Emerging Markets  Turkey (MPCBMÁ3FTFBSDI

 We are expanding our Turkish universe Turkey by 10, to 30 stocks Initiating coverage on 10 new stocks and revisiting ratings for full coverage  Universe now covers 82% of the ISE-100 index and 88% of Turkey MSCI index

 On existing ratings, we upgrade Anadolu Efes, Arcelik, Koc and Vestel. Downgrades for Eregli, Ford Otosan and Hurriyet

 Key Overweights are TEB, Cimsa and Arcelik; key Underweights are Eregli, Dogan Yayin and Petkim Investment conclusion We present our ratings and two-year fair value estimates for 10 additional Turkish companies in this report. This expands HSBC’s coverage in Turkey to 30 stocks, six of which are covered under their relevant global sectors. We review our ratings for our existing universe (excluding the six global stocks), introduced in July 2005, with upgrades for Anadolu Efes (from Underweight to Neutral), Koc (from 21 December 2005 Underweight to Neutral), Vestel (from Underweight to

Cenk Orcan Neutral) and Arcelik (from Neutral to Overweight), and Co-Head, Turkish Research downgrades on Eregli (Neutral to Underweight), Ford +90 212 366 16 05 [email protected] Otosan (Overweight to Neutral) and Hurriyet (Overweight to Bulent Yurdagul Neutral). For our 24 local universe stocks, we arrive at a Co-Head, Turkish Research +90 212 366 16 04 [email protected] ratings distribution of 37% Overweight (nine stocks), 42% Neutral (10 stocks) and 21% Underweight (five stocks). Gunes Ozdemir Senior Analyst DCF is our most widely used valuation method but we also +90 212 366 16 24 [email protected] employ other methodologies, including NAV, PE, Levent Topcu EV/EBITDA and P/BV, due to the differences in the Senior Analyst industries represented by these companies. +90 212 366 16 19 [email protected]

Can Oztoprak Our expanded Turkish coverage now represents 82% of the Analyst ISE-100 index (previously 72%) and 88% of Turkey MSCI +90 212 366 16 17 [email protected] index (previously 84%). We see limited 5% two-year upside Ozgur Goker to our fair value for the 24-stock universe but our nine Analyst +90 212 366 16 18 [email protected] Overweight ratings (excluding global stocks) offer an average potential upside of 18%. Our key Overweight ratings are TEB, Cimsa and Arcelik. Our key Underweight Disclaimer & Disclosures. ratings are Eregli, Dogan Yayin and Petkim. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it

Emerging Markets  Turkey 21 December 2005

Initiation on 10 additional Commentary on existing Turkish stocks 3 coverage 43 Aksigorta 44

Akcansa 5 Anadolu Efes 44

Alarko REIT 9 Arcelik 45 Dogan Holding 45 Anadolu Cam 13 Eregli 46

Cimsa 17 Ford Otosan 46 Hurriyet 47 Denizbank 21 Koc Holding 47

Dogan

6DEDQFÕ+ROGLQJ 48 Finansbank 29 Sise Cam 48

Petkim 32 Tofas Fabrika 48

Petrol Ofisi 36 Trakya Cam 49 Vestel Elektronik 49 TEB 39 Disclosure appendix 56

Disclaimer 59

2 Emerging Markets  Turkey 21 December 2005 

 We expand our Turkish coverage to 30 and initiate on 10 second-tier stocks  Three banks, two cement, two petroleum products, one glass, one REIT and one media company with USD14bn total market cap  Our key Overweight ratings are as follows: newly under coverage – TEB and Cimsa; under existing coverage – Arcelik

Expand coverage to 30 stocks Five of the new companies (Denizbank, Dogan Petrol Ofisi and TEB. we exclude from this report the six Turkish Their cumulative weight in the ISE-100 index is companies that are covered relative to their 10.14% versus 71.64% for the 20 companies respective global sectors (Akbank, Garanti, we already cover. Isbank, Yapi Kredi, Turkcell, Tupras).

Ratings and targets on new coverage of 10 stocks (as of 19 December 2005) Ric code Trading volume Current Mcap Share price Valuation range Notional target % upside Rating (USDm) (USDm) (USD) (USD) price (USD) potential to mid-point TEB* TEBNK 1,399,431 873 15.11 17.13 - 20.93 19.03 26.0 Overweight Cimsa CIMSA 1,236,161 817 6.73 7.27 - 8.89 8.08 20.0 Overweight Akcansa AKCNS 3,175,391 991 5.95 6.22 - 7.60 6.91 16.0 Overweight Petrol Ofisi PTOFS 6,697,446 1,941 4.65 4.85 - 5.93 5.39 15.9 Overweight Alarko REIT ALGYO 824,084 171 47.99 46.70 - 57.08 51.89 8.1 Neutral Anadolu Cam ANACM 659,918 631 4.17 3.86 - 4.72 4.29 3.0 Neutral Finansbank* FINBN 8,328,428 3,923 4.13 3.32 - 4.05 3.68 -10.8 Underweight Denizbank* DENIZ 5,568,009 2,093 6.62 5.31 - 6.49 5.90 -10.9 Underweight Petkim PETKM 25,353,471 1,181 5.77 4.62 - 5.64 5.13 -11.1 Underweight 'RJDQ

* present value of end-2007 notional target range Source: HSBC estimates

3 Emerging Markets  Turkey 21 December 2005 

We review our ratings for the remaining 14 Distribution of ratings (excluding global stocks) companies relative to our expanded local Overweight Neutral Underweight universe, which includes the 10 additional stocks. 9 10 5 24 37% 42% 21% 100%

Ratings and target prices Source: HSBC estimates

The ratings distribution for our expanded local coverage universe of 24 stocks is 37% Overweight (nine stocks), 42% Neutral (10 stocks) and 21% Underweight (five stocks). We base our valuations on methodologies including DCF, NAV, PE, EV/EBITDA and P/BV due to the differences in the industries represented.

Valuations and target prices of Turkish Coverage Universe* (as of 19 December 2005) Ric codeTrading Current Target Share price Valuation range Notional target % upside Rating volume mkt cap mkt cap price potential to (USDm) (USDm) (USDm) (USDm) (USDm) old newnew NTPold new TEB TEBNK 1,399,431 8731,100 15.11 17.13 -20.93 - 19.03 26.0 N/R Overweight Arcelik ARCLK 5,667,217 2,783 3,350 6.96 7.54 -9.21 6.50 8.38 20.4 Neutral Overweight Cimsa CIMSA 1,236,161 817980 6.73 7.27 -8.89 - 8.08 20.0 N/R Overweight Sabanci Holding SAHOL 21,376,475 6,742 8,000 5.62 6.00 -7.33 5.25 6.67 18.7 Overweight Overweight Aksigorta AKGRT 2,984,284 1,150 1,350 7.52 7.94 -9.71 6.08 8.82 17.4 Overweight Overweight Akcansa AKCNS 3,175,391 991 1,150 5.95 6.22 -7.60 - 6.91 16.0 N/R Overweight Petrol Ofisi PTOFS 6,697,446 1,941 2,250 4.65 4.85 -5.93 - 5.39 15.9 N/R Overweight Dogan Holding DOHOL 43,124,283 2,309 2,650 3.14 3.24 -3.96 3.54 3.60 14.8 Overweight Overweight Trakya Cam TRKCM 3,187,977 881 1,000 3.87 3.95 -4.83 4.61 4.39 13.6 Overweight Overweight Alarko REIT ALGYO 824,084 171 185 47.99 46.70 -57.08 - 51.89 8.1 N/R Neutral Ford Otosan FROTO 2,877,828 3,081 3,200 8.78 8.21 -10.03 8.00 9.12 3.9 Overweight Neutral Vestel VESTL 8,990,614 580600 3.65 3.39 -4.15 4.09 3.77 3.4 Underweight Neutral Anadolu Cam ANACM 659,918 631 650 4.17 3.86 -4.72 - 4.29 3.0 N/R Neutral Tofas Fabrika TOASO 9,963,228 1,101 1,100 2.20 1.98 -2.42 1.80 2.20 -0.1 Neutral Neutral Koc Holding KCHOL 25,926,951 5,733 5,700 4.99 4.46 -5.45 4.70 4.96 -0.6 Underweight Neutral Anadolu Efes AEFES 2,800,341 3,150 3,100 27.90 24.72 -30.21 23.00 27.46 -1.6 Underweight Neutral Hurriyet HURGZ 2,678,677 1,582 1,550 3.79 3.35 -4.09 2.76 3.72 -2.0 Overweight Neutral Sise Cam SISE 7,225,711 1,481 1,450 3.50 3.08 -3.77 3.54 3.42 -2.1 Neutral Neutral Migros MIGRS 4,443,622 1,363 1,300 9.90 8.50 -10.38 9.08 9.44 -4.6 Neutral Neutral Finansbank FINBN 8,328,428 3,923 3,500 4.13 3.32 -4.05 - 3.68 -10.8 N/R Underweight Denizbank DENIZ 5,568,009 2,093 1,865 6.62 5.31 -6.49 - 5.90 -10.9 N/R Underweight Petkim PETKM 25,353,471 1,181 1,050 5.77 4.62 -5.64 - 5.13 -11.1 N/R Underweight 'RJDQ

AGGREGATE UPSIDE (%) 4.6

Upside on Overweight stocks (%) 18.1 Upside on Neutral stocks (%) 0.7 Upside on Underweight stocks (%) -4.9

Source: HSBC estimates

4 Emerging Markets  Turkey 21 December 2005 

 Initiating coverage with an Overweight rating based on 16% upside potential to our notional target price  Capitalising on robust cement demand driven by the ongoing boom in Turkey’s construction sector  Well positioned to benefit from growth potential in the sector via acquisitions and capacity upgrades

Company GDP vs. Akcansa’s Sales

Akcansa is Turkey’s leading cement producer, 450 450 400 400 with two plants with a combined annual clinker 350 350 capacity of 3.8m tons and cement grinding 300 300 250 250 200 200 USDm capacity of 6.3m tons. This capacity should USDbn 150 150 increase further, both organically and through 100 100 DFTXLVLWLRQVE\WKHHQGRI6DEDQFÕ+ROGLQJ 50 50 0 0 and Heidelberg Cement each own 40% of the 2000 2001 2002 2003 2004 2005e 2006e 2007e company’s shares, the other 20% being free float. GDP Sales With its market-leading position in terms of capacity and the favourable location of its plants Source: SIS, Akcansa, and HSBC estimates

(in the Marmara region where construction activity is the highest), Akcansa is the primary Prospects beneficiary of the ongoing recovery in the Turkish We expect Iraqi demand to remain robust with cement sector, driven by the boom in construction continued restructuring activities in the country in activity. The huge amount of pent-up demand, 2006, but to lose some pace from 2007, especially especially for homes, developed during the years as new cement capacity is planned by regional of crises, is finally being met, lagging the ongoing competitors. Therefore, cement producers will economic stabilisation. On top of increased local become more dependent on the domestic market, consumption, extra cement demand from the Iraqi where profitability is higher but there is the risk of market is helping to absorb excess capacity in the overcapacity creating pressure on prices and sector and keep average cement prices firm at margins in the long term. around USD60 per tonne, vs USD40 in 2003.

5 Emerging Markets  Turkey 21 December 2005 

However, we do not think this will be the case, as impact of the investment on margins will become the upcoming mortgage system (due to be more visible starting from 2006. launched in 2006 and become a mass product in Valuation and conclusion 2007) is likely to take over as the major driving factor of housing demand and therefore for the We are initiating our coverage on Akcansa with cement sector in Turkey, starting from 2007. an Overweight rating based on 16% potential Furthermore, traditionally, the government upside to our notional target price of USD6.91 per accelerates infrastructure investments prior to share (USD1.15bn in market capitalisation) in a elections, which may, to some extent, be the case range of USD6.22-7.60. Our fair value estimate is in 2007. Under these circumstances, we expect the derived from the combination of a multiple-based cement sector to sustain its momentum and comparison with global peers and a DCF analysis. foresee cement prices stabilising at around We employ the average 2007e multiples of nine USD60-65 per ton in 2006 and 2007. emerging market peers – 2.0x EV/Sales, 6.6x EV/EBITDA, and 11.4x PE – and arrive at Akcansa has recently taken action to benefit from valuation of USD6.92 per share. Our DCF further growth in the Turkish cement sector. It has analysis, which assumes a risk-free rate of 7%, acquired a new plant – Samsun-Ladik Cimento – via equity risk premium of 5%, terminal growth rate the state’s recent auction of nine ex-Uzan Group of 2%, and company beta of 0.88, yields a per cement plants. Through this acquisition, Akcansa now share value of USD6.90. Using an equal weight has access to new geographical regions – the Black for each method, we determine our notional target Sea and Central Anatolia – and additional capacity of price at USD6.91 per share. 578k tons/yr of clinker and 1,162k tons/yr of cement, corresponding to 15% and 18% of its current clinker Akcansa – DCF Valuation Range and cement capacity, respectively. It has also kicked off a capacity upgrade investment at its Canakkale 1,500 plant this year, which is scheduled to become 1,250 1,000 operational by the end of 2007 and raise Akcansa’s 750 USDm total annual clinker and cement capacity to 6.3m and 500 250 9.0m tons, respectively, further strengthening the 0 company’s market leadership position. 4% 5% 6% 7% 8% 9% 10% Risk free rate Given the close correlation between cement demand and GDP growth in Turkey, we assume a long-term Source: HSBC, Akcansa growth rate of 5.5-6.0% in Akcansa’s domestic cement sales and revenues, parallel to our GDP Risks growth forecast. On the cost side, we are looking for Risks to our valuation and rating include new a further but moderate recovery in margins as capacity upgrade decisions by Turkish cement Akcansa completed an investment in May, enabling producers, any delay in the launch of the it to use petcoke exclusively in one of the plants, mortgage system and a slowdown in the providing savings compared to fuel-oil, which is a construction sector’s momentum from lower than more expensive energy source. This puts Akcansa in expected macroeconomic growth, which would an advantageous position vs its competitors and the result in overcapacity in the cement sector and create pressure on prices and margins.

6 Emerging Markets  Turkey 21 December 2005 

Akcansa – income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 277.87 306.28 387.89 414.99 COGS -178.93 -177.37 -219.59 -232.74 Gross Profit 98.94 128.90 168.30 182.26 Operating Costs -15.98 -17.62 -22.31 -23.87 EBIT 57.90 83.16 115.36 124.50 Net Interest income (loss) 9.20 -3.07 -0.08 -1.09 PBT 58.33 100.26 119.31 127.37 Tax -8.70 -14.95 -22.64 -24.50 Minorities -2.24 -3.85 -4.37 -4.65 Net Profit 47.39 81.46 92.30 98.23

EBITDA 82.96 111.29 145.99 158.39 Source: Company data, HSBC estimates

Akcansa – balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total Assets 153.21 91.00 128.62 149.89 Liquid Assets 392.01 537.76 551.95 582.98 Fixed Assets 77.50 145.53 171.41 193.76 Total Liabilities 40.55 37.76 43.58 45.81 Current Liabilities 6.68 74.00 94.00 114.00 Financial Debt 6.68 4.00 4.00 4.00 Short Term Fin. Debt 461.11 476.80 503.06 533.32 Equity 6.61 6.43 6.11 5.78 Minorities 153.21 91.00 128.62 149.89 Source: Company data, HSBC estimates

Akcansa – cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 82.96 111.29 145.99 158.39 Change in WC 0.52 6.45 15.94 5.27 Interest Expense(inc) 0.00 0.00 0.00 0.00 Tax -8.70 -14.95 -22.64 -24.50 HSBC CF 94.43 116.63 163.83 164.54 Dividends -15.91 -15.48 -25.51 -28.90 Cash Flow Before Capex 78.52 101.15 138.32 135.64 Capex -13.43 -40.00 -60.00 -80.00 Net Cash Flow 65.10 61.15 78.32 55.64 Source: Company data, HSBC estimates

7 Emerging Markets  Turkey 21 December 2005 

Akcansa: financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Dom. Cement Price (USD/ton) 57.67 63.00 65.52 67.49 278 306 388 415 Exp. Cement Price (USD/ton) 30.50 36.00 32.40 29.16 Revenue Dom. Sales Growth Rate (%) 13.2% 29.0% 37.5% 4.0% EBITDA 83 111 146 158 Exp. Sales Growth Rate (%) -11.3% -42.8% 15.0% 15.0% Depreciation & amortisation -25 -28 -31 -34 Operating profit/EBIT 58 83 115 124 Net interest 9 -3 0 -1 Notes PBT 58 100 119 127 Domestic cement prices are expected to stabilise at around USD65 over the next HSBC PBT 65 103 121 129 few years, driven mainly by the housing construction activities. Furthermore, the Taxation -9 -15 -23 -24 Ladik Cimento acquisition should help the company increase its sales volume Net profit 47 81 92 98 following the completion of the share transfer in Q1 2006. HSBC net profit 56 88 99 105 Cash flow summary (USDm) Cash flow from operations 94 117 164 165 DCF analysis Capex -13 -40 -60 -80 Cash flow from investment -13 -40 -60 -80 HSBC assumptions DCF, comprising Dividends -16 -15 -26 -29 Change in net debt -41 136 4 6 Equity risk premium 5.0% PV of cash flows 283.3 FCF equity 71 60 79 58 Risk free rate 7.0% PV of continuing value 690.6 Sector beta 0.88 DCF Value 1,150.3 Balance sheet summary (USDm)

Intangible fixed assets 10 10 10 10 Tangible fixed assets 285 288 302 332 Current assets 153 91 129 150 Valuation data Cash & others 77 9 24 38 Total assets 543 627 678 731 Year to 12/2004a 12/2005e 12/2006e 12/2007e Operating liabilities 35 35 41 43 EV/sales 3.0 2.7 2.1 2.0 Gross debt 7 74 94 114 EV/EBITDA 9.9 7.3 5.6 5.2 Net debt -70 65 70 76 EV/IC 2.4 2.4 2.2 2.0 Shareholders funds 461 477 503 533 PE (HSBC) 17.6 11.3 10.0 9.4 Invested capital 337 347 376 412 P/NAV 2.1 2.1 2.0 1.9 FCF yield (%) 7.9 8.0 10.6 7.7 Ratio, growth and per share analysis Dividend yield (%) 1.6 1.6 2.6 2.9

Year to 12/2004a 12/2005e 12/2006e 12/2007e Issuer information Y-o-y % change Share price (TRYk) 800.00 Country Turkey Revenue 15.2 10.2 26.6 7.0 Reuters (Equity) AKCNS.IS Bloomberg (Equity) AKCNS TI EBITDA 92.7 34.1 31.2 8.5 Bloomberg (Debt) Operating profit 234.3 43.6 38.7 7.9 Market cap (TRYm) 1,332 Enterprise value (USDm) 816 PBT 180.5 71.9 19.0 6.8 No of shares (m) 166 Free float (%) 20 HSBC EPS 58.7 55.8 12.8 6.2 Analyst Can Oztoprak Contact details +90 212 366 16 17 Ratios (%) Revenue/IC (x) 0.8 0.9 1.1 1.1 ROIC 14.3 20.7 25.9 25.5 ROE 12.7 18.7 20.2 20.2 ROA 9.5 14.6 14.8 14.6 EBITDA margin 29.9 36.3 37.6 38.2 Operating profit margin 20.8 27.2 29.7 30.0 EBITDA/net interest (x) 36.2 1933.7 145.5 Net debt/equity -15.0 13.5 13.7 14.0 Net debt/EBITDA (x) -0.8 0.6 0.5 0.5 CF from operations/net debt 178.3 235.7 217.3 Per share data (USc) EPS 28.47 48.93 55.45 59.01 HSBC EPS 33.77 52.60 59.35 63.01 DPS 9.56 9.30 15.32 17.36 NAV 276.99 286.41 302.18 320.36

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 8 Emerging Markets  Turkey 21 December 2005 

 Initiating coverage with a Neutral rating based on limited upside potential of 8% to our notional target price  The “Riva Project” is critical to our valuation and under a scenario analysis, we assume a 20% value contribution from the project  The mortgage system, to be launched in 2006, will be a catalyst that should help sustain momentum in the real estate business

Company Alarko REIT generates a total of cUSD4.8m of annual rent income. Alarko REIT is one of the 10 listed REITs in the ISE, and the third largest with a NAV of Prospects USD126m as of 30 September 2005. The Alarko REIT stands out among its peers with its company is 51% owned by the Alarko Group, lucrative land portfolio and strong cash position, which operates primarily in the contracting, which cumulatively account for two-thirds of its energy and tourism sectors, and 49% is free float. current NAV. This provides Alarko REIT with Alarko REIT has a well-diversified portfolio with strong potential to undertake new residential 45% of the total value invested in cash assets, projects, benefiting from robust housing demand 31% in developed property and 23% in project in Turkey on the back of economic stabilisation developable land. and a fall in interest rates. We expect the ongoing Portfolio breakdown boom in residential projects to continue with the

Land Projects introduction of the mortgage system in 2006. We 23% 1% expect the system to become a mass-financing instrument in 2007. Therefore, we forecast that the momentum in the real estate sector will continue unabated, unless there is a major Cash & negative shift in the EU and IMF anchors. Developed Sec. Property 45% Development projects, which currently constitute 31% an insignificant portion of the NAV, are likely to pick up as Alarko REIT initiates its planned Source: HSBC, Alarko REIT strategy on four sites it has bought. The plan Its property portfolio consists of real estate includes the development of a housing project located in Istanbul, Ankara, and the consisting of 63 units (luxury villas) and a golf Mediterranean town of Fethiye, from which course on two sites near Istanbul.

9 Emerging Markets  Turkey 21 December 2005 

The villa project is currently the single-largest Valuation and conclusion project at hand, and is due to be completed in We are assigning a Neutral rating to Alarko REIT, 2008, when Alarko REIT expects to record sales with a notional target price of USD51.9 per share revenues of approximately USD50m, vs a total (USD185 m market capitalisation) in a range of project cost of USD28m. We expect the net NAV USD46.7-57.1 per share. Our notional target price contribution from the project to be around implies 8% potential upside from the current price USD18m, in other words c15% of the current and is based on a DCF model, where we assume a NAV. On another site located in Maslak, one of risk-free rate of 7%, equity risk premium of 5%, the most valuable high-density business districts terminal growth rate of 3%, and company beta of Istanbul, the company plans to build a shopping of 0.80. mall and a hotel, which are expected to generate rental income of USD4.0m pa starting from 2010. Excluding the Riva Project, we value Alarko REIT Finally, the site in the city of Izmir will be sold, as at USD152m (vs current market value of the company believes it is not feasible to develop USD172m). We analyse the potential value a housing project there. Alarko REIT expects to contribution of Riva via a scenario analysis, as it is generate USD4.5m of sales revenues from the sale not yet certain how large a stake in the project in 2006. Alarko REIT will end up owning. Our DCF-based fair value estimate for the whole project is However, it is the Riva Project, in which Alarko USD156m. Under our base case scenario, we REIT does not yet have any direct stake, that assume Alarko REIT obtains a 20% stake in the constitutes the single most important potential project. As the company’s tax advantage decreases value driver for the company. This is a massive along with the government’s latest decision to cut residential project, consisting of 3,700 housing the corporate tax rate from 30% to 20%, we units, to be built in Riva, a Black Sea town near decreased our previous Riva participation Istanbul, in six phases until 2016. It is currently assumption of 30% to 20%. Including the potential the parent company, Alarko Holding, which owns value contribution from a 20% stake of USD31m, the project. Nevertheless, it is highly likely that a we set our target market cap as USD185m – meaningful portion of the project will be leading to a notional target price of USD51.9 per accounted under Alarko REIT, as this would share, indicating 8% upside potential. maximise the benefits for the Alarko Group, as REITs are exempt from income tax. Although there are ongoing efforts and talks within the group, it is not yet certain how and when Alarko REIT will get involved in this project, or the exact stake to be transferred. Alarko REIT management expects the project to generate total revenues of USD1.5bn, while the costs are estimated at cUSD1.25bn.

10 Emerging Markets  Turkey 21 December 2005 

Riva Project - scenario analysis (USD) Risks Stake in Riva Value from Riva Target value Upside potential 10% 15.6 167.8 -2.4% Lower than expected (ie 20%) participation in the 20% 31.2 183.4 6.7% Riva Project, failure to initiate planned projects 30% 46.8 199.0 15.8% and/or a major delay in the launch of the mortgage 40% 62.4 214.6 24.9% 50% 78.0 230.2 34.0% system would be the main downside risks to our 60% 93.6 245.8 43.0% valuation and rating. On the other hand, a higher 70% 109.2 261.4 52.1% than expected participation in Riva is our main 80% 124.8 277.0 61.2% upside risk. Source: HSBC

Alarko REIT - income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 2.48 4.75 9.39 5.04 COGS 0.00 0.00 -2.27 0.00 Gross Profit 2.48 4.75 7.12 5.04 Operating Costs -1.80 -1.19 -1.18 -1.19 EBIT 0.69 3.56 5.94 3.85 Net Interest income (loss) 7.69 4.94 2.96 2.22 PBT -2.67 8.50 8.90 6.07 Tax 0.00 0.00 0.00 0.00 Minorities 0.00 0.00 0.00 0.00 Net Profit -2.67 8.50 8.90 6.07

EBITDA 1.52 4.15 6.81 5.00

Source: Company data, HSBC estimates

Alarko REIT – balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total Assets 106.22 111.57 137.39 125.01 Liquid Assets 52.03 49.26 57.63 30.92 Fixed Assets 54.18 62.31 79.76 94.09 Total Liabilities 0.71 0.31 25.31 15.31 Current Liabilities 0.34 0.15 0.14 0.13 LT Liabilities 0.00 0.00 25.00 15.00 Short Term Fin. Debt 0.00 0.00 0.00 0.00 Equity 105.51 111.26 112.08 109.70 Minorities 0.00 0.00 0.00 0.00

Source: Company data, HSBC estimates

Alarko REIT – cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 1.52 4.15 6.81 5.00 Change in WC 2.95 -0.16 0.13 -1.85 Interest Expense(inc) 0.00 0.00 0.00 0.00 Tax 0.00 0.00 0.00 0.00 HSBC CF 4.47 4.01 6.95 3.17 Dividends 0.00 2.49 2.62 1.79 Cash Flow Before Capex 4.47 6.51 9.57 4.96 Capex 28.59 1.00 14.00 14.00 Net Cash Flow 33.06 7.51 23.57 18.96

Source: Company data, HSBC estimates

11 Emerging Markets  Turkey 21 December 2005 

Alarko REIT: financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Annual Rent flow (USDm) 4.78 4.92 5.07 5.22 2 5 9 5 Revenue from real estate sales - - 4.5 - Revenue I/R on company’s sec. portfolio 12% 10% 8% 7% EBITDA 2 4 7 5 Depreciation & amortisation -1 -1 -1 -1 Operating profit/EBIT 1 4 6 4 Notes Net interest 8 5 3 2 In addition to the company’s stable rental revenue, the housing development PBT -3 9 9 6 projects will add substantial value to Alarko REIT. As the mortgage system is HSBC PBT -3 9 9 6 expected to be launched in 2006, we expect the company to accelerate its Taxation 0 0 0 0 residential projects over the next few years. Net profit -3 9 9 6 HSBC net profit -3 9 9 6

Cash flow summary (USDm) DCF analysis Cash flow from operations 4 4 7 3 Capex 29 1 14 14 HSBC assumptions DCF, comprising Cash flow from investment 29 1 14 14 Dividends 0 2 3 2 Equity risk premium 5.0% PV of cash flows 53.6 Change in net debt 34 0 -8 27 Risk free rate 7.0% PV of continuing value 75.8 FCF equity 41 10 24 19 Sector beta 0.80 DCF Value 183.4

Balance sheet summary (USDm)

Intangible fixed assets 0 0 0 0 Tangible fixed assets 53 61 79 93 Valuation data Current assets 52 49 58 31 Cash & others 49 49 57 31 Year to 12/2004a 12/2005e 12/2006e 12/2007e Total assets 106 112 137 125 EV/sales 48.4 25.4 12.0 27.6 Operating liabilities 0 0 25 15 EV/EBITDA 78.8 29.0 16.5 27.8 Gross debt 0 0 0 0 EV/IC 2.2 2.0 2.1 1.8 Net debt -49 -49 -57 -31 PE (HSBC) 20.1 19.2 28.1 Shareholders funds 106 111 112 110 P/NAV 1.6 1.5 1.5 1.5 Invested capital 55 61 54 78 FCF yield (%) 24.1 5.9 14.1 11.4 Dividend yield (%) 0.0 1.5 1.5 1.1 Ratio, growth and per share analysis Year to 12/2004a 12/2005e 12/2006e 12/2007e Issuer information Y-o-y % change Share price (TRYk) 6450.00 Country Turkey Reuters (Equity) ALGYO.IS Bloomberg (Equity) ALGYO TI Revenue 321.0 91.2 97.8 -46.4 Bloomberg (Debt) EBITDA 172.6 64.0 -26.5 Market cap (TRYm) 230 Enterprise value (USDm) 121 Operating profit 419.1 66.8 -35.1 No of shares (m) 4 Free float (%) 49 PBT 4.7 31.8 Analyst Can Oztoprak Contact details +90 212 366 16 17 HSBC EPS 4.7 31.8

Ratios (%) Revenue/IC (x) 0.1 0.1 0.2 0.1 ROIC 1.7 6.1 10.3 5.8 ROE -2.5 7.8 8.0 5.5 ROA -18.0 3.3 3.7 2.3 EBITDA margin 61.3 87.5 72.5 99.3 Operating profit margin 27.6 75.0 63.2 76.5 EBITDA/net interest (x) Net debt/equity -46.3 -44.1 -51.0 -27.9 Net debt/EBITDA (x) -32.1 -11.8 -8.4 -6.1 CF from operations/net debt Per share data (USc) EPS -74.88 238.46 249.56 170.22 HSBC EPS -74.88 238.46 249.56 170.22 DPS 0.00 69.94 73.40 50.21 NAV 2959.57 3122.78 3149.60 3086.49

12 Emerging Markets  Turkey 21 December 2005 

 Market leader in domestic glass packaging market; increasing its presence in Russia  Lower than expected demand both in Turkey and Russia clearly poses risk  We initiate coverage with Neutral rating due to limited upside potential

Company Anadolu Cam’s capacity

Anadolu Cam is an affiliate of Sisecam Holding 2000 (engaged in all types of glass production and with 1500 vertical integrated structure) and is the main glass 1000 packaging producer in Turkey. The company 500 produces returnable and non-returnable lightweight bottles for alcoholic and non-alcoholic beverages, Capacity(*1000 tons) 0 and bottles for cosmetics, pharmaceutical and food 2004 2005 2006 2007 containers. Anadolu Cam produces around 505,000 Turkey Ov erseas tons of glass packaging pa from its two plants in

Turkey (Mersin, Topkapi), way ahead of its nearest Source: HSBC, Anadolu Cam competitor, Marmara Cam (30,000 tons pa). It plans to lift this capacity to 625,000 pa by Q1 2006. Prospects

The company also has four plants (Mina, Ufa, Anadolu Cam provides exposure to the growing Pokrovsky, Gorohvetz) in Georgia and Russia. economies of Turkey and Russia. The company is Currently its foreign operations have 685,000 tons already the no.1 in its domestic market and faces pa capacity but when the new furnace in its Ufa no new entrant threat currently due to high start- plant becomes operational at the beginning of Q2 up costs. Imports are also limited due to high 2006, foreign capacity will increase to 805,000 transportation costs. Anadolu Cam is currently tons pa. In the Russian market, the company increasing its domestic capacity to 625,000 tons provides bottles for seven big beer producers and pa to capitalise on the increase it expects in glass commands c22% market share. Through its packaging demand along with the improving capacity expansion in Russia, the company macroeconomic conditions. expects to increase its market share to 60%, solely due to capacity expansion.

13 Emerging Markets  Turkey 21 December 2005 

We expect profit margins to improve slightly in Anadolu Cam – DCF valuation range Turkey as it switches from using fuel oil to natural 1.000 gas as its energy source, as the price of fuel oil is 800 almost 2.5 times that of natural gas and energy makes up c25-30% of the cost of goods sold. In 600 addition, in the middle of 2006, Sisecam group’s 400 USDm electricity producer company will start to produce 200 electricity in its Mersin plant using the 0 cogeneration method (using natural gas). We 5% 6% 7% 8% 8% 9% Risk free rate expect this to have a positive impact on margins Source: HSBC, Anadolu Cam as electricity will be purchased from its sister company (Camis Elektrik) with a discount. Risks The company is also a leading player in Russia, Downside risks to valuation include higher-than- having only begun operations in the country in expected decline in beer demand growth, 2003. Anadolu Cam plans to almost double its especially in Russia and a further increase in capacity in Russia within two years and to energy prices. Moreover, the entry of a strong command a 60% market share in 2007. Despite global player into this market might curb the growth slowing, the Russian beer sector is the company’s expansion policy in Russia. fastest-growing beer market in Europe of the past five years and we expect growth to exceed 5% pa The company recently announced it is taking into on average between 2005 and 2010. PET usage is consideration new investment opportunities in still dominant in Russian beer packaging, but the Russia, which would alter our target price; shift to premium beers by an increasing number of however, due to lack of information we haven’t brands and consumers has created a demand for attributed any value that may come from any premium packaging ie in favour of glass bottles. further growth here. Valuation and conclusion Although we expect the growth in demand for glass packaging products to increase due to We are assigning a Neutral rating to Anadolu Cam, hygiene and aesthetic concerns, higher with a notional target value of USD4.29 per share in transportation costs and availability of cheaper a range of USD3.86-4.72 derived from DCF substitutes such as PET, can or paper packaging valuation (7% risk-free rate, 5% equity risk may hamper growth prospects. premium, 10.5% WACC). The midpoint indicates just 4% upside potential for the stock. We have used DCF analysis as we believe it is a more appropriate valuation method than multiple analysis for a fast- growing company like Anadolu Cam.

14 Emerging Markets  Turkey 21 December 2005 

Anadolu Cam – income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 361 360 455 451 COGS -256 -254 -314 -332 Gross profit 104 106 141 119 Operating costs -37 -45 -61 -59 EBIT 67 60 80 59 Net interest income (loss) -1 -5 -10 -11 PBT 60 49 47 38 Tax -13-9-6-2 Minorities -2 -2 -3 -2 Net profit 46 38 38 34

EBITDA 117 106 126 116

Source: Company data, HSBC estimates

Anadolu Cam – balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total assets 573 689 772 819 Liquid assets 155 160 199 209 Fixed assets 418 529 573 610 Total liabilities 164 248 304 329 Current liabilities 75 101 113 109 Financial debt 89 144 186 213 Short-term financial debt 38 40 40 41 Equity 381 408 431 447 Minorities 28 32 38 43 Source: Company data, HSBC estimates

Anadolu Cam – cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 117 106 126 116 Change in WC 6 -7 20 3 Interest expense (inc) -10 -21 -45 -44 Tax -13-9-6-2 HSBC CF 100 69 95 73 Dividends -14 -15 -15 -17 Cash flow before capex 87 53 80 56 Capex -47 -128 -90 -90 Net cash flow 40 -75 -10 -34

Source: Company data, HSBC estimates

15 Emerging Markets  Turkey 21 December 2005 

Anadolu Cam: financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Dom. sales vol. 527k tons 526k tons 617k tons 585k tons 361 396 500 494 Int. sales vol 372k tons 478k tons 677k tons 731k tons Revenue GDP 8.9% 4.9% 5.0% 4.6% EBITDA 117 114 126 132 Avg USD/TRY 1.421 1.348 1.423 1.507 Depreciation & amortisation -50 -45 -46 -56 YE USD/TRY 1.342 1.379 1.452 1.533 Operating profit/EBIT 67 69 80 75 Net interest -1 -5 -10 -11 PBT 60 51 40 50 HSBC PBT 60 51 40 50 Notes Taxation -13 -14 -5 -2 We expect an increase in the company’s total sales volume in the next year, the Net profit 46 35 33 45 exact amount to depend on new capacity additions. However, as we expect one of HSBC net profit 46 35 33 45 the company’s furnaces in Turkey will be in cold repair in 2007, we forecast a decline in Anadolu Cam’s domestic sales volume in that year. Cash flow summary (USDm) Cash flow from operations 100 63 84 73 Capex -47 -128 -90 -90 Cash flow from investment -47 -128 -90 -90 DCF analysis Dividends -14 -14 -13 -23 Change in net debt 10 78 38 10 HSBC assumptions DCF, comprising FCF equity 63 -34 43 30 Equity risk premium 5% PV of cash flow 113 Balance sheet summary (USDm) Risk free rate 7% PV of cont. value 605 0000Comp. beta 0.91 DCf Value 654 Intangible fixed assets Tangible fixed assets 369 474 518 555 Current assets 155 165 202 213 Cash & others 27 3 7 24 Valuation data Total assets 573 694 776 823 Year to 12/2004a 12/2005e 12/2006e 12/2007e Operating liabilities 36 69 80 71 Gross debt 89 144 186 213 EV/sales 1.7 1.8 1.5 1.5 Net debt 63 141 179 189 EV/EBITDA 5.1 6.2 6.2 6.2 Shareholders funds 381 406 426 448 EV/IC 1.3 1.3 1.2 1.1 Invested capital 462 567 633 672 PE (HSBC) 14.0 18.4 18.9 14.0 P/NAV 1.7 1.6 1.5 1.4 Ratio, growth and per share analysis FCF yield (%) 11.7 -5.9 7.5 5.3 Dividend yield (%) 2.1 2.2 2.1 3.5 Year to 12/2004a 12/2005e 12/2006e 12/2007e Y-o-y % change Issuer information Revenue 33.1 9.8 26.2 -1.1 Share price (TRYk) 570.00 Country Turkey EBITDA 32.6 -2.0 10.5 4.0 Reuters (Equity) ANACM.IS Bloomberg (Equity) ANACM TI Operating profit 20.8 2.9 16.4 -6.5 Bloomberg (Debt) ANACM PBT 6.9 -15.6 -20.7 25.4 Market cap (TRYm) 863 Enterprise value (USDm) 713 HSBC EPS -10.8 -23.8 -3.7 35.0 No of shares (m) 151 Free float (%) 19 Analyst Gunes Ozdemir Contact details +90 212 366 1624 Ratios (%)

Revenue/IC (x) 0.8 0.8 0.8 0.8 ROIC 12.2 9.7 11.9 11.0 ROE 12.7 8.8 8.0 10.3 ROA 8.2 6.3 6.1 7.4 EBITDA margin 32.4 28.9 25.3 26.6 Operating profit margin 18.6 17.4 16.1 15.2 EBITDA/net interest (x) 147.1 22.6 12.1 11.5 Net debt/equity 15.4 32.1 38.5 38.5 Net debt/EBITDA (x) 0.5 1.2 1.4 1.4 CF from operations/net debt 159.7 44.9 46.9 38.9 Per share data (USc) EPS 30.05 22.90 22.05 29.76 HSBC EPS 30.05 22.90 22.05 29.76 DPS 9.03 9.16 8.82 14.88 NAV 251.97 268.07 281.05 295.63

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 16 Emerging Markets  Turkey 21 December 2005 

 Initiating coverage with an Overweight rating based on 20% potential upside to our notional target price  Benefits from the strength in the Turkish cement market and from being a producer of white cement where margins are higher  Acquisition of Eskisehir Cimento has improved the growth outlook

Company Additionally, the company is capable of switching &LPVDRQHRIWKH6DEDQFÕ*URXSFHPHQW one of its clinker kilns to white clinker with no additional cost. Currently, the company utilises companies, is located in Turkey’s Mediterranean this kiln approximately 45% for grey clinker and Region and sells cement both there and in Central 55% for white, meaning in the event of further Anatolia. The company operates three kilns, demand for white cement, the company can easily which have a total annual white clinker capacity shift from grey to the more lucrative white clinker of 1.0m tons and grey clinker capacity of 2.2m production. tons. In order to expand operations in Central Anatolia, where cement consumption is the GDP vs. Cimsa’s Sales second-highest after Marmara, Cimsa is currently 450 400 building a kiln at its Kayseri grinding plant, which 400 350 350 300 will increase its annual clinker capacity by 600k 300 250 250 tons in January 2006. 200 200 150 150 USDm Cimsa has benefited from the upward trend in USDbn 100 100 cement prices and sales volume, driven by strong 50 50 0 0 housing demand and sales of excess capacity to 2000 2001 2002 2003 2004 2005e 2006e 2007e the Iraqi market. Unlike Akcansa, Cimsa benefits GDP Sales more directly from Iraqi demand thanks to its Source: SIS, Cimsa, and HSBC estimates relatively close location to the Iraqi border.

In addition to grey cement, the company produces white cement, which is a high value added product, which differentiates Cimsa from its local competitors. Although white cement accounts for 33% of total cement sales by volume, in dollar terms, it accounts for 42% of the company’s overall cement sales.

17 Emerging Markets  Turkey 21 December 2005 

Prospects Valuation and conclusion

As well as the ongoing capacity upgrade at its We are initiating our coverage of Cimsa with an Kayseri facility, the acquisition of Standart Overweight rating based on 20% upside to our Cimento as part of the cement plant tenders held by notional target price of USD8.08 (USD980m the Turkish State in October 2005 has provided market capitalisation) in a range of USD7.27- further support for Cimsa’s growth plans in Central 8.89. We conclude that Cimsa offers growth Anatolia. Standart Cimento, an ex-Uzan cement potential by the positive sectoral outlook, Standart company, is located in the Central Anatolian City Cimemto acquisition and ongoing capacity of Eskisehir and has annual clinker and cement upgrade investments. Our fair value estimate is grinding capacity of 495k and 1,016k tons, derived from the combination of a multiple-based respectively. Once the necessary approvals are comparison with global peers and a DCF analysis. gained, the acquisition is expected to take place in We employ the average 2007e multiples of nine Q1 2006 for a payment of USD175.5m. This emerging market peers, ie 2.0x EV/Sales, 6.6x acquisition price implies a premium of c30% to EV/EBITDA, and 11.4x PE and arrive at a value Turkish cement sector averages based on of USD8.37 per share. Our DCF analysis, which EV/clinker and EV/cement capacity multiples, but assumes a risk-free rate of 7%, equity risk such a premium looks justifiable to us in view of premium of 5%, terminal growth rate of 2%, and the strong growth prospects for the cement market. company beta of 0.84, results in a value of USD7.79 per share. Using an equal weight for Although cement demand from Iraq is very likely each method, we arrive at our fair value estimate to lose some pace from 2007, the launch of new of USD8.08 per share. capacity and the introduction of the mortgage system in Turkey should more than offset the Cimsa – DCF valuation range possible negative impact from there and help the cement sector sustain its upward momentum. We 1,200 1,000 also think that the general elections could create 800 extra demand in the form of infrastructure 600 investments, which historically increase prior to 400 USDm 200 election periods. Under these circumstances, we 0 expect average domestic cement prices to stay at 4% 5% 6% 7% 8% 9% 10% around USD65 over the next two years. Cimsa, Risk free rate one of the major market players, should continue to benefit from the momentum in the sector, by Source: HSBC, Cimsa capitalising on its increased capacity via the Risks Kayseri investment and new Eskisehir plant. The downside risks to our valuation and Overweight rating would be: new capacity upgrade decisions by Turkish cement producers, a delay in the launch of the mortgage system and a slowdown in the construction sector’s momentum as a result of lower than expected macroeconomic growth, which would result in overcapacity in the cement sector, creating pressure on prices and margins.

18 Emerging Markets  Turkey 21 December 2005 

Cimsa – income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 219.75 266.67 340.79 347.20 COGS -141.45 -168.43 -213.96 -224.25 Gross Profit 78.30 98.24 126.84 122.95 Operating Costs -19.23 -25.57 -33.01 -32.00 EBIT” 59.08 72.67 93.82 90.95 Net Interest income (loss) 12.52 15.52 14.37 13.50 PBT 68.71 104.37 128.55 123.89 Tax -20.24 -30.74 -25.71 -24.78 Minorities 0.00 0.00 0.00 0.00 Net Profit 48.47 73.63 102.84 99.11

EBITDA 83.50 98.64 121.35 119.42

Source: Company data, HSBC estimates

Cimsa – balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total Assets 432.17 629.41 664.90 677.12 Liquid Assets 121.37 129.47 160.05 173.50 Fixed Assets 310.80 499.93 504.85 503.62 Total Liabilities 47.55 227.14 208.23 188.17 Current Liabilities 15.70 18.36 23.10 23.78 LT Liabilities 2.78 172.49 152.49 132.49 Short Term Fin. Debt 2.49 2.49 2.49 2.49 Equity 384.62 402.27 456.67 488.95 Minorities 0.00 0.00 0.00 0.00

Source: Company data, HSBC estimates

Cimsa – cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 83.50 98.64 121.35 119.42 Change in WC 0.00 0.00 0.00 0.00 Interest Expense(inc) 0.00 0.00 0.00 0.00 Tax -20.24 -30.74 -25.71 -24.78 HSBC CF 83.50 98.64 121.35 119.42 Dividends -19.85 -29.51 -45.37 -43.85 Cash Flow Before Capex 63.65 69.12 75.98 75.57 Capex -32.65 -40.00 -40.00 -35.00 Net Cash Flow 31.00 29.12 35.98 40.57

Source: Company data, HSBC estimates

19 Emerging Markets  Turkey 21 December 2005 

Cimsa: financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Dom. Cement Price (USD/ton) 54.4 63.0 66.2 66.2 220 267 341 347 Exp. Cement Price (USD/ton) 32.0 48.0 48.0 45.6 Revenue Dom. Sales Growth Rate (%) 8.0% 17.7% 83.0% 14.4% EBITDA 83 99 121 119 Exp. Sales Growth Rate (%) -38.8% -22.5% 50.0% 5.0% Depreciation & amortisation -24 -26 -28 -28 Operating profit/EBIT 59 73 94 91 Net interest 13 16 14 14 Notes PBT 69 104 129 124 We expect domestic cement prices will be at cUSD65. Cimsa will increase its HSBC PBT 69 104 129 124 sales volume in 2006 when the new kiln in Kayseri will be operational. It will also Taxation -20 -31 -26 -25 help the company to export to the Iraqi market more in 2006. Net profit 48 74 103 99 HSBC net profit 48 74 103 99 Cash flow summary (USDm) Cash flow from operations 83 99 121 119 DCF analysis Capex -33 -40 -40 -35 Cash flow from investment -33 -40 -40 -35 HSBC assumptions DCF, comprising Dividends -20 -30 -45 -44 Change in net debt -6 171 -33 -32 Equity risk premium 5% PV of cash flows 238.4 FCF equity 43 43 70 73 Risk free rate 7% PV of continuing value 549.3 Sector beta 0.84 Balance sheet summary (USDm) DCF Value 940.9

Intangible fixed assets 0000

Tangible fixed assets 162 172 176 174 Current assets 121 129 160 174 Cash & others 54 53 66 77 Valuation data Total assets 432 629 665 677 Year to 12/2004a 12/2005e 12/2006e 12/2007e Operating liabilities 26 29 34 35 Gross debt 3 172 152 132 EV/sales 2.9 2.3 1.8 1.6 Net debt -52 119 87 55 EV/EBITDA 7.5 6.3 4.7 4.5 Shareholders funds 385 402 457 489 EV/IC 3.1 2.8 2.5 2.4 Invested capital 202 219 237 236 PE (HSBC) 22.2 11.2 7.9 8.2 P/NAV 2.8 2.1 1.8 1.7 Ratio, growth and per share analysis FCF yield (%) 6.3 5.6 10.6 11.4 Dividend yield (%) 1.8 3.6 5.3 5.1 Year to 12/2004a 12/2005e 12/2006e 12/2007e Y-o-y % change Issuer information Revenue 7.0 21.4 27.8 1.9 Share price (TRYk) 905.00 Country Turkey EBITDA 52.0 18.1 23.0 -1.6 Reuters (Equity) CIMSA.IS Bloomberg (Equity) CIMSA TI Operating profit 76.7 23.0 29.1 -3.1 Bloomberg (Debt) PBT 29.4 51.9 23.2 -3.6 Market cap (TRYm) 1,098 Enterprise value (USDm) 605 HSBC EPS 12.8 97.3 39.7 -3.6 No of shares (m) 121 Free float (%) 27 Analyst Can Oztoprak Contact details +90 212 366 16 17 Ratios (%)

Revenue/IC (x) 1.1 1.3 1.5 1.5 ROIC 21.4 24.3 32.9 30.8 ROE 13.3 18.7 23.9 21.0 ROA 11.8 13.9 15.9 14.8 EBITDA margin 38.0 37.0 35.6 34.4 Operating profit margin 26.9 27.3 27.5 26.2 EBITDA/net interest (x) Net debt/equity -13.4 29.7 19.0 11.3 Net debt/EBITDA (x) -0.6 1.2 0.7 0.5 CF from operations/net debt 82.6 139.8 216.5 Per share data (USc) EPS 30.76 60.70 84.78 81.70 HSBC EPS 30.76 60.70 84.78 81.70 DPS 12.60 24.33 37.40 36.15 NAV 244.10 331.61 376.46 403.07

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 20 Emerging Markets  Turkey 21 December 2005 

 Initiating coverage with an Underweight rating. Cost of equity adjusted fair value of TRY7.91 (USD5.90) implies 11% downside  A mid-sized bank, having grown rapidly after 2001 by acquiring failed banks’ branches  Developing its retail products, but portfolio is still dominated by corporate loans. Per branch efficiency is below the average, especially in terms of deposit collection and fee base

Company The bank now has 205 domestic branches (223 including international branches) and has plans to Denizbank, controlled 75% by the Zorlu Group, is invest further in its branch network to reach 235 a story of the dedicated growth of a banking branches by the end of this year. Deposits per franchise from a very small base. The bank was branch increased slightly from TRY18.7m in 2003 initially established as a state bank to support the to TRY20.5m, but this is still significantly lower Turkish maritime industry. It was then acquired than the sector average of TRY35m. by Zorlu Group in 1997. Zorlu Group is one of the largest conglomerates in Turkey, mainly focused Denizbank - 3Q05 consolidated loan breakdown on manufacturing and exporting white goods and SME 6% Credit Card consumer durables, along with extensive 12% operations in electricity generation, gas Corporate distribution and home textiles. Zorlu does not use 39% Retail Denizbank as a vehicle to finance its group 12% companies: cash loans to group companies are as low as 2.4% and group company deposits make up 6.5% of total deposits. Commercial 31%

Denizbank is among the mid-sized banks in Source: HSBC Turkey, with a 2.3% asset market share, and holding 2.9% of net loans and 2.0% of deposits in the banking system. The bank’s main expansion followed the 2001 crisis when it acquired branches of those failed banks from the SDIF (Savings Deposits Insurance Fund). Its number of branches tripled to 161 in 2002, from 55 in 2001.

21 Emerging Markets  Turkey 21 December 2005 

Prospects Valuation and discussion

With the branch acquisitions in 2002, the bank Our end-2007 implied mid-target value for completed the first stage of its growth strategy, Denizbank is TRY10.62 (USD7.90), in a range of but we think this extensive branch network is still TRY10.3-10.9 (USD7.7-8.1). Adjusting this for immature, and is not supported by the customer the cost of equity implies TRY7.91 (USD5.90) base, which is keeping the cost/income ratio high. per share, some 10.9% below the market value. Moreover, on a bank-only basis, 9M 2005 We switch into TRY forecasts for Denizbank, consumer deposits are up by only 12%, raising mainly based on bank-only BRSA figures. concerns for the funding of future demand for TL Valuation summary loans. Denizbank claims to have reached 1.2m Long-term risk free rate 10.0 individual clients as of 9M 2005, up by some 20% Forward looking Beta 1.29 y-t-d, but we think per branch efficiency is still Market risk premium 5.5 COE % 17.1 not sufficient, as deposits per branch remain at CAGR of EPS between 2005-09 16.5% TRY20.5m, significantly lower than the sector EPS growth (2010-2014) 8.0% average of TRY35m. The number of branches has Perpetual EPS growth 0.0% increased further, by 20% in 2004, so, Deniz Sum of PV (TRYm) 2,144 Other Value (from participations etc.) (TRYm) 358 clearly needs some time to increase branch Total fair value (TRYm) 2,502 profitability. The speed at which this occurs will Total fair value (USDm) 1,862 have an impact on our valuation, as we mention in Source: HSBC estimates the ‘risks’ section below. Our fair value is derived from our three-stage In 2005 y-t-d, loans have grown by 57%, but discounted earnings model and a multiple-based remain focused on corporate loans. The bank has valuation for unconsolidated subsidiaries. already increased its retail and credit card lending As of Q3 2005, consolidated subsidiaries made up from 19% of total loans to 23% as of Q3 2005, 22% of total assets, 4% of consolidated equity and but this is still low compared to the sector 15% of net profit. Hence, we employ a 10.0x average. Hence, compared to its peers, Denizbank 2005e PE for the unconsolidated subsidiaries, has lower margins and a higher cost/income ratio. making up 14% of overall valuation. Denizbank runs profitable international banking We believe that the favourable macro story for the operations, based in Russia and Austria. Turkish Banks has already been reflected in Management does not expect significant growth Denizbank’s market value. However, if we use from these subsidiaries, but in our view the Russian fairly generous valuation terms and without any franchise is promising. The bank is also active expectation of a slowdown in the macroeconomic domestically in the leasing and factoring segments. recovery, we still fail to justify the current market value. Hence, we initiate coverage for Denizbank with an Underweight rating.

22 Emerging Markets  Turkey 21 December 2005 

Risks Further down the road, the major risks for a lower valuation would obviously be triggered by a Given significant interest in the Turkish banks, slowdown in the Turkish macro environment. and deals being sealed at multiples of 2.0-2.4x From a company-specific perspective, the PBV, Denizbank is similar to Finansbank in the possibility early and intense competition might sense that they are both emerging as strong put extra pressure on margins. candidates for further M&A activity in the Turkish banking sector. Denizbank’s main shareholder Zorlu Group often publicly states that they would be more than willing to team up with a larger partner in banking. Introducing a foreign partner could put Denizbank into different valuation universe in the long term, boosting profitability through enhancing its competitive edge. Moreover, our valuation could also require revisiting if Denizbank turns out to be very successful in reducing costs by focusing more on branch network efficiency and retail banking.

23 Emerging Markets  Turkey 21 December 2005 

Denizbank: Financials & valuation

Financial statements Core profitability (% RWAs) and leverage Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e P&L summary (TRYm) Net interest income 9.3 8.9 8.0 7.1 Net fees/commissions 1.7 1.8 1.9 2.0 Net interest income 342 458 514 567 Trading profits -0.3 0.3 0.4 0.3 Net fees/commissions 61 92 120 156 Total income 15.5 13.6 12.4 11.5 Trading profits -9 17 23 24 Other income 4.8 2.6 2.3 2.0 Other income 178 132 146 161 Operating expense -8.0 -6.5 -5.8 -5.2 Total income 572 699 803 908 Pre-provision profit 7.6 7.0 6.7 6.2 Operating expense -294 -338 -373 -413 Bad debt charge -2.3 -2.3 -2.3 -1.9 Bad debt charge -83 -121 -148 -153 HSBC attributable profit 3.3 3.7 3.5 3.4 Other -50 0 00 Leverage (x) 5.1 5.5 5.7 5.6 HSBC PBT 145 240 282 342 Return on average equity 17.0 20.6 19.8 19.4 Exceptionals 0 0 00 PBT 145 240 282342 Taxation -23 -48 -56 -68 Minorities + preferences 0 0 0 0 Discounted earnings: PV of 2007-end valuation range per share Attributable profit 123 192 226 274 Intermediate earnings growth CoE(%) 17.6 17.1 16.6 HSBC attributable profit 123 192 226 274 7.0% 7.6 7.8 8.0 Balance sheet summary (TRYm) 7.5% 7.6 7.8 8.1 Ordinary equity 855 1,014 1,261 1,559 8.0% 7.7 7.9 8.1 HSBC ordinary equity 855 1,014 1,261 1,559 8.5% 7.8 8.0 8.2 Customer loans 2,629 4,296 5,556 6,667 9.0% 7.8 8.1 8.3 Debt securities holdings 1,495 1,644 1,734 1,836 Methodology: three-stage earnings growth, explicit period (2005-09e), intermediate (2010-14e) perpetual growth Customer deposits 3,985 4,463 4,999 5,599 Assumptions: perpetual growth (0%) Interest earning assets 5,523 7,042 8,572 9,861 Total assets 6,690 8,588 9,920 11,323 Discounted earnings: 2007-end valuation range per share Capital (%) Intermediate earnings growth CoE (%) 17.6 17.1 16.6 RWA (TRYm) 3,684 5,158 6,454 7,933 7.0% 10.2 10.4 10.7 Core tier 1 0.0 0.0 0.0 0.0 7.5% 10.2 10.5 10.8 Total tier 1 23.2 19.6 19.5 19.6 8.0% 10.3 10.6 10.9 Total capital 23.2 19.6 19.5 19.6 8.5% 10.4 10.7 11.0 9.0% 10.5 10.8 11.1 Ratio, growth & per share analysis Methodology: three-stage earnings growth, explicit period (2005-09e), intermediate (2010-14e) perpetual growth Year-on-year % change Assumptions: perpetual growth (0%)

Total income 32.8 22.2 14.8 13.2 Operating expense 41.4 15.0 10.4 10.9 Valuation data Pre-provision profit 24.8 29.8 18.9 15.1 Year to 12/2004a 12/2005e 12/2006e 12/2007e EPS -27.3 56.7 17.3 21.2 HSBS EPS -27.3 56.7 17.3 21.2 PE (HSBC) 22.9 14.6 12.5 10.3 DPS Pre-provision multiple 10.1 7.8 6.5 5.7 NAV (including goodwill) -7.1 18.6 24.4 23.7 P/NAV 3.3 2.8 2.2 1.8 Ratios (%) P/NAV (including goodwill) 3.3 2.8 2.2 1.8 Cost/income ratio 51.3 48.3 46.4 45.5 Equity cash flow yield (%) -4.8 3.2 4.8 6.0 Bad debt charge 3.8 3.5 3.0 2.5 Dividend yield (%) 0.0 0.0 0.0 0.0 Customer loans/deposits 66.0 96.3 111.1 119.1 NPL/loan 4.5 5.1 5.6 5.6 NPL/RWA 3.1 4.1 4.7 4.6 Issuer information Provision to risk assets/RWA -2.3 -2.3 -2.3 -1.9 Share price (TRYk) 890.00 Country Turkey Net write-off/RWA 0.0 0.0 0.0 0.0 Reuters (Equity) DENIZ.IS Bloomberg (Equity) DENIZ TI Coverage -72.5 -57.0 -48.4 -41.7 Market cap (TRYm) 2,813 Bloomberg (Debt) ROE (including goodwill) 17.0 20.6 19.8 19.4 No of shares (m) 316 Free float (%) 25 Per share data (USc) Analyst Levent Topcu Contact details +90 212 366 1619

EPS 38.82 60.83 71.38 86.54 HSBC EPS 38.82 60.83 71.38 86.54 DPS 0.00 0.00 0.00 0.00 NAV 270.34 320.63 398.81 493.15 NAV (including goodwill) 270.34 320.63 398.81 493.15

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 24 Emerging Markets  Turkey 21 December 2005 

 'RJDQ

Company In addition, we estimate the acquisition should 'RJDQ

Although DYH ranks first in terms of its share of ex -Uzan 7% the ad market, revenues are currently derived mainly from the printed media segment (72%). As Cukurova 12% broadcasting gets the lion’s share of advertising in

Turkey with c53%, the Star TV acquisition will 6RXUFH+6%&'RJDQ

25 Emerging Markets  Turkey 21 December 2005 

Prospects We value Dogan

With its market-leading position in Turkey’s The law, which was annulled by Constitutional media sector, we believe DYH should be well Court, states that if a TV/radio channel’s average positioned to benefit from the booming ad market. annual viewership/listening share exceeds 20%, In addition, the inclusion of Star TV should boost ownership of a person (or a legal entity) in the DYH’s weak EBITDA margin in broadcasting by given TV or radio cannot be more than 50%. The creating synergies and reducing some overhead restriction also applies if a person (or legal entity) costs. With two mainstream channels, DYH’s has more than one TV/radio and these position with its advertisers should also be stations/channels cumulatively exceed this improved. threshold level ie 20%. Hence, if the law is enacted as it stands, DYH may be forced to The impact of the Star TV acquisition is likely to reduce its stake in broadcasting assets, as it will be felt in 2007e financials, with the shares trading exceed the threshold (DYH’s channels have 17% at 9.45x 2007e EV/EBITDA. viewership rate and Star TV has 8% viewership Valuation and conclusion rate, which should improve).

We estimate the net contribution of Dogan TV to Foreign ownership is currently capped at 25% in DYH at USD810m, assuming that Star TV was Turkey. The government is aiming to remove the acquired at fair value. However, the real value limit, however, which is likely to attract addition to the group comes from the likelihood previously reluctant foreign players to the market. that the acquisition has hindered or at least A financially strong investor could purchase one delayed the entrance of a strong global player. of the several free-to-air TV stations currently up for sale, stiffening the competition for DYH.

26 Emerging Markets  Turkey 21 December 2005 

Dogan

EBITDA 172 184 205 280

Source: HSBC estimates, company data

'RJDQ

Source: HSBC estimates, company data

Dogan

Source: HSBC estimates, company data

27 Emerging Markets  Turkey 21 December 2005 

DYH: Financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Ad/GDP Ratio 0.41% 0.45% 0.48% 0.52% Revenue 1,044 1,216 1,388 1,528 TV’s ad share 51% 53% 53% 53% EBITDA 172 184 205 280 Newsp’s ad sh. 36% 34% 33% 33% Depreciation & amortisation -94 -78 -55 -59 Magazine ad.sh 4% 3% 3% 3% Operating profit/EBIT 78 106 150 220 Others ad share 10% 10% 10% 11% Newsprint Price 563USD/ton 680USD/ton 670USD/ton 660USD/ton Net interest -7 6 -51 -48 PBT 90 112 98 172 HSBC PBT 90 112 98 172 Notes Taxation -43 -34 -20 -34 We expect ad/GDP ratio to double in Turkey within 10 years, following the same Net profit 44 52 53 112 pattern as countries that have already experienced disinflation process. This HSBC net profit 44 52 53 112 translates into 11% CAGR during 2005-14 Cash flow summary (USDm) Broadcasting is likely to maintain its large piece of the total ad pie, ie preserve its 53% share Cash flow from operations 97 158 176 245 Capex -72 -70 -70 -70 Cash flow from investment -72 -70 -70 -70

Revenue 47.7 16.5 14.1 10.1 Valuation data EBITDA 104.1 6.6 11.3 36.8 Operating profit 35.4 40.9 47.2 Year to 12/2004a 12/2005e 12/2006e 12/2007e PBT 60.5 24.9 -12.3 75.0 2.4 2.3 2.0 1.7 HSBC EPS -9.5 18.5 1.7 109.4 EV/sales EV/EBITDA 14.8 15.3 13.5 9.4 Ratios (%) EV/IC 2.9 2.4 2.4 2.4 PE (HSBC) 49.2 41.6 40.9 19.5 Revenue/IC (x) 1.3 1.2 1.2 1.4 P/NAV 2.4 4.1 3.9 3.5 ROIC 5.2 7.3 10.3 15.7 FCF yield (%) 0.0 1.2 1.5 4.2 ROE 10.5 10.5 9.8 18.8 Dividend yield (%) 0.0 0.0 0.5 1.0 ROA 4.5 8.9 8.7 12.1 EBITDA margin 16.5 15.1 14.7 18.3 Operating profit margin 7.5 8.7 10.8 14.4 Issuer information EBITDA/net interest (x) 24.1 4.0 5.8 Net debt/equity 29.5 58.2 43.7 25.5 Share price (TRYk) 510.00 Country Turkey Net debt/EBITDA (x) 1.1 2.3 1.7 0.8 Reuters (Equity) DYHOL.IS Bloomberg (Equity) DYHOL TI CF from operations/net debt 49.3 36.7 50.5 110.9 Bloomberg (Debt) Market cap (TRYm) 2,938 Enterprise value (USDm) 2812 Per share data (USc) No of shares (m) 576 Free float (%) 30 Analyst Gunes Ozdemir Contact details +90 212 366 1624 EPS 7.68 9.10 9.25 19.36 HSBC EPS 7.68 9.10 9.25 19.36 DPS 0.00 0.00 1.85 3.87 NAV 156.69 91.49 98.19 107.74

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 28 Emerging Markets  Turkey 21 December 2005 

 One of the most efficient and profitable Turkish banks, active in credit cards, building market share in housing loans and a strong candidate for second-tier M&A activities  High leverage with 14% CAR (one of the lowest); increasingly dependent on external financing  Solid fundamentals but valuation stretched: CoE adjusted notional target price TRY4.95 (USD3.68) implies 11% downside. Initiate with Underweight

Company The Russian and Romanian operations are making a positive bottom line and should bring rapid Finansbank is one of the largest second-tier banks growth. in Turkey, commanding a total asset market share of 3.0%. The bank has been growing aggressively, Morgan Stanley has recently been mandated as a especially in 2004, posting 32% inflation-adjusted consultant bank to explore future partnership growth in assets vs. 8% growth for the sector. It opportunities for Finansbank. We believe this has 5.0% market share in loans, with a strong signals future M&A possibilities. positioning in credit card loans, at 7.1% market Finansbank - Q3 2005 loan breakdown share. Finansbank has also been investing in Credit Card housing loan market, increasing market share 17% from 4.3% in FY 2004 to 6.2% in 9M 2005. Corporate 29% Relative to its Turkish peers size, Finansbank has the largest foreign operations: the Netherlands, SME Switzerland, Romania, Russia and Ukraine 17% generate USD60m-70m annual income (18% of consolidated profit as of 9M 2005). Finansbank’s operations, particularly in the Netherlands and Retail Switzerland, exist as standalone mature franchises, Commercial 13% 24% generating a ROAE of 18% (Q3 2005) and excess Source: Company presentation cash to fund growth in Russia and Romania. These franchises also generate a stable and solid income stream that smoothes out earnings.

29 Emerging Markets  Turkey 21 December 2005 

Prospects We base our forecasts for Finansbank in TRY, using mainly bank-only BRSA figures. Our fair Finansbank has been growing and investing value for domestic operations is derived from a heavily during the post-crisis (2001 to date) three-step discounted earnings model. period, both in Turkey and abroad. It has become a well-run bank, in our view, enjoying the highest We acknowledge that Finansbank’s international net interest margin in the Turkish banking sector presence is sizeable and profitable. As of Q3 (9.3% in 9M 2005 unadjusted, unconsolidated), 2005, consolidated subsidiaries made up 33% of along with the lowest securities holdings and the total assets, 11% of consolidated equity and 18% highest loan/assets ratios (61% as of 9M 2005 vs. of net profit. Hence, we employ a 13.0x 2005e the sector average of 37%). Finansbank has PER for the unconsolidated subsidiaries, making accumulated a respectable customer base and up 20% of overall valuation, which we believe is cross-selling ratio, with particular success in generous but justified due to the high growth credit card loans. prospects in Romania and Russia.

Due to its extensive exposure in higher yielding In addition to the implied downside to our assets, however, Finansbank has one of the lowest valuation, the bank is trading at 3.9x 2005e PBV capital adequacy ratios of its peers, at 14% as of 9M (unconsolidated) and 3.5x 2005e PBV 2005. This is still healthy, in our view, evidencing (consolidated), by far the highest multiple in the capital management and optimisation, but could universe. Higher ROE would justify a certain raise concerns that it will be looking for long-term premium to its peers, but this is not sustainable finance to fund fast growth. This could in turn forever. Consequently, despite fairly generous reduce the buffer against possible asset quality valuation terms and leaving out the possibility of problems, should the economy begin to suffer. an economic slowdown, we still fail to justify the Valuation and discussion current market value. Hence, we initiate coverage for Finansbank with an Underweight rating. Our end-2007 implied notional mid-target value for Finansbank is TRY6.64 (USD4.94), in a range of Risks TRY6.5-6.8 (USD4.8-5.1); which, adjusted for the Finansbank is a highly efficient mid-sized bank cost of equity implies TRY4.95 (USD3.68) value per and a potential M&A target; hence, the share, some 11% below the market value. introduction of a stronger partner could put Finansbank into a different valuation universe in Finansbank - valuation summary the long term, boosting its competitive edge. Risk free rate 10.0 Forward looking Beta 1.20 Market risk premium 5.5 As we mentioned above, a consultant bank has COE % 16.6 already been employed to explore future CAGR of EPS between 2005e-09e 14.3% partnership opportunities. Developments here EPS growth (2010e-2014e) 8.0% Perpetual EPS growth 0.0% could be a further upside risk to our valuation.

Sum of PV (TRYm) 3,685 Participations @13x 2005e PER (TRYm) 1,014 Total market value TRYm 4,699 Total market value USDm 3,497

Source: HSBC estimates

30 Emerging Markets  Turkey 21 December 2005 

Finansbank: Financials & valuation

Financial statements Core profitability (% RWAs) and leverage Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e P&L summary (TRYm) Net interest income 8.5 8.6 7.7 6.8 Net fees/commissions 3.0 2.9 2.8 2.8 Net interest income 531 797 907 1,014 Trading profits -0.3 -0.3 -0.3 -0.2 Net fees/commissions 190 265 332 415 Total income 12.5 12.1 11.1 10.1 Trading profits -16 -30 -33 -36 Other income 1.3 1.0 0.8 0.7 Other income 80 92 98 104 Operating expense -6.1 -4.9 -4.3 -3.8 Total income 784 1,124 1,303 1,497 Pre-provision profit 6.5 7.2 6.8 6.3 Operating expense -380 -456 -504 -559 Bad debt charge -1.2 -2.2 -2.3 -2.3 Bad debt charge -72 -206 -273 -340 HSBC attributable profit 3.1 3.5 3.6 3.2 Other -77 0 00 Leverage (x) 6.6 7.8 7.6 7.4 HSBC PBT 255 462 526 598 Return on average equity 20.2 27.1 27.1 23.7 Exceptionals 0 0 00 PBT 255 462 526598 Taxation -63 -139 -105 -120 Minorities + preferences 0 0 0 0 Discounted earnings: PV of 2007-end valuation range per share Attributable profit 192 323 421 478 Intermediate earnings growth CoE(%) 17.1 16.6 16.1 HSBC attributable profit 192 323 421 478 7.0% 4.8 4.9 5.0 Balance sheet summary (TRYm) 7.5% 4.8 4.9 5.0 8.0% 4.8 4.9 5.1 Ordinary equity 1,047 1,337 1,770 2,262 8.5% 4.9 5.0 5.1 HSBC ordinary equity 1,047 1,337 1,770 2,262 9.0% 4.9 5.0 5.2 Customer loans 5,191 7,488 9,312 11,640 Debt securities holdings 1,286 1,672 1,763 1,867 Methodology: three-stage earnings growth, explicit period (2005-09e), intermediate (2010-14e) perpetual Customer deposits 4,829 6,036 7,243 8,692 growthAssumptions: perpetual growth (0%) Interest earning assets 6,741 9,378 12,088 14,485 Total assets 8,630 11,971 14,287 16,979 Discounted earnings: 2007-end valuation range per share Capital (%) Intermediate earnings growth CoE (%) 17.1 16.6 16.1 7.0% 6.3 6.5 6.7 RWA (TRYm) 6,255 9,275 11,784 14,853 7.5% 6.4 6.5 6.7 Core tier 1 0.0 0.0 0.0 0.0 8.0% 6.4 6.6 6.8 Total tier 1 16.7 14.4 15.0 15.2 8.5% 6.5 6.6 6.8 Total capital 16.7 14.4 15.0 15.2 9.0% 6.5 6.7 6.9

Ratio, growth & per share analysis Methodology: three-stage earnings growth, explicit period (2005-09e), intermediate (2010-14e) perpetual growth Assumptions: perpetual growth (0%) Year-on-year % change Total income -5.7 43.4 15.9 14.9 Valuation data Operating expense -11.7 20.0 10.4 10.9 Pre-provision profit 0.7 65.4 19.7 17.4 Year to 12/2004a 12/2005e 12/2006e 12/2007e EPS -22.0 68.7 30.2 13.6 PE (HSBC) 28.3 16.3 12.5 11.0 HSBS EPS -22.0 68.7 30.2 13.6 Pre-provision multiple 8.3 5.0 4.2 3.6 DPS P/NAV 5.2 3.9 3.0 2.3 NAV (including goodwill) -11.6 27.7 32.4 27.8 P/NAV (including goodwill) 5.2 3.9 3.0 2.3 Ratios (%) Equity cash flow yield (%) -4.5 2.1 4.5 4.9 Dividend yield (%) 0.0 0.0 0.0 0.0 Cost/income ratio 48.5 40.6 38.7 37.3 Bad debt charge 1.8 3.3 3.2 3.2 Customer loans/deposits 107.5 124.1 128.6 133.9 Issuer information NPL/loan 2.1 2.7 3.2 3.2 NPL/RWA 1.7 2.1 2.5 2.5 Share price (TRYk) 555.00 Country Turkey Provision to risk assets/RWA -1.2 -2.2 -2.3 -2.3 Reuters (Equity) FINBN.IS Bloomberg (Equity) FINBN TI Net write-off/RWA 0.0 0.0 0.0 0.0 Market cap (TRYm) 5,273 Bloomberg (Debt) FINBN Coverage -66.5 -105.1 -93.2 -92.9 No of shares (m) 950 Free float (%) 43 ROE (including goodwill) 20.2 27.1 27.1 23.7 Analyst Levent Topcu Contact details +90 212 366 1619 Mark Rorison 44 20 7992 3706 Per share data (USc)

EPS 32.47 54.77 71.33 81.06 HSBC EPS 32.47 54.77 71.33 81.06 DPS 0.00 0.00 0.00 0.00 NAV 177.46 226.59 299.94 383.32 NAV (including goodwill) 177.46 226.59 299.94 383.32

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 31 Emerging Markets  Turkey 21 December 2005 

 Following capacity increases this year that cut output, we expect easy 2006 comparables  High naphtha costs and declining product prices remain a short- term concern. Long-term prospects are weaker due to expected global capacity increases in next two years  Underweight rating due to unattractive valuation. Risk to rating from possible block sale of company

Company to monetise 34.5% of its 88% stake in the company in March 2005 (remaining 7% is held by Turkey’s sole producer of basic petrochemicals the Pension Fund) and increase the free float from and the biggest producer of thermoplastics and 4% to 39%. We expect the remaining shares to be intermediates in Turkey, Petkim currently meets put up for sale in 2006. The Privatisation 33% of domestic demand. Although there are Administration has announced that it shelved the some other small petrochemical companies in block sale option and the strategy is now one of Turkey, most of the remaining demand is met by further SPOs with the aim of taking Petkim imports. Despite a recent attempt by importers to private by increasing the free-float rate above reduce prices, Petkim has been able to sell all its 50%. However, this may be affected by the recent output to the market due to a higher level of increase in foreigners’ direct investment interest demand in Turkey. in Turkey and we believe both options could be Increasing capacity and meeting the increased on the agenda. demand in the domestic market have been part of Petkim’s shareholder structure the company’s strategic plan in the past few years. However, as a state-owned company, this has not always been possible as attempts by the Free Float government to privatise the company have 39% delayed execution of its strategy. The Privatisation Administration government, who previously owned 88% stake in 54% Petkim, tried to privatise the company through block sale in 2003 and 2004, but both attempts Pension Fund were unsuccessful mainly because of insufficient 7% demand. Turkey’s Privatisation Administration Source: HSBC, Petkim had to realize a secondary public offering (SPO)

32 Emerging Markets  Turkey 21 December 2005 

Under the scenario of a block sale, Petkim may Although global price trends in oil prices will become an acquisition target and investors might determine the outlook, especially for supply costs, react very positively to it, but any plan by the we expect petrochemical prices to gradually Privatisation Administration for another SPO decline during 2007-09 to significantly low levels would definitely lead to a strong overhang due to the commissioning of new petrochemical capacity in the Middle East and elsewhere. Long- on the shares. term prospects are therefore weaker than 2006, Prospects in our view. Petkim’s investment in extra capacity in 2005 led Valuation and conclusion to a temporary halt in production in some of its plants. The company was therefore unable to We initiate coverage of Petkim with an capitalise on the increase in product prices due to Underweight rating relative to our Turkish higher supply costs during this period. In 2006, coverage universe based on unattractive valuation we expect Petkim will benefit from higher sales and sector prospects. Using a DCF analysis volumes (due to increase in capacity from 1.35m (risk-free rate: 7%, WACC: 10.5%, downturn in tons to 1.65m tons) and positive market profit 2007-09), we derive a fair value range of conditions due to sufficient growth in demand. USD4.62-5.64 per share from which we take a midpoint notional target price of USD5.13. Petkim – HSBC net profit forecasts Compared to the current share price, this implies 100 11% downside risk. 80 Petkim – EBITDA forecasts 60 40 300

20 250 0 200 -20 150 -40 2004 2005e 2006e 2007e 2008e 100 50 Source: company, HSBC estimates 0 2004 2005e 2006e 2007e 2008e A y-o-y recovery in 2006 performance seems very likely due to easier comparisons with 2005, and Source: HSBC an improvement in profitability may be a positive catalyst for the share price. We expect the Risks company to post a loss of USD32m in 2005 and a It will be the privatisation roadmap that will rather net profit of USD86m in 2006, with the recovery determine the stock’s performance in the being led by operating performance. We expect upcoming period, in our view. A block sale EBITDA to increase from USD64m in 2005 to decision might be a positive catalyst for the shares USD246m in 2006. as we have experienced other major block sale processes in 2005. On the other hand, a sharp decline in oil prices and higher than expected product prices also pose risks to our rating.

33 Emerging Markets  Turkey 21 December 2005 

Petkim – income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 1,169 1,093 1,421 1,428 COGS -1,043 -1,025 -1,155 -1,172 Gross profit 125 68 266 256 Operating costs -62 -56 -72 -76 EBIT 56 4 186 172 Net interest income (loss) 42 29 22 17 PBT 46 -20 165 149 Tax 0 -12 -79 -71 Minorities 0 0 0 0 Net profit 46 -32 86 77

EBITDA 206 64 246 233

Source: Petkim, HSBC estimates

Petkim – balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total assets 1,307 1,334 1,548 1,642 Liquid assets 460 385 524 538 Fixed assets 847 949 1,024 1,104 Total liabilities 199 168 182 197 Current liabilities 113 102 111 120 Financial debt 8 10 10 11 Short-term fin. debt 8 10 10 11 Equity 1,108 1,167 1,367 1,447 Minorities 0 0 0 0

Source: Petkim, HSBC estimates

Petkim – cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 206 64 246 233 Change in WC 151 -6 18 20 Interest expense(inc) -12 -11 -10 -9 Tax 0 -12 -79 -71 HSBC CF 345 36 176 172 Dividends 0 0 0 0 Cash flow before capex 345 36 176 172 Capex -93 -140 -84 -67 Net cash flow 252 -104 92 105

Source: Petkim, HSBC estimates

34 Emerging Markets  Turkey 21 December 2005 

Petkim: Financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Brent average 39 55 57 50 (USD/bbl) Revenue 1,169 1,093 1,421 1,428 GDP Growth 8.9 4.9 5.0 4.6 EBITDA 206 64 246 233 Rates Depreciation & amortisation -150 -60 -61 -60 USD/TRY 1.3421 1.3794 1.4521 1.5330 Operating profit/EBIT 56 4 186 172 period-end Net interest 42 29 22 17 USD/TRY 1.4218 1.3485 1.4236 1.5073 PBT 46 -20 165 149 average HSBC PBT 46 -20 165 149 Taxation 0 -12 -79 -71 Net profit 46 -32 86 77 HSBC net profit 46 -32 86 77 Notes Cash flow summary (USDm) We initiate coverage of Petkim with an Underweight rating relative to our Turkish Cash flow from operations 345 36 176 172 coverage universe based on unattractive valuation and sector prospects. Using a Capex -93 -140 -84 -67 DCF analysis (risk-free rate: 7%, WACC: 10.5%, downturn in profit 2007-09), we Cash flow from investment -93 -140 -84 -67 derive a fair value range of USD4.62-5.64 per share from which we take a Dividends 0 0 0 0 midpoint notional target price of USD5.13. Despite growing demand, we expect Change in net debt -6 59 -112 15 product prices to decline significantly in 2007-09 due to anticipated downturn in FCF equity 306 -63 124 131 the petrochemical cycle. Balance sheet summary (USDm) DCF analysis Intangible fixed assets 0 0 0 0 Tangible fixed assets 847 949 1,023 1,104 HSBC assumptions DCF, comprising Current assets 460 385 524 538 Cash & others 124 67 180 166 Equity risk premium 5.0% PV of cash flows USD468m Total assets 1,307 1,334 1,548 1,642 Risk free rate 7.0% PV of continuing value USD453m Operating liabilities 106 93 101 109 Company beta 0.96 DCF value USD1,050m Gross debt 8 10 10 11 Net debt -116 -58 -170 -155 Shareholders funds 1,108 1,167 1,367 1,447 Invested capital 1,076 1,174 1,267 1,367 Valuation data Year to 12/2004a 12/2005e 12/2006e 12/2007e Ratio, growth and per share analysis EV/sales 0.9 1.0 0.7 0.7 Year to 12/2004a 12/2005e 12/2006e 12/2007e EV/EBITDA 5.2 17.4 4.1 4.4 EV/IC 1.0 1.0 0.8 0.7 Y-o-y % change PE (HSBC) 25.5 13.7 15.3 Revenue 49.8 -6.5 30.0 0.5 P/NAV 1.1 1.0 0.9 0.8 EBITDA 744.3 -68.7 283.2 -5.5 FCF yield (%) 26.0 -5.4 10.5 11.1 Operating profit -92.3 4246.7 -7.2 Dividend yield (%) 0.0 0.0 0.0 0.0 PBT -143.3 -10.1 HSBC EPS -169.3 -10.1 Issuer information Ratios (%) Share price (TRY) 7.75 Country Turkey Revenue/IC (x) 1.2 1.0 1.2 1.1 Reuters (Equity) PETKM.IS Bloomberg (Equity) PETKM TI ROIC 6.6 1.8 8.2 7.1 Bloomberg (Debt) PETKM ROE 4.6 -2.8 6.8 5.5 Market cap (TRYm) 1,587 Enterprise value (USDm) 1119 ROA 4.0 -1.1 6.3 5.1 No of shares (m) 205 Free float (%) 39 EBITDA margin 17.6 5.9 17.3 16.3 Analyst Bulent Yurdagul Contact details +90 212 366 1604 Operating profit margin 4.8 0.4 13.1 12.1 EBITDA/net interest (x) Net debt/equity -10.5 -4.9 -12.4 -10.7 Net debt/EBITDA (x) -0.6 -0.9 -0.7 -0.7 CF from operations/net debt Per share data (USc) EPS 22.54 -15.61 41.87 37.66 HSBC EPS 22.54 -15.61 41.87 37.66 DPS 0.00 0.00 0.00 0.00 NAV 541.08 570.06 667.51 706.55

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 35 Emerging Markets  Turkey 21 December 2005 

 Turkey’s largest fuel retailer has been benefiting from sector liberalisation since the beginning of the year  Higher distribution margins and an ongoing recovery in financials are positive catalysts for the shares  Initiate coverage with Overweight rating based on attractive valuation and strong growth prospects

Company From Q2 2005, the company increased its distribution margins significantly, in line with the Turkey’s leading fuel retailer, Petrol Ofisi (PO), is other sector players. a 93%-owned subsidiary of Turkey’s leading conglomerate Dogan Holding. Petrol Ofisi is High leverage has been a concern over the past currently the Turkish market leader in all fuel few years due to PO’s merger with its huge debt products: diesel (35.2%), gasoline (25.0%), black holder parent Is-Dogan Petroleum in 2002. Strong products (46.4%), aviation products (74.6%) and cash generation capabilities of the firm and a lubricants (25.9%). Since privatisation back in benign macro economic outlook have turned out 2001, PO has improved efficiency with fewer to be positive for PO. The bottom line has stations but higher sales per station. PO, unlike its benefited from a stronger TRY. We expect competitors, supplies nearly the whole improvements in financial performance to geographical area of Turkey with its existing 3,200 continue to boost the shares in the medium term. stations. With its huge storage capacity, PO is able Prospects to utilise a higher level of imports and enjoy better- cost advantages relative to its competitors when The EU process and deregulation in the Turkish oil distributing products to the stations. sector should benefit the large players in the market. A lower incidence of smuggled products, free Petrol Ofisi has recently benefited from the pricing and removal of import limits should increase liberalisation of the energy sector since the operational profitability. Strong market conditions beginning of 2005, with the removal of import and lower tax rates in the long term should serve to limits and price regulations. As the market leader, increase local consumption. Petrol Ofisi’s plans to Petrol Ofisi is able to lead sector pricing trends. support its existing operations with refining or The removal of import limits means reduced natural gas business will diversify its portfolio and product costs, competitive payment terms and tax should minimise product-specific risks. advantages for PO, and the wider liberalisation process has provided PO the flexibility to improve its cost structure and sales prices.

36 Emerging Markets  Turkey 21 December 2005 

The growing consumption of natural gas, which Petrol Ofisi – financial debt (USDm) has in the past posed a significant threat to some 1,000 Petrol Ofisi products, could now enable the 900 800 company to sustain long-term growth. 700 600 Petrol Ofisi - net profit (USDm) 500 400 350 300 200 300 100 250 0 2003 2004 2005e 2006e 2007e 200 150 Source: HSBC estimates, Petrol Ofisi 100 50 Risks 0 2003 2004 2005e 2006e 2007e 2008e Despite its strong interest and efforts, Petrol Ofisi

Source: HSBC estimates, Petrol Ofisi could not manage to acquire Turkey’s sole refinery Tupras, whose privatisation tender was Based on an improvement in distribution margins held in September 2005. More critically, the and cost reduction, we expect EBITDA growth of highest bids came from Petrol Ofisi’s two major 18% and 7% in 2005 and 2006, respectively. We competitors, Shell-Turkey and Koc Group’s estimate the bottom line will grow by 7% in 2005 OPET. Following the takeover of Tupras, Shell and 24% in 2006. We conservatively assume and OPET will have the capability to integrate intensified competition after 2007, which would Tupras vertically into their distribution business, limit growth potential for a few years. which might trigger deterioration in the Valuation and conclusion competitive environment and threaten Petrol Ofisi’s market share and/or profitability in the Since Petrol Ofisi focuses on distribution, it is not long term. possible to make a reasonable international On the other hand, as Tupras’s largest customer, comparison valuation for the stock. Therefore, we Petrol Ofisi should have the power to negotiate its apply a DCF analysis with a WACC of 9.9% and terms. Therefore, Petrol Ofisi could well prove a terminal growth rate of 1.5% for PO. DCF successful in defending its leadership position in yields a fair value range of USD4.85-5.93 with a the distribution market and continue to grow in notional target price of USD5.39 – an upside of related segments. In this case, a lower debt 16%. We therefore initiate coverage of Petrol position and increasing profitability would Ofisi with an Overweight rating. A declining debt improve the company’s long-term valuation. position with higher cash generation and attractive valuation should be key catalysts for the shares.

37 Emerging Markets  Turkey 21 December 2005 

Petrol Ofisi - cash flow Year-end Dec (USDm) 2004 2005e 2006e 2007e EBITDA 335 395 424 420 Change in WC 23 63 111 64 Interest Expense(inc) -17 -19 -19 -17 Tax -104 -111 -99 -78 HSBC CF 236 329 417 389 Dividends 0 0 0 -52 Cash Flow Before Capex 236 329 417 337 Capex -52 -69 -62 -65 Net Cash Flow 184 260 355 272

Source: HSBC estimates, Petrol Ofisi

Petrol Ofisi - balance sheet At end Dec (USDm) 2004 2005e 2006e 2007e Total Assets 3,249 3,592 3,741 3,773 Liquid Assets 962 1,284 1,432 1,464 Fixed Assets 2,287 2,308 2,309 2,309 Total Liabilities 1,751 1,707 1,571 1,300 Current Liabilities 1,138 1,223 1,201 1,094 Financial Debt 810 705 597 410 Short Term Fin. Debt 208 248 246 216 Equity 1,496 1,884 2,168 2,471 Minorities -2 -2 -2 -2

Source: HSBC estimates, Petrol Ofisi Petrol Ofisi - income statement Year-end Dec (USDm) 2004 2005e 2006e 2007e Revenues 7,723 9,615 10,226 10,022 COGS -7,401 -9,089 -9,654 -9,446 Gross Profit 322 526 573 576 Operating Costs -146 -203 -213 -224 EBIT 172 319 356 348 Net Interest income (loss) 117 -19 -19 -17 PBT 290 308 344 339 Tax -104 -111 -99 -78 Minorities 0 0 0 0 Net Profit 185 197 245 261

EBITDA 335 395 424 420

Source: HSBC estimates, Petrol Ofisi

38 Emerging Markets  Turkey 21 December 2005 

Petrol Ofisi: Financials & valuation

Financial statements Key forecast drivers Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e Profit & loss summary (USDm) Brent average 39 55 57 50 (USD/bbl) Revenue 7,723 9,615 10,226 10,022 GDP Growth 8.9 4.9 5.0 4.6 EBITDA 335 395 424 420 Rates (%) Depreciation & amortisation -162 -76 -69 -72 USD/TRY 1.3421 1.3794 1.4521 1.5330 Operating profit/EBIT 172 319 356 348 period-end Net interest 117 -19 -19 -17 USD/TRY 1.4218 1.3485 1.4236 1.5073 PBT 290 308 344 339 average HSBC PBT 290 308 344 339 Unleaded Gas. 21% 4% 5% 5% Taxation -104 -111 -99 -78 Growth Net profit 185 197 245 261 Diesel Growth 10% 2% 4% 5% HSBC net profit 185 197 245 261 Cash flow summary (USDm) Notes Cash flow from operations 236 329 417 389 Lower incidence of smuggled products, free pricing and removal of import limits Capex -52 -69 -62 -65 likely to increase operational profitability. Strong macro conditions and lower tax Cash flow from investment -52 -69 -62 -65 rates in the long term should increase local consumption. We apply a DCF Dividends 0 0 0 -52 analysis with a WACC of 9.9% and a terminal growth rate of 1.5% for PO. DCF Change in net debt -161 -313 -172 -237 yields a fair value range of USD4.85-5.93 and the mid-point of our notional fair FCF equity 319 260 355 324 value is USD5.39, which points to an upside of 16%. Therefore, we initiate coverage of Petrol Ofisi with an Overweight rating.we initiate coverage of Petrol Balance sheet summary (USDm) Ofisi with an Overweight rating. Intangible fixed assets 1,666 1,713 1,713 1,713 Tangible fixed assets 621 595 595 595 DCF analysis Current assets 962 1,284 1,432 1,464 Cash & others 93 301 364 414 HSBC assumptions DCF, comprising Total assets 3,249 3,592 3,741 3,773 Operating liabilities 933 1,002 974 890 Equity risk premium 5.5% PV of cash flows USD863m Gross debt 810 705 597 410 Risk free rate 7.0% PV of continuing value USD1,791m Net debt 717 404 233 -4 Company beta 0.87 DCF value USD2,250m Shareholders funds 1,496 1,884 2,168 2,471 Invested capital 2,223 2,290 2,403 2,469 Valuation data Ratio, growth and per share analysis Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e EV/sales 0.3 0.2 0.2 0.2 Y-o-y % change EV/EBITDA 7.9 5.9 5.1 4.6 EV/IC 1.2 1.0 0.9 0.8 Revenue 28.8 24.5 6.4 -2.0 PE (HSBC) 10.4 9.8 7.9 7.4 EBITDA 30.6 18.1 7.3 -0.9 P/NAV 1.3 1.0 0.9 0.8 Operating profit 32.6 85.5 11.3 -2.1 FCF yield (%) 16.5 13.4 18.4 16.7 PBT -8.3 6.4 11.7 -1.4 Dividend yield (%) 0.0 0.0 0.0 2.7 HSBC EPS -14.9 6.5 24.2 6.6 Ratios (%) Issuer information Revenue/IC (x) 3.7 4.3 4.4 4.1 Share price (TRY) 6.25 Country Turkey ROIC 5.4 9.2 10.9 11.1 Reuters (Equity) PTOFS.IS Bloomberg (Equity) PTOFS TI ROE 14.2 11.7 12.1 11.3 Bloomberg (Debt) PTOFS ROA 6.5 6.1 7.1 7.3 Market cap (TRYm) 2,609 Enterprise value (USDm) 2,338 EBITDA margin 4.3 4.1 4.1 4.2 No of shares (m) 417 Free float (%) 7 Operating profit margin 2.2 3.3 3.5 3.5 Analyst Bulent Yurdagul Contact details +90 212 366 1604 EBITDA/net interest (x) 20.9 21.9 24.7 Net debt/equity 47.9 21.4 10.7 -0.2 Net debt/EBITDA (x) 2.1 1.0 0.5 0.0 CF from operations/net debt 32.9 81.4 179.4 Per share data (USc) EPS 44.37 47.26 58.71 62.56 HSBC EPS 44.37 47.26 58.71 62.56 DPS 0.00 0.00 0.00 12.51 NAV 358.47 451.20 519.45 591.95

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 39 Emerging Markets  Turkey 21 December 2005 

 Growth accelerated after BNP’s acquisition in early 2005: y-t-d loan growth is 62%, one of the fastest in our universe  Earnings momentum very strong: we expect EPS to increase at a CAGR of 24% between 2005-09  Valuation attractive; initiating coverage with Overweight. Cost of equity-adjusted notional target price of TRY25.74 (USD19.03), which implies 26% upside

Company TEB – Q3 2005 loan breakdown 3% Credit Card TEB is a small bank with less than 1.5% share of Consumer 8% overall banking assets in Turkey. Prior to the Corporate acquisition with BNP, it focused on corporate 37% loans according to a conservative lending policy, giving it very low NPLs and very little presence in retail banking. The bank had a small presence in credit cards and other retail banking products but Commercial has gained significant expertise in foreign trade 52% financing and commercial banking. Source: Company

TEB’s risk-averse banking strategy, entailing high liquidity and operational efficiency, has enabled the Prospects bank’s earnings to grow at a low but steady pace. TEB’s safe banking practices and presence in trade financing has enabled the bank to achieve In late 2004 TEB entered into a JV agreement with one of the lowest deposit costs in the Turkish BNP Paribas, which acquired a 40% indirect stake bank sector. Consequently, the bank is least in TEB, in a deal concluded in February 2005. vulnerable to interest rate risk and has a much After the acquisition, TEB outlined a new strategy lower maturity mismatch. of greater focus on retail products while maintaining its niche positioning in other key areas. TEB achieved the fastest loan growth in our coverage universe y-t-d in 2005, posting 62%

increase in net loans in 9M 2005, significantly higher than the sector average of 32%. The bank also enjoys the lowest NPL ratio in the sector, at 0.92% as of 9M 2005.

40 Emerging Markets  Turkey 21 December 2005 

Since BNP became a partner in February 2005, Valuation summary TEB has begun to transform itself into a more Risk-free rate 10.0 Forward-looking beta 1.18 customer-oriented retail bank, increasing the share Market-risk premium 5.5 of retail products and loans. Share of consumer COE % 16.5 loans (including the credit card loans) increased CAGR of EPS between 2005-09 24.3% EPS growth (2010-14) 8.0% from 6% of the loan book to 10% in 9M 2005. Perpetual EPS growth 0.0% The flight-to-quality effect had an immediate Sum of PV (TRYm) 1,488 impact on deposits in 2005, where total deposits Total market value (TRYm) 1,488 increased by 32% ytd vs 17% in the sector. Total market value (USDm) 1,107 Source: HSBC estimates In our view, the re-branding has been completed satisfactorily and the major co-management issues Cross-checking our valuation with the multiples, resolved. We believe TEB now has significant TEB trades at 2.4x 2005E P/BV, a discount to its room to benefit from this strategy shift. We expect peers. Given the recovery in ROE, which we think net profit of TRY93m in 2005, an almost will reach a sustainable 20%, the valuation is threefold increase y-o-y. Given that it is attractive, upside is solid and we initiate coverage concentrating on loan growth and has significant with Overweight. equity available, we expect TEB to maintain its Risks strong earnings growth. Downside risks to our valuation include: concerns Valuation and discussion over the sustainability of margins, given that TEB Our 2007-end implied notional target value for is strong on deposit collection but has limited TEB is TRY34.60 (USD25.75), in a range of access to TRY deposits. In our view, given that TRY33.5-35.8 (USD24.9-26.7); which, adjusted TEB has finalised the partnership talks with BNP, for the cost of equity implies TRY25.74 there may also be a possibility that TEB’s long- (USD19.03) value per share, c26% higher than the term story may not be as exciting to the market as current share price. We base our forecasts for TEB other stories, leaving limited room for a re-rating in TRY, mainly using bank-only BRSA figures. of the stock. Finally, a slowdown in Turkey’s Our fair value is derived from a three-step recovering macro fundamentals may have a discounted earnings model, where we employ 10% negative impact on margins and volume. long-term risk free rate for TL, 5.5% equity risk premium and 1.18x forward-looking beta for TEB.

41 Emerging Markets  Turkey 21 December 2005 

TEB: Financials & valuation

Financial statements Core profitability (% RWAs) and leverage Year to 12/2004a 12/2005e 12/2006e 12/2007e Year to 12/2004a 12/2005e 12/2006e 12/2007e P&L summary (TRYm) Net interest income 10.1 8.9 8.4 7.3 Net fees/commissions 1.7 1.5 1.4 1.4 Net interest income 181 233 304 342 Trading profits 1.8 1.4 1.0 0.8 Net fees/commissions 30 39 51 66 Total income 15.0 12.5 11.4 10.1 Trading profits 32 35 36 37 Other income 1.4 0.8 0.6 0.5 Other income 24 21 22 24 Operating expense -8.8 -6.2 -4.9 -4.2 Total income 267 328 413 469 Pre-provision profit 6.1 6.3 6.5 5.8 Operating expense -158 -162 -178 -198 Bad debt charge -1.4 -1.2 -1.3 -1.4 Bad debt charge -25 -32 -48 -65 HSBC attributable profit 1.9 3.5 4.1 3.5 Other -31 0 00 Leverage (x) 4.7 5.9 6.3 6.3 HSBC PBT 54 134 186 206 Return on average equity 8.8 20.9 26.0 22.1 Exceptionals 0 0 00 PBT 54 134 186206 Taxation -20 -42 -37 -41 Minorities + preferences 0 0 0 0 Discounted earnings: PV of 2007-end valuation range per share Attributable profit 34 93 149 165 CoE(%) 17.0 16.5 16.0 HSBC attributable profit 34 93 149 165 Intermediate earnings growth

Balance sheet summary (TRYm) 7.0% 24.4 25.2 26.1 Ordinary equity 394 491 654 835 7.5% 24.6 25.5 26.3 HSBC ordinary equity 394 491 654 835 8.0% 24.9 25.7 26.6 Customer loans 1,585 2,696 3,770 4,896 8.5% 25.2 26.0 26.9 Debt securities holdings 503 653 719 755 9.0% 25.4 26.3 27.2 Customer deposits 2,164 2,814 3,658 4,389 Methodology: Discounted dividend 2005-09, Gordon perpetual growth model post-2009 Interest earning assets 3,141 3,882 5,065 6,225 Assumptions: Cost of equity (12.8) Total assets 3,564 4,762 6,015 7,170 Discounted earnings: 2007-end valuation range per share Capital (%) Intermediate earnings growth CoE (%) 17.0 16.5 16.0 RWA (TRYm) 1,784 2,622 3,613 4,665 Core tier 1 0.0 0.0 0.0 0.0 7.0% 32.4 33.5 34.7 Total tier 1 22.1 18.7 18.1 17.9 7.5% 32.8 33.9 35.0 Total capital 22.1 18.7 18.1 17.9 8.0% 33.1 34.2 35.4 8.5% 33.5 34.6 35.8 Ratio, growth & per share analysis 9.0% 33.8 35.0 36.2

Year-on-year % change Methodology: Three-stage earnings growth, explicit period (2005-09), intermediate (2009-14) perpetual growth Assumptions: Perpetual growth (0%) Total income -5.9 22.8 25.9 13.6 Operating expense 10.3 2.5 10.4 10.9 Valuation data Pre-provision profit -22.4 52.1 40.8 15.7 EPS -44.4 174.1 60.5 10.9 Year to 12/2004a 12/2005e 12/2006e 12/2007e HSBS EPS -44.6 175.1 60.5 10.9 DPS PE (HSBC) 34.8 12.7 7.9 7.1 NAV (including goodwill) 1.2 24.4 33.3 27.8 Pre-provision multiple 10.7 7.1 5.0 4.3 P/NAV 3.0 2.4 1.8 1.4 Ratios (%) P/NAV (including goodwill) 3.0 2.4 1.8 1.4 Equity cash flow yield (%) -7.8 2.9 6.8 7.8 Cost/income ratio 59.0 49.3 43.2 42.2 Dividend yield (%) 0.0 0.0 0.0 0.0 Bad debt charge 1.7 1.5 1.5 1.5 Customer loans/deposits 73.2 95.8 103.1 111.5 NPL/loan 1.3 1.0 1.0 1.0 Issuer information NPL/RWA 1.2 1.0 1.1 1.1 Provision to risk assets/RWA -1.4 -1.2 -1.3 -1.4 Share price (TRYk) 2030.00 Country Turkey Net write-off/RWA 0.0 0.0 0.0 0.0 Reuters (Equity) TEBNK.IS Bloomberg (Equity) TEBNK TI Coverage -117.9 -117.3 -126.6 -130.5 Market cap (TRYm) 1,173 Bloomberg (Debt) TEBNK ROE (including goodwill) 8.8 20.9 26.0 22.1 No of shares (m) 58 Free float (%) 20 Analyst Levent Topcu Contact details +90 212 366 1619 Per share data (USc)

EPS 58.48 160.31 257.23 285.18 HSBC EPS 58.26 160.31 257.23 285.18 DPS 0.00 0.00 0.00 0.00 NAV 682.00 848.65 1131.21 1445.44 NAV (including goodwill) 682.00 848.65 1131.21 1445.44

Disclaimer and Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it 42 Emerging Markets   Turkey 21 December 2005 

 We revise valuations on existing 14 stocks (mainly upwards) following Q3 results and corporate tax rate cut decision  We upgrade Anadolu Efes, Koc Holding and Vestel to Neutral, and Arcelik to Overweight  We downgrade Ford Otosan and Hurriyet to Neutral, and Eregli to Underweight

A review of ratings and fair value estimates on our This results in four upgrades (Anadolu Efes, Koc existing Turkish coverage (excluding the six global Holding and Vestel to Neutral and Arcelik to stocks) is due in light of the ongoing positive Overweight) and three downgrades (Ford and developments on Turkey’s macro economic front, Hurriyet to Neutral and Eregli to Underweight) better-than-expected financial results and the Despite our optimistic view for the Turkish media decision to cut the corporate tax rate to 20% from sector, we are downgrading our Overweight rating 30% in 2006. In this report we revise our forecasts, for Hurriyet to Neutral, due solely to its recent determine new fair value ranges and re-rate our strong share price performance. coverage universe accordingly.

Review of ratings on existing coverage (excluding global stocks) Curr. Curr. New target price range Notional target price % upside Mcap Share price _____ Ratings change ______(USD) (USD) potential to Ric code (USDm) (USD) from to old new new NTP Arcelik ARCLK 2,783 6.96 Neutral Overweight 7.54 - 9.21 6.50 8.38 20.4 Sabanci Holding SAHOL 6,742 5.62 Overweight Overweight 6.00 - 7.33 5.25 6.67 18.7 Aksigorta AKGRT 1,150 7.52 Overweight Overweight 7.94 - 9.71 6.08 8.82 17.4 Dogan Holding DOHOL 2,309 3.14 Overweight Overweight 3.24 - 3.96 3.54 3.60 14.8 Trakya Cam TRKCM 881 3.87 Overweight Overweight 3.95 - 4.83 4.60 4.39 13.6 Ford Otosan FROTO 3,081 8.78 Overweight Neutral 8.21 - 10.03 8.00 9.12 3.9 Vestel VESTL 580 3.65 Underweight Neutral 3.39 - 4.15 4.09 3.77 3.4 Tofas Fabrika TOASO 1,101 2.20 Neutral Neutral 1.98 - 2.42 1.80 2.20 -0.1 Koc Holding KCHOL 5,733 4.99 Underweight Neutral 4.46 - 5.45 4.70 4.96 -0.6 Anadolu Efes AEFES 3,150 27.90 Underweight Neutral 24.72 - 30.21 23.00 27.46 -1.6 Hurriyet HURGZ 1,582 3.79 Overweight Neutral 3.35 - 4.09 2.76 3.72 -2.0 Sise Cam SISE 1,481 3.50 Neutral Neutral 3.08 - 3.77 3.54 3.42 -2.1 Migros MIGRS 1,363 9.90 Neutral Neutral 8.50 - 10.38 9.10 9.44 -4.6 Eregli EREGL 3,176 6.51 Neutral Underweight 5.07 - 6.20 5.12 5.64 -13.4

Source: HSBC estimates

43 Emerging Markets   Turkey 21 December 2005 

Our downgrade of Eregli to Underweight is based The increased market value of Aksigorta’s listed mainly on uncertainty over the company’s post- participations since our ratings launch in July privatisation prospects, a gloomy outlook for the prompted the change. Turkish metals and mining sector, with declining Our valuation for Aksigorta is driven mainly by sales prices and higher raw material costs, and an sum-of-the parts, yielding a USD1,21bn value for unattractive valuation. For Ford Otosan, we are the equity portfolio. In addition, we attach downgrading our DCF-driven rating to Neutral USD130m value for the core insurance from Overweight based on the limited potential operations. We would note that, excluding upside to our new notional target price following dividend income from participations, Aksigorta the stock’s recent strong rally. still generates a good chunk of technical profits An upward revision to our forecasts has prompted and financial income ranging between USD15- our upgrade on Arcelik, to Overweight from 20m annually, implying 7.0-7.5x PER for the Neutral. Our new figures are based on: i) a insurance business, which is fair in our view. brighter outlook for the household appliances Prolonged delays in the enactment of the new sector in Turkey as a result of the ongoing boom insurance framework and, consequently, sliding in the domestic construction sector and residential market share and profitability in the upcoming housing projects and ii) the decision to cut competitive environment, are the major risks to corporate tax rates from 30% to 20% in 2006. Our our valuation in the long term. upgrade of Koc Holding to Neutral from Underweight is in line with the increase in our Anadolu Efes NAV-driven notional target price, due to our We upgrade our Underweight rating for Anadolu upward revision in valuations of Koc’s major Efes to Neutral, with a revised valuation range of listed participations in this report, such as Arcelik, USD24.72-30.21 and new notional target price of Ford Otosan and Tofas. Our third upgrade – from USD27.46 (previously 23.00) per share. The changes Underweight to Neutral – is on Anadolu Efes, are as a result of an upward revision of our Coca- Turkey’s largest brewery company. Our revised Cola Icecek valuation and incorporate the recently notional target price and rating are the result of an announced tax rate cut for domestic operations. upward revision of our Coca-Cola Icecek valuation and incorporate the recently announced Anadolu Efes announced an intra-group tax rate cut for domestic operations. transaction to bring its international and domestic Coca-Cola operations under the same roof. In the following section, we present details of our Accordingly, the company sold its overall 51.87% revisions and comment on stocks where we are VWDNHLQ(IHV6ÕQDL WKHVXEVLGLDU\WKDWUXQVWKH reiterating our rating. international Coca-Cola operations) to Coca-Cola Aksigorta Icecek A.S. (ie CCI, the subsidiary that runs the domestic Coca-Cola operations) for USD144m. We maintain our Overweight rating on Aksigorta, This values 100% shares of Efes Sinai at but revise upwards our valuation range to USD277m and 100% shares of CCI at USD7.94-9.71, giving a new notional target price USD1,248m via a cross-selling of stakes. of USD8.82 (from USD6.08). This implies 17% Currently a tender call is being made by CCI, upside potential on the current market price. although as it is not a listed company, there will be no tender offer.

44 Emerging Markets   Turkey 21 December 2005 

USD1,248m value of CCI indicates a rather The impact on our estimates for 2006-07 is an 8% demanding 9.6x 2006e EV/EBITDA multiple; hike in EBITDA and 19% hike in net profit on however the market did not factor in this average. On revised estimates, Arcelik trades on valuation as the shares underperformed after the 2007e PE of 9.5x and EV/EBITDA of 5.2x, announcement. We therefore apply a 15% versus the global peer averages of 12.3x and 6.3x, discount and incorporate it in our sum-of-the-parts respectively, denoting an average 20% discount, valuation. Our revised notional target price of whereas historically Arcelik has always traded at USD27.46 indicates 2% downside potential. a premium to the same peer group. The downside risks to our valuation and rating would include Upside and downside risks to our valuation are global price hikes in raw materials (petroleum and related to CCI’s upcoming IPO. A higher-than- steel), or the Turkish government deciding to expected price would support the valuation, and increase consumer taxes on durable goods, vice versa. including white goods. Arcelik Dogan Holding We are upgrading our rating on Arcelik, Turkey’s We maintain our Overweight rating for Dogan leading white goods manufacturer with c60% Holding but increase our fair value range to domestic market share, to Overweight from USD3.24-3.96 and notional target price to Neutral. Our DCF-driven new fair value range is USD3.60 compared to our previous target price of USD7.54-9.21 per share (vs. 5.90-7.20 USD3.54, derived from its target NAV calculation. previously), indicating a notional target price of The company currently trades at 33% and 35% USD8.38 per share (USD3.35bn in market discounts to its current and target NAVs, capitalisation), up 29% from USD6.50 previously. respectively. The strength of the TRY against USD, Our new notional target suggests 20% potential lower interest rates, a stronger economy, more upside on the current price. In our view a rating advertisers, rising foreign interest in the media upgrade is justified given the average upside on business and liberalisation in the oil sector are the our coverage universe is much less at 5%. Our major long-term catalysts for Dogan, which has full revised figures and rating stem from: exposure to Turkish consumer dynamics. 1 an ongoing boom in the domestic construction With the USD800m in proceeds received from the sector and residential housing projects, which sale of its banking business, Dogan acquired an should signal a brighter outlook for demand additional 49% stake in its subsidiary Petrol Ofisi. for Turkish household appliances. We have Its media subsidiary has also recently acquired consequently increased our 10-year CAGR Turkey’s fourth largest national TV station, Star estimate for domestic white goods demand, TV. Since the acquisitions were funded by long- from 7% to 12% term loans, the holding company still sits on a 2 an improvement in net profit and cash flow cash position of more than USD300m, which is resulting from the cut in corporate tax rates earmarked to be spent on growing new businesses from 30% to 20%, due 2006 that will enhance returns from the core sectors of energy and media.

45 Emerging Markets   Turkey 21 December 2005 

Medium-term acquisition stories and strong Despite this potential catalyst, which could be medium- and long-term growth potential in realised in the short term, we remain cautious existing operations are likely to be key drivers for about Eregli based on uncertainties regarding the Dogan. The National Lottery, electricity company’s long-term strategy. We would, distribution, Cable TV, refining and natural gas therefore, revisit Eregli’s long-term prospects businesses are possible targets in the next couple after the sales process is complete and when the of years. Risks to our rating would be i) Turkey- strategy of the new owners becomes clear. We specific economic and political risks, ii) failure to expect Oyak’s corporate governance strategies to grow in profitable businesses, with possible losses be key in Eregli’s long-term valuation. in tenders, iii) possible deterioration in the Ford Otosan competitive environment of the fuel distribution sector following the acquisition of Tupras by We downgrade our DCF-driven rating on Ford Petrol Ofisi’s competitors (OPET, Aygaz and Otosan to Neutral from Overweight due to the Shell Turkey). reduced potential upside (4%) to our new notional Eregli target price of USD9.12 in a range of USD8.21- 10.03 (previously USD8.00). In light of the We downgrade Eregli to Underweight from corporate tax rate cut from 30% to 20% from Neutral, although we raise our fair value estimate 2006 onwards, our DCF analysis gives a 14% slightly, to USD5.64 per share in a range of increase in our fair value estimate, although Ford USD5.07-6.20 due to the recent tax cut decision. Otosan will not benefit from lower corporate tax Our valuation is based on a DCF analysis, rates initially due to extensive investment employing a risk free rate of 7% and a WACC of incentives outstanding from past projects. Our key 10.9%. Our downgrade is as a result of DCF model parameters remain unchanged with a uncertainty over the company’s post-privatisation 7% risk free rate, 5% equity risk premium, 3% prospects, an unattractive sector outlook with terminal growth rate (beyond the forecast period declining sales prices and higher raw material of 2014), and 0.92 company beta. costs and the 13% potential downside implied by As Turkey’s leading manufacturer of light our notional target price. commercial vehicles, Ford Otosan continues to be We expect a contraction in company profitability the primary beneficiary of strong local demand for in the upcoming quarters, leading to unappealing LCVs (up 7% y-o-y as of 11/2005 vs. 7% financials for investors. In addition, the market is shrinkage in the passenger car market over the questioning the contribution of the new owner same period). It is also able to capitalise on its Oyak Group to Eregli and still expects Oyak to position as Ford’s single production hub for the team up with a foreign sector player. We believe European LCV market (excluding UK), operating that even though it would be a minority share at close to capacity. As a cash-cow company partnership, teaming up with a foreign player within the Koc Group, Ford Otosan offers high would be beneficial, since it would help Eregli to profitability and strong dividends for investors but challenge ongoing global consolidation. in our view, the current valuation prices in growth prospects for our investment horizon of the next two years.

46 Emerging Markets   Turkey 21 December 2005 

Downside risks to our Neutral rating would be a The revised target NAV now points to a value of squeeze on operating margins from sharp raw USD5.7bn, showing Koc on a slight 2% premium. material (petroleum and steel) hikes or a This valuation includes Tupras, for which Koc government decision to raise taxes on auto sales, offered the highest bid in a JV with Shell in the which would hit on domestic vehicle demand. The recently held privatisation tender: the shares are upside risk would come from a decision by Ford due to be transferred before year-end 2005. Europe to commission Ford Otosan for production However, the price is much above Tupras’ current of an additional model. market value as well as our two-year price Hurriyet objective for the company, so the transaction has an adverse impact on Koc’s NAV. Excluding Despite our optimistic view for the Turkish media Tupras, we calculate Koc’s target NAV at sector in general, we are downgrading Hurriyet to USD7.0bn, in which case Koc would trade at an Neutral from Overweight, due solely to the recent 18% discount. On our new notional target price, strong share performance. Hurriyet’s share price Koc does not offer any potential upside, justifying reached our revised valuation of USD3.35-4.09, a Neutral rating. (mid-point USD3.72) from previously USD2.50- The upside risks to our Neutral rating and revised 3.00. Our target range is derived from a DCF valuation would be: a rise in global refinery valuation (7% risk free rate, 5% equity risk margins (justifying higher valuations at Tupras) premium, 3% terminal growth rate and 1.2 and a sale of a minority stake (of up to 47%) in company beta). Tupras to a third party (preferably a foreign Downside risk, in our view, would come in the refiner, which may help speed up the efficiency form of a derailing of the current positive improvement process and provide relief to the macroeconomic trend in Turkey or an unexpected financing burden). Downside risk include: a increase in raw material expenses (especially downturn in global refinery margins, tax hikes for newsprint costs). The main upside risk would be autos and/or durable goods by the government, or higher than expected growth in the ad market. further write-offs (higher-than-expected) at Yapi Koc Holding Kredi Bank, which would cause Koc’s short-term consolidated profit to deteriorate. We upgrade our rating on Koc Holding to Neutral from Underweight, with a revised NAV-driven Migros valuation range of USD4.46-5.45 and notional We reiterate our Neutral rating for Migros with a target price of USD4.96 (previously USD4.70 in a revised notional target price of USD9.44 in a range of USD4.23-5.17). The adjustment to our range of USD8.50-10.38. We have not included fair value is in line with our upward revision in the acquisition of food retailer Tansas in our the values of Koc’s major listed participations, valuation. primarily Arcelik, Ford Otosan and Tofas. Downside risk to our valuation would be if the Tansas acquisition destroyed value in the short term due to too many overlapping stores. Upside risk could stem from news of a resurgent takeover bid from a global retail giant.

47 Emerging Markets   Turkey 21 December 2005 

6DEDQFÕ+ROGLQJ Our notional target price also assumes a 10% :HPDLQWDLQRXU2YHUZHLJKWUDWLQJRQ6DEDQFÕZLWK discount (average historical) applied to our NAV estimate. a revised valuation range of USD6.00-7.33 and a new notional target price of USD6.67 (previously An increasing possibility of an SPO within the USD5.25, range USD4.73-5.78). We have reviewed restructuring framework efforts of major our sum-of-the-SDUWVDQDO\VLVIRU6DEDQFÕUHflecting shareholder Isbank may pose a threat to share the impact of corporate tax rate cuts on our value performance. Upside risk to our valuation would estimates for major listed participations. This come from higher-than-planned cost savings due boosted our target NAV to USD9.5bn from to the switch from fuel oil to natural gas in some USD8.0bn, but the mid-point of our new two-year of the glass plants. Downside risk would come price objective of USD8.0bn assumes a 20% from a delay in fixing quotas on Chinese flat glass discount on listed participation value as before. imports. It is appropriate, in our view, to apply such a Tofas Fabrika GLVFRXQWRQ6DEDQFÕ¶VOLVWHGSDUWLFLSDWLRQYDOXH We maintain our Neutral rating on Tofas but due to the heavy weight of the banking subsidiary, adjust our valuation range to USD1.98-2.42, Akbank, in the NAV (around 55%), indicating giving a higher notional target price of USD2.20 OLPLWHGVFDUFLW\YDOXHWKDW6DEDQFÕRIIHUVEH\RQG (previously USD1.80 in a USD1.63-2.00 range). banking. At a YDOXDWLRQRI86'EQ6DEDQFÕ The revision is based on Tofas’ widened discount would be trading at approximately 19% discount to global peer averages on 2007e multiples since to its target NAV. we launched our rating in July 2005. Currently, Downside risks to our valuation and rating would Tofas trades on 2007e EV/EBITDA of 6.1x EHDQLQDELOLW\RQ6DEDQFÕ¶VSDUWWRLPSURYHWKH versus HSBC’s auto sector of 6.0x (peers from profitability of its non-financial operations, and Turkey, India and Japan). There is no potential especially a failure to embark on any acquisitions upside from our revised notional target price, in the targeted privatisations. Following justifying our Neutral rating. management’s decision to retreat from the Telsim We continue to see Tofas’ long-term growth WHQGHUWKHPDLQH[SHFWDWLRQIRU6DEDQFÕRQWKH prospects as among the best in our coverage privatisation front is the regional electricity universe, but we think it will continue to suffer distribution rights, where tenders are due to kick from low capacity utilisation over the next two off in Q1 2006. In addition, given the track record years, until the launch of its two new models for of the Group, we would consider family Fiat and the PSA Group in the second half of placements as another downside risk. 2007. DCF valuations incorporating the impact of Sise Cam the new models starting from 2008 would justify significantly higher valuations for Tofas, in our We reiterate our Neutral rating for Sise Cam view. However, within our investment horizon, although we have slightly lowered our NAV- we would expect prevailing dynamics such as driven notional target price to USD3.42 per share continued market share loss in the domestic (in a range of USD3.08-3.77) from USD3.54 passenger car segment and weak profitability to previously (USD3.20-3.90), reflecting the changes overshadow longer-term prospects. We therefore in our value estimates for some participations, prefer to employ a multiple based valuation rather such as Trakya Cam, in the portfolio. than DCF in setting a two-year target value.

48 Emerging Markets   Turkey 21 December 2005 

Upside risks to our rating include sooner-than- Our DCF model now yields a range of USD3.39- expected completion of new model investments 4.15, with a new notional target price of and, on the downside, a delay in the launch of USD3.77, compared to USD4.09 (range new models and a hike in state taxes for autos. USD3.70-4.50) previously. The DCF analysis Trakya Cam employs the same parameters as before: a risk free rate of 7%, equity risk premium of 5%, terminal Despite revising our valuation range for Trakya growth rate of 3% (beyond the forecast period of Cam to USD3.95-4.83, giving a slightly lower 2014), and a company beta of 1.03. Our revised notional target price of USD4.39 from USD4.61 valuation implies slight upside potential of 3% based on DCF valuation, due to continuing from the current share price and justifies an pricing pressure and the threat from China, we upgrade to a Neutral rating relative to our average maintain our long-term optimistic view on the upside of 5% in our coverage universe. stock and reiterate our Overweight rating. In our view, the major problem for Vestel remains Major downside risks to our rating and valuation the inability to translate strong top-line growth include a delay in fixing quotas on Chinese flat into profitability, due to a continuous decline in glass imports (expected to be effective in Q1 global sector prices and margins. However, we 2006) and a decline in flat glass prices globally. In also believe that most of the negative addition, a Belgian company (although its name developments are in the price as Vestel has was not mentioned, we believe it is Glaverbel) is significantly underperformed the Turkish index planning to build a flat glass line in Turkey. If this (by 5% 1M, 12% 3M, and 40% 12M). Looking company produces products that are not in the forward, we think the current margin levels will Trakya’s spectrum, it would likely procure the flat be sustainable as Vestel shifts production towards glass from Trakya, which would be good news. higher-value added products, such as TFT and However, if the Belgian company produces the plasma TVs and to markets such as Russia. same products, Trakya’s dominant position will Upside risks could come from any engagement in be in danger. M&A activity and the successful realisation of the Vestel Elektronik long-delayed IPO of the white goods division. We upgrade our rating on Vestel to Neutral from We see the major downside risk as a revaluation Underweight despite downward adjustments to our of TRY against foreign currencies, particularly financial forecasts and fair value estimate in the the euro, raising inventory costs and hurting light of the weak outlook for operating margins export margins. with the Q3 results. We have lowered our 2007e EBITDA margin estimate by 2pp to 6% from 8% (9M 2005 figure was 5.7%), resulting in a 30% cut in our 2007 EBITDA forecast to USD229m.

49 Emerging Markets   Turkey 21 December 2005 

Turkish stocks ranking on 2006e PE Turkish stocks ranking on 2007e PE

S abanci Holding Sise Cam Petrol Ofisi TEB TEB S abanci Holding Cims a Petrol Ofisi Ves tel Koc Holding Ford Otosan Cims a Sise Cam Ves tel Arcelik Dogan Holding Koc Holding Ford Otosan Akcansa Akcansa Dogan Holding Arcelik Trakya Cam Trakya Cam Denizbank Denizbank F inans bank F inans bank Petkim Hurriyet Anadolu Efes Anadolu Cam Hurriyet Petkim Eregli Anadolu Efes Anadolu Cam Eregli Alarko REIT Migros Migros Aksigorta Õ Aksigorta Dogan Yayn Tofas Fabrika Tofas Fabrika Alarko REIT Dogan YayÕn 0.0 5.0 10.0 15.0 20.0 25.0 30.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0

R ed : Overweight, P ink - Neutral, B lack = Underweight R ed : Overweight, P ink - N eutral, B lack = Underweight

Source: HSBC estimates Source: HSBC estimates

50 Emerging Markets   Turkey 21 December 2005 

Turkish stocks ranking on 2006e EV/EBITDA Turkish stocks ranking on 2007e EV/EBITDA

Sise Cam Sise Cam

Ves tel Ves tel

Petkim Trakya Cam

Cims a Petkim

Ford Otosan Cims a

Trakya Cam Petrol Ofisi

Petrol Ofisi Ford Otosan

Akcansa Arcelik

Arcelik Akcansa

Eregli Eregli

Anadolu Cam Tofas Fabrika

Tofas Fabrika Anadolu Cam

Migros Migros

Anadolu Efes Hurriyet

Hurriyet Anadolu Efes

Õ Dogan Yayn Dogan YayÕn

Alarko R EIT Alarko R EIT

0.0 3.0 6.0 9.0 12.0 15.0 0.0 3.0 6.0 9.0 12.0 15.0 R ed : Overweight, P ink - N eutral, B lack = Underweight R ed : Overweight, P ink - N eutral, B lack = Underweight

Source: HSBC estimates Source: HSBC estimates

51 Emerging Markets   Turkey 21 December 2005 

Analyst coverage – Turkey Bulent Yurdagul Can Oztoprak Cenk Orcan Gunes Ozdemir Levent Topcu Ozgur Goker [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] +902123661604 +902123661617 +902123661605 +902123661624 +902123661619 +902123661618 Dogan Holding Akcansa Arcelik Anadolu Cam Aksigorta Eregli Petkim Alarko REIT Koc Holding Anadolu Efes Denizbank Petrol Ofisi Cimsa Ford Otosan 'RJDQ

52 Emerging Markets  Turkey 21 December 2005 

53 Emerging Markets  Turkey 21 December 2005 

54 Emerging Markets  Turkey 21 December 2005 

55 Emerging Markets  Turkey 21 December 2005 

Stock ratings and basis for financial analysis HSBC believes that institutional investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 2-year time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website. Details of these short- term investment opportunities can be found under the Reports section of this website.

HSBC's Sector and Companies research is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts’ views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock (vs Global sector universe of companies under coverage by sector team)  Overweight (Buy)

 Neutral (Hold)

 Underweight (Sell)

HSBC assigns ratings to its stocks in this sector on the following basis:

For companies covered on a sector basis, we apply a ratings structure which ranks the stocks according to their notional target price vs current market price and then categorises (approximately) the top 40% as Overweight, the next 40% as Neutral and the last 20% as Underweight. The performance horizon is 2 years. The notional target price is defined as the mid-point of the analysts’ valuation for a stock.

Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts. For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take.

56 Emerging Markets  Turkey 21 December 2005 

Rating distribution for long-term investment opportunities As of 20 December 2005, the distribution of all ratings published is as follows:

Overweight/Buy 41% (38% of these provided with Investment Banking Services) Neutral/Hold 42% (39% of these provided with Investment Banking Services) Underweight/Sell 17% (36% of these provided with Investment Banking Services) Information regarding company share price performance and the history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report, is available from www.hsbcnet.com/research. Issuer & Analyst disclosures

Disclosure checklist Company Ticker Recent price Disclosure Aksigorta AKGRT.IS 8.02 2, 5 Anadolu Efes AEFES.IS 26.39 6 Arcelik ARCLK.IS 6.72 6, 7 Eregli Demir Celik EREGL.IS 6.61 6 Finansbank FINBN.IS 5.55 2, 5, 6, 7 Hurriyet HURGZ.IS 3.79 6 KOC Holding KCHOL.IS 4.90 6, 7 Migros MIGRS.IS 9.51 6, 7 Petkim PETKM.IS 7.85 2 6DEDQFÕ+ROGLQJ SAHOL.IS 5.65 6, 7 TEB TEBNK.IS 19.5 6, 7 Tofas Fabrika TOASO.IS 2.14 5, 6 Vestel VESTL.IS 3.61 2

Source: HSBC

1. HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3. At the time of publication of this report, HSBC is a market maker in securities issued by this company. 4. As of 30 November 2005, HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5. As of 31 October 2005, this company was a client of HSBC or had during the 12-month period preceding the publication of this report been a client of and/or paid compensation to HSBC in respect of investment banking services. 6. As of 31 October 2005, this company was a client of HSBC or had during the 12-month period preceding the publication of this report been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7. As of 31 October 2005, this company was a client of HSBC or had during the 12-month period preceding the publication of this report been a client of and/or paid compensation to HSBC in respect of non-securities services. 8. The analyst/s who wrote this report received compensation from this company in the past 12 months. 9. The analyst/s who wrote this report or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10. The analyst/s who wrote this report or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company other than the primary subject(s) of this research, please see the most recently published report on that company available at www.hsbcnet.com/research. The research analyst(s) identified in this report certifies(y) that the views expressed herein accurately reflect the research analyst's(s') personal views about the subject security(ies) and issuer(s) and that no part of his/her/their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report.

* HSBC legal entities listed on page 59

57 Emerging Markets  Turkey 21 December 2005 

Additional disclosures 1. This report is dated as at 21 December 2005 2. All market data included in this report is dated as at close, 19 December 2005 unless otherwise indicated in the report. 3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

58 Emerging Markets  Turkey 21 December 2005 

*Legal entities as at 23 November 2005 Issuer of report HSBC Bank Middle East Limited, Dubai; HSBC Research (Malaysia) Sdn. Bhd, Kuala Lumpur; +6%&

287542

59

Turkey Team List

Cenk Orcan Levent Topcu Co-Head, Turkish Research Senior Analyst +90 212 36616 05 [email protected] +90 212 36616 19 [email protected] Bulent Yurdagul Can Oztoprak Co-Head, Turkish Research Analyst +90 212 36616 04 [email protected] +90 212 36616 17 [email protected] Gunes Ozdemir Ozgur Goker Senior Analyst Analyst +90 212 36616 24 [email protected] +90 212 36616 18 [email protected] Esra Erisir Economist +90 212 36616 15 [email protected]