turkis h Airlines
Akcansa Halkbank
Petkim
Akbank TAV
1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Zorlu Enerji Vak ifbank Gubretas Garanti Bank asi
Anadolu Sigor ta 2.0
Dogus Otomotiv
Ford Otosan

CCI
Turkc ell
Bagfas
Ak sigorta Kiler Aygaz Sisecam
Turk Telekom
1.0

Tat Konserve
BIM
Anadolu Efes

0.0
Thematic relative

Source: HSBC estimates * Size of bubbles represents market capitalisation

economies of scale and its strong market share will continue to post high RoEs, while the
gain in loans over the past few years. pace of store expansion should support
market share gains. These qualities make
Winner 4: Like discount retail market leader
Bizim one of the winners according to the
BIM, we believe Bizim can also sustain its
theme of this report.
market share gains and high RoE level.
Unlike BIM, Bizim is not yet the largest Winner 5: Tupras enjoys a monopolistic
player in its sector, although we believe it has position in the domestic market, with
adopted the right model to increase its reach significant control over the oil infrastructure,
in Turkey and gain market share from small and this results in strong pricing power. The
and regional competitors. The mass cash & main benefit Tupras obtains from its sole
carry and wholesale business is still in its refiner status is its ability to charge fuel
initial growth stage in Turkey. We believe distributors/retailers for refining product at
Bizim, with its ambitious plans to expand prices above international levels. We view
both its own operations and the market itself, this as a natural benefit of serving hinterland
has considerable potential to grow at a faster markets and having substantial storage and
pace than the total retail sector. By expanding pipeline infrastructure, which provides a
via its smaller stores, we believe the company deeper reach at lower cost. In its core refining

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5 October 2011

business, the company faces no threats until with a c38% market share, giving it a high
end-2015 when the Socar and Turcas refinery profile in a very competitive industry.
is scheduled to come on stream.
Sisecam is the market leader in flat glass (via
Theme winners with limited potential Trakya Cam), packaging and glassware
returns markets, with a 70-90% market share
Some of the winners on our scorecard system do depending on the type of product. The
not appear as attractively valued according to our conglomerates market position is secured by
valuations (see company sections for details): high entry costs and tariffs in the flat glass
BIM, Tofas, Sisecam, Garanti Bank, and Petkim segment and a strong brand name in
glassware segment. We expect its market
BIM is the market leader among the share in the packaging segment to decrease
organised retailers and by far the largest with the addition of one competitor, but do
player among the discounters. We think the not expect to see any fragmentation in the
company will retain its position of strength market owing to the lower margins and scaled
among the retailers since it is one of the most production requirement of this segment.
efficient players in the sector. Since, Sisecam is also active in Egypt, Bulgaria and
moreover, penetration in the retail sector is Russia via its subsidiaries. The group is not a
still low (45%), this should support share leader in these markets but is a prominent
gains from traditional outlets. Growth among player with market shares of 20%-40%. We
the other discounters in the market will believe its profitability and market share are
almost certainly erode BIMs market share in sustainable in the longer term, thanks to the
the discounters segment, where it is by far the companys well-established relationships with
largest discounter by net sales. However, clients, incumbent position in the segments
within the retail sector as a whole, we expect where it operates and geographical
the company to make market share gains from diversification. These position the company
unorganised retailers. We therefore view as one of the winners under the analysis we
BIMs high RoE and rising market share have conducted in this report.
trend as sustainable.
Garanti Bank scores strongly among the
Tofas has made great progress in improving Turkish banks within our competition
its market position in recent years. Its sales analysis. Although the Turkish banking sector
growth has far outstripped the average rate in cannot be defined as a fragmented compared
the geographies where it sell its products, with other sectors since the top five account
thanks to its success in attracting new for 63% of the sector by asset size one, the
products. This allowed it to achieve a major level of competition has always been quite
turnaround in capacity, output and scale high. Garanti has differentiated itself within
benefits. In the past five years, Tofas has this highly competitive sector and thereby
become an LCV hub for Fiat via the gained market share (up c4pp in the last five
commissioning of new models (Doblo, years), while managing to keep its
Minicargo), which has led to a reversal in its profitability level higher than those of most of
fortunes. The company is now becoming an its large peers. In the banking sector size
LCV OEM for multiple brands (Fiat, PSA, matters, as it allows economies of scale,
Opel) and leads the LCV segment in Turkey

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which is very important in order to achieve a Petkim is the only naphtha-based


lower cost to income ratio and therefore a petrochemical producer in Turkey and faces
higher level of ROAA. Most of the smaller no major competitive pressures other than
banks have higher cost to income ratios, from import products. It is also protected by
which prevents them from achieving import tariffs. The current structure works in
sustainably high ROAE levels. In the past few favour of Petkim as it has close relationships
years, Garanti has risen to its current position with its customers and can deliver small
as one of the top three banks in different quantities of products in timely fashion.
categories loans, deposits and assets. This Potential integration benefits via its
gives it the strength it needs to keep its shareholders refining investment are another
profitability levels above the sector average. 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 steam in terms of asset growth, lagging slightly Tamer Sengun*
Analyst
Akbank scored medium in our scorecard for below the market. HSBC Yatrm Menkul
Deerler A..
competitive analysis. While the bank has a medium Sustainable growth outlook is medium +90 212 376 4615
tamersengun@hsbc.com.tr
to weak profitable market share, its market share Compared to its peers and the rest of the sector,
*Employed by a non-US affiliate
momentum has been negative during the last few Akbanks cost to income was much better in of HSBC Securities (USA) Inc,
years. Although operating in a not highly fragmented and is not registered/ qualified
2010, yet its asset turnover was relatively lower pursuant to FINRA regulations
sector, as all the rest of the banks do, Akbank faces than that of most large size peers. Hence we
strong competition from its peers. define Akbanks sustainable growth outlook as
"Profitable market share" score is medium to medium. However, if the bank were to improve
weak the pricing for the products that it offers, the
According to our ROE vs. market share matrix sustainable growth outlook could improve.
Akbank scores weak compared to banks like Market fragmentation structure is medium to
Garanti, Isbank, Halkbank or Yapi Kredi, which strong
all have higher profitability with lower market The top five players claimed 63% market share as of
share. As stated in our latest banking sector note, 2010, while the top 10 claimed 87%. Hence, the
Akbank is among the banks who price their remaining c30banks constitute only 13% of the
products at unfavourable rates despite a sector. From that perspective, the Turkish banking
favourable balance sheet breakdown. However, in sector is not very fragmented compared to some
the event of better pricing of its products other sectors, yet it is still quite competitive.
Akbanks profitability could increase given its
advantageous market share position. Entry barriers to the sector are quite high, not only
due to the low fragmented structure of the sector but
Market share momentum is medium
also due to the tight regulations. Given the relatively
After strong growth in 2004 and 2005, during the lower profitability of the Turkish banking sector due
period between 2006 and 2010 the bank lost to the low interest rate environment, we believe
small sizes banks are likely to consolidate in the

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future due to their relatively higher cost to Investment thesis


income ratios. According to our analysis of the Turkish banking
Low interest rate environment should be sector, Akbank will be the bank which will benefit
positive in the short term but negative in the least from the new normal in 2012 (higher TRY
long term for Turkish banks and Akbank
loan to deposit spread and lower securities yield); ie
Turkish banks benefit from declining interest rates we expect only a 11% net income increase for the
due to the maturity mismatch between their assets bank in 2012. On a 2012e PE of 10.5x, Akbank
and liabilities (liabilities reprice faster than trades at a c50% premium to the banks on which we
assets). Hence, declining interest rate periods have have Overweight ratings.
historically resulted in widening margins for Rating, valuation and risks
Turkish banks and Akbank. However, when
We value Turkish banks using a residual income
interest rates stabilise at lower levels, the income
valuation methodology, in which the intrinsic value
on free funds (free equity and demand deposits
of the bank is the sum of its current NAV and the
etc.) declines resulting in a lower NIM, but
present value of future residual income (returns
stronger loan growth.
achieved over the cost of equity). The model consists
Weak TRY environment should be neutral to of three stages: the first includes residual income
negative for Turkish banks and Akbank based on an explicit forecast period (2011e-13e), the
A weak TRY environment has almost no direct second (maturity/ transition stage) assumes a
impact on the Turkish banks as they do not carry constant growth rate for net profit (2014e-29e) and
any significant FX positions. However, there are the final (declining stage) assumes a convergence of
two main indirect effects of a weak TRY. The returns towards the cost of equity (2030e-39e). Our
first one is increasing asset quality risks as the cost of equity assumptions incorporate an 8.0% risk-
SMEs or commercial companies that the banks free rate and a 5.5% equity risk premium. We use a
lend to may face some difficulties in paying their beta of 1.0 for Akbank. This implies a cost of equity
FX debts, if they do not have sustainable FX of 13.5% until the end of our valuation horizon
revenue streams. The second one is related to the in 2039e.
capital adequacy ratio of the bank. Almost one
Our residual-income DCF method yields a target
third of the risk weighted assets are denominated
price of TRY7.6 for Akbank, which implies a
in FX. Therefore, any weakness in TRY results in
potential return of c6%. This is below the 8.5%-
an inflation of the FX risk weighted assets, and
18.5% Neutral band for non-volatile Turkish stocks.
results in a lower capital adequacy ratio.
Therefore, we maintain our Underweight rating.

Risks
The main upside risk specific to Akbank is a
faster-than-expected rise in inflation, from which
the bank would benefit most owing to its sizeable
CPI-linker position.

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Financials & valuation: Akbank Underweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 5.8 4.0 3.9 3.7
Net fees/commissions 1.8 1.6 1.5 1.4
Net interest income 4,277 3,771 4,519 5,124 Trading profits 0.0 0.2 0.1 0.1
Net fees/commissions 1,309 1,547 1,737 1,959 Total income 8.9 6.6 6.2 5.9
Trading profits 33 203 152 114
Other income 1.2 0.8 0.7 0.7
Other income 891 723 819 1,042
Operating expense -3.3 -2.6 -2.3 -2.1
Total income 6,510 6,245 7,227 8,240 Pre-provision profit 5.6 3.9 3.8 3.8
Operating expense -2,417 -2,516 -2,739 -2,914 Bad debt charge -0.5 -0.4 -0.6 -0.9
Bad debt charge -348 -354 -708 -1,188
HSBC attributable profit 3.9 2.5 2.3 2.2
Other -171 -367 -433 -369
Leverage (x) 4.6 5.3 6.0 6.5
HSBC PBT 3,574 3,008 3,348 3,769 Return on average equity 18.0 13.5 14.0 14.2
Exceptionals 0 0 0 0
PBT 3,574 3,008 3,348 3,769
Taxation -718 -587 -654 -736 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 2,857 2,420 2,694 3,033 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 2,857 2,420 2,694 3,033 PE* 9.6 11.4 10.2 9.1
Balance sheet summary (TRYm) Pre-provision multiple 6.7 7.4 6.1 5.2
P/NAV 1.6 1.5 1.4 1.2
Ordinary equity 17,565 18,294 20,262 22,486 REP multiple 1.0 1.3 1.2 1.1
HSBC ordinary equity 17,565 18,294 20,262 22,486 Equity cash flow yield (%) 5.4 2.7 4.9 4.5
Customer loans 52,896 70,275 87,014 106,935 Dividend yield (%) 2.0 2.1 2.6 2.9
Debt securities holdings 49,879 43,268 45,550 47,250
Customer deposits 67,167 77,712 89,837 104,144
Interest earning assets 101,543 118,938 138,224 160,068 Issuer information
Total assets 113,183 131,957 152,732 176,504 Share price (TRY) 7.2 Target price (TRY) 7.60 Potent'l return (%) 5.5
Capital (%)
Reuters (Equity) AKBNK.IS Bloomberg (Equity) AKBNK TI
RWA (TRYm) 83,035 106,976 126,253 151,971 Market cap (USDm) 14,929 Market cap (TRYm) 27,520
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 25
Total tier 1 19.1 16.6 15.7 14.5 Country Turkey Sector Commercial Banks
Total capital 20.6 17.5 16.5 15.3 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income -1.3 -4.1 15.7 14.0
Operating expense 10.7 4.1 8.8 6.4
Pre-provision profit -7.2 -8.9 20.4 18.7
EPS 4.8 -15.3 11.3 12.6
HSBC EPS 4.8 -15.3 11.3 12.6
DPS 12.5 5.6 27.4 11.3
NAV (including goodwill) -7.2 4.1 10.8 11.0
Ratios (%)
Cost/income ratio 37.1 40.3 37.9 35.4
Bad debt charge 0.8 0.6 0.9 1.2
Customer loans/deposits 78.8 90.4 96.9 102.7
NPL/loan 2.4 1.7 1.8 2.1
NPL/RWA 1.5 1.2 1.3 1.5
Provision to risk assets/RWA 1.5 1.2 1.3 1.5
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 100.0 100.0 100.0 100.0
ROE (including goodwill) 18.0 13.5 14.0 14.2
Per share data (TRY)
EPS reported (fully diluted) 0.71 0.61 0.67 0.76
HSBC EPS (fully diluted) 0.71 0.61 0.67 0.76
DPS 0.14 0.14 0.18 0.20
NAV 4.39 4.57 5.07 5.62
NAV (including goodwill) 4.39 4.57 5.07 5.62

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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 market share of around 7-8% (within non-life Tamer Sengun*
Analyst
Among the sectors listed in the ISE, the Insurance insurers) in a highly fragmented market can be HSBC Yatrm Menkul
considered as a relative strength, similar to most Deerler A..
sector can be defined as the sector which suffers +90 212 376 4615
the most from a high level of fragmentation and a of its peers with higher market shares Aksigorta tamersengun@hsbc.com.tr

fragmentation-led low level of profitability. As of suffers form a low level of profitability ie. H1 *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
YE2010, there were 57 insurers sharing an annual 2011 ROAE below 1%. and is not registered/ qualified
pursuant to FINRA regulations
total premium generation amount of TRY14bn Market share momentum is medium
(1.26% of GDP). The total shareholders equity Aksigortas market share remained quite flat
held by the insurers amounts to TRY5bn, which within the total insurance sector between 2006
makes it very difficult to post RoEs above CoE and 2010.
given the low level of penetration of insurance
products. Therefore, we believe the sector is a Sustainable growth outlook is weak

candidate for consolidation and increased- For the companies operating in the Turkish
penetration-led profit recovery over the long term. insurance sector sustainable growth is a function
If the degree of market fragmentation does not of the level of competition. Unless the sector
diminish, we believe the profitability levels will consolidates, it is highly likely that the level of
continue to be lower than those of most other competition will stay high and irrational pricing
sectors in Turkey. Aksigorta suffers from the will continue to exist.
unfavourable competitive landscape of the sector Market fragmentation structure is weak
and this is why the H1 2011 ROAE of the The sector is highly fragmented. The top 5 players
company was just below 1%. claim only 40% market share, and the top 10
"Profitable market share" score is weak players claim 73%. We believe consolidation is a
According to our ROE vs. market share matrix must given this level of fragmentation.
Aksigorta scores medium to weak. Although a

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Low interest rate environment is negative for Rating, valuation and risks
insurance companies We value Aksigorta by using the implied
Investment income is one of the revenue sources valuation from the warranted equity method
of the insurance companies. During low interest (WEM) and a valuation based on previous
rate environments, yields on TRY securities insurance sector transactions. We value
decline which results in lower revenue Aksigortas core insurance business operations at
contributions for the insurance companies. Hence, TRY101m. We use the JV deal value in our
Aksigorta is not a beneficiary of a declining valuation, at USD710m, since we believe it will
interest rate environment. form a benchmark for market valuations.
Weak TRY environment should be neutral to We give a 30% weight to the value implied from
negative for Turkish insurers and Aksigorta the deal (down from 50% as the psychological
A weak TRY environment has almost no direct impact of the deal has diminished). The remaining
impact on pensions business and therefore on 70% (from 50% previously) is the value implied
Aksigorta. by the WEM. On this basis, we lower our target
price to TRY1.30 from TRY1.94, implying a
Investment thesis potential return of -0.8%. Our Neutral band for
We define the non-life insurance sector as one of non-volatile Turkish stocks is 8.5% - 18.5%. We
the least attractive sectors in Turkey due to the maintain our Underweight rating on Aksigorta.
high level of fragmentation and competition. It is
Risks
almost impossible for any of the players to protect
Competition is fierce in the sector and companies
themselves from the intensely competitive
are working with core insurance losses to sustain
landscape.
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 Underweight


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

51
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is weak Market share momentum is strong Tamer Sengun*
Analyst
Albaraka Turk scored medium to weak in our During the period between 2006 and 2010 Albaraka
HSBC Yatrm Menkul
scorecard for competitive analysis. Having a Turks asset growth posted a 36% CAGR versus Deerler A..
+90 212 376 4615
market share below 1% within the Turkish sector growth of 19%. The participation banking tamersengun@hsbc.com.tr
banking sector, Albaraka Turk does not have any sector has been growing quite rapidly and Albaraka *Employed by a non-US affiliate
has participated in this. Capital adequacy poses the of HSBC Securities (USA) Inc,
pricing power, and therefore, is more of a price and is not registered/ qualified
taker. Having said that, since it operates in a niche biggest constraint for the future growth prospects of pursuant to FINRA regulations

segment participation banking Albaraka has Albaraka. We believe if the capital of the bank is
its own advantages. The segment has grown increased, the faster-than-conventional-bank growth
rapidly compared to the conventional banking can be maintained.
sector over the past several years and Albaraka Sustainable growth outlook is medium
Turk has participated in this growth. In addition, Albarakas cost to income ratio was comparable
Albaraka Turks profitability level is comparable to that of the sector both in H1 2011 and in 2010,
to that of the conventional banks average, which and its asset turnover was slightly better. Hence
is another positive. we define Albarakas sustainable growth outlook
"Profitable market share" score is medium to as medium.
weak Market fragmentation structure is medium to
According to our ROE vs. market share matrix weak
Albaraka scores weak compared to most The top five players claimed 63% of the market
conventional banks given its market share below share as of 2010, while the top 10 claimed 87%.
1%. Although operating in a niche segment is a Hence, the remaining c30banks constitute only 13%
positive, within the segment (which has only four of the sector. From that perspective, the Turkish
players) the market share of the bank is around banking sector is not very fragmented compared to
20%, ie it is not the top player. some other sectors, yet it is still quite competitive.

52
Equities
Turkish Equities abc
5 October 2011

In the participation banking sector, which is a Investment thesis


subsector of the Turkish banking sector, the Albaraka Turk is a well-managed bank with decent
market is shared by only four players which profitability in a niche segment that offers
command 4.2% of the total Turkish banking significant growth. We believe the markets main
sector. There has always been talk that a fifth concerns are the low trading volume of the stock
participation banking license may be issued by the (USD1m average daily turnover) and fears of a
BRSA. If issued, it would increase the level of potential rights issue. Although our model shows
competition among participation banks. Recall that the bank can sustain asset growth of 15-20%
that participation banks competitors for loans are with the the current level of profitability, if
the conventional banks, but they do also compete management were to seek to increase its market
among themselves, mostly for deposits. share within the sector we believe a rights issue
Low interest rate environment is negative for might be considered. But even with these concerns
participation banks and Albaraka in mind, we still find Albaraka a very attractive
While Turkish banks benefit from declining stock within the Turkish banking sector universe.
interest rates due to the maturity mismatch Rating, valuation and risks
between their assets and liabilities (liabilities
We value Turkish banks using a residual income
reprice faster than assets), participation banks do
valuation methodology, in which the intrinsic value
not benefit as they do not offer fixed deposit rates.
of the bank is the sum of its current NAV and the
In declining interest rate periods, the participation
present value of future residual income (returns
banks usually pay higher returns to their deposit
achieved over the cost of equity). The model
holders, which is positive from a deposit
consists of three stages: the first includes residual
collection perspective but negative for margins.
income based on an explicit forecast period (2011e-
Therefore, participation banks are negatively
13e), the second (maturity/ transition stage)
affected by declining and low interest rates.
assumes a constant growth rate for net profit
Weak TRY environment should be neutral to (2014e-29e) and the final (declining stage) assumes
negative for Turkish banks and Albaraka a convergence of returns towards the cost of equity
(2030e-39e). Our cost of equity assumptions
A weak TRY environment has almost no direct
incorporate a 8.0% risk-free rate and a 5.5% equity
impact on the Turkish banks as they do not carry
risk premium. We use a beta of 1.0 for Albaraka.
any significant FX positions. However, there are
This implies a cost of equity of 13.5% until the end
two main indirect effects of a weak TRY. The
of our valuation horizon in 2039e.
first one is increasing asset quality risks as the
SMEs or commercial companies that the banks Our residual-income DCF method yields a 12-
lend to may face some difficulties in paying their month forward target value of TRY1.5bn, or
FX debts, if they do not have sustainable FX TRY2.8 per share. The stock is trading at a
revenue streams. The second one is related to the significant discount to Turkish conventional banks
capital adequacy ratio of the bank. Almost one on a 2012e PE and PBV of 5.7x and 0.9x,
third of the risk weighted assets are denominated respectively, with an expected ROAE of 16%.
in FX. Therefore, any weakness in TRY results in
Our target price implies a 50% potential return, and
an inflation of the FX risk weighted assets, and
we maintain the stock at Overweight.
results in a lower capital adequacy ratio.

53
Equities
Turkish Equities abc
5 October 2011

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.

54
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Albaraka Turk Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 6.0 5.9 6.1 6.3
Net fees/commissions 1.6 1.4 1.4 1.4
Net interest income 316 379 456 549 Trading profits 0.3 0.2 0.2 0.1
Net fees/commissions 83 92 107 124 Total income 8.9 8.4 8.6 8.9
Trading profits 16 14 11 9
Other income 1.1 0.8 1.0 1.1
Other income 57 54 74 95
Operating expense -3.8 -3.8 -3.8 -3.7
Total income 472 540 649 777 Pre-provision profit 5.1 4.6 4.9 5.1
Operating expense -201 -244 -284 -327 Bad debt charge -1.3 -1.1 -1.4 -1.6
Bad debt charge -68 -69 -102 -140
HSBC attributable profit 2.5 2.4 2.3 2.4
Other -37 -37 -43 -50
Leverage (x) 6.8 7.0 7.0 6.9
HSBC PBT 166 190 219 260 Return on average equity 17.1 16.5 16.3 16.4
Exceptionals 0 0 0 0
PBT 166 190 219 260
Taxation -32 -38 -44 -52 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 134 152 175 208 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 134 152 175 208 PE* 7.5 6.6 5.7 4.8
Balance sheet summary (TRYm) Pre-provision multiple 3.7 3.4 2.8 2.2
P/NAV 1.2 1.0 0.9 0.7
Ordinary equity 853 989 1,165 1,373 REP multiple 0.8 0.7 0.6 0.5
HSBC ordinary equity 853 989 1,165 1,373 Equity cash flow yield (%) 4.1 8.8 8.5 11.9
Customer loans 6,271 7,188 8,699 10,461 Dividend yield (%) 0.0 0.0 0.0 0.0
Debt securities holdings 435 537 590 649
Customer deposits 6,882 7,810 9,116 10,636
Interest earning assets 7,073 8,659 10,014 11,839 Issuer information
Total assets 8,406 9,808 11,609 13,666 Share price (TRY) 1.87 Target price (TRY) 2.80 Potent'l return (%) 49.7
Capital (%)
Reuters (Equity) ALBRK.IS Bloomberg (Equity) ALBRK TI
RWA (TRYm) 5,965 6,861 8,148 9,404 Market cap (USDm) 547 Market cap (TRYm) 1,008
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 42
Total tier 1 13.5 13.8 13.8 14.2 Country Turkey Sector COMMERCIAL BANKS
Total capital 14.1 14.4 14.4 14.7 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income 7.1 14.3 20.2 19.9
Operating expense 13.6 21.1 16.4 15.3
Pre-provision profit 2.8 9.2 23.3 23.4
EPS 27.3 13.1 15.7 18.7
HSBC EPS 27.3 13.1 15.7 18.7
DPS
NAV (including goodwill) 20.0 16.0 17.7 17.9
Ratios (%)
Cost/income ratio 42.7 45.2 43.8 42.1
Bad debt charge 1.2 1.0 1.3 1.5
Customer loans/deposits 91.1 92.0 95.4 98.4
NPL/loan 3.0 3.0 3.3 3.6
NPL/RWA 3.2 3.3 3.6 4.2
Provision to risk assets/RWA 2.7 2.9 3.2 3.7
Net write-off/RWA 0.3 0.1 0.0 0.0
Coverage 85.7 89.0 89.0 89.0
ROE (including goodwill) 17.1 16.5 16.3 16.4
Per share data (TRY)
EPS reported (fully diluted) 0.25 0.28 0.33 0.39
HSBC EPS (fully diluted) 0.25 0.28 0.33 0.39
DPS 0.00 0.00 0.00 0.00
NAV 1.58 1.84 2.16 2.55
NAV (including goodwill) 1.58 1.84 2.16 2.55

55
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is medium despite the fact that its pension business has not Tamer Sengun*
Analyst
Anadolu Hayat operates in both the life insurance yet broken even. HSBC Yatrm Menkul
Deerler A..
and pensions business segments. While life Market share momentum is medium +90 212 376 4615
tamersengun@hsbc.com.tr
insurance is a relatively older sector, the pensions While Anadolu Hayat gained some market share
*Employed by a non-US affiliate
sector is a very newly established one in Turkey in the private pension segment since 2006 (up by of HSBC Securities (USA) Inc,
(established in 2003). There are currently a total and is not registered/ qualified
2.7pps), its life segment market share has not pursuant to FINRA regulations
of 14 private pensions companies which improved considerably. Given that the pension
commanded total assets under management of business is still growing at a rapid pace, market
TRY14bn (c1.15% of GDP) as of mid-September. share in this segment may well be volatile.
Anadolu Hayat has c21% market share both in Therefore, in this analysis, we preferred rating the
terms of contributions and assets under company as medium.
management (AUM), and ranks as first among its
peers. As the AUM is still posting rapid growth, Sustainable growth outlook is medium to

and as the costs associated with acquiring private strong

pension customers are still high, the private As stated previously, as the AUM is still posting
pensions sector has not yet reached breakeven. rapid growth, and as the costs associated with
However, we believe that in the very near future, acquiring private pension customers are still high,
the private pension system will become a very the private pension sector has not yet reached
profitable sector and, having a really strong breakeven. However, we believe that in the very
position in this segment; Anadolu Hayat will be near future, the private pension system will
one of the major beneficiaries. become a very profitable sector and having a
really strong position in this segment; Anadolu
"Profitable market share" score is strong Hayat will be one of the major beneficiaries.
According to our ROE vs. market share matrix
Anadolu Hayat scores strong. Having the largest Market fragmentation structure is medium to

market share and an ROE above 15%, Anadolu strong

Hayat scores quite well according to the criteria, While the market is highly fragmented in the
insurance sector, the private pension sector (with

56
Equities
Turkish Equities abc
5 October 2011

a total of only 14 players) can be considered as pension funds to grow by 26% (previously 34%)
quite consolidated (the top four players account vs 14% for total non-life premium growth. Also,
for 74% of total AUM), although there is a risk we expect Anadolu Hayat to post ROAEs of 16%
that new players are likely to enter the sector as it in 2012 and 19% in 2013, compared with c5% for
is still in the developing phase. Aksigorta and Anadolu Sigorta.

Low interest rate environment is negative for In this note, we lowered our net income estimates
insurance companies for Anadolu Hayat for 2012 and 2013, to
Investment income is one of the revenue sources for TRY79m and TRY94m on lower investment
insurance companies. During low interest rate income due to lower interest rates and slower
environments, yields on TRY securities decline AUM growth assumptions from the previous
which results in lower revenue contribution for the TRY87m and TRY127m.
insurance companies. In addition, the fixed income
Forecast changes
funds do not yield high returns and management fee
___ 2011e____ ___ 2012e ____ ___ 2013e____
growth is also negatively affected. On the other TRYm old New Old new old new
hand, as equities usually rally during declining Premiums 391 373 411 392 431 412
interest rate periods, equity funds tend to appreciate Fund size 3,540 3,247 4,570 4,228 5,586 5,226
Net income 74 78 87 79 127 94
more and result in higher management fees. RoE 16% 17% 18% 16% 21% 19%
However, the share of equity funds is lower than that Source: HSBC estimates

of the fixed income pension funds. Hence, on


balance, Anadolu Hayat is not a beneficiary of a Rating, valuation and risks
declining interest rate environment. We use a DDM for the explicit period and a
warranted equity method for the post-explicit
Weak TRY environment should be neutral to
period. Our main assumptions are an 8.5% risk-
negative for Turkish insurers and Anadolu Hayat
free rate, 5.5% equity risk premium, and 0.70 beta
Weak TRY environment has almost no direct yielding a 12.4% CoE. On our lower net income
impact on the pensions business and therefore forecasts, our warranted equity method-driven
Anadolu Hayat. A potential indirect impact is a valuation yields a target price of TRY4.5 (from
positive contribution to the FX Eurobond pension TRY5.33). Our new target price implies a 51%
funds value appreciation in TRY terms, and potential return. That is above our Neutral band
hence a higher revenue contribution from for non-volatile Turkish stocks of 8.5%- 18.5%,
management fees. so we maintain our Overweight rating.

Investment thesis Risks

Within the insurance sector, we favour the private The main downside risk to our rating is the
pensions business and therefore Anadolu Hayat emergence of greater competition, mainly in the
as it is the only segment that offers decent pensions sector, that could lead to lower fees for
visibility regarding sustainable profit growth, in all companies. That in turn would hurt the ROE of
our view. Anadolu Hayat is the only listed Anadolu Hayat and hence our valuation. An
insurance company with direct exposure to the unexpected catastrophic event is the major risk for
secular growth story of the private pensions the life branch.
business. The short-term outlook for the company
is also supportive. In 2011, we expect total private

57
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Anadolu Hayat Overweight


Financial statements Per share data (TRY)
Year to 12/2010a 12/2011e 12/2012e 12/2013e 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) EPS reported (fully diluted) 0.29 0.31 0.31 0.38
HSBC EPS (fully diluted) 0.26 0.27 0.26 0.42
Gross written premium 551 570 602 674 DPS 0.22 0.16 0.25 0.28
Net earned premium 356 373 392 412 NAV 1.80 1.93 1.99 2.02
Other income 56 71 88 108
Embedded value 0.06 0.12 0.12 0.13
PBT (operating) 79 83 86 105
PBT (reported) 87 95 98 117
Total tax -15 -16 -20 -23
Net operating profit 64 67 66 105 Valuation data
Net reported profit 71 78 79 94 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Net earned primary life & health prem 356 373 392 412
PE reported* 10.4 9.5 9.5 7.9
Net earned primary P&C prem
PE (HSBC)* 11.6 11.2 11.3 7.1
Net earned life & health re-ins prem 0 0 0 0
Price / EV 53.4 25.2 24.9 23.4
Net earned P&C re-ins prem 0 0 0 0
Price / NAV 53.4 25.2 24.9 23.4
Balance sheet summary (TRYm) New business multiple 1.7 1.5 1.5 1.5
Reported ROE
Total investments 5,269 5,979 7,293 8,713 Reported ROEV 0.0 0.0 0.0 0.0
Banking assets 0 0 0 0 Dividend cover 1.2 1.7 1.1 1.5
Tangible assets 5,269 5,979 7,293 8,713 Note: * = Based on fully diluted shares
Value of in-force business 0 0 0 0
Intangible & other assets 2 3 3 3
Total assets 5,299 6,014 7,330 8,751 Issuer information
Technical reserves 2,155 2,222 2,561 2,979
Share price (TRY) 2.98 Target price (TRY) 4.50 Potent'l return (%) 51.0
Banking liabilities 0 0 0 0
Reuters (Equity) ANHYT.IS Bloomberg (Equity) ANHYT TI
Other liabilities 2,693 3,310 4,270 5,266
Market cap (USDm) 484 Market cap (TRYm) 894
Debt capital 0 0 0 0
Total liabilities 4,848 5,532 6,826 8,239 Free float (%) 20
Country Turkey Sector INSURANCE
Shareholders funds 451 482 498 506 Analyst Tamer Sengun Contact +90 212 376 4615
Average invested capital 440 466 490 502
Equity 451 482 498 506
Quasi equity 0 0 0 0 Price relative
Long-term debt & hybrid capital 0 0 0 0 6 6
Short-term debt 2,688 3,305 4,265 5,260
Third party assets under mgmt 2,671 3,286 4,245 5,239 5 5
Total assets under mgmt 2,671 3,286 4,245 5,239 4 4
3 3
Ratios & growth 2 2
12/2010a 12/2011e 12/2012e 12/2013e 1 1
Year-on-year % change 0 0
2009 2010 2011 2012
Gross net earned life prem -28.3 5.0 5.0 5.0
Gross net earned P&C prem Anadolu Hayat Rel to ISTANBUL COMP
Operating PBT -13.8 4.3 3.4 22.1
Source: HSBC
Reported PBT -11.4 8.8 3.9 19.4
EPS (operating) -12.9 4.3 -1.1 58.4
EPS (reported) -9.9 9.9 0.1 19.4 Note: price at close of 28 Sep 2011
DPS 31.0 -27.3 56.9 12.6
Total investments 19.5 13.5 22.0 19.5
Third party asset managed 34.1 23.0 29.2 23.4
Net asset value
Ratios (%)
Life new business margin 0.0 0.0 0.0 0.0
P&C combined ratio 0.0 0.0 0.0 0.0
P&C loss ratio 0.0 0.0 0.0 0.0
P&C expense ratio 0.0 0.0 0.0 0.0
P&C reserve ratio 0.0 0.0 0.0 0.0

58
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is weak share can be considered as a relative strength, Tamer Sengun*
Analyst
Among the sectors listed in the ISE, the Insurance similar to most of its peers with higher market
HSBC Yatrm Menkul
sector can be defined as the sector which suffers shares, Anadolu Sigorta suffers from a low level Deerler A..
+90 212 376 4615
the most from a high level of fragmentation and a of profitability. tamersengun@hsbc.com.tr

fragmentation-led low level of profitability. As of *Employed by a non-US affiliate


Market share momentum is strong of HSBC Securities (USA) Inc,
YE2010, there were 57 insurers sharing an annual Anadolu Sigorta has been improving its market and is not registered/ qualified
total premium generation amount of TRY14bn pursuant to FINRA regulations
share during the past years. The company remains
(1.26% of GDP). The total shareholders equity market share focused, as is the case with the rest
held by the insurers amounts TRY5bn, which of the sector. We do not think the company will
makes it very difficult to post ROEs above COE lose market share going forward but that same
given the low level of penetration of insurance reason will continue to prevent all sector players
products. Therefore, we believe the sector is a from posting decent profit numbers.
candidate for consolidation and increased-
penetration-led profit recovery over the long term. Sustainable growth outlook is weak

If the degree of fragmentation does not diminish, For the companies operating in the Turkish
we believe profitability levels will continue to be insurance sector sustainable growth is a function
lower than those of most other sectors in Turkey. of the level of competition. Unless the sector
Anadolu Sigorta suffers from the unfavourable consolidates, it is highly likely that the level of
competitive landscape of the sector and this is competition will stay high and irrational pricing
why we expect the company to post only a 4% will continue to exist.
adj. ROAE in 2011. Market fragmentation structure is weak

"Profitable market share" score is medium The sector is highly fragmented. The top 5 players
According to our ROE vs. market share matrix claim only 40% market share, and the top 10
Anadolu Sigorta scores medium. Despite having a players claim 73%. We believe consolidation is a
market share of around 12% (within non-life must given this level of fragmentation.
insurers), which in a highly fragmented market

59
Equities
Turkish Equities abc
5 October 2011

Low interest rate environment is negative for Rating, valuation and risks
insurance companies We value the company by using a sum-of-the-
Investment income is one of the revenue sources parts valuation for the operations and a valuation
for insurance companies. During low interest rate based on past insurance sector transactions. Our
environments, yields on TRY securities decline SOTP is driven by a TRY0.2 per share (was
which results in a lower revenue contribution for TRY0.3 per share) value for the Core Insurance
the insurance companies. Hence, Anadolu Sigorta operations and TRY0.48 per share (was TRY0.54
is not a beneficiary of a declining interest rate per share) for the NAV of participations which
environment. yields TRY0.7 per share when combined. We
Weak TRY environment should be neutral to assign an 85% weight to the SOTP value (up from
negative for Turkish insurers and Anadolu 80% as we believe a potential deal within the
Sigorta insurance sector is highly unlikely in the short to
medium term given the turbulence in the markets)
A weak TRY environment has almost no direct and a 15% weight (previously 20%) to the implied
impact on the pensions business and therefore value from previous deals yielding TRY0.46 per
Anadolu Sigorta. share (was TRY0.61 per share).
Investment thesis We lower our target price to TRY1.05 (from
We define the non-life insurance sector as one of the TRY1.32). The main reason for the TP cut is the
least attractive sectors in Turkey due to the high lower value attributed to past deals. As this implies a
levels of fragmentation and competition. It is almost c18% potential return, we maintain our
impossible for any of the players to protect Neutral rating.
themselves from the intensely competitive
Risks
landscape. However, we favour Anadolu Sigorta
Upside risks include potential consolidation in the
over Aksigorta, due to its better profitability and its
market that may act as a positive catalyst for
participation portfolio (Anadolu Hayat and Is REIT).
insurance stocks. The main downside risks are
catastrophic events, such as an earthquake; and a
worsening global macroeconomic downturn.

60
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Anadolu Sigorta Neutral


Financial statements Per share data (TRY)
Year to 12/2010a 12/2011e 12/2012e 12/2013e 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) EPS reported (fully diluted) 0.08 0.07 0.09 0.12
HSBC EPS (fully diluted) -0.07 -0.07 -0.06 -0.05
Gross written premium 1,420 1,622 1,810 1,969 DPS 0.02 0.03 0.03 0.04
Net earned premium 1,112 1,228 1,369 1,488 NAV 1.70 1.75 1.81 1.89
Other income 0 0 0 0
Embedded value 0.00 0.00 0.00 0.00
PBT (operating) 44 42 56 72
PBT (reported) 44 42 56 72
Total tax -6 -8 -10 -13
Net operating profit 38 34 45 59 Valuation data
Net reported profit 38 34 45 59 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Net earned primary life & health prem 0 0 0 0
PE reported* 11.9 12.9 9.9 7.6
Net earned primary P&C prem
PE (HSBC)*
Net earned life & health re-ins prem 0 0 0 0
Price / EV
Net earned P&C re-ins prem 0 0 0 0
Price / NAV
Balance sheet summary (TRYm) New business multiple 0.5 0.5 0.5 0.5
Reported ROE
Total investments 1,638 1,779 1,925 2,065 Reported ROEV 0.0 0.0 0.0 0.0
Banking assets 0 0 0 0 Dividend cover 3.8 -2.5 -1.8 2.6
Tangible assets 1,638 1,779 1,925 2,065 Note: * = Based on fully diluted shares
Value of in-force business 0 0 0 0
Intangible & other assets 26 26 26 26
Total assets 1,951 2,109 2,271 2,429 Issuer information
Technical reserves 933 1,064 1,187 1,293
Share price (TRY) 0.89 Target price (TRY) 1.05 Potent'l return (%) 18.0
Banking liabilities 0 0 0 0
Reuters (Equity) ANSGR.IS Bloomberg (Equity) ANSGR TI
Other liabilities 170 172 179 189
Market cap (USDm) 241 Market cap (TRYm) 445
Debt capital 0 0 0 0
Total liabilities 1,103 1,236 1,367 1,440 Free float (%) 48
Country Turkey Sector INSURANCE
Shareholders funds 849 873 905 947 Analyst Tamer Sengun Contact +90 212 376 4615
Average invested capital 827 861 889 926
Equity 849 873 905 947
Quasi equity 0 0 0 0 Price relative
Long-term debt & hybrid capital 0 0 0 0 2.5 2.5
Short-term debt 129 131 138 147
Third party assets under mgmt 0 0 0 0 2 2
Total assets under mgmt 0 0 0 0
1.5 1.5

Ratios & growth 1 1

12/2010a 12/2011e 12/2012e 12/2013e 0.5 0.5

Year-on-year % change 0 0
2009 2010 2011 2012
Gross net earned life prem
Gross net earned P&C prem 7.7 10.5 11.5 8.7 Anadolu Sigorta Rel to ISTANBUL COMP
Operating PBT -26.1 -3.2 31.2 30.0
Source: HSBC
Reported PBT -26.1 -3.2 31.2 30.0
EPS (operating) -39.5 -2.2 -7.7 -24.8
EPS (reported) -22.0 -8.3 31.2 30.0 Note: price at close of 28 Sep 2011
DPS -60.0 32.1 23.4 36.6
Total investments 12.3 8.7 8.2 7.3
Third party asset managed
Net asset value
Ratios (%)
Life new business margin 0.0 0.0 0.0 0.0
P&C combined ratio 105.4 103.3 103.1 102.3
P&C loss ratio 73.6 67.1 68.2 67.4
P&C expense ratio 31.8 36.2 34.9 34.9
P&C reserve ratio 30.0 28.6 28.6 28.6

61
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is weak conventional banks given its market share of only Tamer Sengun*
Analyst
Bank Asya scored medium to weak in our around 1.5%. However, operating in a niche
HSBC Yatrm Menkul
scorecard for competitive analysis. Having a segment is a positive, especially for a bank that Deerler A..
+90 212 376 4615
market share of around 1.5% within Turkish commands almost one-third of the market. tamersengun@hsbc.com.tr
banking sector, Bank Asya does not have any Market share momentum is strong
*Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
pricing power on the asset front and, therefore, is During the period between 2006 and 2010 the and is not registered/ qualified
more of a price taker. Having said that, since it pursuant to FINRA regulations
banks asset growth posted a 37% CAGR versus
operates in a niche segment participation sector growth of 19%. The participation banking
banking Bank Asya has its own advantages ie. sector has been growing quite rapidly and Bank
not directly competing with the conventional Asya has participated in this growth. Capital
banks for deposits. adequacy poses the biggest constraint for the
The participation banking segment has grown future growth prospects of Bank Asya, as is the
rapidly compared to the conventional banking case for Albaraka. We believe if the capital of the
sector during the past several years and Bank bank were to be increased, the faster-than-
Asya has participated in this growth. conventional-bank growth could be maintained.

Compared to Albaraka, Bank Asyas profitability Sustainable growth outlook is medium to weak
level is lower, which is a negative for the banks Bank Asyas cost to income ratio was weaker than
competitive outlook. However, the new the sector average in both H1 2011 and 2010, but
management is taking steps to improve the its asset turnover was better. Yet, with such a high
profitability of the bank via better allocation of cost to income ratio, we define Bank Asyas
the limited capital. sustainable growth outlook as medium to weak.

"Profitable market share" score is medium to Market fragmentation structure is medium to


weak weak
According to our ROE vs. market share matrix The top five players claimed 63% market share as of
Bank Asya scores weak compared to most 2010, while the top 10 claimed 87%. Hence, the

62
Equities
Turkish Equities abc
5 October 2011

remaining c30banks constitute only 13% of the inflation of the FX risk weighted assets, and a
sector. From that perspective, the Turkish banking lower capital adequacy ratio.
sector is not very fragmented compared to some
Investment thesis
other sectors, yet it is still quite competitive. In the
participation banking sector, which is a subsector of Despite a lower-than-consensus for 2012 net
the Turkish banking sector, the market is shared by income estimate for Bank Asya, we believe that
only four players which command 4.2% of total the valuation is compelling and most of the
Turkish banking sector assets. There has always negatives have been more than priced in after
been talk that a fifth participation banking license relative underperformances of 18% and 21%,
could be issued by the BRSA. If issued, it would respectively, versus the ISE-Banks and the ISE-
increase the level of competition for the participation 100 y-t-d. We also believe that the new
banks. Recall that participation banks competitors managements strategy for the bank is realistic.
for loans are the conventional banks, but they do also Rating, valuation and risks
compete among themselves, mostly for the deposits.
We value Turkish banks using a residual income
Low interest rate environment is negative for valuation methodology, in which the intrinsic value
participation banks and Bank Asya of the bank is the sum of its current NAV and the
While Turkish banks benefit from declining interest present value of future residual income (returns
rates due to the maturity mismatch between their achieved over the cost of equity). The model consists
assets and liabilities (liabilities reprice faster than the of three stages: the first includes residual income
assets), participation banks do not benefit as they do based on an explicit forecast period (2011e-13e), the
not offer a fixed deposit rate. In declining interest second (maturity/ transition stage) assumes a
rate periods, participation banks usually pay higher constant growth rate for net profit (2014e-29e) and
returns to their deposit holders, which is positive the final (declining stage) assumes a convergence of
from a deposit collection perspective but negative returns towards the cost of equity (2030e-39e). Our
for margins. Therefore, participation banks are cost of equity assumptions incorporate an 8.0% risk-
negatively affected by declining and low free rate and a 5.5% equity risk premium. We use a
interest rates. beta of 1.0 for Bank Asya. This implies a cost of
equity of 13.5% until the end of our valuation
Weak TRY environment should be neutral to
horizon in 2039e.
negative for Turkish banks and Bank Asya
The stock is currently trading at a 2012e PE and
A weak TRY environment has almost no direct
PBV of 6.3x and 0.7x, respectively. We maintain
impact on the Turkish banks as they do not carry
our target price at TRY2.75, which implies a 40%
any significant FX positions. However, there are
potential return. This is above the 8.5%-18.5%
two main indirect effects of a weak TRY. The
Neutral band for non-volatile Turkish stocks.
first one is increasing asset quality risks as the
Therefore, we keep our rating for Bank Asya
SMEs or commercial companies that the banks
at Overweight.
lend to may face some difficulties in paying their
FX debts, if they do not have sustainable FX Risks
revenue streams. The second one is related to the The main downside risk is the lower returns to be
capital adequacy ratio of the bank. Almost one shared with participation account owners in the case
third of the risk weighted assets are in FX terms. of higher-than-expected NPLs, which may result in
Therefore, any weakness in TRY results in an slower IEA growth for the bank.

63
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Bank Asya Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 4.6 4.0 4.4 4.5
Net fees/commissions 1.9 1.7 1.7 1.7
Net interest income 594 620 775 913 Trading profits 0.3 0.3 0.3 0.3
Net fees/commissions 249 267 305 347 Total income 7.8 6.6 7.0 7.1
Trading profits 45 46 50 55
Other income 1.0 0.6 0.6 0.5
Other income 134 91 98 111
Operating expense -4.1 -3.7 -3.6 -3.4
Total income 1,022 1,024 1,228 1,426 Pre-provision profit 3.8 2.9 3.4 3.6
Operating expense -530 -573 -632 -692 Bad debt charge -0.8 -0.7 -1.1 -1.2
Bad debt charge -108 -114 -196 -249
HSBC attributable profit 2.0 1.5 1.6 1.7
Other -60 -55 -47 -51
Leverage (x) 7.1 7.5 7.6 7.7
HSBC PBT 324 281 353 434 Return on average equity 14.2 11.0 12.3 13.3
Exceptionals 0 0 0 0
PBT 324 281 353 434
Taxation -64 -56 -71 -87 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 260 225 282 347 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 260 225 282 347 PE* 6.8 7.8 6.2 5.1
Balance sheet summary (TRYm) Pre-provision multiple 3.6 3.9 2.9 2.4
P/NAV 0.9 0.8 0.7 0.6
Ordinary equity 1,942 2,159 2,442 2,789 REP multiple 0.7 0.9 0.7 0.6
HSBC ordinary equity 1,942 2,159 2,442 2,789 Equity cash flow yield (%) 3.7 4.7 7.0 8.2
Customer loans 10,955 12,961 15,324 17,887 Dividend yield (%) 0.0 0.0 0.0 0.0
Debt securities holdings 474 601 662 728
Customer deposits 11,167 12,726 14,917 17,473
Interest earning assets 10,862 14,029 16,981 20,185 Issuer information
Total assets 14,513 17,475 20,596 24,488 Share price (TRY) 1.95 Target price (TRY) 2.75 Potent'l return (%) 41.0
Capital (%)
Reuters (Equity) ASYAB.IS Bloomberg (Equity) ASYAB TI
RWA (TRYm) 14,420 16,444 18,708 21,616 Market cap (USDm) 952 Market cap (TRYm) 1,755
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 42
Total tier 1 12.8 12.7 12.7 12.6 Country Turkey Sector COMMERCIAL BANKS
Total capital 13.3 13.2 13.2 13.1 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income -3.1 0.2 20.0 16.1
Operating expense 15.5 8.1 10.4 9.4
Pre-provision profit -17.4 -8.4 32.2 23.3
EPS -13.7 -13.4 25.4 23.1
HSBC EPS -13.7 -13.4 25.4 23.1
DPS
NAV (including goodwill) 13.7 11.2 13.1 14.2
Ratios (%)
Cost/income ratio 51.9 56.0 51.5 48.5
Bad debt charge 1.1 1.0 1.4 1.5
Customer loans/deposits 98.1 101.8 102.7 102.4
NPL/loan 4.0 3.9 4.5 5.4
NPL/RWA 3.1 3.2 3.8 4.6
Provision to risk assets/RWA 2.1 2.0 2.5 2.9
Net write-off/RWA 0.5 0.5 0.5 0.5
Coverage 67.9 64.5 64.0 64.0
ROE (including goodwill) 14.2 11.0 12.3 13.3
Per share data (TRY)
EPS reported (fully diluted) 0.29 0.25 0.31 0.39
HSBC EPS (fully diluted) 0.29 0.25 0.31 0.39
DPS 0.00 0.00 0.00 0.00
NAV 2.16 2.40 2.71 3.10
NAV (including goodwill) 2.16 2.40 2.71 3.10

64
Equities
Turkish Equities abc
5 October 2011

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 "Profitable market share" score is strong Tamer Sengun*
Analyst
Among the Turkish banks, Garanti scores strong According to our ROE vs. market share matrix
HSBC Yatrm Menkul
within our competition analysis. Although, with Garanti scores strong compared to its large cap Deerler A..
+90 212 376 4615
the top five accounting for 63% of the sector in private peers like Akbank or Isbank tamersengun@hsbc.com.tr

terms of assets, the Turkish Banking sector cannot *Employed by a non-US affiliate
Market share momentum is strong of HSBC Securities (USA) Inc,
be defined as a fragmented one compared to other Garanti has differentiated itself within the highly and is not registered/ qualified
sectors, the level of competition has always been pursuant to FINRA regulations
competitive banking sector by gaining a
quite high. Garanti has differentiated itself within significant amount of market share since 2004 (up
this highly competitive sector by gaining a by 4.3pps), while managing to keep its
significant amount of market share since 2004 (up profitability level superior to that of most of its
by 4.3pps) while managing to keep its large size peers.
profitability level superior to that of most of its
large size peers. Size (from the point of view of Sustainable growth outlook is medium

economies of scale) is very important in the Compared to its peers and the rest of the sector,
banking sector in order to be able to achieve a Garantis cost to income ratio lagged peers like
lower cost to income ratio and therefore a higher Halkbank and Akbank in 2010, yet its asset
ROAE. Most of the smaller banks suffer from turnover was relatively better than that of most of
higher cost to income ratios, which prevent them its large size peers ie Akbank, Isbank, Vakifbank
from achieving sustainably high ROAE levels. and Ziraat. Hence we define Garantis sustainable
Over the last few years, Garanti has improved its growth outlook as medium.
position and now ranks as one of the top three Market fragmentation structure is medium to
banks in the key categories ie. loans, deposits, strong
assets This gives the bank the necessary strength The top five players claimed 63% of the market
to protect its relatively more profitable operations share as of 2010, while the top 10 claimed 87%.
compared to sector averages. Hence, the remaining c30banks constitute only 13%
of the sector. From that perspective, the Turkish

65
Equities
Turkish Equities abc
5 October 2011

banking sector is not very fragmented compared to Investment thesis


some other sectors, yet it is still quite competitive. High trading gain and asset sale income in H1 2011
Entry barriers to the sector are quite high, not only creates an unfavourable base for Garanti Banks
due to the low fragmented structure of the sector earning growth in 2012. We expect net income
but also due to the tight regulations. Given the growth of 13% for Garanti Bank. On a 2012e PE of
relatively lower profitability of the Turkish 11.0x, Garanti trades at a c30% premium to the
banking sector due to the low interest rate banks on which we have Overweight ratings.
environment, we believe small sized banks are Rating, valuation and risks
likely to consolidate in the future due to their
We value Turkish banks using a residual income
relatively higher cost to income ratios.
valuation methodology, in which the intrinsic value
Low interest rate environment should be of the bank is the sum of its current NAV and the
positive in the short term but negative in the present value of future residual income (returns
long term for Turkish banks and Garanti achieved over the cost of equity). The model consists
Turkish banks benefit from declining interest rates of three stages: the first includes residual income
due to the maturity mismatch between their assets based on an explicit forecast period (2011e-13e), the
and liabilities (liabilities reprice faster than second (maturity/ transition stage) assumes a
assets). Hence, declining interest rate periods have constant growth rate for net profit (2014e-29e) and
historically resulted in widening margins for the final (declining stage) assumes a convergence of
Turkish banks and Garanti. However, when returns towards the cost of equity (2030e-39e). Our
interest rates stabilise at lower levels, the income cost of equity assumptions incorporate an 8.0% risk-
on free funds (free equity and demand deposits free rate and a 5.5% equity risk premium. We use
etc.) declines resulting in a lower NIM, but beta of 1.12 for Garanti Bank. This implies a cost of
stronger loan growth. equity of 14.2% until the end of our valuation
horizon in 2039e.
Weak TRY environment should be neutral to
negative for Turkish banks and Garanti According to our residual income discount model,
we set our target price for Garanti at TRY8.1,
A weak TRY environment has almost no direct
which implies a potential return of 15%. This is
impact on the Turkish banks as they do not carry
within the 8.5%-18.5% Neutral band for non-
any significant FX positions. However, there are
volatile Turkish stocks. Therefore, we maintain
two main indirect effects of a weak TRY. The
our rating for Garanti at Neutral.
first one is increasing asset quality risks as the
SMEs or commercial companies that the banks Risks
lend to may face some difficulties in paying their Eureko has a call option to buy a 35% stake in
FX debts, if they do not have sustainable FX Garanti Pension from Garanti Bank. If completed,
revenue streams. The second one is related to the we expect the transactions to result in a
capital adequacy ratio of the bank. Almost one cUSD400m capital gain for Garanti. However;
third of the risk weighted assets are denominated that transaction is not in our forecasts and
in FX. Therefore, any weakness in TRY results in valuations, yet. If completed, it would have a
an inflation of the FX risk weighted assets, and a positive impact on Garanti Banks valuation. The
lower capital adequacy ratio. main downside risk is further regulatory pressure
relating to credit cards.

66
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Garanti Bankasi Neutral


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2009a 12/2010e 12/2011e 12/2012e Year to 12/2009a 12/2010e 12/2011e 12/2012e
P&L summary (TRYm) Net interest income 8.0 6.3 4.3 4.3
Net fees/commissions 2.8 2.4 2.0 2.0
Net interest income 5,080 4,755 4,226 5,148 Trading profits 1.4 0.5 0.4 0.3
Net fees/commissions 1,772 1,816 1,986 2,379 Total income 12.8 10.1 7.4 7.2
Trading profits 881 364 419 314
Other income 0.6 0.9 0.7 0.6
Other income 358 643 655 731
Operating expense -4.3 -4.0 -3.1 -2.7
Total income 8,091 7,577 7,286 8,573 Pre-provision profit 8.5 6.0 4.4 4.5
Operating expense -2,699 -3,041 -3,015 -3,241 Bad debt charge -1.9 -0.5 -0.3 -0.7
Bad debt charge -1,212 -387 -325 -792
HSBC attributable profit 5.2 4.2 2.8 2.8
Other -70 -198 -436 -416
Leverage (x) 5.6 5.0 5.7 6.1
HSBC PBT 4,109 3,952 3,509 4,124 Return on average equity 28.9 21.1 16.0 17.0
Exceptionals -330 0 176 0
PBT 3,779 3,952 3,685 4,124
Taxation -816 -807 -753 -825 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 2,962 3,145 2,933 3,299 Year to 12/2009a 12/2010e 12/2011e 12/2012e
HSBC attributable profit 3,292 3,145 2,757 3,299 PE* 9.0 9.4 10.8 9.0
Balance sheet summary (TRYm) Pre-provision multiple 5.5 6.5 6.9 5.6
P/NAV 2.2 1.8 1.6 1.4
Ordinary equity 13,316 16,475 18,093 20,806 REP multiple 1.0 1.2 1.0
HSBC ordinary equity 13,316 16,475 18,093 20,806 Equity cash flow yield (%) 10.6 5.6 3.5 6.8
Customer loans 49,733 64,827 83,370 101,699 Dividend yield (%) 0.9 1.2 1.9 2.0
Debt securities holdings 36,356 39,210 37,420 38,633
Customer deposits 62,808 72,658 84,908 97,317
Interest earning assets 93,311 110,152 132,483 156,805 Issuer information
Total assets 105,462 123,974 153,990 176,383 Share price (TRY) 7.06 Target price (TRY) 8.10 Potent'l return (%) 14.7
Capital (%)
Reuters (Equity) GARAN.IS Bloomberg (Equity) GARAN TI
RWA (TRYm) 64,501 85,810 110,315 128,647 Market cap (USDm) 16,086 Market cap (TRYm) 29,652
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 49
Total tier 1 18.2 16.9 15.5 15.4 Country Turkey Sector COMMERCIAL BANKS
Total capital 21.2 19.6 17.7 17.5 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2009a 12/2010e 12/2011e 12/2012e
Year-on-year % change
Total income 59.3 -6.3 -3.9 17.7
Operating expense 10.6 12.6 -0.8 7.5
Pre-provision profit 104.4 -15.9 -5.9 24.9
EPS 69.2 6.2 -6.8 12.5
HSBC EPS 100.8 -4.5 -12.3 19.7
DPS 27.3 62.9 2.9
NAV (including goodwill) 40.6 23.7 9.8 15.0
Ratios (%)
Cost/income ratio 33.4 40.1 41.4 37.8
Bad debt charge 2.4 0.7 0.4 0.9
Customer loans/deposits 79.2 89.2 98.2 104.5
NPL/loan 4.3 2.9 1.8 1.9
NPL/RWA 3.5 2.3 1.4 1.5
Provision to risk assets/RWA 2.8 1.9 1.1 1.2
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 81.0 81.9 81.0 80.0
ROE (including goodwill) 28.9 21.1 16.0 17.0
Per share data (TRY)
EPS reported (fully diluted) 0.71 0.75 0.70 0.79
HSBC EPS (fully diluted) 0.78 0.75 0.66 0.79
DPS 0.07 0.08 0.14 0.14
NAV 3.17 3.92 4.31 4.95
NAV (including goodwill) 3.17 3.92 4.31 4.95

67
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is strong market share gain (up by 3.1pps). The bank has Tamer Sengun*
Analyst
Halkbank has been one of the most profitable carried a vast amount of marketable securities on its
HSBC Yatrm Menkul
banks for years. When we analyse what the balance sheet since the end of 2001. Transforming Deerler A..
+90 212 376 4615
sources of the superior profitability are, we find a the bank into a more loan-focussed bank resulted in tamersengun@hsbc.com.tr

better pricing of its products, relatively lower a big switch from a security- heavy asset structure to *Employed by a non-US affiliate
a loan-heavy one. of HSBC Securities (USA) Inc,
costs to revenues and higher leverage as the key and is not registered/ qualified
reasons. We believe Halkbank will maintain its pursuant to FINRA regulations
Sustainable growth outlook is medium to
relatively more profitable structure going forward, strong
which provides the bank the necessary Compared to its peers and the rest of the sector,
ammunition for sustainable growth. Halkbanks cost to income ratio was better than
Halkbank scores the best in the competitive that of most private bank peers in 2010, and its
outlook analysis among its peers in the banking asset turnover was comparable to theirs.
sector due to its stronger profitability, its decent Therefore, we believe that sustainable growth
size, enabling economies of scale, and its strong outlook for Halkbank is medium to strong.
market share gain in loans over the last few years. Market fragmentation structure is medium to

"Profitable market share" score is strong strong

According to our Du Pont profitability matrix The top five players claimed 63% market share as of
Halkbank scores the best among the large size 2010, while the top 10 claimed 87%. Hence, the
banks, excluding Ziraat whose ROAE declined in remaining c30banks constitute only 13% of the
H1 2011. sector. From that perspective, the Turkish banking
sector is not very fragmented compared to some
Market share momentum is medium to strong other sectors, yet it is still quite competitive.
In terms of asset market share, Halkbank has kept its
market share almost flat during the last four years. Entry barriers to the sector are quite high, not only
However, when the market share of total loans is due to the low fragmented structure of the sector
analysed, it has been the bank posting the strongest but also due to the tight regulations. Given the

68
Equities
Turkish Equities abc
5 October 2011

relatively lower profitability of the Turkish our most favoured banking sector stocks in Turkey.
banking sector due to the low interest rate It is also the Turkish bank most favoured by the
environment, we believe small size banks are competition as well, with 23 Overweight ratings out
likely to consolidate in the future due to their of a total of 32 recommendations.
relatively higher cost to income ratios.
We believe that the market attaches a higher risk
Low interest rate environment should be premium for Halkbanks long-expected potential
positive in the short term but negative in the secondary public offering. On a 2012e PE of 6.9x,
long term for Turkish banks and Halkbank Halkbank is one of the most attractively valued
Turkish banks benefit from declining interest rates banking sector stocks.
due to the maturity mismatch between their assets
Rating, valuation and risks
and liabilities (liabilities reprice faster than
assets). Hence, declining interest rate periods We value Turkish banks using a residual income
historically have resulted in widening margins for valuation methodology, in which the intrinsic
Turkish banks and Halkbank. However, when value of the bank is the sum of its current NAV
interest rates stabilise at the lower levels, the and the present value of future residual income
income on free funds (free equity and demand (returns achieved over the cost of equity). The
deposits etc.) declines resulting in a lower NIM, model consists of three stages: the first includes
but stronger loan growth. residual income based on an explicit forecast
period (2011e-13e), the second (maturity/
Weak TRY environment should be neutral to transition stage) assumes a constant growth rate
negative for Turkish banks and Halkbank for net profit (2014e-29e) and the final (declining
A weak TRY environment has almost no direct stage) assumes a convergence of returns towards
impact on the Turkish banks as they do not carry the cost of equity (2030e-39e). Our cost of equity
any significant FX positions. However, there are assumptions incorporate an 8.0% risk-free rate
two main indirect effects of a weak TRY. The and a 5.5% equity risk premium. We use a beta of
first one is increasing asset quality risks as the 1.05 for Halkbank. This implies a cost of equity of
SMEs or commercial companies that the banks 13.8% until the end of our valuation horizon in
lend to may face some difficulties in paying their 2039e. As we wish to be conservative, we
FX debts, if they do not have sustainable FX continue to apply a 10% haircut to account for a
revenue streams. The second one is related to the potential SPO.
capital adequacy ratio of the bank. Almost one We maintain our target price for Halkbank at
third of the risk weighted assets are in FX terms. TRY17.4, which implies a potential return of
Therefore, any weakness in TRY results in an 42%. This is above the 8.5%-18.5% Neutral band
inflation of the FX risk weighted assets, and a for non-volatile Turkish stocks. Hence we
lower capital adequacy ratio. Given its relatively maintain our rating for Halkbank at Overweight.
lower FX weight within total assets Halkbank is
Risks
less susceptible to TRY weakness.
The main downside risk to our rating for
Investment thesis Halkbank is a potential SPO in 2012 of a nature
Being one of the expected beneficiaries of the new that would imply a higher risk premium than our
normal and having proved its prudent and profitable 10% haircut.
banking style for many years, Halkbank is among

69
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Halkbank Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 7.8 6.1 6.4 6.2
Net fees/commissions 1.3 1.2 1.2 1.2
Net interest income 3,191 3,183 4,014 4,628 Trading profits 0.3 0.3 0.2 0.1
Net fees/commissions 526 647 781 876 Total income 10.4 8.8 8.8 8.5
Trading profits 115 162 122 91
Other income 1.1 1.2 1.0 1.0
Other income 451 611 635 737
Operating expense -3.6 -3.3 -3.1 -2.9
Total income 4,283 4,603 5,551 6,332 Pre-provision profit 6.8 5.5 5.7 5.6
Operating expense -1,495 -1,730 -1,944 -2,183 Bad debt charge -0.8 -0.4 -0.7 -0.9
Bad debt charge -316 -221 -463 -699
HSBC attributable profit 4.5 3.6 3.5 3.4
Other -142 -293 -353 -251
Leverage (x) 6.2 6.5 6.6 6.5
HSBC PBT 2,329 2,358 2,791 3,199 Return on average equity 27.7 23.4 23.2 22.3
Exceptionals 180 0 0 0
PBT 2,509 2,358 2,791 3,199
Taxation -499 -468 -558 -640 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 2,010 1,890 2,233 2,560 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 1,830 1,890 2,233 2,560 PE* 8.4 8.1 6.9 6.0
Balance sheet summary (TRYm) Pre-provision multiple 5.5 5.3 4.2 3.7
P/NAV 2.1 1.8 1.5 1.2
Ordinary equity 7,445 8,679 10,533 12,423 REP multiple 0.8 0.8 0.7 0.6
HSBC ordinary equity 7,445 8,679 10,533 12,423 Equity cash flow yield (%) 7.0 7.0 10.0 10.8
Customer loans 44,296 55,676 67,926 81,990 Dividend yield (%) 1.9 2.6 2.5 4.4
Debt securities holdings 20,207 22,694 23,580 24,873
Customer deposits 54,782 64,011 72,413 81,920
Interest earning assets 64,311 78,677 94,730 109,248 Issuer information
Total assets 72,942 91,873 105,815 121,758 Share price (TRY) 12.25 Target price (TRY) 17.40 Potent'l return (%) 42.0
Capital (%)
Reuters (Equity) HALKB.IS Bloomberg (Equity) HALKB TI
RWA (TRYm) 46,436 58,140 68,118 81,046 Market cap (USDm) 8,307 Market cap (TRYm) 15,313
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 25
Total tier 1 15.0 14.9 15.4 15.3 Country Turkey Sector COMMERCIAL BANKS
Total capital 15.9 15.6 16.2 16.1 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income 11.0 7.5 20.6 14.1
Operating expense 25.3 15.7 12.4 12.3
Pre-provision profit 4.7 3.1 25.6 15.0
EPS 23.3 -6.0 18.1 14.6
HSBC EPS 12.2 3.3 18.1 14.6
DPS 15.4 34.6 -4.4 77.2
NAV (including goodwill) 29.3 16.6 21.4 17.9
Ratios (%)
Cost/income ratio 34.9 37.6 35.0 34.5
Bad debt charge 0.8 0.4 0.7 0.9
Customer loans/deposits 80.9 87.0 93.8 100.1
NPL/loan 3.8 2.9 2.7 2.8
NPL/RWA 3.8 2.8 2.8 2.9
Provision to risk assets/RWA 3.2 2.4 2.3 2.4
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 83.3 84.0 83.0 82.0
ROE (including goodwill) 27.7 23.4 23.2 22.3
Per share data (TRY)
EPS reported (fully diluted) 1.61 1.51 1.79 2.05
HSBC EPS (fully diluted) 1.46 1.51 1.79 2.05
DPS 0.24 0.32 0.30 0.54
NAV 5.96 6.94 8.43 9.94
NAV (including goodwill) 5.96 6.94 8.43 9.94

70
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is medium Therefore, we believe that the sustainable growth Tamer Sengun*
Analyst
Having one of the largest deposit franchises outlook of Isbank is medium to weak. HSBC Yatrm Menkul
Deerler A..
among the Turkish banks, Isbank has always been Market fragmentation structure is medium to +90 212 376 4615
one of the most advantageously positioned tamersengun@hsbc.com.tr
strong
Turkish banks in terms of competition. However, *Employed by a non-US affiliate
The top five players claimed 63% market share as of of HSBC Securities (USA) Inc,
we do not see this advantage reflected in the 2010, while the top 10 claimed 87%. Hence, the
and is not registered/ qualified
pursuant to FINRA regulations
profitability levels of the bank. We therefore rate remaining c30banks constitute only 13% of the
the overall competitive outlook of the bank as sector. From that perspective, the Turkish banking
weak within Turkish equities and medium within sector is not very fragmented compared to some
Turkish banks. other sectors, yet it is still quite competitive.
"Profitable market share" score is medium Entry barriers to the sector are quite high, not only
According to our Du Pont profitability matrix due to the low fragmented structure of the sector
Isbank only scores better than Akbank and but also due to the tight regulations. Given the
Vakifbank among the big banks. Garanti, Yapi relatively lower profitability of the Turkish
and Halkbank score better. banking sector due to the low interest rate
Market share momentum is medium to weak environment, we believe small size banks are
In terms of asset market share, Isbank has lost likely to consolidate in the future due to their
some market share in both loans (down by 1.4pps) relatively higher cost to income ratios.
and assets (down by 2.0bps) since 2006. Isbank is the only big private bank with no foreign
Sustainable growth outlook is medium to weak partner. One might think that having no foreign
Compared to its peers and the rest of the sector, partner could make Isbank an acquisition
Isbanks cost to income ratio was slightly lower candidate for foreign banks. However, given the
than that of most private bank peers in 2010, and ownership structure (one-third being owned by
its asset turnover was comparable to theirs. the political party CHP and another one-third by

71
Equities
Turkish Equities abc
5 October 2011

the employees pension fund), we see this as Investment thesis


highly unlikely. Despite a relatively less favourable 2012 outlook
Low interest rate environment should be compared to banks like Yapi Kredi, Isbank and
positive in the short term but negative in the Vakifbank, Isbank remains among the Turkish
long term for Turkish banks and Isbank
banks that we favour, given that it is trading at a
Turkish banks benefit from declining interest rates discount to its large-cap peers (on a 2012e PE of
due to the maturity mismatch between their assets 7.8x), with positive fundamental qualities such as
and liabilities (liabilities reprice faster than a widespread deposit base, one of the lowest loan-
assets). Hence, declining interest rate periods have to-deposit ratios in the sector and a free provision
historically resulted in widening margins for level amounting to cTRY1bn.
Turkish banks and Isbank. However, when Rating, valuation and risks
interest rates stabilise at lower levels, the income
We value Turkish banks using a residual income
on free funds (free equity and demand deposits
valuation methodology, in which the intrinsic value
etc.) declines resulting in a lower NIM, but
of the bank is the sum of its current NAV and the
stronger loan growth.
present value of future residual income (returns
Weak TRY environment should be neutral to achieved over the cost of equity). The model consists
negative for Turkish banks and Isbank of three stages: the first includes residual income
based on an explicit forecast period (2011e-13e), the
A weak TRY environment has almost no direct
second (maturity/ transition stage) assumes a
impacts on the Turkish banks as they do not carry
constant growth rate for net profit (2014e-29e) and
any significant FX positions. However, there are
the final (declining stage) assumes a convergence of
two main indirect effects of a weak TRY. The
returns towards the cost of equity (2030e-39e). Our
first one is increasing asset quality risks as the
cost of equity assumptions incorporate an 8.0% risk-
SMEs or commercial companies that the banks
free rate and a 5.5% equity risk premium. We use a
lend to may face some difficulties in paying their
beta of 1.0 for Isbank. This implies a cost of equity
FX debts, if they do not have sustainable FX
of 13.5% until the end of our valuation horizon
revenue streams. The second one is related to the
in 2039e.
capital adequacy ratio of the bank. Almost one
third of the risk weighted assets are denominated We keep our residual-income DCF-driven target
in FX. Therefore, any weakness in TRY results in price at TRY5.85. This target price implies a 26%
an inflation of the FX risk weighted assets, and a potential return which is above the 8.5% to 18.5%
lower capital adequacy ratio. Neutral band for non-volatile Turkish stocks. We
therefore maintain our Overweight rating.

Risks
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.

72
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: IS Bankasi Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 5.3 4.1 4.2 4.1
Net fees/commissions 1.4 1.2 1.2 1.1
Net interest income 4,582 4,487 5,448 6,205 Trading profits 0.2 0.1 0.1 0.1
Net fees/commissions 1,236 1,337 1,487 1,662 Total income 9.1 7.2 6.9 6.8
Trading profits 135 154 116 87
Other income 2.2 1.6 1.5 1.5
Other income 1,938 1,765 1,924 2,289
Operating expense -3.7 -3.3 -3.0 -2.8
Total income 7,891 7,744 8,975 10,243 Pre-provision profit 5.4 3.9 3.9 4.0
Operating expense -3,203 -3,551 -3,896 -4,250 Bad debt charge -0.9 -0.6 -0.8 -1.0
Bad debt charge -770 -625 -1,029 -1,526
HSBC attributable profit 3.4 2.3 2.1 2.0
Other -366 -611 -648 -601
Leverage (x) 5.7 6.0 6.4 6.6
HSBC PBT 3,553 2,957 3,401 3,865 Return on average equity 19.6 13.6 13.4 13.5
Exceptionals 0 0 0 0
PBT 3,553 2,957 3,401 3,865
Taxation -571 -503 -680 -773 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 2,982 2,454 2,721 3,092 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 2,982 2,454 2,721 3,092 PE* 7.0 8.5 7.7 6.8
Balance sheet summary (TRYm) Pre-provision multiple 4.5 5.0 4.1 3.5
P/NAV 1.2 1.1 1.0 0.9
Ordinary equity 17,014 18,995 21,510 24,346 REP multiple 0.7 1.0 0.9 0.8
HSBC ordinary equity 17,014 18,995 21,510 24,346 Equity cash flow yield (%) 7.4 4.1 6.7 6.3
Customer loans 64,232 83,565 102,317 124,153 Dividend yield (%) 2.6 3.3 3.5 3.9
Debt securities holdings 45,697 44,716 46,959 48,722
Customer deposits 88,260 100,361 115,110 132,025
Interest earning assets 112,217 132,321 155,178 178,245 Issuer information
Total assets 131,796 159,247 182,553 208,450 Share price (TRY) 4.64 Target price (TRY) 5.85 Potent'l return (%) 26.1
Capital (%)
Reuters (Equity) ISCTR.IS Bloomberg (Equity) ISCTR TI
RWA (TRYm) 96,857 119,696 138,686 163,995 Market cap (USDm) 11,327 Market cap (TRYm) 20,880
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 30
Total tier 1 15.7 14.1 13.6 12.9 Country Turkey Sector COMMERCIAL BANKS
Total capital 17.5 15.8 15.4 14.7 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income 0.7 -1.9 15.9 14.1
Operating expense 18.9 10.9 9.7 9.1
Pre-provision profit -8.8 -10.6 21.1 18.0
EPS 25.7 -17.7 10.9 13.6
HSBC EPS 15.8 -17.7 10.9 13.6
DPS 128.0 25.4 6.5 10.9
NAV (including goodwill) -13.7 11.6 13.2 13.2
Ratios (%)
Cost/income ratio 40.6 45.9 43.4 41.5
Bad debt charge 1.4 0.8 1.1 1.3
Customer loans/deposits 72.8 83.3 88.9 94.0
NPL/loan 3.6 2.7 2.5 2.6
NPL/RWA 2.5 1.9 1.9 2.0
Provision to risk assets/RWA 2.5 1.9 1.9 2.0
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 100.0 100.0 100.0 100.0
ROE (including goodwill) 19.6 13.6 13.4 13.5
Per share data (TRY)
EPS reported (fully diluted) 0.66 0.55 0.60 0.69
HSBC EPS (fully diluted) 0.66 0.55 0.60 0.69
DPS 0.12 0.15 0.16 0.18
NAV 3.78 4.22 4.78 5.41
NAV (including goodwill) 3.78 4.22 4.78 5.41

73
Equities
Turkish Equities abc
5 October 2011

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
Target price kept at TRY4.75; maintained at Overweight

Overall competitive outlook is medium Sustainable growth outlook is medium Tamer Sengun*
Analyst
With a lower-than-sector-average profitability, the Compared to its peers and the rest of the sector, HSBC Yatrm Menkul
Deerler A..
competitive outlook of Vakifbank can be defined Vakifbanks cost to income ratio slightly lags +90 212 376 4615
as medium to weak compared to both Turkish peers like Garanti, Halkbank and Akbank in 2010, tamersengun@hsbc.com.tr

banks and also Turkish equities. Given the and the asset turnover was also relatively worse *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
relatively low level of profitability, shareholders than most large size peers excluding Ziraat. Hence and is not registered/ qualified
we define Vakifbanks sustainable growth outlook pursuant to FINRA regulations
equity accumulation for Vakifbank is slower and
that limits the sustainable growth prospects of the as medium to weak.
bank. The positive front according to our analysis Market fragmentation structure is medium to
is the behaviour of the banks CAR against weak strong
TRY. Since the banks assets are more in TRY The top five players claimed 63% of the market
terms, it is less exposed to TRY weakness from a share as of 2010, while the top 10 claimed 87%.
CAR perspective. Hence, the remaining c30banks constitute only 13%
"Profitable market share" score is medium to of the sector. From that perspective, the Turkish
weak banking sector is not very fragmented compared to
According to our ROE vs. market share matrix some other sectors, yet it still quite competitive.
Vakifbank scores weaker than its large cap Entry barriers to the sector are quite high, not only
private peers. due to the low fragmented structure of the sector
Market share momentum is medium but also due to the tight regulations. Given the
Vakifbank has maintained its market share in relatively lower profitability of the Turkish
loans, deposits and assets during the last four banking sector due to the low interest rate
years. Given the relatively low level of environment, we believe small sized banks are
profitability, shareholders equity accumulation for likely to consolidate in the future due to their
Vakifbank is slower and that limits the potential relatively higher cost to income ratios.
growth prospects of the bank.

74
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Turkish Equities abc
5 October 2011

Low interest rate environment should be On the provisioning expenses front, things are not
positive in the short term but negative in as positive as the NIM forecasts. Because of the
thelong term for Turkish banks and Vakifbank change in the general provisioning regulation,
Turkish banks benefit from declining interest rates Vakifbank with 10.6% of its total assets as
due to the maturity mismatch between assets and general purpose loans will be the most
liabilities (liabilities reprice faster than assets). negatively affected large bank. We expect the
Hence, declining interest rate periods historically banks general provisioning expenses to increase
have resulted in widening margins for Turkish banks by 185% in 2011 and 13% in 2012.
and Vakifbank. However, when interest rates
The mix of a positive outlook for margins but a
stabilise at lower levels, the income on free funds
negative outlook for provisioning expenses yields
(free equity and demand deposits etc.) declines
a 19% net income growth estimate for Vakifbank
resulting in a lower NIM, but stronger loan growth.
in 2012.
Weak TRY environment should be neutral to
Rating, valuation and risks
negative for Turkish banks and Vakifbank
We value Turkish banks using a residual income
A weak TRY environment has almost no direct valuation methodology, in which the intrinsic value
impact on the Turkish banks as they do not carry of the bank is the sum of its current NAV and the
any significant FX positions. However, there are present value of future residual income (returns
two main indirect effects of a weak TRY. The achieved over the cost of equity). The model consists
first one is increasing asset quality risk as the of three stages: the first includes residual income
SMEs or commercial companies that the banks based on an explicit forecast period (2011e-13e), the
lend to may face some difficulties in paying their second (maturity/ transition stage) assumes a
FX debts, if they do not have sustainable FX constant growth rate for net profit (2014e-29e) and
revenue streams. The second one is related to the the final (declining stage) assumes a convergence of
capital adequacy ratio of the bank. Almost one returns towards the cost of equity (2030e-39e). Our
third of the risk weighted assets are denominated cost of equity assumptions incorporate an 8.0% risk-
in FX. Therefore, any weakness in TRY results in free rate and a 5.5% equity risk premium. We use
an inflation of the FX risk weighted assets, and beta of 1.05 for Vakifbank. This implies a cost of
hence a lower capital adequacy ratio. Given its equity of 13.8% until the end of our valuation
relatively lower FX weight within total assets horizon in 2039.
Vakifbank is less susceptible to TRY weakness. The stock currently trades on a 2012e PE and PBV
Investment thesis of 6.9x and 0.9x, respectively, both at a discount to
peers. We keep our target price for Vakifbank at
Having 42% of its total assets as TRY loans, we
TRY4.75. The stock offers a c30% potential return
expect Vakifbank to be positively affected by the
which is above the 8.5% to 18.5% Neutral band for
expansion in the TRY loan to deposit spread similar
non-volatile Turkish stocks. We therefore keep our
to Halkbank. In addition, the banks securities to
rating at Overweight for Vakifbank.
assets ratio is also among the lowest among the
large banks at 21%. Therefore, we estimate a 33bps Risks
NIM expansion for Vakifbank in 2012, which would The main downside risk is related to a rapid rise
result in a rise of 28% in NII. in interest rates, as the banks level of hedges
against long-term mortgages are among the lowest
in the sector.

75
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Vakifbank Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 5.4 4.5 4.9 4.7
Net fees/commissions 0.9 0.9 0.9 0.9
Net interest income 2,730 2,838 3,627 4,096 Trading profits 0.6 0.1 0.1 0.1
Net fees/commissions 443 547 655 754 Total income 8.2 6.9 6.9 6.7
Trading profits 316 82 62 46
Other income 1.3 1.4 1.1 1.1
Other income 636 860 817 959
Operating expense -3.4 -3.1 -2.9 -2.7
Total income 4,126 4,328 5,161 5,855 Pre-provision profit 4.8 3.8 4.0 4.0
Operating expense -1,690 -1,952 -2,178 -2,371 Bad debt charge -1.3 -0.8 -1.1 -1.3
Bad debt charge -664 -509 -808 -1,142
HSBC attributable profit 2.3 1.8 1.8 1.8
Other -309 -447 -509 -408
Leverage (x) 6.3 6.9 7.4 7.7
HSBC PBT 1,463 1,419 1,666 1,934 Return on average equity 14.5 12.5 13.2 13.5
Exceptionals 0 0 0 0
PBT 1,463 1,419 1,666 1,934
Taxation -306 -294 -333 -387 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 1,157 1,126 1,333 1,547 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 1,157 1,126 1,333 1,547 PE* 7.9 8.1 6.9 5.9
Balance sheet summary (TRYm) Pre-provision multiple 3.8 3.9 3.1 2.6
P/NAV 1.1 1.0 0.9 0.8
Ordinary equity 8,559 9,490 10,710 12,124 REP multiple 0.9 0.9 0.8
HSBC ordinary equity 8,559 9,490 10,710 12,124 Equity cash flow yield (%) 3.6 2.4 5.9 6.0
Customer loans 44,861 57,108 68,577 81,547 Dividend yield (%) 1.3 0.0 1.2 1.5
Debt securities holdings 18,096 18,460 18,611 19,127
Customer deposits 47,701 56,271 62,981 70,487
Interest earning assets 64,938 78,420 92,892 105,384 Issuer information
Total assets 73,962 91,734 103,896 117,742 Share price (TRY) 3.66 Target price (TRY) 4.75 Potent'l return (%) 29.8
Capital (%)
Reuters (Equity) VAKBN.IS Bloomberg (Equity) VAKBN TI
RWA (TRYm) 56,186 69,064 80,398 94,609 Market cap (USDm) 4,964 Market cap (TRYm) 9,150
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 25
Total tier 1 13.2 12.8 12.5 12.1 Country Turkey Sector COMMERCIAL BANKS
Total capital 14.4 13.8 13.5 13.1 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income 1.7 4.9 19.3 13.4
Operating expense 10.2 15.5 11.6 8.9
Pre-provision profit -3.5 -2.5 25.6 16.8
EPS -7.5 -2.7 18.4 16.1
HSBC EPS -7.5 -2.7 18.4 16.1
DPS -100.0 18.4
NAV (including goodwill) 16.0 10.9 12.9 13.2
Ratios (%)
Cost/income ratio 41.0 45.1 42.2 40.5
Bad debt charge 1.7 1.0 1.3 1.5
Customer loans/deposits 94.0 101.5 108.9 115.7
NPL/loan 4.8 3.7 3.5 3.6
NPL/RWA 4.0 3.2 3.1 3.2
Provision to risk assets/RWA 4.0 3.2 3.1 3.2
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 98.9 99.6 100.0 100.0
ROE (including goodwill) 14.5 12.5 13.2 13.5
Per share data (TRY)
EPS reported (fully diluted) 0.46 0.45 0.53 0.62
HSBC EPS (fully diluted) 0.46 0.45 0.53 0.62
DPS 0.05 0.00 0.05 0.05
NAV 3.42 3.80 4.28 4.85
NAV (including goodwill) 3.42 3.80 4.28 4.85

76
Equities
Turkish Equities abc
5 October 2011

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
Target price kept at TRY5.4; maintained at Overweight

Overall competitive outlook is medium Market fragmentation structure is medium to Tamer Sengun*
Analyst
While the banks relatively higher-than-sector- strong
HSBC Yatrm Menkul
average profitability provides a competitive The top five players claimed 63% market share as of Deerler A..
+90 212 376 4615
strength for Yapi Kredi, the bank has lost some 2010, while the top 10 claimed 87%. Hence, the tamersengun@hsbc.com.tr
market share during the last four years while remaining c30banks constitute only 13% of the *Employed by a non-US affiliate
sector. From that perspective, the Turkish banking of HSBC Securities (USA) Inc,
improving its profitability. Although operating in and is not registered/ qualified
a not highly fragmented sector, as all the rest of sector is not very fragmented compared to some pursuant to FINRA regulations

the banks do, Yapi Kredi faces strong competition other sectors, yet is still quite competitive.
from its peers. Entry barriers to the sector are quite high, not only
"Profitable market share" score is medium to due to the low fragmented structure of the sector
strong but also due to the tight regulations. Given the
According to our ROE vs.market share matrix Yapi relatively lower profitability of the Turkish
Kredi scores higher than its large cap private peers. banking sector due to the low interest rate
environment, we believe small sized banks are
Market share momentum is medium to weak
likely to consolidate in the future due to their
Compared to the levels back in 2006, Yapi Kredi relatively higher cost to income ratios.
has lost market share in assets and deposits, of
1.4pps and 1.5pps, respectively. Its market share Low interest rate environment should be
in loans is slightly down, by 0.3pps. positive in the short term but negative in the
long term for Turkish banks and Yapi Kredi
Sustainable growth outlook is medium Turkish banks benefit from declining interest rates
Having a large banks high asset turnover, and a due to the maturity mismatch between assets and
large banks average cost to income ratio, Yapi liabilities (liabilities reprice faster than the assets).
Kredi ranks as one of the favoured banks from a Hence, declining interest rate periods have
Du Pont profitability matrix perspective. Hence historically resulted in widening margins for
we define Yapi Kredis sustainable growth Turkish banks and Yapi Kredi. However, when
outlook as medium to strong.

77
Equities
Turkish Equities abc
5 October 2011

interest rates stabilise at lower levels, the income Rating, valuation and risks
on free funds (free equity and demand deposits We value Turkish banks using a residual income
etc.) declines resulting in a lower NIM, but valuation methodology, in which the intrinsic value
stronger loan growth. of the bank is the sum of its current NAV and the
Weak TRY environment should be neutral to present value of future residual income (returns
negative for Turkish banks and Yapi Kredi achieved over the cost of equity). The model consists
of three stages: the first includes residual income
A weak TRY environment has almost no direct based on an explicit forecast period (2011e-13e), the
impacts on the Turkish banks as they do not carry second (maturity/ transition stage) assumes a
any significant FX positions. However, there are constant growth rate for net profit (2014e-29e) and
two main indirect effects of a weak TRY. The the final (declining stage) assumes a convergence of
first one is increasing asset quality risks as the returns towards the cost of equity (2030e-39e). Our
SMEs or commercial companies that the banks cost of equity assumptions incorporate an 8.0% risk-
lend to may face some difficulties in paying their free rate and a 5.5% equity risk premium. We use a
FX debts, if they do not have sustainable FX beta of 1.0 for Vakifbank. This implies a cost of
revenue streams. The second one is related to the equity of 13.5% until the end of our valuation
capital adequacy ratio of the bank. Almost one horizon in 2039e.
third of the risk weighted assets are denominated
in FX. Therefore, any weakness in TRY results in Our residual-income DCF driven target price for
an inflation of the FX risk weighted assets, and a Yapi Kredi is TRY5.4. This implies a potential
lower capital adequacy ratio. Given its relatively return of 43%. This is above the 8.5%-18.5%
lower FX weight within total assets Yapi Kredi is Neutral band for non-volatile Turkish stocks. Hence
less susceptible to TRY weakness. we keep our rating for Yapi Kredi at Overweight.

Investment thesis Risks


A larger-than-expected reduction in the credit card
Yapi Kredi Bank is the best positioned bank not only
interest rate caps to be set by the CBRT is the key
with respect to our base-case margin scenario but
downside risk for the bank.
also to the general provisioning regulation. Our 2012
net income estimate for Yapi is 10% higher than
consensus and we expect consensus to revise its
earnings estimates for the bank upwards.

Moreover, the valuation has also become more


compelling after the 7% and 11%
underperformances versus the ISE-Banks and ISE-
100 indices y-t-d.

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


6.8x and 1.1x.

78
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Financials & valuation: Yapi Kredi Bankasi Overweight


Financial statements Core profitability (% RWAs) and leverage
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
P&L summary (TRYm) Net interest income 5.0 3.8 4.0 3.9
Net fees/commissions 2.5 2.2 2.0 1.9
Net interest income 3,185 3,215 4,194 4,715 Trading profits -0.1 0.0 0.0 0.0
Net fees/commissions 1,596 1,821 2,072 2,356 Total income 9.5 7.0 7.0 6.9
Trading profits -67 -21 0 0
Other income 2.1 1.1 1.0 1.1
Other income 1,361 938 1,043 1,312
Operating expense -3.9 -3.1 -2.8 -2.6
Total income 6,076 5,953 7,310 8,384 Pre-provision profit 5.6 3.9 4.2 4.2
Operating expense -2,489 -2,653 -2,940 -3,211 Bad debt charge -1.4 -0.9 -1.1 -1.3
Bad debt charge -881 -759 -1,123 -1,564
HSBC attributable profit 3.2 2.2 2.3 2.2
Other -188 -196 -236 -276
Leverage (x) 6.9 7.5 7.8 7.8
HSBC PBT 2,519 2,345 3,010 3,332 Return on average equity 22.2 16.8 18.1 17.0
Exceptionals 325 0 0 0
PBT 2,844 2,345 3,010 3,332
Taxation -459 -457 -602 -666 Valuation data
Minorities + preferences 0 0 0 0
Attributable profit 2,384 1,888 2,408 2,666 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC attributable profit 2,059 1,888 2,408 2,666 PE* 8.0 8.7 6.8 6.2
Balance sheet summary (TRYm) Pre-provision multiple 4.6 5.0 3.8 3.2
P/NAV 1.6 1.4 1.1 1.0
Ordinary equity 10,318 12,094 14,502 16,927 REP multiple 0.8 0.9 0.7 0.7
HSBC ordinary equity 10,318 12,094 14,502 16,927 Equity cash flow yield (%) 4.6 1.8 8.0 7.4
Customer loans 52,615 68,864 83,403 100,148 Dividend yield (%) 0.0 0.0 0.0 1.5
Debt securities holdings 18,346 20,427 18,764 17,548
Customer deposits 52,725 61,720 70,832 81,287
Interest earning assets 67,350 89,003 106,778 121,719 Issuer information
Total assets 84,776 108,383 123,181 140,110 Share price (TRY) 3.78 Target price (TRY) 5.40 Potent'l return (%) 42.9
Capital (%)
Reuters (Equity) YKBNK.IS Bloomberg (Equity) YKBNK TI
RWA (TRYm) 73,259 95,938 111,473 132,274 Market cap (USDm) 8,914 Market cap (TRYm) 16,432
Core tier 1 0.0 0.0 0.0 0.0 Free float (%) 18
Total tier 1 12.2 11.4 12.0 11.9 Country Turkey Sector COMMERCIAL BANKS
Total capital 16.1 14.1 14.4 14.1 Analyst Tamer Sengun Contact +90 212 376 4615
Notes: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2005 are IFRS compliant

Ratio, growth & per share analysis


Year to 12/2010a 12/2011e 12/2012e 12/2013e
Year-on-year % change
Total income 9.2 -2.0 22.8 14.7
Operating expense 7.6 6.6 10.8 9.2
Pre-provision profit 10.3 -8.0 32.4 18.4
EPS 76.0 -20.8 27.6 10.7
HSBC EPS 52.0 -8.3 27.6 10.7
DPS
NAV (including goodwill) 24.8 17.2 19.9 16.7
Ratios (%)
Cost/income ratio 41.0 44.6 40.2 38.3
Bad debt charge 1.9 1.3 1.5 1.7
Customer loans/deposits 99.8 111.6 117.7 123.2
NPL/loan 3.4 2.8 3.0 3.5
NPL/RWA 2.5 2.0 2.3 2.7
Provision to risk assets/RWA 2.0 1.5 1.6 1.8
Net write-off/RWA 0.0 0.0 0.0 0.0
Coverage 77.1 75.0 70.0 67.0
ROE (including goodwill) 22.2 16.8 18.1 17.0
Per share data (TRY)
EPS reported (fully diluted) 0.55 0.43 0.55 0.61
HSBC EPS (fully diluted) 0.47 0.43 0.55 0.61
DPS 0.00 0.00 0.00 0.06
NAV 2.37 2.78 3.34 3.89
NAV (including goodwill) 2.37 2.78 3.34 3.89

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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)

Overall competitive outlook is weak power of Turkish manufacturers we do not expect Levent Bayar*
Analyst
Adana Cimento came out weak in our scorecard Adana's export market share to change. HSBC Yatrm Menkul
Deerler A..
for competitive analysis. The reason for that is the Market share momentum is weak +90 212 376 4617
cement industry's overcapacity in Turkey and its leventbayar@hsbc.com.tr
Adana Cimento's market share momentum is
fragmented market structure. In addition, Adana *Employed by a non-US affiliate
weak as the company has not increased its of HSBC Securities (USA) Inc,
Cimento is also exposed to competition in its capacity in the last five years while the sector's and is not registered/ qualified
pursuant to FINRA regulations
export markets (Iraq, Syria and North Africa in overall capacity hasincreased by c25%. This has
particular) and has lost market share in both caused market share loss for Adana Cimento.
domestic and export markets. With the new capacity investment Adana's market
Looking forward, we expect fragmentation in the share momentum should recover.
market to decrease via consolidation, yet Sustainable growth outlook is medium to
overcapacity should remain as a source of concern strong
as long as economic activity stays slow. Adana Cimento's DuPont scoring is in the
"Profitable market share" score is medium medium range compared to its peers in the
Adana Cimento had an ROE of 15% in 2010, domestic market. Its gross profit is slightly better
which puts the company in the leading position in compared to cement manufacturers but worse
this metric when compared with other building compared to glass manufacturers. Its growth
material stocks in Turkey. However, due to the outlook is mediocre as profitability of cement
very low market share of the company its overall manufacturers is dependent on demand growth
profitability market share scores only at the and fuel costs.
medium level (3). With the recently announced Market fragmentation structure is medium to
capacity investment in the Iskenderun plant we weak
expect the company's market share to improve in The cement market in Turkey is heavily
the domestic market, yet due to the low pricing fragmented with the top 8 players claiming 50%
of the market and with about 20 mid-sized players

82
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in the sector. Compared to EM and developed uncertainty, we believe the current valuation
markets the Turkish market is particularly presents an attractive investment opportunity.
fragmented and is in need of consolidation, in our
Rating, valuation and risks
view. However, due to the Competition Board's
close supervision of the sector (as a result of past We use a blend of DCF, EV/clinker and peer
misdemeanours) and its strict limit of 30% multiples comparison to value Adana Cimento.
maximum market share we see limited prospects Our DCF assumptions are: 8.5% RFR, 5.5% ERP,
for domestic consolidation. We also see little 0.69 beta (up from 0.58 before) leading to an
appetite from international cement companies as 11.3% WACC (up from 10.9% before). We
Turkey's cement market has limited appeal assume a 3% terminal growth rate. Our DCF
compared to some of the other EM markets such model implies a valuation of TRY6.0 per share
as Iraq, Syria and some North Africa countries. (from TRY6.1).

Low interest rate environment should be Adana Cimento trades at USD85/t EV/tonne,
positive for Adana Cimento which is a 14% discount to the domestic average
A low interest environment should have a positive of USD100/t. Applying the domestic average, we
impact on Adana Cimento and other Turkish cement reach a valuation of TRY5.6 per share (from
companies in the short term as the low rate TRY7.1). On the multiples front, Adana Cimento
environment will boost mortgage affordability and currently trades at an 9.3x2012e PE, a 20%
public infrastructure investment. Adana Cimento has discount to the global peer average of 11.6x. The
limited leverage (even when taking into account the company is trading at a 4.8x 2012e EV/EBITDA
upcoming investment of EUR80m) hence lower compared with a peer average of 7.5x. Applying
rates do not play a critical role with respect to the peer multiples leads to a valuation of TRY5.6 per
debt position of the company. share (from TRY6.3).

Weak TRY environment should be positive in Taking the average of the three provides a target
the short term and negative in the long term for price of TRY5.75 for Adana Cimento (from
Adana Cimento TRY6.5). Under our research methodology, the
hurdle rate for non-volatile Turkish stocks is 8.5-
A weak TRY should boost Adana Cimento's 18.5%. Since our target price implies a 40%
exports in the short term. However, in the long potential return, we upgrade our rating to
term, due to higher fuel and (indirectly) electricity Overweight from Neutral.
costs, the effect would be negative.
Risks
Investment thesis The key downside risks to our valuation are a
Adana Cimento is located in a growing region of slowdown in the Mediterranean region residential
Turkey and has plans to build up its capacity in market, further competitive pressures in Syria that
order to reclaim the market share that it has lost would force Adana out of the market, and a
over the last five years. It is also close to Iraq, prolonged North African construction slowdown.
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

83
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5 October 2011

Financials & valuation: Adana Cimento Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) ASP - Domestic (TRY/t) 76.0 78.3 78.3 83.7
Sales volume (m tonnes) 3.2 3.3 3.4 3.4
Revenue 305 328 347 359 Domestic market sales (m tonne 2.3 2.4 2.4 2.5
EBITDA 68 74 73 72 Export sales (m tonnes) 0.9 0.9 0.9 1.0
Depreciation & amortisation -22 -18 -20 -23
Operating profit/EBIT 46 56 53 49
Net interest 74 41 40 40
PBT 116 80 85 59
HSBC PBT 116 80 85 59
Taxation -13 -14 -14 -10 Valuation data
Net profit 102 67 71 49 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 102 67 71 49
EV/sales 1.4 1.3 1.1 1.3
Cash flow summary (TRYm) EV/EBITDA 5.6 5.4 4.8 5.7
Cash flow from operations 91 108 48 74 EV/IC 1.2 1.1 1.1 1.0
Capex -17 -45 -80 -80 PE* 6.4 9.9 9.3 13.4
Cash flow from investment -17 -45 -80 -80 P/Book value 1.5 1.4 1.3 1.3
Dividends -63 -58 -40 -50 FCF yield (%) 35.0 23.4 -4.4 6.2
Change in net debt 92 20 -45 56 Dividend yield (%) 9.4 8.7 6.0 7.4
FCF equity 135 90 -17 24 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (TRYm)


Intangible fixed assets 7 7 7 7 Issuer information
Tangible fixed assets 258 254 275 329 Share price (TRY) 4.11 Target price (TRY) 5.75 Potent'l return (%) 39.9
Current assets 149 242 271 192
Cash & others 26 85 129 45 Reuters (Equity) ADANA.IS Bloomberg (Equity) ADANA TI
Total assets 734 822 873 847 Market cap (USDm) 380 Market cap (TRYm) 701
Operating liabilities 28 28 48 51 Free float (%) 86 Enterprise value (TRYm) 441
Gross debt 60 140 140 112 Country Turkey Sector CONSTRUCTION
Net debt 35 55 11 67 MATERIALS
Shareholders funds 446 454 485 485 Analyst Levent Bayar Contact 90 212 376 46 17
Invested capital 361 390 376 431

Price relative
Ratio, growth and per share analysis
7 7
Year to 12/2010a 12/2011e 12/2012e 12/2013e 6 6
Y-o-y % change 5 5

Revenue 4.2 7.6 5.8 3.4 4 4


EBITDA -13.5 9.0 -1.1 -2.0 3 3
Operating profit -28.5 21.0 -4.3 -7.8 2 2
PBT 23.7 -30.6 6.1 -30.4
HSBC EPS 29.9 -34.8 6.1 -30.4 1 1
2009 2010 2011 2012
Ratios (%) Adana Cimento Rel to ISTANBUL COMP

Revenue/IC (x) 0.9 0.9 0.9 0.9


Source: HSBC
ROIC 11.4 11.2 10.5 9.1
ROE 21.0 14.8 15.1 10.1
ROA 14.9 8.6 8.3 5.7 Note: price at close of 27 Sep 2011
EBITDA margin 22.3 22.5 21.1 20.0
Operating profit margin 15.1 16.9 15.3 13.7
EBITDA/net interest (x)
Net debt/equity 7.8 12.2 2.2 13.7
Net debt/EBITDA (x) 0.5 0.7 0.1 0.9
CF from operations/net debt 261.7 194.4 452.2 110.6
Per share data (TRY)
EPS Rep (fully diluted) 0.24 0.13 0.12 0.07
HSBC EPS (fully diluted) 1.16 0.76 0.80 0.56
DPS 0.38 0.36 0.24 0.30
Book value 2.83 2.89 3.08 3.08

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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
Target price cut to TRY8.5 (from TRY9.7) on lower peer
valuations, maintain OW rating

Levent Bayar*
Overall competitive outlook is medium expect Akcansa's ROE to improve over time with
Analyst
Akcansa scored medium to weak in our scorecard the commissioning of its waste heat recovery HSBC Yatrm Menkul
Deerler A..
for competitive analysis. The main reason for that facility and the better pricing outlook in the +90 212 376 4617
Marmara region. leventbayar@hsbc.com.tr
is the cement industry's overcapacity in Turkey
*Employed by a non-US affiliate
and the fragmented market structure which Market share momentum is medium to strong of HSBC Securities (USA) Inc,
weakens the pricing power of the manufacturers. and is not registered/ qualified
Akcansa's market share momentum is medium to pursuant to FINRA regulations
On the other hand, Akcansa has an advantage in strong as the company has increased its capacity
export markets given its access to the Aegean Sea, in the last five years by 70% with organic growth
from where it can service the Black Sea and via the Canakkale plant coupled with the
Mediterranean markets. acquisition of the Ladik plant. Given the sector's
Looking forward, we expect fragmentation in the capacity growth of only 25% over the same
market to decrease via consolidation, yet period, Akcansa has therefore gained significant
overcapacity will likely remain as a source of market share. However we do not expect
concern as long as economic activity stays slow. Akcansa's market share to change much from here
Due to the significant infrastructure planned for as it has no immediate plans for capacity
the Marmara region, we expect lower competitive expansion in Turkey and we do not expect
pressure for Akcansa compared to peers. capacity growth in the Marmara region from other
companies either.
"Profitable market share" score is medium
Akcansa had an ROE of 9% in 2010, which puts Sustainable growth outlook is medium to

the company at the bottom of the range in this strong

metric when compared with other building Akcansa's DuPont scoring is 4. While it's gross
material stocks in Turkey. However, due to its profit is slightly lower compared to its peers its
higher market share the companys overall asset turnover is much better thanks to its new and
profitable market share score is medium (3). We more efficient plants. We think that Akcansa's

85
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sustainable growth outlook will be boosted by the Similar to other cement companies, weak TRY
significant infrastructure investment planned for should boost Akcansa's exports in the short term.
the Marmara region (third Bosphorus Bridge, However, in the long term, due to higher fuel and
Marmara bridge, Izmir highway projects). (indirectly) electricity costs, the weak TRY
However, fuel costs may distort gross profit if pet environment will likely be negative.
coke prices increase above product prices.
Investment thesis
Market fragmentation structure is medium to Our investment case for Akcansa has not changed
weak from our previous report on the company (please
The cement market in Turkey is heavily fragmented see Turkish Construction and Real Estate Sector
with the top 8 players claiming 50% of the market Thematic April 2011). We believe Akcansa is a
and with about 20 mid-sized players in the sector. play on the Marmara region's infrastructure story
Compared to EM and developed markets the and Russian export potential for 2012.
Turkish cement market is particularly fragmented
and is in need of consolidation. However, due to the Rating, valuation and risks
Competition Board's close supervision of the sector We use a blend of DCF and multiples methodologies
(as a result of past misdemeanours) and its strict to value Akcansa. Our DCF assumptions are 8.5%
limit of 30% maximum market share we expect RFR, 5.5% ERP, 0.73 beta (down from 0.8 before)
limited prospects for domestic consolidation. We resulting in a WACC of 11.3% (down from 11.6%).
also see little appetite from international cement We assume a 3% terminal growth rate. Our DCF
companies as Turkey's cement market has limited valuation is TRY9.4 per share (from TRY9.5). In
appeal compared to some of the other EM markets terms of EV/tonne, we compare Akcansa with
such as Iraq, Syria and some North Africa countries. domestic and global players. Akcansa is currently
trading at USD90/t compared with the average of
Akcansa is located in an oligopolistic region of
USD100/t for domestic peers and USD165/t for
Turkey with four main players and may benefit
international players. Applying the domestic peer
from this via more rational competition.
average yields a valuation of TRY8.4 per share,
Low interest rate environment should be down from TRY10.5. Akcansa is trading at a slight
positive for Akcansa discount to peers, at a 10.2x 2012e PE, compared to
A low interest environment should have a positive 11.6x for the peer group, and on a 2012e
impact on Akcansa and other Turkish cement EV/EBITDA of 6.1x, compared with a peer group
companies in the short term as the low rate average of 7.5x. Our multiples methodology yields a
environment will boost mortgage affordability and valuation of TRY7.8 per share (from TRY9.1).
public infrastructure investment. Akcansa should
Taking the average of the three gives us a TRY8.5
also benefit from low rates as it has a TRY240m
target price for Akcansa. This implies a 28%
debt position with 70% of it being short term and
potential return, which falls above our Neutral
therefore eligible for cheaper refinancing in the
range of 8.5-18.5% for non-volatile Turkish
near term.
stocks. We therefore maintain our Overweight
Weak TRY environment should be positive in rating on the stock.
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 stronger-
than-expected increase in raw-material and fuel
costs for Akcansa.

Launch of big-ticket projects in the Marmara


region (Marmara Bridge and Third Bridge on the
Bosphorus) and the nuclear power plant in the
Black Sea region are potential catalysts.

87
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Financials & valuation: Akcansa Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) ASP - Domestic (TRY/t) 82.0 87.7 93.0 97.7
Total sales vol. (m tonnes) 8.5 8.9 9.8 9.8
Revenue 817 942 1,113 1,183 Domestic market sales (m tonne 6.5 6.8 7.6 7.5
EBITDA 136 193 233 257 Export sales (m tonnes) 2.0 2.1 2.2 2.3
Depreciation & amortisation -64 -60 -61 -63
Operating profit/EBIT 72 134 171 194
Net interest -12 -12 -7 -5
PBT 72 114 154 198 Valuation data
HSBC PBT 72 114 154 198 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -13 -21 -28 -36
Net profit 59 94 126 163 EV/sales 1.6 1.5 1.3 1.1
HSBC net profit 59 94 126 163 EV/EBITDA 9.6 7.4 6.0 5.2
EV/IC 1.5 1.6 1.5 1.5
Cash flow summary (TRYm) PE* 21.5 13.6 10.1 7.8
Cash flow from operations 150 183 237 226 P/Book value 2.0 1.8 1.7 1.6
Capex -52 -60 -40 -20 FCF yield (%) 10.6 11.0 17.6 18.4
Cash flow from investment -52 -60 -40 -20 Dividend yield (%) 3.1 5.5 7.4 9.6
Dividends -39 -70 -95 -122 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt 12 125 -23 -74
FCF equity 121 125 200 210
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 6.66 Target price (TRY) 8.50 Potent'l return (%) 27.6
Intangible fixed assets 129 129 129 129
Tangible fixed assets 642 638 639 619 Reuters (Equity) AKCNS.IS Bloomberg (Equity) AKCNS TI
Current assets 312 222 258 334 Market cap (USDm) 692 Market cap (TRYm) 1,275
Cash & others 40 -86 -103 -49 Free float (%) 20 Enterprise value (TRYm) 1425
Total assets 1,232 1,137 1,175 1,230 Country Turkey Sector CONSTRUCTION
Operating liabilities 188 199 220 228 MATERIALS
Gross debt 201 200 160 140 Analyst Levent Bayar Contact 90 212 376 46 17
Net debt 161 286 263 189
Shareholders funds 640 694 750 818
Invested capital 855 876 910 904 Price relative
10 10
9 9
Ratio, growth and per share analysis 8 8
7 7
Year to 12/2010a 12/2011e 12/2012e 12/2013e
6 6
Y-o-y % change 5 5
4 4
Revenue 15.2 15.2 18.2 6.3 3 3
EBITDA -20.7 42.5 20.5 10.4 2 2
Operating profit -28.5 86.3 28.2 13.3 1 1
PBT -19.1 58.1 34.8 28.8 2009 2010 2011 2012
HSBC EPS -20.4 57.9 34.8 28.8 Akcansa Rel to ISTANBUL COMP

Ratios (%) Source: HSBC

Revenue/IC (x) 1.0 1.1 1.2 1.3


ROIC 7.8 12.9 16.0 17.8 Note: price at close of 27 Sep 2011
ROE 8.7 14.1 17.5 20.8
ROA 4.9 7.6 10.5 13.1
EBITDA margin 16.6 20.5 20.9 21.7
Operating profit margin 8.8 14.2 15.4 16.4
EBITDA/net interest (x) 11.8 16.1 34.2 49.4
Net debt/equity 24.6 40.4 34.5 22.7
Net debt/EBITDA (x) 1.2 1.5 1.1 0.7
CF from operations/net debt 93.7 64.0 90.2 120.1
Per share data (TRY)
EPS Rep (fully diluted) 0.31 0.49 0.66 0.85
HSBC EPS (fully diluted) 0.31 0.49 0.66 0.85
DPS 0.20 0.37 0.49 0.64
Book value 3.34 3.63 3.92 4.27

88
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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 share loss for Akenerji if the company fails to Levent Bayar*
Analyst
Akenerji scored weak in our scorecard for build its 900 MW natural gas power plant (which HSBC Yatrm Menkul
is currently on hold) or fails to acquire additional Deerler A..
competitive analysis. The reason for that is the weak +90 212 376 4617
market share momentum of the company given the capacity in the upcoming power plant leventbayar@hsbc.com.tr

reduction in its market share as its peers have privatisations. *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
increased their capacity in Turkey's growing power Sustainable growth outlook medium
and is not registered/ qualified
pursuant to FINRA regulations
market. This offsets the companys improving Akenerji's DuPont scoring falls in the medium
profitability leading to a medium score overall. range compared to its peers in emerging markets.
"Profitable market share" score is medium Its asset turnover ratio is slightly better than that
Akenerji scores moderately on our score card of Zorlu Enerji (its domestic peer) but lower than
comparing ROE vs market share as Turkish that of Aksa Enerji and some of the other
utilities have weak ROEs compared to most of emerging market peers. The company has lower
their EM peers and some of their developed peers. asset turnover compared to Aksa Enerji (the
Akenerji's main ROE edge is its 50% renewable market leader in this metric) due to lower output
energy capacity. Going forward we expect of its hydro power plants compared to that of
Akenerji's ROE to improve further due to Aksa Enerji's lower valued gas fired power plants.
establishment of new hydro power capacity and We believe the growth outlook is modest as with
an improvement in the general power pricing the commencement of the new hydro plants the
mechanism in Turkey. companys profitability should improve.
Market share momentum is weak Market fragmentation structure is medium
Due to significant capacity build-up in the The States share in the power generation market
industry over the last five years and Akenerji's will decrease substantially as it is determined to
choice of building fewer but more profitable privatise 70% of its generation portfolio which
capacities the company has lost market share. currently comprises 50% of Turkey's power
Looking forward we expect to see more market generation capacity. The keen interest of utility

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players in the privatisation process will likely lead 50% of the company's capacities are renewable
to fragmentation in the Turkish energy market. power generation which operate at higher
profitability and are more resilient in the face of
Thus the outlook for Akenerji's market share rests
gas price hikes.
on how the privatistaion process pans out. If the
company manages to acquire some assets its Akenerji's parents (Akkok and CEZ) have decided
market share will improve, and vice versa. to sell some or all of the company following their
decision to investigate other sectors and regions.
Low interest rate environment should be
We believe that if they manage to sell the
positive for AKNR
company at the market prices for its relevant
A low interest environment should have a positive
capacities then this would imply substantial
impact on Akenerji and the Turkish utility sector
upside as the company currently trades at a 40%
in general as a major portion of its capex is
discount to its SOTP valuation based on appraisal
financed by debt.
of its assets.
Akenerji is a highly leveraged company (TRY1bn
Rating, valuation and risks
net debt as of Q2 2011) and lower interest rates
will reduce the interest burden on its P&L thus Our 50/50 weighted DCF and SOTP driven
helping to boost its bottom line. valuation provides a target price of TRY4.6 (from
TRY5.0) for Akenerji.
Weak TRY environment should be negative for
Akenerji Our DCF assumptions are: 8.5% RFR and 5.5%
ERP, 0.87 beta and 5% terminal growth rate. This
Akenerji should be negatively impacted by a weak provides a fair value of TRY4.6 per share (vs
TRY due to both its short FX position of TRY1bn TRY4.8 before) while our SOTP is also TRY4.6
(related to its debt position) and a potential FX- per share (vs TRY5.2).
related rise in natural gas prices, albeit the latter
effect should be less compared to peers thanks to The decrease in our DCF is attributable to our gas
its higher share of renewable generation. price hike projection for Q3 which decreases the
margins of the company in 2011 and 2012 (since
Investment thesis prices are carried forward from the previous year).
Akenerji offers a strong investment case being
Our SOTP is based on the summation of
poised in Turkey's growing power market with
individual DCFs for the generation and
unsaturated demand meeting short supply in a
distribution businesses from which we then
liberated price environment. However it scored low
subtract the net debt position of the company.
in our analysis for competition as it has limited
This SOTP has decreased due to the significant
market share in a non-fragmented industry.
depreciation of TRY which has increased the net

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

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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 Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Tariff prices (TRY/MWh) 151.1 155.2 166.1 177.7
DUY (free market) prices (TRY/ 122.5 131.1 140.3 150.1
Revenue 428 519 582 610 Natural Gas prices (TRY/mcm) 491 511 537 563
EBITDA 28 110 139 161 Power output (GWh) 2,811 3,079 3,254 3,183
Depreciation & amortisation -28 -44 -44 -44
Operating profit/EBIT 0 66 95 117
Net interest -57 -70 -70 -65
PBT -27 -8 79 100 Valuation data
HSBC PBT -27 -8 79 100 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation 1 2 -16 -20
Net profit -26 -6 62 78 EV/sales 4.0 3.4 3.0 2.7
HSBC net profit -26 -6 62 78 EV/EBITDA 60.8 16.0 12.4 10.2
EV/IC 1.3 1.3 1.2 1.1
Cash flow summary (TRYm) PE* 18.0 14.3
Cash flow from operations 111 29 110 123 P/Book value 1.5 1.5 1.4 1.2
Capex -570 -68 -68 -43 FCF yield (%) -70.4 -6.9 -3.3 3.1
Cash flow from investment -551 -68 -68 -43 Dividend yield (%) 0.0 0.0 0.0 0.0
Dividends 0 0 0 0 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt 369 39 -42 -81
FCF equity -589 -58 -28 26
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 2.97 Target price (TRY) 4.60 Potent'l return (%) 55.0
Intangible fixed assets 37 37 37 37
Tangible fixed assets 1,353 1,377 1,401 1,400 Reuters (Equity) AKENR.IS Bloomberg (Equity) AKENR TI
Current assets 245 239 260 311 Market cap (USDm) 606 Market cap (TRYm) 1,116
Cash & others 40 3 4 46 Free float (%) 25 Enterprise value (TRYm) 1762
Total assets 1,913 1,931 1,976 2,026 Country Turkey Sector INDEPENDENT POWER
Operating liabilities 220 241 264 272 PRODUCERS
Gross debt 926 929 887 848 Analyst Levent Bayar Contact 90 212 376 46 17
Net debt 886 925 884 803
Shareholders funds 766 760 822 900
Invested capital 1,375 1,409 1,431 1,430 Price relative
6 6

Ratio, growth and per share analysis 5 5


4 4
Year to 12/2010a 12/2011e 12/2012e 12/2013e
3 3
Y-o-y % change
2 2
Revenue -7.6 21.2 12.1 4.7 1 1
EBITDA -53.8 288.4 26.1 15.9
Operating profit -100.4 43.7 23.3 0 0
PBT -244.2 26.4 2009 2010 2011 2012
HSBC EPS -126.1 26.4 Akenerji Rel to ISTANBUL COMP

Ratios (%) Source: HSBC

Revenue/IC (x) 0.4 0.4 0.4 0.4


ROIC 0.0 3.8 5.3 6.5 Note: price at close of 27 Sep 2011
ROE -3.6 -0.8 7.8 9.1
ROA 1.6 2.6 6.1 6.6
EBITDA margin 6.6 21.2 23.9 26.4
Operating profit margin 0.0 12.7 16.3 19.2
EBITDA/net interest (x) 0.5 1.6 2.0 2.5
Net debt/equity 115.8 122.0 107.5 89.1
Net debt/EBITDA (x) 31.2 8.4 6.4 5.0
CF from operations/net debt 12.5 3.1 12.5 15.4
Per share data (TRY)
EPS Rep (fully diluted) -0.10 -0.02 0.16 0.21
HSBC EPS (fully diluted) -0.10 -0.02 0.16 0.21
DPS 0.00 0.00 0.00 0.00
Book value 2.04 2.02 2.19 2.39

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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

Overall competitive outlook is medium believe that, although its growth will slow as the Levent Bayar*
Analyst
Aksa Enerji scored medium in our scorecard for bulk of its investments are now complete, Aksa HSBC Yatrm Menkul
Deerler A..
competitive analysis. On the positive side the Enerji will continue to gain market share. Aksa +90 212 376 4617
company has managed to increase its market share Enerji is also the only Turkish utility company leventbayar@hsbc.com.tr

with profitable, efficient assets. However,its that exports power, which affords additional *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
significant debt position and FX vulnerability opportunities for growth, particularly in relation to and is not registered/ qualified
exports to power-hungry Syria and Cyprus. pursuant to FINRA regulations
imposes risks on its profitability and the company
achieves a medium score from our analysis as Sustainable growth outlook is medium to
a result. strong

"Profitable market share" score is medium Highest asset turnover compared to other Turkish
Aksa Enerjis ROE of 9% in 2010, puts the utilities, coupled with high profitability, leads
company in a leading position when compared to Aksa Enerji to score level (4) on our score card.
its domestic peers, but slightly below other Although Turkish power generators gross profit
emerging market utilities. But due to Turkey's is lower compared to that of both developed and
consolidated market structure Aksa Enerji scores emerging peers, due to high gas prices and the
medium with respect to the profitable market weak power price environment in 2010, the
share metric. growth outlook is attractive as we expect greater
liberalisation to boost the profitability of the
However, given its plans to expand its capacity to Turkish utility players.
4,200MW by 2014 we expect the company's
domestic market share to improve. Aksa Enerji, with its new and more efficient
power plants, scores highly on asset turnover and
Market share momentum is strong we expect this ratio to increase further as those
Aksa Enerji's market share momentum is strong, capacities that were in ramp-up mode during 2010
scoring level (5) on our score card, as the come fully on stream.
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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Market fragmentation structure is medium long way towards addressing the company's low
The States share in the power generation market free float problem.
will decrease substantially as it is determined to
Asa result we believe the company currently offers
privatise 70% of its generation portfolio which
an attractive investment opportunity, with its positive
currently comprises 50% of Turkey's power
operational profitability outlook coupled with the
generation capacity. The keen interest of the utility
potential upside from a partial sale.
players in the privatisation process will likely lead to
fragmentation in the Turkish energy market. Rating, valuation and risks
We expect Turkey's power market to become Our DCF and SOTP and multiples driven
much more fragmented and Aksa Enerji to be a valuations lead to a target price of TRY5.8
moderate beneficiary of privatisation (losing some (previously TRY7.0) for Aksa Enerji.
market share but operating in a better price The decrease in our target price is attributable to a
environment). lower DCF valuation as a result of the cuts to our
Low interest rate environment should be EBITDA forecasts (15% for 2011 and 14% for
positive for Aksa Enerji 2012) due to last week's 14% natural gas price
Being a highly levered company (TRY1.4bn net hike which has a significant cost effect on Aksa
debt as of Q2 2011) lower interest rates will benefi Enerji as 75% of company's capacity is gas-fired.
Aksa Enerji by way of reduced interest expenses. Revision to forecasts
2010 _____ 2011e _______ _____ 2012e _____
Weak TRY environment should be negative for
actual old new chg(%) old new chg(%)
Aksa Enerji
Sales 911 1,492 1,492 0% 1,766 1,766 0%
EBITDA 190 330 281 -15% 417 359 -14%
Due to its TRY1.2bn short FX position Aksa EBITDA m 21% 22% 19% -3% 24% 20% -3%
Net profit 61 146 9 -94% 204 154 -24%
Enerji is very vulnerable to TRY weakness.
Source: HSBC estimates, company data

On the operational side, although a weak TRY


would benefit Aksa Enerji by improving its export The DCF component of our valuation (8.5% RFR,
competitiveness, on the other hand its fuel costs 5.5% ERP, 1.0 beta) leads to a fair value of
would surge, thereby curbing its operating margin. TRY6.5 per share (from TRY7.7) while our SOTP
valuation falls to TRY5.0 per share (from
Investment thesis
TRY5.8). We base our SOTP on cost-driven asset
Aksa Enerji is Turkeys biggest IPP with its 2,000 valuation for the assets of the company and
MW installed capacity. It is also the only player in subtract the net debt position.
Turkey that has access to isolated regions and
exports power. We believe this diversification in Our new target price implies a 106% return
its operations, along with its new and efficient potential, which is above the Neutral range of
capacities, implies a strong outlook for its 3.5%-23.5% for volatile Turkish stocks hence
operational profitability. we maintain Overweight (V) rating.

Aksa Enerjis parent recently drew up an Risks

agreement with an investment bank to sell 26% of The key downside risk for Aksa Enerji is failure
its stake for USD450m. While the final price is to seal new bilateral contracts for its power as the
subject to change it currently implies a 75% company currently under-utilises its power
premium over the current price and would go a 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 Overweight (V)


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Tariff prices (TRY/MWh) 152.5 163.3 174.8 187.0
DUY (spot) prices (TRY/MWh) 162.0 162.0 173.3 185.5
Revenue 911 1,492 1,766 2,114 Natural Gas prices (TRY/mcm) 46.0 47.8 50.2 52.7
EBITDA 190 281 359 369 Power output (GWh) 4,576 8,375 9,539 11,482
Depreciation & amortisation -59 -106 -106 -106 Blended PLF (%) 41 53 57 62
Operating profit/EBIT 131 176 253 263 Effective installed capacity 1,398 1,819 1,940 2,165
Net interest -82 -49 -50 -42
PBT 85 12 193 222
HSBC PBT 85 12 193 222
Taxation -24 -2 -39 -44 Valuation data
Net profit 61 9 154 177 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 61 9 154 177
EV/sales 3.0 2.1 1.6 1.3
Cash flow summary (TRYm) EV/EBITDA 14.4 11.2 7.8 7.2
Cash flow from operations -161 47 578 237 EV/IC 1.4 1.3 1.3 1.2
Capex -405 -471 -206 -81 PE* 26.8 176.6 10.5 9.2
Cash flow from investment -354 -471 -206 -81 P/Book value 2.0 2.0 1.7 1.4
Dividends 0 -7 -7 -31 FCF yield (%) -39.8 -17.1 24.8 10.1
Change in net debt 212 424 -366 -125 Dividend yield (%) 0.0 0.4 1.9 2.2
FCF equity -613 -264 382 156 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (TRYm)


Intangible fixed assets 6 6 6 6 Issuer information
Tangible fixed assets 1,332 1,696 1,796 1,772 Share price (TRY) 2.82 Target price (TRY) 5.80 Potent'l return (%) 105.8
Current assets 960 870 870 1,005
Cash & others 78 -345 -115 -166 Reuters (Equity) AKSEN.IS Bloomberg (Equity) AKSEN TI
Total assets 2,385 2,659 2,760 2,869 Market cap (USDm) 883 Market cap (TRYm) 1,629
Operating liabilities 239 549 637 776 Free float (%) 6 Enterprise value (TRYm) 3163
Gross debt 1,276 1,276 1,140 965 Country Turkey Sector INDEPENDENT POWER
Net debt 1,197 1,621 1,256 1,130 PRODUCERS
Shareholders funds 824 833 981 1,127 Analyst Levent Bayar Contact 90 212 376 46 17
Invested capital 1,980 2,369 2,151 2,172

Price relative
Ratio, growth and per share analysis
6.5 6.5
Year to 12/2010a 12/2011e 12/2012e 12/2013e 6 6
5.5 5.5
Y-o-y % change 5 5
4.5 4.5
Revenue 3.8 63.7 18.3 19.7 4 4
EBITDA -16.4 48.4 27.4 3.0 3.5 3.5
Operating profit -5.9 34.4 43.8 4.2 3 3
PBT -20.0 -86.4 1573.9 14.9 2.5 2.5
HSBC EPS -30.3 -84.9 1574.0 14.9 2 2
2009 2010 2011 2012
Ratios (%) Aksa Enerji Rel to ISTANBUL COMP

Revenue/IC (x) 0.5 0.7 0.8 1.0


Source: HSBC
ROIC 5.1 6.5 9.0 9.8
ROE 9.4 1.1 17.0 16.8
ROA 5.6 1.9 7.2 7.5 Note: price at close of 27 Sep 2011
EBITDA margin 20.8 18.9 20.3 17.5
Operating profit margin 14.4 11.8 14.3 12.5
EBITDA/net interest (x) 2.3 5.7 7.1 8.8
Net debt/equity 145.3 194.6 128.1 100.3
Net debt/EBITDA (x) 6.3 5.8 3.5 3.1
CF from operations/net debt 2.9 46.0 21.0
Per share data (TRY)
EPS Rep (fully diluted) 0.11 0.02 0.27 0.31
HSBC EPS (fully diluted) 0.11 0.02 0.27 0.31
DPS 0.00 0.01 0.05 0.06
Book value 1.43 1.44 1.70 1.95

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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

Overall competitive outlook is weak "Profitable market share" score is medium to Levent Bayar*
Analyst
Anadolu Cam scored weak in our competitive weak HSBC Yatrm Menkul
Anadolu Cam had an adjusted ROE of 11% in Deerler A..
analysis. While the company currently enjoys a +90 212 376 4617
monopolistic market share in Turkey an 2010. When we look at the individual regions, leventbayar@hsbc.com.tr

aggressive competitor planning to match 70% of Turkey's ROE was 18% and Russias ROE was *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
Anadolu Cam's capacity has started construction 2%. For Turkey we expect to see a contraction in and is not registered/ qualified
ROE with the entry of the new competitor in pursuant to FINRA regulations
of its furnaces which are due to become
operational in the next four years. While 2013e. For Russia, we expect to see an
increasing public awareness in Turkey towards improvement in ROE via better consumer
the use of glass packaging will boost consumption spending compared to 2010. However, due to the
and increase diversification for Anadolu Cam, the significant exposure of the company to the beer
new competitor will bring pressure for the market in Russia, any legal action against alcohol
company as well. consumption puts Anadolu Cam at risk.

In Russia, Anadolu Cam operates in an Market share momentum is weak

oligopolistic market and competes with glass Anadolu Cam's market share in Turkey has not
packaging, tetrapak and tin packaging companies. changed in the last five years, while it has posted
Due to the increased cost and tax burden on c20% growth per annum in Russia over the same
beverage manufacturers Anadolu Cam lost period. The latter has been driven by the increased
significant share in the market during the 2008- capacity in Russia which has led to market share
2009 turmoil. However, we believe the outlook gains. However, we expect tougher going in both
may improve for Anadolu Cam as consumer markets over the next five years, due to the entry
spending has now recovered substantially. of the new competitor in Turkey and higher
competition in Russia with different product types
(tetrapak, cans etc)

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Sustainable growth outlook is medium perspective as the company has a TRY670m net
Anadolu Cam's DuPont scoring is 3. The debt position of which 50% is short term.
company's adjusted gross profit margin is stronger
Weak TRY environment should have a mixed
compared to its peers, yet its asset turnover is
impact on Anadolu Cam
lower, which offsets the former and leaves the
DuPont score at the medium level. Since the Similar to other exporters, a weak TRY would
company has pricing power in Turkey, and boost Anadolu Cam's international sales. As the
increasing awareness of glass packaging should bulk of the operations in Russia are handled in
boost demand, we expect to see slight growth in RUB, changes in the RUB-TRY exchange rate are
the gross profit margin over the next two years. particularly important for Anadolu Cam.
Thereafter, following the entry of the new
In addition, the company has a TRY250m short
competitor, we expect to see a decrease in the
FX position which would result in FX losses in
gross profit margin, which will also decrease the
the event of a further devaluation of TRY.
DuPont score.
Investment thesis
In the Russian market we expect to see an
increase in the gross profit margin as it hit trough We believe Anadolu Cam will continue its solid
levels during the 2008-2010 period and the growth at least for the next two years in Turkey,
outlook for the Russian market has now improved due to the ongoing increase in glass packaging
given the recovery in consumer spending. demand. Recent articles in the press about health
issues regarding plastic containers for water and
Market fragmentation structure is medium to other beverages should boost demand for glass
strong packaging, in our view. Over the longer term,
As mentioned before, Anadolu Cam is the following the entry of the new player, we may see
monopolistic market leader in Turkey in the glass a contraction in Anadolu Cams profitability due
packaging segment and is one of the oligopoly to greater price competition.
players in Russia. We do not expect to see a
fragmentation beyond a few number of new In Russia, we believe the worst is over, as
competitors in either market, hence the sector should consumer spending is much better compared to
still score strong on our fragmentation metric. the crisis period and the company should benefit
from this.
Low interest rate environment should have a
Revisions to forecasts
slightly positive impact on Anadolu Cam
A low interest rate environment would have a We increase our 2011 EBITDA and net profit
limited impact on Anadolu Cam as the company estimates on the back of very strong Q2 numbers.
mainly supplies to a rateinsensitive sector. For 2H 2011 and 2012 we increase our sales
However, with increased consumer spending estimates with the assumption of higher sales
people could shift their preference towards better volumes in Turkey due to ongoing campaigns for
quality containers which would have a positive using glass as the preferred container.
impact on Anadolu Cam.

Anadolu Cam would also benefit from a low


interest rate environment from a financing

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Revisions to forecasts Risks


2010a _____ 2011e ______ _____2012e _____ Risks to our view include weakness in Russian beer
(TRYm) actual old new chg(%) old new chg(%)
demand through further tax rate increases. An
Sales 1,117 1,171 1,220 4% 1,267 1,345 6%
EBITDA 268 293 328 12% 317 366 15% additional downside risk is a possible devaluation of
margin 24% 25% 27% 2ppt 25% 27% 2ppt the TRY and/or the RUB against the USD.
Net Income 102 111 133 20% 129 142 10%
Source: HSBC estimates, company data Positive growth in Russia beer demand is an
upside risk to our valuation for Anadolu Cam.
Rating, valuation and risks
If Anadolu Cam acquired new capacity in a growing
We use a 50/50 weighted average of DCF and peer
region it may act as a catalyst for the shares.
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 Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Turkey contain. sales grw. (%) 10.0 6.0 6.0 6.0
Russia contain. sales grw. (%) 7.0 7.0 7.0 7.0
Revenue 1,117 1,220 1,345 1,483 USD/TRY - yearend 1.5112 1.7550 1.6000 1.5500
EBITDA 268 328 366 391
Depreciation & amortisation -140 -147 -167 -180
Operating profit/EBIT 128 180 199 211
Net interest -1 -10 -17 -21 Valuation data
PBT 127 170 182 189 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC PBT 127 170 182 189
Taxation -26 -34 -36 -38 EV/sales 1.2 1.0 0.9 0.8
Net profit 102 133 142 147 EV/EBITDA 5.0 3.6 3.3 2.9
HSBC net profit 102 133 142 147 EV/IC 1.1 1.1 1.0 0.9
PE* 10.7 8.2 7.7 7.4
Cash flow summary (TRYm) P/Book value 1.4 1.3 1.1 1.0
Cash flow from operations 352 286 403 419 FCF yield (%) 11.7 -3.4 15.0 -10.0
Capex -215 -276 -198 -461 Dividend yield (%) 2.3 2.4 2.6 3.4
Cash flow from investment -215 -276 -198 -461 Note: * = Based on HSBC EPS (fully diluted)
Dividends 26 27 28 37
Change in net debt -97 -243 28 -65
FCF equity 110 -35 151 -101 Issuer information
Balance sheet summary (TRYm) Share price (TRY) 3.15 Target price (TRY) 4.50 Potent'l return (%) 43.0
Intangible fixed assets 3 3 3 3 Reuters (Equity) ANACM.IS Bloomberg (Equity) ANACM TI
Tangible fixed assets 909 869 984 1,008 Market cap (USDm) 592 Market cap (TRYm) 1,091
Current assets 685 833 849 937 Free float (%) 20 Enterprise value (TRYm) 1174
Cash & others 253 446 422 466 Country Turkey Sector CONTAINERS & PACKAGING
Total assets 1,744 1,785 1,916 2,028 Analyst Levent Bayar Contact 90 212 376 46 17
Operating liabilities 153 159 171 183
Gross debt 658 609 613 593
Net debt 406 163 191 127 Price relative
Shareholders funds 788 871 987 1,106
Invested capital 1,191 1,100 1,243 1,298 6 6
5 5
4 4
Ratio, growth and per share analysis
3 3
Year to 12/2010a 12/2011e 12/2012e 12/2013e 2 2
Y-o-y % change 1 1

Revenue 23.2 9.2 10.2 10.2 0 0


EBITDA 41.2 22.2 11.6 6.9 2009 2010 2011 2012
Operating profit 261.2 40.8 10.6 5.8 Anadolu Cam Rel to ISTANBUL COMP
PBT 9472.5 33.7 6.9 4.1
HSBC EPS 556.6 30.1 6.8 3.9 Source: HSBC

Ratios (%)
Note: price at close of 27 Sep 2011
Revenue/IC (x) 1.0 1.1 1.1 1.2
ROIC 8.7 12.6 13.6 13.3
ROE 14.3 16.0 15.3 14.1
ROA 3.6 1.2 8.2 7.4
EBITDA margin 24.0 26.8 27.2 26.4
Operating profit margin 11.4 14.8 14.8 14.2
EBITDA/net interest (x) 479.6 33.3 21.4 18.5
Net debt/equity 45.2 16.6 17.4 10.4
Net debt/EBITDA (x) 1.5 0.5 0.5 0.3
CF from operations/net debt 86.6 175.0 210.6 330.7
Per share data (TRY)
EPS Rep (fully diluted) 0.29 0.38 0.41 0.43
HSBC EPS (fully diluted) 0.29 0.38 0.41 0.43
DPS 0.07 0.08 0.08 0.11
Book value 2.27 2.52 2.85 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

Overall competitive outlook is medium performance clearly shows the companys Erol Hullu*
Analyst
Not surprisingly, Anadolu Efes ranks highly in managerial skills. HSBC Yatrm Menkul
Deerler A..
terms of competitive outlook. The company has a Sustainable growth outlook is strong +90 212 376 4616
erolhullu@hsbc.com.tr
monopolistic position in the Turkey beer market, Anadolu Efes ranks well in terms of its adjusted
*Employed by a non-US affiliate
the highest EBITDA contributor, a very strong gross margin, a result of its monopolistic position of HSBC Securities (USA) Inc,
position in soft-drinks through its subsidiary CCI and is not registered/ qualified
and strong business model in Turkey. It has a similar pursuant to FINRA regulations
and an increasing market share in the Russian asset turnover ratio to its peers. While its gross
beer market. In terms of competition, we think margin might come under attack from greater
Anadolu Efes will have no problems. competition, especially in Russia, we think the
"Profitable market share" score is strong company can sustain growth in the longer term.
Anadolu Efes has a similar ROE to that of its EM Market fragmentation structure is medium to
peers but ranks higher in terms of market share. strong
We calculate the companys EBITDA-weighted Apart from in the Russian beer market, Anadolu
average market share (Turkey beer, EBI, CCI) to Efes has dominant positions in its businesses
be much higher than that of any EM peer. ROE of which give it the upper hand versus the
around 20% at 2010-end tells us that the company competitors. We see the chances of consolidation
is well positioned within its industry. in the Turkey beer and soft drink markets as low.
Market share momentum is medium Since these two businesses represent 70% of the
The company has been instrumental in further EBITDA we see the company as immune to any
increasing its market share in the Turkish beer risks associated with potential M&A in the sector.
market from what was already almost a In Russia, potential consolidation would
monopoly. Its market share hit 89% in 2010. It negatively affect the company since competition
has also been gaining market share in the Russian is already becoming tougher.
beer market. Further market share gains from this
point on will be very tough to achieve but past

101
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Turkish Equities abc
5 October 2011

Low interest rate environment should be Rating, valuation and risks


neutral for Anadolu Efes We value the company using a sum-of-the-parts
Without a doubt a low interest rate environment analysis. We value the domestic beer business on
positively affects the interest burden of the the average of our DCF and peer multiples. Our
company. Yet we do not believe beer or soft-drink DCF for the domestic beer operations, using a
businesses are highly sensitive to interest rates. risk-free-rate of 8.5%, ERP of 5.5%, beta of 0.70
Weak TRY environment should be negative for and a WACC of 12.0%, produces a fair value of
Anadolu Efes TRY6,884m (was TRY6,621m). Our multiples-
based analysis using 7.1x 2012e and 6.3x 2013e
The Company had a c1x net debt/EBITDA EV/EBITDA and 14.2x 2012e and 12.9x 2013e
position at the 2010 year end. Most of the debt is PE indicates a fair value of TRY5,161m (was
denominated in USD and EUR which increases TRY4,975m). The average of the two yields
the EPS sensitivity to fluctuations in TRY. TRY6,023m (was TRY5,798m) for the Turkey
Furthermore, the company uses commodities such beer operations.
as pet, aluminium, barley, and sugar in its
products, the prices of which are either linked to For the soft drink operations, we use our target value
USD or are in USD. for Coca-Cola Icecek. For EBI (not rated) we value
the operations using the same peer multiples we use
Investment thesis for the domestic beer operations which yields
Even though beer consumption in Turkey and TRY1,029m (was TRY1,605m). For Alternatifbank
Russia is lower than the DM average, volume (not rated), we take the current market capitalisation
growth in both countries has been under pressure of TRY378m (was TRY465m).
from substantial tax hikes. During 2010 the
Our target price for Anadolu Efes is TRY21.80,
special consumption tax on beer was increased by
down from TRY23.40 previously. The target price
a total of c70% in Turkey and by a mammoth
decline is a result of lower valuations for the
200% in Russia.
international beer operations and CCI. Under our
The company has a dominant position in Turkey research model, the Neutral band for non-volatile
where the price sensitivity of consumers is low. Turkish stocks is 8.5% -18.5%. As our target price
Yet a 17% price increase in Q4 was apparently implies a 4% potential return we maintain our
too much to digest even for Turkish consumers. In Underweight rating.
Russia, total beer volumes have been contracting
Risks
since 2009 and this has continued to be the case
The companys major value driver is the Turkish
so far in 2011. Both countries governments look
beer operations. Better sales growth or margin
committed to curbing alcoholic consumption or
performance here is an upside risk. We have
see taxing it as an efficient way to increase tax
factored in increasing raw material prices
revenues, both of which are unsupportive for
following the surge in global grain prices. A sharp
Anadolu Efes. Moreover, in Russia we have been
fall will have a positive impact on our valuation.
seeing signs of irrational pricing behaviour since
Also, the company has been very active in M&A
all players want to increase their market share in
in international markets during the past few years.
the absence of demand growth.
Any unexpected large scale acquisition could
present an upside risk to our rating.

102
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Turkish Equities abc
5 October 2011

Financials & valuation: Anadolu Efes Underweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Domestic Beer volume (ml) 851 827 852 877
EBI volume (ml) 1,570 1,604 1,706 1,812
Revenue 4,169 4,609 5,047 5,624 Soft Drinks volume (m.uc) 665 756 840 936
EBITDA 1,019 1,049 1,204 1,336 Beer export volume growth % 5 5 5 5
Depreciation & amortisation -316 -341 -375 -420
Operating profit/EBIT 703 708 829 915
Net interest -6 -13 -26 -14
PBT 659 656 837 893 Valuation data
HSBC PBT 659 656 837 893 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -140 -140 -173 -185
Net profit 504 501 645 688 EV/sales 2.5 2.3 2.1 1.8
HSBC net profit 504 501 645 688 EV/EBITDA 10.0 9.9 8.6 7.5
EV/IC 2.8 2.5 2.3 2.2
Cash flow summary (TRYm) PE* 18.8 18.9 14.7 13.7
Cash flow from operations 893 1,450 1,508 1,413 P/Book value 3.4 3.1 2.7 2.4
Capex -644 -234 -250 -271 FCF yield (%) 1.8 11.9 12.4 11.2
Cash flow from investment -644 -234 -250 -271 Dividend yield (%) 1.5 2.3 2.1 2.7
Dividends -144 -216 -200 -258 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt -13 151 -42 -391
FCF equity 172 1,128 1,175 1,064
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 21.00 Target price (TRY) 21.80 Potent'l return (%) 3.8
Intangible fixed assets 1,233 1,357 1,357 1,357
Tangible fixed assets 2,178 2,052 1,934 1,791 Reuters (Equity) AEFES.IS Bloomberg (Equity) AEFES TI
Current assets 2,141 2,713 3,258 3,943 Market cap (USDm) 5,127 Market cap (TRYm) 9,450
Cash & others 994 1,078 1,129 1,582 Free float (%) 45 Enterprise value (TRYm) 10392
Total assets 5,589 6,163 6,594 7,142 Country Turkey Sector BEVERAGES
Operating liabilities 905 934 1,007 1,043 Analyst Erol Hullu Contact 90 212 376 4616
Gross debt 1,764 1,999 2,009 2,071
Net debt 770 921 879 489
Shareholders funds 2,767 3,052 3,496 3,926 Price relative
Invested capital 3,652 4,111 4,412 4,467
25 25

20 20
Ratio, growth and per share analysis
Year to 12/2010a 12/2011e 12/2012e 12/2013e 15 15

Y-o-y % change 10 10
Revenue 9.4 10.6 9.5 11.4
EBITDA 11.2 3.0 14.7 10.9 5 5
Operating profit 7.7 0.7 17.0 10.4 2009 2010 2011 2012
PBT 21.1 -0.4 27.6 6.7 Anadolu Efes Rel to ISTANBUL COMP
HSBC EPS 19.2 -0.6 28.8 6.6
Source: HSBC
Ratios (%)
Revenue/IC (x) 1.1 1.2 1.2 1.3 Note: price at close of 27 Sep 2011
ROIC 15.2 14.3 15.4 16.3
ROE 19.4 17.2 19.7 18.5
ROA 10.5 9.9 11.4 11.2
EBITDA margin 24.4 22.8 23.9 23.7
Operating profit margin 16.9 15.4 16.4 16.3
EBITDA/net interest (x) 173.7 83.9 46.2 98.0
Net debt/equity 27.4 29.6 24.6 12.1
Net debt/EBITDA (x) 0.8 0.9 0.7 0.4
CF from operations/net debt 116.0 157.4 171.4 289.0
Per share data (TRY)
EPS Rep (fully diluted) 1.12 1.11 1.43 1.53
HSBC EPS (fully diluted) 1.12 1.11 1.43 1.53
DPS 0.32 0.48 0.45 0.57
Book value 6.15 6.78 7.77 8.72

103
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Turkish Equities abc
5 October 2011

Arcelik
Arcelik's overall competitive outlook is medium compared to its
peers and other industrials in Turkey
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)

Overall competitive outlook is medium towards low-cost brands) has been the driving
The Turkish durable goods sector, led by Arcelik, factor in our view. Going forward, market share
has high production capacities providing scale and gains in the main market, Turkey, look difficult
efficiency in production, a relatively low tax burden whereas gains in selective markets in Europe still
(6.7% consumer tax rate vs. 37% to 84% for cars), a look possible. Arcelik seeks further growth via
strong Turkish brand regionally (Beko), the highest acquisitions in new markets (e.g. South Africa)
technology (in energy efficient products) and a fully Sustainable growth outlook is medium
liberalised industry that has been open to The Du Pont Profitability Matrix paints a mixed
competition since 1996 (when Turkey became a picture for Turkish (listed) white goods
member of the EU Customs Union). manufacturers: Arcelik ranks at around the
"Profitable market share" score is medium European sector averages.
Arcelik is placed in the mid range of ROE Market fragmentation structure is medium to
rankings in Europe. Arcelik makes up for its strong
disadvantage in terms of scale compared with The top three players account for a significant
larger European competitors through highly share (c90%) of the market. The unique
efficient plants with large capacities under a distribution system in Turkey (through
single roof. BSH and Electrolux top the industry manufacturer-owned retail stores) sets a higher
as the two dominant players in white goods barrier to entry and results in a low import share.
market in Europe. Therefore, we not expect the existing rankings
Market share momentum is strong (Arcelik-BSH-Vestel-Indesit) to change much in
Arcelik has posted higher growth than its relevant at least the next five years despite the evolution of
sales markets during the past five years. mass retail stores in big cities.
Successful penetration into European markets and Low interest rate environment is positive
new sales channels, especially with the 2008-09 Arcelik benefits from a low interest rate environment
crisis (when consumers switched from premium due to increased consumption. Although white

104
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5 October 2011

goods demand is less interest rate sensitive than Rating, valuation and risks
automotive demand, there is a long-term positive We revise our forecasts on more cautious export
correlation between demand and interest rates. Also, volume assumptions in Europe (5% growth in
Arcelik continues to generate a positive margin 2012e vs. 8% previously). We look for total sales
generally between interest earned on instalment sales volume growth (white goods) of 9% this year and
and interest paid on loans. 5% in 2012 (vs. 10% and 7% previously). We
Weak TRY has a neutral impact curb our margin forecasts slightly, incorporating
Arcelik operates with various currencies but its the lower volume impact, leading to an 8% lower
largely protected against FX changes through net profit for 2011e and 7% lower for 2012e.
hedges. The FX exposure is very limited in the on These estimate changes, incorporating also new
the balance sheet (only a USD18m short as of macro parameters (GDP growth, FX etc) result in
end-H1 2011). A 10% increase in various a lower DCF-based target price of TRY9.0, down
currencies against TRY (USD, EUR, GBP, RUB from TRY10.0. Under our research methodology,
and others) curbs bottom-line profits by only the hurdle rate for non-volatile Turkish stocks is
cTRY3m (based on the balance sheet footnotes as 8.5- 18.5%. Based on the potential return of 31%,
of end H1 2011) we maintain our Overweight rating, though we
remove the volatility (V) flag in recognition of the
Investment thesis
stock's historical volatility having stabilised.
Arcelik generates c30% of revenues from Western
Europe and a slowdown in the European economy Our DCF parameters remain the same as before:
would affect its exports negatively. That said, 8.5% risk free rate, 5.5% equity risk premium, 3%
Arceliks low-to-medium end market position in terminal growth and 0.91 (was 1.08) beta, leading
Europe can help cushion the pressure to some to 11.2% WACC (previously 11.8%).
extent. On the other hand, a slowdown in Turkey
would not hit white goods demand significantly, Arcelik - Forecast changes

in our view, as there is still some pent up demand TRYm 2011e 2011e 2012e 2012e 2013e 2013e
old new old new old new
in this market (compared to autos). Turkish white
Revenue 7,744 7,627 8,363 8,147 9,077 8,695
goods demand has been solid in 2011 YTD with EBITDA 910 859 988 945 1,071 1,028
21% y-o-y growth (wholesale volumes) in the margin 11.8% 11.3% 11.8% 11.6% 11.8% 11.8%
Jan-Aug period. Net profit 569 523 636 592 674 642
Source: HSBC estimates
Arcelik continues to seek growth outside Turkey
and outside its main export markets; the The main downside risks to our valuation and
acquisition of South Africas leading white goods rating would be i) lower sales volumes in Turkey
brand Defy recently (12.5% EBITDA margin) and export markets than assumed, ii) tougher
may be followed by similar actions (brand competition in Turkey and Europe leading to
acquisitions and/or green field investment lower-than-expected margins, iii) acquisitions or
decisions) in new geographies, such as South East investments in foreign markets that would be
Asia. We believe that Arcelik has a sound growth deemed as expensive or out of scope by the
strategy, complementing its strong organic growth market, iv) an increase in the 6.7% consumer tax
profile in Turkey with inorganic growth in new rate on white goods sales in Turkey (although
and promising markets. We see the company very unlikely in the context of a slowing
generating above industry margins in the economy, v) adverse developments in global TV
foreseeable future. markets (sharp price or demand falls) hurting the
profitability of Arceliks TV segment.

105
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Turkish Equities abc
5 October 2011

Financials & valuation: Arcelik Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Turkish GDP growth 9.0 7.0 3.0 5.1
EUR/TRY - year end 2.01 2.52 2.61 2.69
Revenue 6,936 7,627 8,147 8,695 EUR/TRY - year avg. 2.00 2.52 2.56 2.65
EBITDA 758 859 945 1,028 CBT Policy rates (year-end) 6.5% 5.5% 5.5% 5.0%
Depreciation & amortisation -193 -209 -223 -238 Arcelik domestic unit sales gr 10% 10% 6% 5%
Operating profit/EBIT 638 650 722 790 Arcelik int'l unit sales gr. 7% 8% 5% 6%
Net interest 7 -5 2 13
PBT 657 658 737 818
HSBC PBT 657 658 737 818
Taxation -107 -115 -130 -160 Valuation data
Net profit 517 523 592 642 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 479 523 592 642
EV/sales 0.7 0.6 0.5 0.5
Cash flow summary (TRYm) EV/EBITDA 6.1 5.3 4.6 4.0
Cash flow from operations 653 913 939 962 EV/IC 1.3 1.2 1.1 17.9
Capex -196 -290 -321 -344 PE* 9.7 8.9 7.8 7.2
Cash flow from investment -196 -290 -321 -344 P/Book value 1.4 1.3 1.2 1.1
Dividends -100 -250 -262 -355 FCF yield (%) 9.6 16.2 16.5 16.8
Change in net debt -464 -23 -119 -114 Dividend yield (%) 5.4 5.6 7.7 9.7
FCF equity 377 621 615 611 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (TRYm)


Intangible fixed assets 469 469 469 469 Issuer information
Tangible fixed assets 1,309 1,381 1,479 -2,436 Share price (TRY) 6.86 Target price (TRY) 9.00 Potent'l return (%) 31.2
Current assets 4,748 5,715 6,281 6,708
Cash & others 1,318 1,986 2,338 2,544 Reuters (Equity) ARCLK.IS Bloomberg (Equity) ARCLK TI
Total assets 7,322 8,450 9,212 5,834 Market cap (USDm) 2,515 Market cap (TRYm) 4,635
Operating liabilities 1,628 1,742 1,828 1,967 Free float (%) 21 Enterprise value (TRYm) 4540
Gross debt 2,058 2,702 2,936 3,027 Country Turkey Sector Household Durables
Net debt 739 716 598 483 Analyst Cenk Orcan Contact 90 212 376 46 14
Shareholders funds 3,342 3,676 4,007 4,293
Invested capital 3,580 3,838 4,062 230
Price relative
10 10
Ratio, growth and per share analysis 9 9
8 8
Year to 12/2010a 12/2011e 12/2012e 12/2013e 7 7
6 6
Y-o-y % change 5 5
4 4
Revenue 5.2 10.0 6.8 6.7 3 3
EBITDA -13.4 13.4 10.0 8.8 2 2
Operating profit -14.8 2.0 11.0 9.5 1 1
PBT 13.9 0.2 12.0 11.0 0 0
HSBC EPS 15.4 9.1 13.2 8.3 2009 2010 2011 2012
Arcelik Rel to ISTANBUL COMP
Ratios (%)
Source: HSBC
Revenue/IC (x) 1.9 2.1 2.1 4.1
ROIC 13.2 14.5 15.1 29.6
ROE 15.9 14.9 15.4 15.5 Note: price at close of 27 Sep 2011
ROA 11.4 10.9 11.1 13.7
EBITDA margin 10.9 11.3 11.6 11.8
Operating profit margin 9.2 8.5 8.9 9.1
EBITDA/net interest (x) 177.7
Net debt/equity 21.7 19.1 14.6 11.0
Net debt/EBITDA (x) 1.0 0.8 0.6 0.5
CF from operations/net debt 88.3 127.4 157.1 199.1
Per share data (TRY)
EPS Rep (fully diluted) 0.77 0.77 0.88 0.95
HSBC EPS (fully diluted) 0.71 0.77 0.88 0.95
DPS 0.37 0.39 0.53 0.66
Book value 4.95 5.44 5.93 6.35

106
Equities
Turkish Equities abc
5 October 2011

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)

Overall competitive outlook is medium Sustainable growth outlook is strong Bulent Yurdagul*
Analyst
Aygaz has a strong brand and the highest market Aygazs business is attractive with above average HSBC Yatrm Menkul
Deerler A..
share in the Turkish LPG market. Excluding auto- asset turnover ratio (2.10x) and a decent adjusted +90 212 376 4612
gross profit margin (13%). However, we think bulentyurdagul@hsbc.com.tr
LPG, which includes the presence of large fuel
there is downside risk to this, as low-profit auto *Employed by a non-US affiliate
retailers, it faces a lower competitive threat. Auto- of HSBC Securities (USA) Inc,
LPG is the fastest growing fuel in the domestic sales will contribute a larger share of revenues in and is not registered/ qualified
pursuant to FINRA regulations
market, rapidly replacing gasoline, and the market coming years.
offers higher competitive intensity than for other Market fragmentation structure is strong
fuels. The market is dominated by Aygaz in the LPG
"Profitable market share" score is strong segment and is the price setter. Two thirds of the
Turkish LPG distribution margins are high in all market is controlled by the top three players
segments (except exports). With a strong therefore the market is not fragmented.
franchise and extensive distribution infrastructure, Low interest rate environment should be
Aygaz clearly remains the market leader in this neutral
defensive and yet lucrative segment. As Aygaz is not significantly leveraged, lower
Market share momentum is weak interest rates do not have a major impact on
Aygazs market share in the LPG market has financial expenses. Also, business demand is not
stagnated at around 30%. However, underlying sensitive to interest rates.
this, Aygaz has been holding its share steady in Weak TRY environment should be neutral
the fast growing auto-LPG segment as well as Aygaz has an FX short position worth around
retaining its market lead and maintaining its share TRY100m on its balance sheet, but it is also
in other LPG segments. Other than consolidation exposed to FX-based leverage through the Tupras
opportunities, we see little potential for increasing SPV, in which it has a 20% share. Therefore, the
market share. impact on financial expenses of a weak TRY
should be negative as it will result in FX losses.

107
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5 October 2011

However, since Aygazs product prices are linked Rating, valuation and risks
to USD, a weaker TRY supports operational We reduce our estimates for 2011 and 2012 by up
profitability which compensates for its negative to 18% due to lower-than-expected H1 2011
impact on the P&L. performance and a weaker TRY environment.
Investment thesis We reduce our 12-month target price to TRY10.8
We maintain our Underweight call on Aygaz, (from TRY11.9), derived from a SOTP valuation.
simply because we think that its valuation has Our DCF model uses a WACC of 13.0% and a
been over-done despite running a defensive and terminal growth rate of 3.0%, which is derived using
safer business. Aygaz actually posted very strong a risk-free rate of 8.5%, an equity risk premium of
results at the operating level (EBITDA) in 2008 as 5.5%, a beta of 0.87, and a cost of debt of 5.75%.
well as in 2009, helped by strong auto-LPG We use 6.3x (down from 8.1x) as the peer average
demand growth and stronger margins. However, for Aygaz's PE valuation for 2012e.
in the current scenario, we do not expect this to
Under our research model, for non-volatile stocks,
continue with domestic auto-LPG growth having
the Neutral band is 8.5% to 18.5%. Our target
slowed down. Also, with the current inflation
price of TRY10.80 per share implies a potential
expectations, margins are unlikely to improve.
return of 8%, which falls below the Neutral band.
Aygaz also suffers from non-cash FX losses on
Hence, we maintain Aygazs Underweight rating.
the balance sheet, due to TRY depreciation.
Risks
Aygaz: HSBC forecast changes
Better-than-expected LPG margins, lower-than-
(TRYm) _________ 2011e __________________ 2012e_________
New Old change New Old change expected competition in the market and higher
EBITDA 266 311 -14.5% 284 321 -11.5% growth in demand are the main upside risks to our
EBIT 186 228 -18.4% 207 244 -15.2% valuation. Aygazs strategic target of being a
Net profit 429 455 -5.7% 245 273 -10.3%
Source: HSBC estimates
bigger gas and energy player through acquisitions
of new assets may also prove an upside risk, if
acquisitions were to be realised at reasonable
price levels.

Aygaz: SOTP valuation


TRYm TRY/share Basis
LPG business valuation 1,651 5.5 50% DCF and 50% EV/EBITDA
Electricity business valuation 151 0.5 Based on AES deal
Valuation of core businesses 1,801 6.0 a+b
Valuation of participations 1,022 3.4 At HSBC target mcap with a conglomerate discount of 20% (excluding Opet which is
valued at a 10.3x PE multiple)
Total enterprise value 2,823 9.4
Less: minority offset (25) (0.1) at transaction price
Less: net debt 435 1.4
Equity value 3,233 10.78
Source: HSBC estimates

108
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Turkish Equities abc
5 October 2011

Financials & valuation: Aygaz Underweight


Financial statements Key forecast drivers

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

Profit & loss summary (TRYm) Turkish cylinder LPG market gr -0.08 -0.05 -0.05 -0.05
Turkish Auto LPG market growth 0.08 0.06 0.04 0.04
Revenue 4,658 5,114 4,667 4,549 Cylinder LPG sales margin 679 697 670 671
EBITDA 306 266 284 317 Auto LPG sales margin 359 365 339 336
Depreciation & amortisation -89 -81 -77 -78
Operating profit/EBIT 217 186 207 239
Net interest 9 -6 -4 -6
Valuation data
PBT 283 472 287 323
HSBC PBT 283 472 287 323 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -43 -43 -40 -45
Net profit 239 429 245 276 EV/sales 0.4 0.3 0.3 0.3
HSBC net profit 239 429 245 276 EV/EBITDA 6.1 5.9 5.2 4.2
EV/IC 2.2 1.8 1.7 1.5
Cash flow summary (TRYm) PE* 12.5 7.0 12.2 10.8
Cash flow from operations 388 202 325 347 P/Book value 1.5 1.3 1.3 1.2
Capex -81 -81 -80 -80 FCF yield (%) 13.9 1.9 8.7 9.5
Cash flow from investment -54 -81 -80 -80 Dividend yield (%) 4.2 5.7 3.3 3.7
Dividends -100 -125 -172 -98 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt -231 -283 -84 -156
FCF equity 280 37 174 190
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 9.98 Target price (TRY) 10.80 Potent'l tot rtn (%) 8.2
Intangible fixed assets 8 8 8 8
Tangible fixed assets 529 529 531 533 Reuters (Equity) AYGAZ.IS Bloomberg (Equity) AYGAZ TI
Current assets 1,246 1,425 1,476 1,609 Market cap (USDm) 1,624 Market cap (TRYm) 2,994
Cash & others 262 515 569 695 Free float (%) 100 Enterprise value (TRYm) 1574
Total assets 2,804 2,983 3,037 3,171 Country Turkey Sector Oil & Gas
Operating liabilities 679 561 561 561 Analyst Bulent Yurdagul Contact 90 212 376 46 12
Gross debt 111 81 51 20
Net debt -151 -435 -518 -675
Shareholders funds 1,978 2,263 2,337 2,515 Price relative
Invested capital 841 886 885 894
14 14
12 12
Ratio, growth and per share analysis 10 10
8 8
Year to 12/2010a 12/2011e 12/2012e 12/2013e
6 6
Y-o-y % change 4 4
2 2
Revenue 23.0 9.8 -8.7 -2.5
EBITDA -21.6 -12.9 6.8 11.5 0 0
Operating profit -26.0 -14.3 11.4 15.6 2009 2010 2011 2012
PBT -24.3 66.7 -39.3 12.6 Aygaz Rel to ISTANBUL COMP
HSBC EPS -23.9 79.1 -42.9 12.7
Source: HSBC
Ratios (%)
Revenue/IC (x) 5.6 5.9 5.3 5.1 Note: price at close of 27 Sep 2011
ROIC 22.2 19.6 20.1 23.1
ROE 13.0 20.2 10.7 11.4
ROA 8.6 15.0 8.3 9.1
EBITDA margin 6.6 5.2 6.1 7.0
Operating profit margin 4.7 3.6 4.4 5.3
EBITDA/net interest (x) 48.0 71.1 49.8
Net debt/equity -7.5 -18.9 -21.9 -26.4
Net debt/EBITDA (x) -0.5 -1.6 -1.8 -2.1
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 0.80 1.43 0.82 0.92
HSBC EPS (fully diluted) 0.80 1.43 0.82 0.92
DPS 0.42 0.57 0.33 0.37
Book value 6.59 7.54 7.79 8.38

109
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Turkish Equities abc
5 October 2011

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

Overall competitive outlook is medium Bagfas domestic sales volume declined 52% versus Erol Hullu*
Analyst
Bagfas is a regional player with no intention to go a total market contraction of 4%. HSBC Yatrm Menkul
Deerler A..
national and compete with the current duopoly of Sustainable growth outlook is strong +90 212 376 4616
Gubretas and Tekfen. It has been losing market erolhullu@hsbc.com.tr
The companys operational agility is high thanks
share due to an increased focus on exports. It *Employed by a non-US affiliate
to it being a small regional player. Hence, it has of HSBC Securities (USA) Inc,
scored 19 in our scorecard, in the mid range of the one of the highest asset turnover ratios among its and is not registered/ qualified
pursuant to FINRA regulations
score spectrum. Although the company is more fertiliser peers. This will support the company in
profitable than other domestic players we do not sustaining growth, in our view. Yet, like all
believe it has the muscle to compete with the commodity players, tproduct prices will be critical
leaders in the Turkish market overall. in determining the level of growth.
"Profitable market share" score is medium Market fragmentation structure is medium to
Bagfas operates with a higher ROE than its major weak
competitors. During the up-cycle the ROE gap We dont think current market conditions are very
widens further even though the company has only positive for Bagfas. It has given up market share
a c3% market share. Going forward, if demand in the domestic market for the sake of higher
from export markets dries, the company would exports. Operating at higher profit margins clearly
have to focus more on the domestic market which gives Bagfas the upper hand verus the competition
might lead to a higher market share, but also a but we doubt the market leaders would want to
lower ROE, in our view. give away their market share gains easily. If any
Market share momentum is weak consolidation were to happen in the sector, it
The company has been losing market share in would increase competition for Bagfas and might
Turkey over the past few years since the booming hurt its margins and market share.
global fertiliser demand and the value-added product
portfolio of the company has enabled it to generate
higher revenues from exports. During 2005-2010

110
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5 October 2011

Low interest rate environment should be Forecast changes


neutral for Bagfas 2010 ____2011e ____ ____2012e ____
TRYm old new old new
Low interest rates certainly lower farmers financial
Net sales 280 350 354 307 318
burdens, but we think the trend in global fertiliser EBIT 53 73 76 22 24
prices is more critical for fertiliser companies. EBITDA 63 84 87 34 36
EBITDA margin 23% 24% 25% 11% 11%
Hence, we regard the impact of the change in Net profit 47 68 79 26 23
domestic interest rates as neutral for Bagfas. Source: HSBC estimates

Weak TRY environment should be positive for


As a result of TRY weakness we slightly revise up
Bagfas
our forecasts for Bagfas given that its product
Bagfas is one of the winners when TRY prices are linked USD and it has a long USD
depreciates. The companys selling prices are position. We forecast that the EBITDA margin
linked to global prices which are based in USD. will decline to 11% in 2012 from 25% (was 24%)
The company also has a long USD position on its in 2011. We increase our net income expectation
balance sheet which corresponded to 25% of total for 2011 by 16% to TRY79m on higher FX gains.
assets at 1H 11. On our new estimates, we expect y-o-y
contractions of c60% in EBITDA and c70% in net
Investment thesis income for 2012.
We expect DAP prices to fall over 20% y-o-y in
2012, whereas our price expectations for N-type
Rating, valuation and risks
fertilisers are more optimistic. Bagfas is more Our DCF valuation for Bagfas uses a risk-free rate
exposed to DAP than other major Turkish of 9.5%, a risk premium of 5.5% and a beta of
fertiliser company: in 2006-10, DAP sales 1.2. The terminal growth rate of 3% implies a
constituted 30% of its total sales volume on value of TRY515m (was TRY492m) and a target
average, compared with 9% for Gubretas price of TRY171.5 (was TRY164).
(including Razi) and 8% for Tekfen. In our view, Under our research model, for stocks without a
Bagfas is more at risk of margin erosion, volatility indicator, the Neutral band is 8.5% to
especially in 2012. 18.5%. Our target price of TRY170.5 implies a
We think the significant margin gains Bagfas has potential return of 3%; we therefore downgrade
made over the past two years will come to an end our rating from Neutral to Underweight.
in 2012. Given its high exposure to DAP we Risks
expect Bagfass net sales to fall 10% in the lower Fertiliser prices are linked to food and commodity
pricing environment. prices. Continued upward trends would positively
affect our valuation.

111
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Financials & valuation: Bagfas Underweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Average sales price TRY/ton 545 772 633 665
Sales volume (kt) 514 458 502 527
Revenue 280 354 318 350 Production (kt) 472 436 462 475
EBITDA 63 87 36 57 CUR % 72 67 71 73
Depreciation & amortisation -10 -12 -12 -13
Operating profit/EBIT 53 76 24 43
Net interest 0 0 0 0
PBT 58 98 29 49 Valuation data
HSBC PBT 58 98 29 49 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -11 -20 -6 -10
Net profit 47 79 23 40 EV/sales 1.4 1.0 1.1 1.0
HSBC net profit 47 79 23 40 EV/EBITDA 6.3 4.0 9.8 5.9
EV/IC 4.5 3.6 4.2 3.6
Cash flow summary (TRYm) PE* 10.6 6.3 21.3 12.6
Cash flow from operations 73 77 45 45 P/Book value 2.7 2.1 2.2 2.0
Capex -7 -8 -8 -11 FCF yield (%) 11.3 9.7 6.2 4.9
Cash flow from investment -7 -8 -8 -11 Dividend yield (%) 0.0 4.9 7.9 2.3
Dividends 0 -24 -39 -12 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt -55 -46 3 -19
FCF equity 56 48 31 24
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 165.50 Target price (TRY) 170.50 Potent'l return (%) 3.0
Intangible fixed assets 0 0 0 0
Tangible fixed assets 87 84 80 77 Reuters (Equity) BAGFS.IS Bloomberg (Equity) BAGFS TI
Current assets 160 238 209 249 Market cap (USDm) 269 Market cap (TRYm) 497
Cash & others 99 150 147 166 Free float (%) 60 Enterprise value (TRYm) 350
Total assets 250 325 291 329 Country Turkey Sector CHEMICALS
Operating liabilities 59 75 57 67 Analyst Erol Hullu Contact 90 212 376 4616
Gross debt 0 5 5 5
Net debt -99 -145 -142 -161
Shareholders funds 186 240 224 252 Price relative
Invested capital 89 97 84 93
201 201
181 181
161 161
Ratio, growth and per share analysis 141 141
121 121
Year to 12/2010a 12/2011e 12/2012e 12/2013e
101 101
Y-o-y % change 81 81
61 61
Revenue 4.4 26.5 -10.3 10.4 41 41
EBITDA 38.7 -58.8 57.3 21 21
Operating profit 44.2 -68.8 82.7 2009 2010 2011 2012
PBT 70.8 -70.4 69.8 Bagfas Rel to ISTANBUL COMP
HSBC EPS 67.4 -70.4 69.8
Source: HSBC
Ratios (%)
Revenue/IC (x) 2.9 3.8 3.5 4.0 Note: price at close of 27 Sep 2011
ROIC 44.9 65.4 20.9 39.1
ROE 28.9 36.9 10.0 16.6
ROA 20.0 27.4 7.6 12.8
EBITDA margin 22.5 24.7 11.3 16.2
Operating profit margin 18.8 21.5 7.5 12.3
EBITDA/net interest (x)
Net debt/equity -53.1 -60.4 -63.4 -63.8
Net debt/EBITDA (x) -1.6 -1.7 -3.9 -2.8
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 15.66 26.22 7.76 13.18
HSBC EPS (fully diluted) 15.66 26.22 7.76 13.18
DPS 0.00 8.14 13.11 3.88
Book value 61.98 80.06 74.71 84.01

112
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5 October 2011

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

Overall competitive outlook is strong forward. We expect the company to grow by Erol Hullu*
Analyst
BIM scores high on our overall scorecard. The taking share from unorganised retailers. HSBC Yatrm Menkul
Deerler A..
companys high market share in Turkish food Sustainable growth outlook is strong +90 212 376 4616
erolhullu@hsbc.com.tr
retail along with its small store format gives it an BIM is a hard discounter and by virtue of its
*Employed by a non-US affiliate
upper hand in terms of competition. The business model the company has a lower gross of HSBC Securities (USA) Inc,
increasing penetration of organised retail in profit margin as compared to companies operating and is not registered/ qualified
pursuant to FINRA regulations
Turkey and the low financial leverage of the supermarkets in Turkey. However, taking the
company further improve the outlook. business model into consideration we believe that
"Profitable market share" score is strong BIMs gross profit margin is good and is
Among the food retailers in Turkey BIM had a sustainable going forward. BIM more than makes
market share of 6% in 2010. The company ranks up for its lower gross profit margin with a high
high in terms of ROE with 55% in 2010. We asset turnover ratio. In 2010, the company had an
believe that with the small store format and the asset turnover ratio of 5.9x, which is among the
current plans for accelerated expansion, BIM will highest in the industry.
be able to maintain a high ROE along with its Market fragmentation structure is medium to
market share. Due to these factors BIM scores strong
high on the profitable market share metric. BIMs position with regards to market
Market share momentum is strong fragmentation is medium to strong. We believe
BIM is currently the market leader among Turkish that, even though there are good chances of
food retailers. However, among the hard consolidation happening in the Turkish retail
discounters in Turkey the company has lost a little market, BIM, with its strong store network will
market share to the competition. Nevertheless, we not be impacted by it. The increasing penetration
believe that the company is still strong on the of organised retail in the country further
market share momentum metric as the penetration strengthens its case.
of organised retailers has been increasing over the
years and we see the trend continuing going

113
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Low interest rate environment should be Having said that, we appreciate management
positive for BIM comments on year-end new store openings, which
The company currently has a small debt position. As will be north of 350. This is the highest number
of Q2 2011, BIM had TRY38m in short-term debt among the competitors and should compensate for
whereas it had TRY209m in cash and cash the market share losses of recent years.
equivalents. Due to this, there will be little impact
We are optimistic on BIMs 2011 results.
from reduced interest costs. However, BIM will
However, on our estimates the stock is trading at a
certainly benefit from higher consumer spending and
2012e PE of 25.2x and 16.3x EV/EBITDA. At our
greater traffic in a low interest rate environment.
target price the stock would trade at a PE multiple
Weak TRY environment should be neutral for of 24.8x for 2012e, and EV/EBITDA of 17.6x,
BIM leaving little room for further appreciation.

BIM does not have any foreign exchange Rating, valuation and risks
denominated debt or significant exposure to Our DCF analysis, using a TRY-based risk-free
foreign currency denominated assets. Due to this rate of 8.5%, ERP of 5.5%, a beta of 0.70, a
we believe that a weak TRY environment will WACC of 12.4%, and a terminal growth rate of
have a neutral effect on the company. 6%, produces value of TRY59 per share.
Investment thesis In our research model for non-volatile Turkish
We think BIM has been a very rational leader stocks, the Neutral band 8.5% -18.5%. Our target
during the past years. Being the leader, and the price implies an 8% potential return. Hence we
most efficient player in the market, BIM is the maintain our rating at Neutral.
price setter for all of its SKUs. Competitors
Risks
benchmark themselves to BIM but at these price
Higher store expansion and better LFL sales growth
level competitors are making the same margins as
are the major upside risks. Abdulrahman El Khereiji
BIM. So, if it wanted to, BIM could have attacked
still holds over 10% stake in the company. If he
the competition by introducing even lower prices
continues to sell his stakes in the market, it might
at the expense of margins. Were yet to see
create an overhang on stock performance.
whether the company has made the right decision
over the past years.

114
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5 October 2011

Financials & valuation: BIM Neutral


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Store Number 2,951 3,326 3,676 3,676
GPM (%) 16.8 16.4 16.1 16.1
Revenue 6,574 7,912 9,420 11,010 Opex/Sales (%) -12.4 -12.0 -12.0 -12.0
EBITDA 356 425 487 567 Capex/Sales (%) 2.2 2.2 2.0 2.0
Depreciation & amortisation -65 -76 -94 -114
Operating profit/EBIT 292 349 393 453
Net interest 10 12 13 14
PBT 306 366 412 474 Valuation data
HSBC PBT 306 366 412 474 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -60 -73 -82 -95
Net profit 246 293 330 379 EV/sales 1.2 1.0 0.8 0.7
HSBC net profit 246 293 330 379 EV/EBITDA 22.6 18.9 16.3 13.9
EV/IC 28.5 24.8 23.0 21.8
Cash flow summary (TRYm) PE* 33.8 28.3 25.2 21.9
Cash flow from operations 397 465 557 641 P/Book value 16.6 13.6 11.8 10.1
Capex -142 -171 -186 -202 FCF yield (%) 2.5 2.8 3.6 4.3
Cash flow from investment -142 -171 -186 -202 Dividend yield (%) 1.6 2.2 2.8 3.2
Dividends -133 -182 -235 -264 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt -83 -38 -73 -101
FCF equity 205 234 302 358
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 54.75 Target price (TRY) 59.00 Potent'l return (%) 7.8
Intangible fixed assets 3 3 3 3
Tangible fixed assets 555 649 741 830 Reuters (Equity) BIMAS.IS Bloomberg (Equity) BIMAS TI
Current assets 815 882 1,064 1,281 Market cap (USDm) 4,509 Market cap (TRYm) 8,311
Cash & others 258 288 361 462 Free float (%) 55 Enterprise value (TRYm) 8023
Total assets 1,372 1,534 1,808 2,113 Country Turkey Sector MULTILINE RETAIL
Operating liabilities 832 923 1,102 1,291 Analyst Erol Hullu Contact 90 212 376 4616
Gross debt 8 0 0 0
Net debt -250 -288 -361 -462
Shareholders funds 500 611 707 822 Price relative
Invested capital 283 324 346 360
69 69
59 59
Ratio, growth and per share analysis 49 49
Year to 12/2010a 12/2011e 12/2012e 12/2013e 39 39

Y-o-y % change 29 29
19 19
Revenue 23.5 20.3 19.1 16.9
EBITDA 13.4 19.3 14.6 16.3 9 9
Operating profit 12.7 19.8 12.6 15.3 2009 2010 2011 2012
PBT 14.0 19.7 12.5 15.0 BIM Rel to ISTANBUL COMP
HSBC EPS 15.4 19.3 12.5 15.0
Source: HSBC
Ratios (%)
Revenue/IC (x) 24.6 26.1 28.2 31.2 Note: price at close of 27 Sep 2011 Stated accounts as of 31 Dec 2002 are IFRS compliant
ROIC 87.6 92.1 94.0 102.7
ROE 55.3 52.7 50.0 49.6
ROA 19.2 19.5 19.1 18.8
EBITDA margin 5.4 5.4 5.2 5.1
Operating profit margin 4.4 4.4 4.2 4.1
EBITDA/net interest (x)
Net debt/equity -49.9 -47.1 -51.1 -56.2
Net debt/EBITDA (x) -0.7 -0.7 -0.7 -0.8
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 1.62 1.93 2.17 2.50
HSBC EPS (fully diluted) 1.62 1.93 2.17 2.50
DPS 0.88 1.20 1.54 1.74
Book value 3.30 4.03 4.65 5.42

115
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5 October 2011

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)

Overall competitive outlook is strong Market share momentum is strong Erol Hullu*
Analyst
Bizim scores among the top-ten on our overall Bizim, with the help of its small store format has HSBC Yatrm Menkul
Deerler A..
scorecard. The company has maintained consistent been able to grow faster compared to the overall +90 212 376 4616
market share in the Turkish cash and carry segment. food retail market. Bizim has the largest number of erolhullu@hsbc.com.tr

We also like Bizims small store format which we cash and carry stores in Turkey and has presence in *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
believe is beneficial for expansion. We think the largest number of cities. We believe that these and is not registered/ qualified
factors will help the company to maintain and grow pursuant to FINRA regulations
opening small stores is the main pillar of the
business model in terms of handling the competition. its market share going forward.
The low financial leverage along with the high ROE Sustainable growth outlook is strong
further strengthens our view on the company. We do Bizim operates solely in the cash and carry
not see any significant weak points in our scorecard segment. This segment operates on very tight
for Bizim. gross margins: in 2010, Bizim had an 8.6% gross
"Profitable market share" score is medium margin. It is actually more important to look at the
Bizim is the second largest player in the Turkish asset turnover ratio where Bizim fares extremely
cash and carry segment in terms of sales. The cash well with respect to its peers. In 2010, the
and carry segment in Turkey has very few company had an asset turnover ratio of 5.9x.
organised players. Yet since the sector is at an Thanks to these qualities we believe that Bizims
initial growth stage Bizim only had a c2% market sustainable growth outlook is strong.
share as of 2010 and hence its hard to say that it Market fragmentation structure is medium to
commands substantial market power. The strong
company was able to maintain a very healthy The top two Turkish cash and carry players have a
ROE of 42% in 2010, which is one of the highest market share of only c4%. The cash and carry
among peers and should fuel future growth. Due segment is highly fragmented with very low
to these factors Bizim scores medium on our penetration by organised players. We believe
profitable market share metric. consolidation will happen in this sector. However,

116
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Turkish Equities abc
5 October 2011

Bizim, with strong financial backing from Yildiz Rating, valuation and risks
Holdings, would likely not be affected in a Forecast changes
negative manner. The companys small store ______ 2011e________ _______ 2012e _______
format, due to which it has been able to expand TRYm Old New Old New

into a large number of cities, will bode well in the Sales 1757 1751 2180 2177
EBITDA 65 62 85 81
event of a significant consolidation in the market. EBIT 57 53 74 70
Net profit 34 31 45 42
Due to these factors Bizim scores medium in
Source: HSBC estimates
terms of market fragmentation structure.

Low interest rate environment should be We have only slightly revised our forecasts for
positive for Bizim Bizim. We expect TRY 31m net income for 2011
Bizim does not have any significant debt on its (was TRY34m) and TRY42m for 2012 (was
balance sheet. Due to this, there will be little TRY45m). We slightly lower our EBITDA
impact from lower interest costs. However, a low margin forecast for 2011 to 3.5% from 3.7%.
interest rate environment is clearly beneficial for
Our DCF-based valuation leads to a target price of
many of Bizims customers which in turn will
TRY37.3 (was TRY39.6) using a WACC of
increase the traffic and basket sizes in its stores.
11.5%, a risk-free rate of 8.5%, an ERP of 5.5%
Weak TRY environment should be neutral for and a beta of 0.70, terminal growth rate of 6%.
Bizim Under our research model, for stocks with a
Bizim does not have foreign exchange volatility indicator, the Neutral band is 3.5% -
denominated debt or significant exposure to 23.5%. Our target price implies a potential return
foreign currency denominated items on its balance of c70%, which is above the Neutral band; hence,
sheet, nor does it have any costs based in FX. we maintain our Overweight (V) rating.
Hence, a weak TRY environment will have little
Risks
impact on the company.
The main risk we foresee to our valuation is
Investment thesis lower-than-expected LFL ticket growth and LFL
We see Bizims business model and investment traffic growth for non-tobacco products. With the
thesis as solid based on three main factors. It increasing number of stores opening in the
operates in a niche segment of the retail sector with a medium term, there is also a risk of
very low penetration level supporting LFL growth cannibalisation among the stores situated near
which will be positive for the top-line. The company each other. The companys valuation may be
aims to increase non-tobacco sales, which will weighed down by pressure on margins due to an
support the gross margin since tobacco sales increase in the number of store openings and
generate far lower gross margins than non-tobacco expansion into low-margin regions. The
sales (1.8% versus 11.1% in Q2 11). Lastly, the performance of Sok discount stores going forward
strategy to open small sized stores enables it to will also add to the risk.
operate with one of the highest ROICs in the sector
which will support FCF generation and encourage
the company to expand faster.

117
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5 October 2011

Financials & valuation: Bizim Toptan Satis Overweight (V)


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

118
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5 October 2011

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
Target price cut to TRY11.0 (from TRY12.8) on lower peer
valuations; maintain Overweight rating

Overall competitive outlook is medium construction of Turkey's first nuclear power plants Levent Bayar*
Analyst
Cimsa scored medium in our scorecard for and the Summer games 2013 two big ticket
HSBC Yatrm Menkul
competitive analysis. The main reason for that is projects that will boost cement demand in the Deerler A..
+90 212 376 4617
the cement industry's overcapacity in Turkey and Mediterranean region. leventbayar@hsbc.com.tr

the fragmented market structure which weakens *Employed by a non-US affiliate


Market share momentum is strong of HSBC Securities (USA) Inc,
the pricing power of manufacturers. Looking Cimsa's market share momentum is strong as the and is not registered/ qualified
forward, we expect fragmentation in the market to pursuant to FINRA regulations
company has increased its capacity in the last five
decrease via consolidation, yet overcapacity years by 70% with the acquisition of the Eskisehir
should remain as a source of concern as long as and Nigde plants and organic growth at the
economic activity stays slow. Eskisehir and Kayseri plants. Given the sector's
Cimsa caters to the strongest growing region of capacity growth of only 25% over the same
Turkey which gives the company an edge against period, Cimsa gained significant market share.
the overcapacity problem. In addition, the We do not expect Cimsa's market share to change
company has an efficient network mechanism dramatically in the Central Anatolia region as
among its plants which enables it to distribute its there are no plans to increase capacity there.
product among different pricing regions in order Cimsa will lose some market share to Adana
to attain the maximum possible margin. Cimento in the Mediterranean region once the
latter's capacity investment completes in 2013.
"Profitable market share" score is medium
Cimsa had an ROE of 11% in 2010, which puts the Sustainable growth outlook is medium to

company at the middle position in this metric when strong

compared with other building material stocks in Cimsa's DuPont scoring is 4. While its gross profit
Turkey. With the highest weighted market share of is slightly lower compared to its peers its asset
the company among its peers under our coverage the turnover is better thanks to new and more efficient
company scores at the medium level (3). We expect plants. We think that Cimsa's sustainable growth
Cimsa's ROE to increase further with the start of outlook is strong given the big ticket projects

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planned in the Mediterranean region. Our only Weak TRY environment should be positive in
concern is fuel costs which could hamper the short term and negative in the long term for
profitability if pet coke prices increase by more Cimsa
than the average sales price of the company.
Similar to other cement companies, a weak TRY
Market fragmentation structure is medium to would boost Cimsa's exports in the short term.
weak However, in the long term, due to higher fuel and
The cement market in Turkey is heavily electricity costs, the effect would be negative.
fragmented with the top 8 players claiming 50%
Investment thesis
of the market and with about 20 mid-sized players
in the sector. Compared to EM and developed Our investment case for Cimsa has not changed
markets the Turkish market is much more from our previous report on the company (please
fragmented and is in need of consolidation. see Turkish top picks April 2011). We believe
However, due to the Competition Board's close that the company will continue to be the highest
supervision of the sector (due to past operating margin mainstream cement producer in
misdemeanours), and its strict limit of 30% Turkey due to strong demand in its hinterland and
maximum market share, we see little prospect of an efficient production network.
domestic consolidation. We also see little appetite Rating, valuation and risks
from international cement companies as Turkey's
We use a blend of DCF and multiples-based
cement market has limited appeal compared to
methodologies to value Cimsa.
some of the other EM markets such as Iraq, Syria
and some North Africa countries. Our DCF assumptions include 8.5% RFR and
5.5% ERP and a 0.75 beta, resulting in a WACC
Cimsa is located in the most fragmented region of
of 11.1%. We assume a 3% terminal growth rate.
Turkey in terms of market share. This creates the
Our DCF implies a valuation of TRY13.1 per
problem of irrational pricing by small competitors
share (from TRY13.2).
which challenges Cimsa's margins. However, thanks
to the company's superior intraplant network and We have compared Cimsa to domestic and
ability to scale production the competition's effect on international peers. The stock trades at USD125/t
its margins has been limited. EV/tonne vs a local peer average of USD100/t
and a global average of USD165/t. Applying the
Low interest rate environment should be
domestic peer average, this methodology yields a
positive for Cimsa
valuation of TRY7.6 per share (from TRY10.5).
A Low interest environment should have a
positive impact on Cimsa and other Turkish Cimsa is trading at a 31% discount to the peer set
cement companies in the short term as the low average of 11.6x on 2012e PE and a 47% discount
rate environment will boost mortgage to the 2012e peer group average EV/EBITDA of
affordability and public infrastructure 7.5x. Applying peer average multiples provides a
investments. Cimsa would also benefit from low valuation of TRY12.6 per share (from TRY14.7).
rates as it has a TRY260m debt position with 70% Taking the average of the three valuations we
of it being short term that would benefit from arrive at our new target price of TRY11.0, down
lower refinancing costs. from TRY12.8. This implies a 47% potential
return, which falls above our Neutral range of

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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 Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) ASP - Domestic (TRY/t) 80.3 94.1 99.7 105.7
Sales volume (m tonnes) 5.6 5.6 5.6 5.6
Revenue 708 738 775 811 Domestic market sales (m tonne 4.2 4.2 4.2 4.2
EBITDA 183 203 212 219 Export sales (m tonnes) 1.4 1.4 1.4 1.4
Depreciation & amortisation -37 -38 -41 -43
Operating profit/EBIT 146 165 171 176
Net interest -7 -20 -10 -4
PBT 130 153 164 222 Valuation data
HSBC PBT 130 153 164 222 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Taxation -27 -28 -30 -40
Net profit 103 126 135 182 EV/sales 1.2 1.1 1.1 1.0
HSBC net profit 103 126 135 182 EV/EBITDA 4.8 4.0 4.1 3.8
EV/IC 1.1 1.1 1.1 1.0
Cash flow summary (TRYm) PE* 9.8 8.0 7.5 5.6
Cash flow from operations 126 166 207 234 P/Book value 1.2 1.1 1.1 1.0
Capex -47 -101 -45 -30 FCF yield (%) 16.8 7.6 15.7 19.3
Cash flow from investment -47 -101 -45 -30 Dividend yield (%) 9.4 11.5 12.3 16.5
Dividends -95 -116 -124 -168 Note: * = Based on HSBC EPS (fully diluted)
Change in net debt 42 -154 50 -31
FCF equity 129 66 136 167
Issuer information
Balance sheet summary (TRYm)
Share price (TRY) 7.50 Target price (TRY) 11.00 Potent'l return (%) 46.7
Intangible fixed assets 137 137 137 137
Tangible fixed assets 500 442 503 507 Reuters (Equity) CIMSA.IS Bloomberg (Equity) CIMSA TI
Current assets 252 597 488 476 Market cap (USDm) 550 Market cap (TRYm) 1,013
Cash & others 11 349 228 204 Free float (%) 27 Enterprise value (TRYm) 813
Total assets 1,136 1,329 1,281 1,272 Country Turkey Sector CONSTRUCTION
Operating liabilities 95 93 97 86 MATERIALS
Gross debt 114 299 228 173 Analyst Levent Bayar Contact 90 212 376 46 17
Net debt 104 -50 0 -32
Shareholders funds 875 906 925 982
Invested capital 784 734 802 828 Price relative
13 13

Ratio, growth and per share analysis 11 11


9 9
Year to 12/2010a 12/2011e 12/2012e 12/2013e
7 7
Y-o-y % change
5 5
Revenue 15.2 4.1 5.0 4.6 3 3
EBITDA 2.6 11.3 4.5 2.9
Operating profit 0.1 13.3 3.8 2.8 1 1
PBT -2.1 17.6 7.1 34.7 2009 2010 2011 2012
HSBC EPS -4.5 21.9 7.1 34.7 Cimsa Rel to ISTANBUL COMP

Ratios (%) Source: HSBC

Revenue/IC (x) 1.0 1.0 1.0 1.0


ROIC 15.5 17.8 18.3 17.7 Note: price at close of 27 Sep 2011
ROE 11.4 14.1 14.7 19.1
ROA 9.6 11.8 11.2 14.6
EBITDA margin 25.8 27.5 27.4 27.0
Operating profit margin 20.5 22.3 22.1 21.7
EBITDA/net interest (x) 24.5 10.2 21.9 56.2
Net debt/equity 11.9 -5.5 0.0 -3.2
Net debt/EBITDA (x) 0.6 -0.2 0.0 -0.1
CF from operations/net debt 121.8
Per share data (TRY)
EPS Rep (fully diluted) 0.76 0.93 1.00 1.34
HSBC EPS (fully diluted) 0.76 0.93 1.00 1.34
DPS 0.70 0.86 0.92 1.24
Book value 6.48 6.71 6.85 7.27

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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

Overall competitive outlook is medium international markets we expect the company to Erol Hullu*
Analyst
Similar to its parent Anadolu Efes, CCI is also in maintain/increase its market share going forward. HSBC Yatrm Menkul
Deerler A..
an advantageous competition position. But unlike Sustainable growth outlook is strong +90 212 376 4616
Anadolu Efes its operations are less diversified erolhullu@hsbc.com.tr
CCI ranks well when its asset turnover and gross
and CCI generates c80% of its EBITDA from *Employed by a non-US affiliate
profit margin are considered. It has relatively high of HSBC Securities (USA) Inc,
Turkey. Since CCI has a c70% market share in asset turnover and a decent gross margin. Since it and is not registered/ qualified
pursuant to FINRA regulations
Turkey with very strong brand awareness in doesnt have the cost advantages that Anadolu
almost all of its products we think its market Efes has in Turkey, its gross margin is lower. Yet,
position will not be easily challenged. given its strong market position and respectable
"Profitable market share" score is strong asset turnover we think growth will be sustained
The companys ROE is similar to those of its in the longer term as well.
global bottling peers. Yet most of its peers operate Market fragmentation structure is medium to
in more diversified geographies than CCI and do strong
not command a combined market share of CCIs The company has a 70% market share in its core
magnitude. A dominant position in Turkey, market where the top three command 96% of the
growing presence in international markets and market. With almost no fragmentation in the
comparable ROE level means CCI ranks well on market, consolidation is unlikely and hence the
this metric. companys position is protected, in our view.
Market share momentum is medium to strong Low interest rate environment should be
Market share momentum is strong for CCI as the positive for CCI
company has proved in the past that it effectively The company had a 1.5x net debt/EBITDA as of
protects it market share, especially in Turkey. We 2010 year-end. Hence lower interest rates bode
think it unlikely that the company would lose well for the company in terms of lower interest
substantial market share in Turkey but nor do we expense. Also, in a low interest rate environment
expect it to further increase its share. In

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consumer confidence tends to improve which in agree that Turkish companies with solid track
turn improves the companys product mix. records and relatively better growth outlooks
should trade at a premium to their peers.
Weak TRY environment should be negative for
However, we believe the market has now fully
CCI
priced in the positives, with the stock trading at a
Company has a short FX position on its balance c60% premium on 2012e PE on our estimates.
sheet and most of the position is in USD. Also,
Valuation
the majority of its raw material costs are either
Following the depreciation in TRY against hard
linked to USD or are in USD, which negatively
currencies and the weaker guidance from the
affects the gross margin. Hence, we think the
company, we have revised down our forecasts.
recent depreciation in TRY will have negatively
We now expect TRY172m net income in 2011,
affected CCIs bottom line, especially in Q3 11.
down from TRY251m, mainly due to higher FX
Investment thesis losses and partially due to a lower EBITDA
Even though we are positive on the long-term margin, as a result of higher cost pressures and
growth potential of CCI and the markets it deterioration in the product mix. We expect a
operates in we think the short-term outlook is recovery in 2012 on potentially lower cost
growing dimmer. Firstly, as outlined above, the pressures and a stronger TRY. Still, our net
company has a short FX position and is also income for 2012 also falls by 6% to TRY276m.
exposed to higher raw material costs since its raw
Forecast changes
material costs (PET, sugar, aluminium) are either
______ 2011e _______ _____ 2012e_______
linked to USD or based in USD. Given that TRY TRYm Old New Old New
depreciated by 14% in Q3 q-o-q we expect a poor Net sales 3,336 3,357 3,865 3,739
Q3 performance from the company. The company EBIT 339 307 408 355
EBITDA 523 491 629 570
states a 10% depreciation of TRY/USD rate EBITDA margin 15.7% 14.6% 16.3% 15.2%
Net profit 215 172 295 276
results in a TRY55m FX loss. Thus the impact of
Source: HSBC estimates
the currency depreciation alone will offset almost
all of the 1H 11 net profit of TRY76m.
We value the company using a DCF (50%
Furthermore, the consumer confidence index weight), including a RFR of 8.5% in TRY terms,
prepared by the CBRT has been showing signs of a WACC of 10.7%, ERP of 5.5% and a 0.70 beta.
weakness recently. Although an early indicator, if This yields a fair value of TRY29.9 per share
the current downward trend persists wed expect (from TRY35.0). We also use an average of
CCIs product mix to be hurt as consumers will implied equity value (50% weight) using PE
likely trade down. During the downbeat market of (13.5x 2012e, 12.2x 2013e) and EV/EBITDA
2009 the companys EBITDA margin contracted (7.1x 2012, 6.2x 2013) multiples implied by peer
by 2.5pp y-o-y. average leading to a value of TRY12.7 per share
(from TRY13.6). This leads to our new target
Rating, valuation and risks price of TRY21.8 (from TRY24.3). Our new
Historically, CCI traded at a discount to its peers forecasts are the main reason behind our lower
offering similar growth potential owing to it target price.
carrying higher EM exposure. This trend has
Under our research model, the Neutral band for non-
changed since mid 2009 as EM markets have
volatile Turkish stocks is 8.5% to 13.5%. As our
shown stonger growth than DM markets. We

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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 Underweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Sales volume-Turkey 494 554 608 668
Sales volume-International 171 202 233 267
Revenue 2,753 3,357 3,739 4,289 Opex/sales % 27.2 26.6 26.6 27.1
EBITDA 445 491 570 683 USD/TRY average 1.477 1.770 1.700 1.700
Depreciation & amortisation -163 -184 -215 -249 CPI y-o-y 8.6 5.7 7.4 7.0
Operating profit/EBIT 281 307 355 434
Net interest -9 -13 -22 -25
PBT 255 222 351 409
HSBC PBT 255 222 351 409 Valuation data
Taxation -57 -50 -74 -86 Year to 12/2010a 12/2011e 12/2012e 12/2013e
Net profit 198 172 276 322
HSBC net profit 198 172 276 322 EV/sales 2.4 2.0 1.8 1.6
EV/EBITDA 14.8 13.8 11.8 9.8
Cash flow summary (TRYm) EV/IC 3.2 2.9 2.7 2.4
Cash flow from operations 304 345 426 573 PE* 29.9 34.3 21.4 18.3
Capex -160 -403 -336 -407 P/Book value 4.2 3.9 3.4 3.0
Cash flow from investment -184 -410 -363 -467 FCF yield (%) 2.4 -1.0 1.5 2.8
Dividends -50 -70 -52 -83 Dividend yield (%) 0.8 1.2 0.9 1.4
Change in net debt -57 219 -44 -16 Note: * = Based on HSBC EPS (fully diluted)
FCF equity 144 -57 89 165
Balance sheet summary (TRYm)
Issuer information
Intangible fixed assets 459 448 437 427 Share price (TRY) 23.20 Target price (TRY) 21.80 Potent'l return (%) -6.0
Tangible fixed assets 1,203 1,449 1,589 1,766
Current assets 1,294 1,341 1,439 1,640 Reuters (Equity) CCOLA.IS Bloomberg (Equity) CCOLA TI
Cash & others 599 514 522 624 Market cap (USDm) 3,201 Market cap (TRYm) 5,901
Total assets 3,014 3,300 3,533 3,907 Free float (%) 25 Enterprise value (TRYm) 6767
Operating liabilities 332 377 421 470 Country Turkey Sector BEVERAGES
Gross debt 1,246 1,380 1,344 1,429 Analyst Erol Hullu Contact 90 212 376 4616
Net debt 647 865 822 805
Shareholders funds 1,417 1,520 1,744 1,983
Invested capital 2,025 2,346 2,522 2,739 Price relative
27 27

Ratio, growth and per share analysis 22 22

Year to 12/2010a 12/2011e 12/2012e 12/2013e 17 17

Y-o-y % change 12 12

Revenue 14.4 21.9 11.4 14.7 7 7


EBITDA 30.8 10.3 16.1 20.0
Operating profit 35.5 9.1 15.6 22.3 2 2
PBT 18.5 -12.8 57.6 16.7 2009 2010 2011 2012
HSBC EPS 16.6 -12.8 60.2 16.7 Coca-Cola Icecek Rel to ISTANBUL COMP

Ratios (%) Source: HSBC

Revenue/IC (x) 1.4 1.5 1.5 1.6


ROIC 11.0 10.9 11.5 13.0 Note: price at close of 27 Sep 2011
ROE 14.8 11.7 16.9 17.3
ROA 7.0 5.8 8.6 9.2
EBITDA margin 16.1 14.6 15.2 15.9
Operating profit margin 10.2 9.1 9.5 10.1
EBITDA/net interest (x) 48.7 37.6 25.9 27.5
Net debt/equity 45.1 56.3 46.6 40.2
Net debt/EBITDA (x) 1.5 1.8 1.4 1.2
CF from operations/net debt 47.0 39.9 51.8 71.1
Per share data (TRY)
EPS Rep (fully diluted) 0.78 0.68 1.08 1.27
HSBC EPS (fully diluted) 0.78 0.68 1.08 1.27
DPS 0.20 0.28 0.20 0.33
Book value 5.57 5.97 6.86 7.80

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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

Overall competitive outlook is medium over the last three years, we expect margins to return Bulent Yurdagul*
Analyst
A strong position in the ad market through its to normal over the next three years. HSBC Yatrm Menkul
Deerler A..
subsidiary Dogan Yayin and its large net cash Market fragmentation structure is strong +90 212 376 4612
position support Dogan Holdings competitive bulentyurdagul@hsbc.com.tr
The Turkish ad market is dominated by a very
position and investment theme. However, slowing *Employed by a non-US affiliate
small number of players and Dogan media group of HSBC Securities (USA) Inc,
economic growth is a risk to its profitability in the has maintained its leading position in all forms of and is not registered/ qualified
pursuant to FINRA regulations
short term. media. We see limited chances of consolidation.
"Profitable market share" score is strong However, the entry of foreign players into the
Dogan Holdings RoE has been volatile over the market cannot be ruled out.
last three years due to lower earnings from media Low interest rate environment is positive
(as a result of tax penalties) and the sale of its oil Advertising spend is mainly driven by the real
& gas operations last year as well as the weaker estate, automotive and retail sectors, which are
TRY. We expect higher RoE going forward as sensitive to interest rate policy.
worries over the potential tax fines are over now
and the media segment should register higher Weak TRY environment is negative
margins in the long term. With a USD1.0bn short position on the balance
sheet, FX losses become a threat to bottom-line
Market share momentum is weak
profitability (a 10% depreciation leads to
Dogan Holdings market share in the broadcasting TRY101m of FX losses).
segment has been maintained. However, in print
media it has lost market share during the last five Investment thesis
years due to increased competition. Dogan Holding had a net cash position of
TRY2.0bn at the end of H1 2011. Following the
Sustainable growth outlook is strong
Petrol Ofisi stake sale, Dogan Holding is
Dogans strong margins, higher asset turnover and
evaluating options to enter new businesses as well
higher financial leverage imply strong sustainable as other acquisition opportunities. Other than
growth potential. Though margins have been volatile

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Dogan Holding NAV table


TRYm Ticker Direct Stake Target price Current Value Value of Stake
Dogan yayin Holding DYHOL.IS 75% 0.77 1,540 1,148
Hurriyet HURGZ.IS 11% 1.5 828 92
Other listed 123 50
Listed Companies 1,289
Unlisted Companies 0

Total Value from participations 1,289


Net (Debt) / Cash 1,900
Total NAV 3,189
Total NAV per share (TRY) 1.30
Holding Discount 40%
Target Price from NAV 0.78
Source: HSBC estimates

expansion plans, the investment theme is mostly Risks


linked to performance of the media operations as The groups strategy of utilising its large cash
well as the future of recent investments in the position, its relations with the government and the
energy business. sale process of its media assets should trigger the
next share price move either to the up or
Rating, valuation and risks
downside. Any recovery in the macroeconomic
As a result of our forecast downgrades for Dogan
environment fuelling ad market growth would be
Yayin and tax penalty provisions in H1, together
an upside risk for our valuation. In the same way,
with expected higher FX losses, we estimate a net
a downturn would hamper market growth and be a
loss of TRY679m in 2011 (excluding possible
downside risk to our valuation.
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.

Dogan Holding: HSBC forecast changes


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

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Financials & valuation: Dogan Holding Neutral (V)


Financial statements Valuation data
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) EV/sales 0.3 0.4 0.3 0.2
EV/EBITDA 3.0 3.7 2.9 2.1
Revenue 2,850 2,992 3,440 3,899 EV/IC 0.3 0.5 0.4 0.4
EBITDA 321 303 352 419 PE* 2.4 34.0 13.5
Depreciation & amortisation -402 -267 -266 -267
P/Book value 0.4 0.4 0.4 0.4
Operating profit/EBIT -81 36 86 152
FCF yield (%) -21.2 22.2 14.3 18.4
Net interest -25 84 48 92 Dividend yield (%) 0.0 0.0 0.6 2.2
PBT 682 -847 73 184
HSBC PBT 682 -847 73 184 Note: * = Based on HSBC EPS (fully diluted)
Taxation -75 -137 -15 -37
Net profit 656 -728 47 118
HSBC net profit 656 -728 47 118 Issuer information

Cash flow summary (TRYm) Share price (TRY) 0.65 Target price (TRY) 0.78 Potent'l tot rtn (%) 20.2

Cash flow from operations 47 372 241 285 Reuters (Equity) DOHOL.IS Bloomberg (Equity) DOHOL TI
Capex -544 -69 -76 -82 Market cap (USDm) 864 Market cap (TRYm) 1,592
Cash flow from investment 1,298 -251 -258 -264 Free float (%) 34 Enterprise value (TRYm) 1133
Dividends 0 0 -9 -35 Country Turkey Sector Conglomerates
Change in net debt -1,824 454 -113 -169 Analyst Bulent Yurdagul Contact 90 212 376 46 12
FCF equity -468 428 274 356
Balance sheet summary (TRYm) Price relative
Intangible fixed assets 1,756 1,696 1,643 1,597 2.5 2.5
Tangible fixed assets 929 868 808 747
Current assets 4,780 3,927 4,108 4,346 2 2
Cash & others 3,663 3,209 3,322 3,491
1.5 1.5
Total assets 8,033 7,834 7,915 8,059
Operating liabilities 972 819 852 884 1 1
Gross debt 2,415 2,415 2,415 2,415
Net debt -1,247 -793 -906 -1,075 0.5 0.5
Shareholders funds 3,865 4,073 4,111 4,193
0 0
Invested capital 2,831 2,463 2,386 2,315
2009 2010 2011 2012
Dogan Holding Rel to ISTANBUL COMP

Ratio, growth and per share analysis Source: HSBC

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


Note: price at close of 27 Sep 2011
Y-o-y % change
Revenue 6.1 4.9 15.0 13.3
EBITDA 83.9 -5.3 16.0 19.2
Operating profit 137.2 77.6
PBT -224.2 150.9
HSBC EPS -210.9 150.9
Ratios (%)
Revenue/IC (x) 0.8 1.1 1.4 1.7
ROIC -1.9 1.6 2.8 5.2
ROE 17.9 -18.3 1.1 2.8
ROA 10.3 -10.7 1.9 3.0
EBITDA margin 11.2 10.1 10.2 10.8
Operating profit margin -2.8 1.2 2.5 3.9
EBITDA/net interest (x) 13.0
Net debt/equity -27.0 -17.3 -19.6 -22.7
Net debt/EBITDA (x) -3.9 -2.6 -2.6 -2.6
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 0.27 -0.30 0.02 0.05
HSBC EPS (fully diluted) 0.27 -0.30 0.02 0.05
DPS 0.00 0.00 0.00 0.01
Book value 1.58 1.66 1.68 1.71

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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)

Overall competitive outlook is medium Market share momentum is medium to weak Bulent Yurdagul*
Analyst
A strong share of the growing Turkish ad market Dogan Yayin has maintained its market share in HSBC Yatrm Menkul
Deerler A..
and the conclusion of long-running tax issues the broadcasting segment, however in print media +90 212 376 4612
it has lost market share over the last five years due bulentyurdagul@hsbc.com.tr
support Dogan Yayins competitive position.
to increased competition. *Employed by a non-US affiliate
However, slowing economic growth and of HSBC Securities (USA) Inc,
weakness in TRY are possible risks to its and is not registered/ qualified
Sustainable growth outlook is strong pursuant to FINRA regulations
profitability. While it benefits from a low interest Dogan Yayins strong margins, higher asset
rate policy, USD-exposed debt means weaker turnover and higher financial leverage imply
TRY is negative for Dogan Yayin. The recently strong sustainable growth potential. Though
completed rights issue has provided much needed margins have declined in the last three to four
cash on the balance sheet. years, we expect margins to return to normal over
"Profitable market share" score is strong next three years.
Dogan Yayin is the leader in broadcasting and Market fragmentation structure is strong
print media in Turkey with brands like Hurriyet, The Turkish ad market is dominated by a very
Star TV and Kanal D. Dogan Yayins RoE has small number of players and Dogan media group
been negative over the last three years due to has maintained its leading position in all forms of
lower earnings from the broadcasting and retail media. We see little opportunity for consolidation
segments, large tax fine provisions and weaker as media companies are held by big business
TRY. We expect a higher RoE going forward as groups. However, entry of foreign players in the
the tax fines are over now and the broadcasting market cannot be ruled out.
segment is registering higher margins. However,
we expect market share to decline in the long term Low interest rate environment is positive

as new players enter the market. 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

130
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USD305m, which should benefit from lower interest Rating, valuation and risks
expenses when interest rates fall. We forecast a net loss of TRY1,074m in 2011,
Weak TRY environment is negative mainly because of tax provisions of TRY924m in
Due to short positions worth USD615m on the H1 2011 and higher FX losses of TRY137m.
balance sheet, FX losses become a threat to However, we raise 2012e and 2013e net profit by
bottom-line profitability (a 10% depreciation 22% and 12%, respectively, on improved margin
leads to TRY106m of FX losses according to performance from the broadcasting segment and
audit reports). strong revenue growth.

Investment thesis We use a DCF methodology to arrive at our new


12-month target price of TRY0.77 (TRY1.15
Turkeys domestic ad market continued its upward
earlier). The tax fine has been finally reduced to
trend in H1 2011 with a y-o-y increase of 19%.
TRY988m. In our valuation, we assume the cash
Dogan Yayins broadcasting segment outperformed,
outflow will be made in three equal annual
with increasing margins driven by strong ad
instalments of TRY329m starting in 2011. We
revenues offsetting lower publishing margins.
keep our WACC assumption unchanged at 12.4%,
The large tax fine imposed on Dogan Yayin and the cost of equity at 14.1% (with an 8.5% risk-free
related lawsuits and settlements have been major rate, 1.02 beta and 3% (was 5%, lowered on a
negative catalysts for a long time. However, with the poorer growth outlook for the media sector) long-
final hearing and liability fixed at TRY988m, to be term growth rate. Our new target price of
paid over three years, uncertainty over the legal issue TRY0.77 implies a potential return of 16%, which
is now over, which should also mean reduced is within the Neutral band of 3.5%-23.5% for
tension with the government. volatile Turkish stocks. Hence, we maintain our
Neutral (V) rating on the stock.
Dogan Yayin Holding sold its Milliyet and Vatan
titles to Demiroren & Karacan Group in May Risks
2011 and raised TRY1bn in a fresh capital issue. Sale of its media assets, macroeconomic
This brought much-needed cash onto the balance developments and the groups relationship with
sheet and the company has announced that it is the government are the key potential risks, both
seeking opportunities for more assets to be sold. downside and upside, to our valuation.

Dogan Yayin Holding: HSBC forecast changes


(TRYm) _____________ New _______________ ______________ Old _______________ ____________Change_____________
2011e 2012e 2013e 2011e 2012e 2013e 2011e 2012e 2013e
Sales 2,717 3,139 3,584 2,914 3,301 3,686 -7% -5% -3%
EBITDA 294 363 435 296 353 385 -1% 3% 13%
Net profit -1,163 47 112 -326 58 98 -256% -19% 14%
Source: HSBC estimates

131
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Financials & valuation: Dogan Yayin Holding Neutral (V)


Financial statements Key forecast drivers

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

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

2 2

Ratio, growth and per share analysis 1.5 1.5

Year to 12/2010a 12/2011e 12/2012e 12/2013e 1 1

Y-o-y % change 0.5 0.5

Revenue 7.6 3.7 15.5 14.2 0 0


EBITDA 282.6 28.3 23.5 19.7 2009 2010 2011 2012
Operating profit 100.9 46.1 Dogan Yayin Holding Rel to ISTANBUL COMP
PBT 94.7
Source: HSBC
HSBC EPS 139.4
Ratios (%)
Note: price at close of 27 Sep 2011
Revenue/IC (x) 1.0 1.1 1.3 1.5
ROIC 0.4 4.0 5.3 7.7
ROE -27.7 -99.4 3.0 6.8
ROA -4.3 -25.9 2.9 4.5
EBITDA margin 8.7 10.8 11.6 12.1
Operating profit margin -4.9 2.8 4.9 6.3
EBITDA/net interest (x) 3.7 4.6 10.1 21.4
Net debt/equity 119.6 28.7 22.1 11.7
Net debt/EBITDA (x) 6.5 2.0 1.3 0.6
CF from operations/net debt 18.7 62.3 131.7
Per share data (TRY)
EPS Rep (fully diluted) -0.12 -0.58 0.02 0.06
HSBC EPS (fully diluted) -0.12 -0.58 0.02 0.06
DPS 0.00 0.00 0.00 0.00
Book value 0.79 1.55 1.60 1.71

132
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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)

Cenk Orcan*
Overall competitive outlook is medium Market share momentum is medium to strong
Analyst
Turkeys leading vehicle importer Dogus With the help of the strong quality perception of HSBC Yatrm Menkul
Deerler A..
Otomotiv (DOAS) benefited strongly from the VW Group brands in Turkey and the strong retail +90 212 376 4614
franchise, DOAS aims to increase its market share cenkorcan@hsbc.com.tr
surge in domestic vehicle demand in 2010 and
in Turkey towards VWs market share level in *Employed by a non-US affiliate
2011 YTD. DOASs competitive position of HSBC Securities (USA) Inc,
improved notably in this period thanks to 1) Europe ie 18%. We see a market share of 15% as and is not registered/ qualified
pursuant to FINRA regulations
support from its OEM Volkswagen in the pricing being achievable in the next 3-4 years provided
of vehicles (i.e. VW bearing the burden of price that i) the currency environment is benign and ii)
cuts, especially for LCVs), 2) better availability of support from VW in terms of pricing and
vehicles, 3) a wider spectrum of vehicle versions availability is as strong as in the past two years.
as demanded by consumers (such as small Sustainable growth outlook is strong
engines, automatics and diesel engines) and 4) DOASs almost full exposure to the Turkish
strong TRY (for most of 2010). DOASs strong market makes it both a volatile and attractive
distribution network in Turkey has also been an business in terms of growth. We believe that the
important driver behind the companys success. long-term growth prospects are strong with very
Going forward, weak TRY reduces the low vehicle penetration in Turkey (140 vehicles
competitiveness of DOAS against local per 1000 people, including LCVs). DOAS stands
manufacturers but we believe OEM support in out as a strong beneficiary.
terms of pricing and product feed will help absorb
some of the pressure from slowing demand in Market fragmentation structure is medium to

Turkey and weak TRY. weak


The Turkish vehicle market is highly competitive
"Profitable market share" score is strong with 60 global brands operating. Therefore,
DOASs market share in light vehicles declined notwithstanding, the fact that the top 3 players
from 12% to 8.9% in 2009 but recovered back to account for c45% market share, the industry is
12.6% as of end of Sep-2011 with surging profits fragmented.
in 2010 and H1 2011.

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Low interest rate environment is positive operation and stake value in parent Dogus
Low interest rates are supportive of DOASs Holding (and hence in Garanti Bank).
operations through access to cheaper financing by
Dogus Otomotiv - Forecast changes
consumers.
TRYm 2011e 2011e 2012e 2012e 2013e 2013e
old new old new old new
Weak TRY has a negative impact
Unit sales (000) 100 105 95 98 101 104
A weak TRY affects the business negatively Revenue 4,276 4,386 4,294 4,339 4,676 4,726
through re-pricing pressure on imported vehicles EBITDA 210 229 189 200 206 217
margin 4.9% 5.8% 4.4% 4.6% 4.4% 4.6%
(although 85% are sold in TRY and 15% in EUR). Net profit (adj.) 153 161 119 144 161 167
A mitigating factor is the sharing of the increased Source: Company, HSBC estimates

cost with the OEM.


Despite the slight increase in our 2011-13 forecasts,
Investment thesis we arrive at a lower target price of TRY5.0 (down
New vehicle sales comprise c90% of DOASs from TYRY5.4) due to 1) more cautious long-term
revenues and c65% of EBITDA (the rest comes margin assumptions, 2) an adjustment of the value of
mostly from non-cyclical parts sales). Passenger the c1% indirect stake in Garanti Bank (via the 3.8%
cars (PC) comprise c75% of the company's total Dogus Holding stake) since our last update (the bank
unit sales (vs. 27% for Tofas excluding imports, is trading at a lower market price now). Our DCF
zero for FROTO). Accordingly, DOAS is more valuation uses the following parameters: 8.5% RFR,
vulnerable to a slow-down, particularly in PC 5.5% ERP, 1.00 beta, 3% terminal growth and
demand. Market share gains thanks to improved 14.0% CoE.
model variety and support from VW should
DOAS Components of the target price
provide some cushion against demand weakness
TRY/share old new chg.
but margins, we believe, should reflect tougher
Core business 2.49 2.12 -15%
competition (and probably a weaker TRY impact Vehicle inspection 1.40 1.42 1%
Dogus Holding stake 1.40 1.35 -4%
starting from H2 2011). We therefore expect VDF 0.11 0.11 0%
lower EPS in 2012 compared to 2011. Total 5.40 5.00 -8%
Source: HSBC estimates
Rating, valuation and risks
We have revised our forecasts for DOAS as in the Under our research methodology, the hurdle rate for
table below. We factor in the weaker TRY volatile Turkish stocks is 3.5%-23.5%. Since our
assumptions of our currency team, the unit sales target price implies a 21% potential return, we
performance so far in Q3 and guidance from the maintain our Neutral rating on the stock, though we
company. As a result, we expect slightly higher add a volatility (V) flag in recognition of the stock's
revenue, margins and profitability than before (for historical volatility having increased.
2011-13) but continue to project lower net profit
Risks
in 2012 due to the expected slow-down in the
Upside risks are i) stronger-than-expected Turkish
Turkish vehicle market.
vehicle demand, ii) stronger market share gains than
We continue to value DOAS on a SOTP (sum-of- we assume, iii) euro weakness (mild declines rather
the-parts) basis, with the use of DCF for core than sharp falls) and iv) a stronger price tag than our
operations. Of our sum-of-parts valuation, nearly fair value for the vehicle inspection business (with
half comes from vehicle distribution and retail DOAS having announced the planned sale of its
business and the rest from vehicle inspection stake in the Istanbul region). The key downside risks
would be the opposite of these.

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Financials & valuation: Dogus Otomotiv Neutral (V)


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Domestic vehicle demand gr. 37% 8% -5% 5%
DOAS unit vehicles sales gr. 75% 27% -6% 6%
Revenue 3,428 4,386 4,339 4,726 Turkish GDP growth 9.0% 7.0% 3.0% 5.1%
EBITDA 222 229 200 217 EUR/TRY year average 1.99 2.52 2.56 2.65
Depreciation & amortisation -21 -26 -26 -28 EUR/TRY year end 2.05 2.52 2.61 2.69
Operating profit/EBIT 202 203 174 189 EUR/USD year average 1.33 1.38 1.40 1.40
Net interest -31 -12 -10 -18
PBT 193 201 181 209
HSBC PBT 205 227 181 209
Taxation -43 -40 -36 -42 Valuation data
Net profit 149 161 144 167 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 161 186 144 167
EV/sales 0.3 0.2 0.2 0.2
Cash flow summary (TRYm) EV/EBITDA 4.0 4.1 4.6 4.2
EV/IC 1.7 1.3 1.1 1.0
Cash flow from operations 116 70 81 63 PE* 5.8 5.1 6.5 5.6
Capex -30 -123 -28 -29 P/Book value 1.3 1.0 0.9 0.9
Cash flow from investment -30 -123 -28 -29 FCF yield (%) 14.9 -9.2 9.0 5.8
Dividends 0 -27 -48 -58 Dividend yield (%) 0.0 2.9 3.3 6.4
Change in net debt -80 43 -21 -14
Note: * = Based on HSBC EPS (fully diluted)
FCF equity 86 -53 52 34
Balance sheet summary (TRYm)
Issuer information
Intangible fixed assets 0 0 0 0
Tangible fixed assets 269 366 368 369 Share price (TRY) 4.13 Target price (TRY) 5.00 Potent'l return (%) 21.0
Current assets 713 992 1,087 1,248 Reuters (Equity) DOAS.IS Bloomberg (Equity) DOAS TI
Cash & others 28 74 111 136 Market cap (USDm) 493 Market cap (TRYm) 909
Total assets 1,499 1,876 1,972 2,134 Free float (%) 35 Enterprise value (TRYm) 910
Operating liabilities 413 538 523 564 Country Turkey Sector Autos
Gross debt 349 438 453 465 Analyst Cenk Orcan Contact 90 212 376 46 14
Net debt 321 364 342 328
Shareholders funds 736 898 994 1,103
Invested capital 541 746 821 916
Price relative
8 8
Ratio, growth and per share analysis 7 7
6 6
Year to 12/2010a 12/2011e 12/2012e 12/2013e 5 5
Y-o-y % change 4 4
3 3
Revenue 61.0 27.9 -1.1 8.9 2 2
EBITDA 131.5 3.1 -13.0 8.9 1 1
Operating profit 160.1 0.6 -14.5 8.9 0 0
PBT 365.9 4.5 -10.2 15.5 2009 2010 2011 2012
HSBC EPS 163.9 15.5 -22.5 15.5 Dogus Otomotiv Rel to ISTANBUL COMP
Ratios (%)
Source: HSBC
Revenue/IC (x) 6.6 6.8 5.5 5.4
ROIC 30.3 25.2 17.7 17.4
Note: price at close of 27 Sep 2011
ROE 25.4 22.8 15.3 15.9
ROA 13.2 10.7 8.8 9.6
EBITDA margin 6.5 5.2 4.6 4.6
Operating profit margin 5.9 4.6 4.0 4.0
EBITDA/net interest (x) 7.1 19.1 20.0 12.0
Net debt/equity 43.6 40.5 34.4 29.8
Net debt/EBITDA (x) 1.4 1.6 1.7 1.5
CF from operations/net debt 36.2 19.2 23.6 19.2
Per share data (TRY)
EPS Rep (fully diluted) 0.68 0.73 0.66 0.76
HSBC EPS (fully diluted) 0.73 0.85 0.66 0.76
DPS 0.00 0.12 0.14 0.27
Book value 3.34 4.08 4.52 5.01

135
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5 October 2011

Emlak Konut REIT


Emlak Konut REITs overall competitive outlook is strong among
its peers and other industrials in Turkey
The company offers strong growth in a supportive regulatory
environment at a cheap price
Target price kept at TRY3.7, maintain Overweight (V)

Overall competitive outlook is strong a decrease in RoE of the company. Although Levent Bayar*
Analyst
Emlak Konut REIT is strong on our scorecard for Emlak Konut REITs RoE is strong, it has very HSBC Yatrm Menkul
limited market share due to Turkeys fragmented Deerler A..
competitive analysis thanks to its unique position +90 212 376 4617
in the Turkish real estate market, where it is real estate market. We do not expect to see a leventbayar@hsbc.com.tr

supplied by the State with cheap land, utilises consolidation taking place if the regulator does *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
third-party developers to minimise risk and has not take action against unregistered developers. and is not registered/ qualified
pursuant to FINRA regulations
the biggest market share in its segment. Market share momentum is strong
The Turkish real estate market is highly Emlak Konut REITs market share momentum is
fragmented due to a fragmented landbank strong as the company has posted impressive sales
resulting from inheritance laws splitting growth in the last five years (a CAGR of 14% from
landholdings, and weak legal enforcement against 2005-2010) versus Turkeys growth in the Turkish
unregistered construction activity. If the regulator real estate sector as a whole of 2% per annum.
started to follow the sector closely it would push Since Emlak Konut REIT has a strong brand
small players out of the market and lead to name and its sub contractors are also happy with
consolidation. Yet in the short term, we do not the companys sales performance we believe there
expect the competitive environment to change will be more developers attracted to this the sub
significantly. Hence we do not expect to see contracting business model and Emlak Konut
Emlak Konut REITs competitive outlook change. REITs market share will continue to grow faster
"Profitable market share" score is medium to than the sector.
strong Sustainable growth outlook is strong
Emlak Konut REIT had an adjusted RoE of 10% For the real estate companies, we have applied a
in 2010, which is well above that of its Turkish slightly different DuPont analysis and have
peers and most of the EM peers as well. The compared cap yield ( = Gross Profit / (5 *
reason for this is access to cheaper land via its Revenues) ) instead of gross profit margin for the
parent TOKI (a State-run mass house builder). companies. On this scale Emlak Konut REITs
Since the business model is not subject to change
for the foreseeable future we do not expect to see

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score is 5 and it is placed well above its domestic its costs in TRY. Hence a weak TRY environment
and EM peers. has no material impact on the company.

The company gains the highest turnover from its Investment thesis
assets as it operates with fixed-return agreements. Emlak Konut REIT is the best vehicle with which
In addition the company has a high cap yield from to play Turkeys mainstream residential growth
its unit sales compared to all of its peers in the story as the company has easy access to a
local market. The reason for this is that the landbank, which lowers costs, has a solid business
company has higher pricing power in the market model utilising third party developers which
thanks to its brand name. limits operational risks and a strong brand name
Market fragmentation structure is medium which gives the company pricing power.
The real estate market is highly fragmented in Emlak Konut REIT currently trades at a 3%
Turkey, as the top 8 players constitute only 20% premium to its NAV versus the historic average of
industry. The key reasons for this are the division a 17% premium and we expect to see 20% growth
of the landbank through inheritance and a high in NAV in the next three quarters with the
number of unregistered developers because of the addition of new projects. This makes Emlak
lack of supervision over the market. Konut REIT a compelling story with a cheap price
We believe the only route to consolidation is through tag, in our opinion.
the tighter application of regulations which would Emlak Konut REIT: HSBC forecast changes
drive small players out of the industry. 2010a ____ 2011e______ ____2012e ____
(TRYm) Actual Old New Chg(%) Old New Chg(%)
Emlak Konut REIT remains resilient against Revenues 1498 894 811 -9% 1260 1297 3%
competition due to its strong brand name, fixed- EBITDA 653 393 307 -22% 457 557 22%
Net profit 470 376 270 -28% 459 559 22%
return contracts and ability to utilise its
Source: HSBC estimates, company data
competitors as developers on its own projects via
revenue sharing agreements. We have changed our 2011 and 2012 P&L
Low interest rate environment should be projections as the company has delayed some
positive portion of deliveries from 2011 to 2012. Since our
A low interest environment should have a positive sales and related cash flow estimations have not
impact on the real estate sector as a whole and so changed, these revisions have no effect on our
on Emlak Konut REIT as low rates will boost valuation of the company.
mortgage affordability. Rating, valuation and risks
Since Emlak Konut REIT does not utilise debt for We use a DCF-based valuation for Emlak Konut
construction activities the company would not be REIT. Our DCF parameters are: 5.5% equity risk,
affected by a low rate environment from a premium, 8.5% risk-free rate, 8.5% RFR, 5.5% ERP,
financing perspective. 1 beta and 5% terminal growth rate, leading to a
12.4% WACC. Our project-based, DCF-driven
Weak TRY environment is neutral
valuation approach to Emlak Konut REIT implies a
Emlak Konut REIT has very few projects that it has
target price of TRY3.70 per share (unchanged), and
sold on USD or EUR terms. In addition, the
a 60% potential return. That is above the 3.5% to
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 Overweight (V)


Financial statements Key forecast drivers

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

Profit & loss summary (TRYm) Housing loan rates (%, 5yr) 11.45 11.91 11.87 11.87
NAV (TRYm) 5,798 6,551 8,919 9,640
Revenue 1,498 811 1,297 2,239 Unit sales (annual) 7,200 10,000 10,000 8,580
EBITDA 653 307 557 680
Depreciation & amortisation 0 0 0 0
Operating profit/EBIT 653 307 557 680
Valuation data
Net interest -183 -37 2 -60
PBT 470 270 559 620 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC PBT 470 270 559 620
Taxation 0 0 0 0 EV/sales 3.5 6.4 3.5 1.8
Net profit 470 270 559 620 EV/EBITDA 8.0 16.9 8.1 6.0
HSBC net profit 470 270 559 620 EV/IC 1.7 1.7 1.6 1.4
PE* 12.3 21.4 10.3 9.3
Cash flow summary (TRYm) P/Book value 1.6 1.6 1.4 1.3
Cash flow from operations 1,037 508 1,101 860 FCF yield (%) 8.1 4.4 8.7 9.2
Capex 0 0 0 0 Dividend yield (%) 0.0 2.4 1.4 3.4
Cash flow from investment 0 0 0 0 Note: * = Based on HSBC EPS (fully diluted)
Dividends 0 -141 -81 -196
Change in net debt -1,372 -381 -993 -700
FCF equity 470 270 559 620 Issuer information
Balance sheet summary (TRYm) Share price (TRY) 2.31 Target price (TRY) 3.70 Potent'l tot rtn (%) 60.4
Intangible fixed assets 0 0 0 0 Reuters (Equity) EKGYO.IS Bloomberg (Equity) EKGYO TI
Tangible fixed assets 6 6 6 6 Market cap (USDm) 3,133 Market cap (TRYm) 5,775
Current assets 7,110 7,227 9,021 10,672 Free float (%) 25 Enterprise value (TRYm) 5181
Cash & others 1,813 2,072 2,965 3,564 Country Turkey Sector Real Estate
Total assets 7,115 6,889 8,357 9,728 Analyst Levent Bayar Contact 90 212 376 46 17
Operating liabilities 2,243 2,124 3,215 4,261
Gross debt 1,256 1,134 1,034 934
Net debt -558 -938 -1,931 -2,630 Price relative
Shareholders funds 3,615 3,630 4,108 4,533
Invested capital 3,059 3,036 2,847 2,852 4.5 4.5
4 4
3.5 3.5
Ratio, growth and per share analysis 3 3
2.5 2.5
Year to 12/2010a 12/2011e 12/2012e 12/2013e
2 2
Y-o-y % change 1.5 1.5

Revenue 73.2 -45.9 60.1 72.6 1 1


EBITDA 39.6 -53.1 81.6 22.1 2009 2010 2011 2012
Operating profit 39.5 -53.1 81.6 22.1 Emlak Konut REIT Rel to ISTANBUL COMP
PBT 5.3 -42.6 107.3 10.9
Source: HSBC
HSBC EPS 5.3 -42.6 107.3 10.9
Ratios (%)
Note: price at close of 27 Sep 2011
Revenue/IC (x) 0.5 0.3 0.4 0.8
ROIC 21.9 10.1 18.9 23.9
ROE 16.5 7.4 14.4 14.3
ROA 10.7 5.3 8.6 8.0
EBITDA margin 43.6 37.8 42.9 30.4
Operating profit margin 43.6 37.8 42.9 30.4
EBITDA/net interest (x) 3.6 8.3 11.3
Net debt/equity -15.4 -25.8 -47.0 -58.0
Net debt/EBITDA (x) -0.9 -3.1 -3.5 -3.9
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 0.19 0.11 0.22 0.25
HSBC EPS (fully diluted) 0.19 0.11 0.22 0.25
DPS 0.00 0.06 0.03 0.08
Book value 1.45 1.45 1.64 1.81

139
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is strong margins. These provide Enka with a high ROE
Enka lnsaats competitive power comes from i) its (which averaged 13% between 2005 and 2010).
long-lasting partnership in construction with US Market share momentum is medium to weak
company Bechtel, especially in Eastern Europe, 2) In the energy market in Turkey, Enkas market
BOT-based risk-free power business in Turkey share of generation capacity and output are likely
(that secures stable/visible cash flows), and 3) a to reduce as other players continue to invest
prominent name as a contractor in Russia/CIS and (although this is not a threat for Enkas profits). In
an office space rental company in construction, Enkas backlog has seen
Moscow/Russia. These have led to a business considerable shrinkage but we believe may start
portfolio and a balance sheet that we believe are growing again. And in Moscows office space
more resilient than many of the other ISE listed market, Enka holds on to its existing premises.
companies to global/domestic shocks.
Sustainable growth outlook is medium
"Profitable market share" score is strong Enkas future growth prospects are rather
Enka generates high returns on businesses that it dependent on its construction segment given that
operates, where it is mostly the leader in the its real estate business in Moscow and power
relevant market. The office rental business in business in Turkey are relatively stable.
Moscow is a high margin business (70% EBITDA
margin) and Enka leads the A-class market there. Market fragmentation structure is medium

The construction business generates higher Enka operates in sectors (power, real estate,
margins than most EM constructors (with an construction) with high competition but its
average 16% EBITDA margin in 2005-10). The positioning is strong allowing for above peer
power generation business in Turkey is currently margins and profitability.
the largest (3,854MW) among private sector Low interest rate environment is neutral
players with stable cash flows thanks to the take- Enkas Turkish exposure is limited to its power
or-pay scheme under the State guarantee and fixed operations where the level of market interest rates
is not relevant for the profitability of its business.

140
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Its large cash position, on the other hand, benefits result, the overall impact on our TRY based financial
to some extent from higher rates. forecasts is positive from 2012 onwards while our
target price goes down mainly because of lower fair
Weak TRY has medium impact
value for construction.
Enka has a very strong balance sheet, sitting on a
significant FX position. But weak EUR/USD We continue to use DCF to value Enka. We use
hurts its profitability since most of its liquid assets the following parameters; 6.5% risk free USD rate
are held in EUR-denominated investments. (previously 5.9%), 5.5% equity risk premium, 3%
terminal growth rate and 0.85 company beta,
Investment thesis
which filter through to a weighted average WACC
The key change in Enkas normally safe and of 11.2% (vs. 9.5% previously).
stable portfolio has been the sharp decline in its
construction backlog from the USD7.5bn peak in Our target price falls from TRY6.42 to TRY5.6. We
2007 to cUSD2.0bn today. Enka did not have any apply a 20% holding discount to our calculated
North African exposure in construction, but the NAV in setting our target price. Based on the 37%
stoppages of its Blue City project in Oman potential return, which is above the Neutral band of
(cUSD900m backlog share) and the motorway 8.5% -18.5% for non-volatile Turkish stocks, we
project in Romania (cUSD3.5bn backlog share) in maintain our Overweight rating.
2010 have weighed negatively on the share price, Enka - forecast changes
which has underperformed the ISE in 2011 YTD. TRYm 2011e 2011e 2012e 2012e 2013e 2013e
Also, the slow pace of the Russian economic old new old new old new
recovery from the 2009 crisis, and hence the only Revenue 7,406 7,301 7,727 8,008 8,336 8,826
EBITDA 1,218 1,293 1,224 1,422 1,373 1,633
gradual improvement in Moscows rental rates, Net profit 876 848 887 955 994 1,098
have kept sentiment towards Enka rather muted. Source: HSBC estimates

The recent announcement from Enka regarding


NAV changes
the Romanian motorway project (that it will
USDm Enka stake Enka stake old / new
complete EUR400m worth of the job before old new
termination of its contract by end-2013), is rather
Construction 4,206 3,568 -15%
positive news in our view. It removes an Energy 3,021 3,022 0%
Real estate 3,251 3,130 -4%
uncertainty and kicks off activity on a frozen Retail 859 932 8%
project. We believe that at current levels, Enkas Trade & Manuf. 374 232 -38%
Total Participation value 10,850 9,993 -8%
valuation more than prices in the backlog Market cap 6,320 6,320
contraction to USD2.0bn. With the prospect of Premium (disc.) to NAV -42% -37%
Holding discount 20% 20%
new project awards (which we assume at NAV per share 3.47 3.20 -8%
12m NAV per share (TRY) 6.42 5.60 -13%
USD1.0bn pa from 2012), we believe the shares
Source: Company, HSBC estimates
still look undervalued.

Rating, valuation and risks Downside risks include i) failure to deliver new
We make three key revisions to our forecasts and wins (or below expected) ii) slower recovery in
valuation; 1) we lower backlog estimates in line with Russia (along with an unexpectedly high drop in
recent developments, 2) we use a higher DCF risk oil prices) than we expect, iii) significant
free rate for construction (6.5% in USD vs 5.9%) delays/payment problems in the major existing
and 3) we revise macro parameters in our model in construction projects iv) sustained EUR/USD
line with our macro teams new forecasts. As a weakness hurting investment income.

141
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Enka Insaat Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Effective aggregate tax rate 18% 18% 18% 18%
Construction EBITDA margin 19.2% 28.0% 20.0% 18.3%
Revenue 7,065 7,301 8,008 8,826 Energy EBITDA margin 9.8% 9.2% 9.6% 10.1%
EBITDA 1,135 1,293 1,422 1,633 Real estate EBITDA margin 63.5% 62.1% 63.5% 65.0%
Depreciation & amortisation -192 -229 -244 -266 Trade & Industry EBITDA margin 7.0% 7.6% 8.0% 8.0%
Operating profit/EBIT 942 1,064 1,178 1,368 Effective aggregate tax rate 18% 18% 18% 18%
Net interest 14 -85 76 78
PBT 1,018 1,102 1,290 1,483
HSBC PBT 1,018 1,102 1,290 1,483
Taxation -179 -194 -269 -309 Valuation data
Net profit 819 848 955 1,098 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 819 848 955 1,098
EV/sales 1.2 1.0 0.8 0.6
Cash flow summary (TRYm) EV/EBITDA 7.4 5.6 4.6 3.5
Cash flow from operations 1,197 1,369 1,382 1,581 EV/IC 1.7 1.2 1.0 0.8
Capex -97 -111 -150 -209 PE* 12.5 12.1 10.7 9.3
Cash flow from investment -97 -111 -150 -209 P/Book value 1.6 1.3 1.1 1.0
Dividends -120 -140 -158 -163 FCF yield (%) 9.8 10.4 11.0 12.1
Change in net debt -524 -1,038 -776 -842 Dividend yield (%) 1.2 1.4 1.5 1.6
FCF equity 936 979 1,039 1,142 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (TRYm)


Intangible fixed assets 224 270 280 288 Issuer information
Tangible fixed assets 5,822 7,122 7,529 7,983 Share price (TRY) 4.10 Target price (TRY) 5.60 Potent'l return (%) 36.6
Current assets 3,711 5,001 5,863 6,806
Cash & others 2,043 3,171 3,891 4,678 Reuters (Equity) ENKAI.IS Bloomberg (Equity) ENKAI TI
Total assets 10,999 13,887 15,218 16,672 Market cap (USDm) 5,560 Market cap (TRYm) 10,250
Operating liabilities 2,670 3,115 3,261 3,403 Free float (%) 13 Enterprise value (TRYm) 7242
Gross debt 923 1,013 958 903 Country Turkey Sector Conglomerates
Net debt -1,120 -2,158 -2,933 -3,775 Analyst Cenk Orcan Contact 90 212 376 46 14
Shareholders funds 6,368 8,022 9,165 10,487
Invested capital 5,044 6,108 6,520 6,997
Price relative
7 7
Ratio, growth and per share analysis
6 6
Year to 12/2010a 12/2011e 12/2012e 12/2013e
5 5
Y-o-y % change 4 4
Revenue -10.8 3.3 9.7 10.2 3 3
EBITDA -17.3 13.9 10.0 14.9 2 2
Operating profit -16.5 12.9 10.7 16.1
PBT -9.4 8.3 17.1 15.0 1 1
HSBC EPS 0.3 3.6 12.5 15.0 2009 2010 2011 2012
Enka Insaat Rel to ISTANBUL COMP
Ratios (%)
Source: HSBC
Revenue/IC (x) 1.4 1.3 1.3 1.3
ROIC 15.5 15.7 14.8 16.0
ROE 13.7 11.8 11.1 11.2 Note: price at close of 27 Sep 2011
ROA 7.7 7.9 6.6 7.0
EBITDA margin 16.1 17.7 17.8 18.5
Operating profit margin 13.3 14.6 14.7 15.5
EBITDA/net interest (x) 15.3
Net debt/equity -16.6 -25.4 -30.2 -34.0
Net debt/EBITDA (x) -1.0 -1.7 -2.1 -2.3
CF from operations/net debt
Per share data (TRY)
EPS Rep (fully diluted) 0.33 0.34 0.38 0.44
HSBC EPS (fully diluted) 0.33 0.34 0.38 0.44
DPS 0.05 0.06 0.06 0.07
Book value 2.55 3.21 3.67 4.19

142
Equities
Turkish Equities abc
5 October 2011

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

Overall competitive outlook is medium utilising all of its capacity and market growth has Bulent Yurdagul*
Analyst
While increasing supply in the local market and been fast. HSBC Yatrm Menkul
Deerler A..
possible slowing demand (as a result of the weaker Sustainable growth outlook is medium +90 212 376 4612
bulentyurdagul@hsbc.com.tr
global growth outlook) are risk factors for Erdemir's Despite strong margins and asset turnover ratios
*Employed by a non-US affiliate
strong and profitable competitive position, it benefits Erdemir rates medium with its Dupont score (due to of HSBC Securities (USA) Inc,
from a low interest rate policy, and the flexibility to a lack of sufficient integration) implying relatively
and is not registered/ qualified
pursuant to FINRA regulations
adjust prices in USD terms provides a safeguard for lower sustainable growth potential. However, we
profitability in the long term. believe utilisation of new capacity in the coming
"Profitable market share" score is high quarters should improve Erdemir's position.
Erdemir's strong market share in the Turkish flat Market fragmentation structure is medium
steel market and its above-average ROE make it Despite an increasing number of players, Erdemir
one of the best positioned companies in the is still well positioned in the flat steel segment as
Turkish universe in terms of profitable market it does not see major competition in some value
share. We expect the high ROE level to be added products. However, going forward,
sustained in the long term due to the companys Erdemir's may experience pressure on its
competitive edges (ie. ability to produce/sell value profitability if macro conditions worsen in 2012.
added products, efficient new capacity). However,
market share loss is inevitable in the long term Low interest rate environment is positive
(beyond 2013) due to capacity constraints and the Since Erdemir has a USD852bn net short FX
lack of new investment plans. position and end sectors (ie. autos, consumer
durables, pipelines, construction) are sensitive to
Market share momentum is weak
low interest rates, the low interest rate policy of
Erdemir has lost market share in the last 5-6 years the Government and Central Bank is positive for
period due to capacity constraints as it has been the company.

143
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5 October 2011

Weak TRY has negative to medium impact Valuation


As product prices are linked to USD, TRY We value Erdemir based on the simple average of its
depreciation positively affects operational DCF value and global peer 2012e PE and
profitability. However, due to a USD1.0bn short EV/EBITDA multiples to arrive at our new target
position on the balance sheet, FX losses become a price of TRY 4.95 (from TRY5.25). Using the DCF
threat to bottom-line profitability (a 10% TRY method and assuming a WACC of 11.6% (cost of
depreciation leads to TRY145m of FX losses). equity: 14.4%; RFR 8.5%, ERP 5.5% and beta1.07,
Investment thesis cost of debt: 9%, terminal growth rate of 3%), we
arrive at a fair value of TRY5.19 per share
Despite weaker demand in the current global
(unchanged). For our global peer multiple based
economic scenario, Erdemir has already secured its
valuation we use the FY12e PE and EV/EBITDA
order book till the end of November. We believe the
multiples and apply these to Erdemirs 2012e
strong order book and still-strong steel prices should
earnings and EBITDA. We use a PE of 8.6x for
drive reasonable earnings growth. However, ongoing
2012e and EV/EBITDA of 5.3x which results in a
turbulence in financial markets may slow demand in
fair value of TRY3.46 per share (from TRY3.98).
end sectors and have some negative impact on
Thus, we arrive at a blended valuation of TRY4.32
operational profitability in Q4 2011. In a bear case
per share and raise it by the cost of equity (14.4%) to
scenario of global recession, Erdemir also faces risks
reach our new 12-month target price of TRY4.95.
of inventory losses as it caries 150 days of inventory
Our target price plus 2011e DPS implies a potential
on average. We calculate that Erdemir would not
return of 53% and justifies an Overweight rating on
face major inventory losses unless product prices see
Erdemir. At our target price, Erdemir would trade on
a sharp 30-40% fall (from the current USD700-720
a 2012e PE of 9.4x.
per tonne to the USD480-520 level for HRC) as it is
protected by short-term raw material contracts and Erdemirs share price has a strong positive
lower costs compared to spot levels. According to correlation with commodity and steel prices. Any
our sensitivity analysis, a 15% fall would not lead to increase in steel prices from hereon would be
any inventory write downs and its impact (through positive for the shareprice.
the EBIT line) would be limited to 10% of our year-
Risks to our rating include a downturn in macro
end 2011 net profit estimate for Erdemir.
conditions, which could lower demand locally and
steel prices globally. Increasing supply from flat-
steel 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).

144
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Turkish Equities abc
5 October 2011

Financials & valuation: Erdemir Overweight


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Average TRY/USD 1.48 1.56 1.50 1.50
Sales (mt) 6.5 7.1 7.9 8.3
Revenue 6,633 8,442 9,175 9,630 Average HRC price (USD/t) 640 725 748 750
EBITDA 1,428 1,632 1,825 2,236 Average CRC price (USD/t) 847 899 908 895
Depreciation & amortisation -299 -306 -313 -311 Average iron ore price (USD/t) 135 132 126 120
Operating profit/EBIT 1,130 1,326 1,512 1,925 Average Coal price (USD/t) 231 260 255 226
Net interest -142 -76 -79 -82
PBT 974 1,229 1,470 1,792
HSBC PBT 974 1,229 1,470 1,792
Taxation -178 -241 -288 -351 Valuation data
Net profit 766 950 1,136 1,385 Year to 12/2010a 12/2011e 12/2012e 12/2013e
HSBC net profit 766 950 1,136 1,385
EV/sales 1.5 1.1 1.0 0.8
Cash flow summary (TRYm) EV/EBITDA 7.0 5.5 4.9 3.6
Cash flow from operations 912 2,383 1,238 2,093 EV/IC 1.0 1.0 0.9 0.8
Capex -305 -260 -278 -278 PE* 6.8 7.3 6.1 5.0
Cash flow from investment -288 -242 -278 -278 P/Book value 0.8 1.0 0.9 0.8
Dividends -6 -444 -570 -618 FCF yield (%) -1.4 19.9 8.2 21.2
Change in net debt -202 -1,041 -35 -806 Dividend yield (%) 6.5 8.2 8.9 11.4
FCF equity -94 1,389 569 1,475 Note: * = Based on HSBC EPS (fully diluted)

Balance sheet summary (TRYm)


Intangible fixed assets 144 165 165 165 Issuer information
Tangible fixed assets 6,780 6,726 6,691 6,657 Share price (TRY) 3.24 Target price (TRY) 4.95 Potent'l return (%) 52.7
Current assets 6,325 5,067 5,342 5,649
Cash & others 2,878 1,948 1,478 1,732 Reuters (Equity) EREGL.IS Bloomberg (Equity) EREGL TI
Total assets 13,541 12,238 12,479 12,752 Market cap (USDm) 3,779 Market cap (TRYm) 6,966
Operating liabilities 705 794 928 930 Free float (%) 48 Enterprise value (TRYm) 8930
Gross debt 5,883 3,912 3,407 2,855 Country Turkey Sector METALS & MINING
Net debt 3,005 1,964 1,929 1,123 Analyst Bulent Yurdagul Contact 90 212 376 46 12
Shareholders funds 6,511 7,033 7,599 8,366
Invested capital 9,665 9,215 9,792 9,809
Price relative
6 6
Ratio, growth and per share analysis
5 5
Year to 12/2010a 12/2011e 12/2012e 12/2013e
4 4
Y-o-y % change 3 3
Revenue 26.7 27.3 8.7 5.0 2 2
EBITDA 260.6 14.3 11.8 22.5 1 1
Operating profit 1611.0 17.4 14.0 27.3
PBT 26.2 19.6 22.0 0 0
HSBC EPS -7.7 19.6 22.0 2009 2010 2011 2012
Erdemir Rel to ISTANBUL COMP
Ratios (%)
Source: HSBC
Revenue/IC (x) 0.7 0.9 1.0 1.0
ROIC 9.9 11.3 12.8 15.8
ROE 12.5 14.0 15.5 17.4 Note: price at close of 27 Sep 2011
ROA 8.0 9.0 10.8 12.5
EBITDA margin 21.5 19.3 19.9 23.2
Operating profit margin 17.0 15.7 16.5 20.0
EBITDA/net interest (x) 10.1 21.5 23.2 27.4
Net debt/equity 44.9 27.1 24.6 12.9
Net debt/EBITDA (x) 2.1 1.2 1.1 0.5
CF from operations/net debt 30.4 121.3 64.1 186.4
Per share data (TRY)
EPS Rep (fully diluted) 0.48 0.44 0.53 0.64
HSBC EPS (fully diluted) 0.48 0.44 0.53 0.64
DPS 0.21 0.27 0.29 0.37
Book value 4.07 3.27 3.53 3.89

145
Equities
Turkish Equities abc
5 October 2011

Ford Otosan
Ford Otosan's overall competitive outlook is medium compared to
its peers and other industrials in Turkey
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

Overall competitive outlook is medium Market share momentum is medium to strong Cenk Orcan*
Analyst
In Turkey, light commercial vehicle (LCV) Ford Otosans overall market share in Turkey HSBC Yatrm Menkul
Deerler A..
manufacturers benefit from tax advantages, peaked in 2005-07 at around 17% and came down +90 212 376 4614
economies of scale in production, a well educated to c15% in 2008-11 due to increased competition cenkorcan@hsbc.com.tr

labour force, and a developed parts industry in in the LCV segment (mainly from Tofas) and in *Employed by a non-US affiliate
of HSBC Securities (USA) Inc,
generating high sales (over assets) and profits. the passenger car import market. Going forward, and is not registered/ qualified
we expect an increase in Fords LCV market pursuant to FINRA regulations
The ability to attract new models is one of the key
drivers for the industry which we expect will share with completion of new model investments
continue to be the case in upcoming years. Ford in 2013-14 (new Transit and a new LCV).
Otosan sets a good example of the new model Sustainable growth outlook is strong
story as one of the leaders of the LCV market and Ford Otosan is in the midst of a big capital
a production hub for Ford Europe for LCVs. It has expenditure program to renew its best selling model,
low cost production, good R&D capabilities and a Transit, and to launch a completely new minivan
strong balance sheet, and pays high dividends model in 2013-14. Until then, newer products by
relative to the Turkish market. competitors may limit the companys relative growth
"Profitable market share" is strong but the long-term growth outlook is intact. On
Ford Otosan has generated an average ROE of existing products, we expect Ford Otosan to compete
27% during the past years, one of the highest in mainly on pricing, which argues for a higher need
the ISE universe. It has an established market for discounts, in our view.
leader position in medium commercial vehicles in Market fragmentation structure is medium to
Turkey (c35% in Jan-Aug 2011) and ranks second weak to
in the light commercial vehicle segment (with a Although the top 3 brands control c45% of the
c20% share). Its efficient production (generating Turkish light vehicle market and the top 5 brands
economies of scale from high export quantities as 60%, the market is more fragmented than
well) provides the company with a very strong consolidated in our view. There is tough
competitive position.

146
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5 October 2011

competition with c60 global brands operating in on our market expectations considering the
the market (either as manufacturers and/or economic slow-down and the strength in the auto
importers). Compared to the last 10-15 years, we market over the last three years (auto sales were
expect no major changes in market structure. up 63% cumulatively in 2009-11e). We expect a
5% decline in total market sales next year; a 7%
Low interest rate environment is neutral
decline for cars but flat demand for LCVs. Under
A low interest rate environment triggers
these sector assumptions, we lower our unit sales
consumption through access to cheaper financing
forecasts for Ford Otosan, particularly for exports
and supports auto sales. Nevertheless, the sectors
but under new FX assumptions (weaker TRY)
response to a low interest rate environment may
revenues are adjusted up. We also trim our margin
be more limited than normal due to the surge in
forecasts considering a more competitive
demand that we have already seen in 2010 and
environment in the remainder of 2011 and
YTD 2011.
throughout 2012, in the face of slowing demand.
Weak TRY has a neutral impact
Ford Otosan - Forecast changes
Ford Otosan has an ungeared balance sheet with
TRYm 2011e 2011e 2012e 2012e 2013e 2013e
no meaningful FX exposure. Operationally, weak old new old new old new
TRY supports export revenues (stated in TRY) Unit sales (000) 347 346 351 333 370 351
and is positive for margins. But huge investments Domestic 135 134 130 129 134 133
Exports 212 212 221 204 236 218
in excess of USD1.0bn in the next three years will Revenue 9,055 10,222 9,136 10,115 9,835 11,018
EBITDA 885 916 866 906 981 1,152
increase leverage and FX sensitivity. margin 9.8% 9.0% 9.5% 9.0% 10.0% 10.5%
Net profit 604 627 524 592 565 667
Investment thesis Source: HSBC estimates
Ford Otosan offers exposure to the relatively more
resilient commercial vehicle segment in a period We continue to value Ford Otosan using DCF with
when demand will likely weaken in both Turkey the following parameters: 8.5% risk free rate, 5.5%
and in export markets. Moreover, Fords main equity risk premium, 0.73 beta (previously 0.65), 3%
export markets (UK, Germany, US) offer a terminal growth and 11.2% WACC (previously
relatively better demand outlook than other main 10.7%) Due to the increase in the WACC, our target
geographies in Europe (such as Italy and France). price declines to TRY15.5 from TRY16.0. We
That said, we believe that Ford Otosans remain Neutral based on a 14% potential return,
advantages are curbed by the fact that its outdated which is within the 8.5%-18.5% Neutral band for
models may need more discounts against non-volatile stocks in Turkey.
competition to keep volumes high. This filters
Risks
through to lower than historical margins in the
Key upside risks are i) stronger-than-expected
next two years, in our view. Considering also the
Turkish, European and North American LCV
USD1.0bn worth of investments in the 2011-13
markets, ii) a sharp fall in raw material prices
period, we maintain our cautious view.
(expanding domestic margins) and iii) moderate
Rating, valuation and risks TRY weakness (supporting exports). Key
We expect Turkish automotive demand to grow downside risks would be the opposite of these,
8% in 2011, reaching 860k units (light vehicles plus tax hikes for auto.
825k). This implies a c15% demand contraction in
the second half y-o-y. For 2012, we are cautious

147
Equities
Turkish Equities abc
5 October 2011

Financials & valuation: Ford Otosan Neutral


Financial statements Key forecast drivers
Year to 12/2010a 12/2011e 12/2012e 12/2013e Year to 12/2010a 12/2011e 12/2012e 12/2013e
Profit & loss summary (TRYm) Froto domestic unit sales gr. 47% 7% -4% 3%
Froto export unit sales gr. 37% 20% -4% 7%
Revenue 7,649 10,222 10,115