SEE Bonds Rally Ahead ECB +385 1 6033 522

09-Sep-16

SEE09-Sep-16 Weekly Analyst: Tajana Striga

SEE bonds rally ahead ECB +385 1 6033 522

Good week for SEE bonds This has been a good week for SEE bonds, in line with the ongoing risk-on, yield-hunt environment. Croatian EUR yields lead the pack with 21bp drop on average, while Slovenia saw a milder 5bp decline, broadly in line wider periphery issues (Spain, Italy, Portugal). As for USD yields, Serbia saw the strongest decline of 17bp on average, followed by 9bp drop in both Croatia and Slovenia. Meanwhile, investors focus was on yesterday’s ECB Council meeting where, in line with the recent market bets, the ECB disappointed on QE expansion. That said, Draghi stated the Council did not even discuss extending its EUR80bn month asset purchasing program after coming to a conclusion that a minor downgrade to its economic forecasts was not enough to require action. However, with persistently low inflation most of the market participants agree the ECB will have no option but to act later in 2016. As for Fed, it is worth noting that although roughly 50% of market participants expects one rate hike by the end of the year, as much as 79% of them do not see a single hike next year. All said, we see SEE bonds profiting going forth for the time being and think it would be wise for Croatia to tap markets with Eurobond issuance after the elections, where we expect the mainstream SDP and HDZ parties in driving seats and depending on the kingmaker Most that will nevertheless see its seat allocation more than halved.

CHART OF THE WEEK: YIELD CHANGE, (average) wow, bp 0

-5

-10

-15 Source: Bloomberg, Addiko research -20

-25 EUR USD EUR USD USD SLO CRO SRB

EUR/HRK and EUR/RSD both trading range bound The CNB intervened early this week, buying EUR69m at 7.5 level whereby after the initial spike the EUR/HRK fell again below 7.50. That said, we see kuna still supported by rather strong FC tourist inflow with foreign tourist nights soaring 12.8% yoy in July on top of a double digit growth in July 2015. In addition, fiscal outperformance, strong C/A surplus, record positive banks' net foreign asset and increasingly important kuna lending all bode well for the kuna. However, following the end of the tourist season, we expect the kuna to resume its usual seasonal depreciation, additionally underpinned by the expected worsening in goods trade trends and CNB’s commitment to easing. That said, the CNB placed HRK630m through 1W repo (against HRK330m maturity), which gives us a net HRK817m liquidity creation in tandem with FX intervention. In spite of the recent increase in short term kuna rates, we see them lower once the excess liquidity rises again in the aftermath of tourist season and further CNB easing (potential). The Serbian MinFin issued EUR98.2m of 5Y bonds at 2.9%, down from 3.45% in March, with somewhat higher bid-to-cover (1.41x). The EUR/RSD traded range bound within 123.1-123.3, with somewhat unusual seasonal stability thanks to a good EM-debt risk appetite. The NBS even had to stem sporadic appreciation pressures, buying EUR30m in September, summing up total 2016 interventions at EUR345m to date. In a short term, we expect the dinar to remain relatively stable in line with the expected carry trade potential (see page 4). Thereafter, we see the dinar returning to a mild weakening trajectory, pushed by the adverse fundamentals, i.e. still relatively large CAD compared to Serbia's CESEE peers. Nevertheless, this weakening pressure will be cushioned by sharply lower fiscal gap, successful continuation of IMF deal and rating improvement with the key credit rating agencies during the past quarters. All said, we see the dinar nominally weakening by 2% along 2016. *SEE Weekly editorial deadline: 4pm Thursday

SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION 09-Sep-16

09-Sep-16 SEE Weekly Analyst: Tajana Striga

[email protected] SEE indices mostly in green +385 1 6033 522

The positive performance of SEE equity markets have continued for another week in a row, driven by positive investor’s sentiment due to latest better-than-expected macro indicators as well as some positive corporate news. That said, BELEX15 saw the strongest rise with 1.3% gain this week led by shares from energy sector as oil prices grew by 6.6% wow on global markets. Both SASX-10 and CROBEX recorded 1.1% gain where the letter was positively influenced by rise of Podravka’s share as they announced new favorable financing conditions on which we elaborate on page 6. BIRS continued with shy recovery and gained 0.2% this week, while only SBITOP recorded negative performance and fell by 0.3%. Finally, except for BIRS and SBITOP, all SEE equities outperformed regional benchmark DJS BALKAN 50, while all of them are lagging behind MSCI EM index.

1W performance

4,0% * 1W total returns

1,3% 1,1% 1,1% 0,5% 0,1%

Source: Bloomberg, Addiko research -0,3% MSCI EM BELEX15 SASX-10 CROBEX DJS BALKAN 50 BIRS SBITOP

On ytd basis, regional indices are slowly entering positive territory with CROBEX leading the group as it posted 11.5% ytd return, while SBITOP return slightly decreased to 11.3% ytd. Thanks to solid performance this week, BELEX15 entered green territory and is currently trailing with 0.5% ytd return, while SASX-10 stayed in red with 0.8% ytd loss. Shy improvements seen in the last couple of weeks didn’t help much to BIRS that is stuck in red throughout the whole year and it is currently trailing with 12.1% ytd loss. Finally, CROBEX and SBITOP are outperforming DJS BALKAN50 on ytd basis, while the whole group is notably lagging behind MSCI Emerging Markets index that is posting 19.1% ytd gain

YTD performance * YTD total returns 19,1% 25.5.2016 Net wage

11,5% 11,3%

0,9% 0,5%

-0,8%

Source: Bloomberg, Addiko research

-12,1% MSCI EM CROBEX SBITOP DJS BALKAN 50 BELEX15 SASX-10 BIRS

Our short-term outlook for main markets (Croatia, Slovenia and Serbia): Crobex: positive because i) improved fundamental picture and ii) positive technical picture offset iii) expensive valuation multiples when compared to long-term valuation levels in relation to MSCI EM. SBITOP: positive as i) positive tehnical picture is offset by ii) positive fundamental outlook and iii) cheap valuation multiples compared to long-term valuation levels in relation to MSCI EM offset BELEX15: positive because of i) improved fundamental outlook and ii) positive technical picture. SEE Weekly Economic Highlights

Slovenia

• Tomorrow, we'll get the July data for goods trade and industrial output whereby we expect a flattish monthly print and a 5.0% yoy gain in the latter due to weaker PMIs of the main trading partners in the euro zone, plus weaker manufacturing orders. We though expect solid development in capital goods and intermediates, hand in hand with the ongoing solid labour productivity growth (2.8% yoy in Q2), which is closely correlated with medium-to-long term prospects. The recent surge in construction confidence points to further easing in the contraction of the construction output, which also supports domestically-oriented capital goods output. That said, we see a similar (or slightly lower) industrial output growth in Q3 to that in Q2 (5.5% yoy), which leaves our FY16 IP growth forecast of 4.5% intact. At the same time, we see export growth in mere single-digits based on subdued export order books expectations amid the growing signs of the main euro zone's trading partners slowdown in the aftermath of the Brexit, despite the ongoing ULC-led competitiveness outperformance of the euro area. With persistent domestic demand and further shrinking in net trade contribution, we still see a similar GDP expansion in the third quarter at 0.4-0.5% qoq pace (to that in Q2), i.e. still inside historic trend-alike norms or around 2.0% yoy.

Croatia

• Industry gets off to a weaker start in Q3... July’s seasonally-adjusted industrial production surprisingly fell 0.5% mom (AddikoE: + 0.4% mom), triggered by an 8.9% mom slump in usually volatile capital goods output, similarly to what happened across the euro zone. This might represent the first hard-data consequences of the Brexit decision in June, but the timing of summer holidays also had its impact. The strongest positive contribution came from consumer non-durables (+2.8% mom), driven by food, beverages and tobacco at the peak tourist season, but also refined petroleum and electrical equipment. On the yoy level, industrial growth slowed to 1.2% yoy (vs. prev +4.3%), driven by 7.2% yoy stronger energy generation and consumer non-durables (+3.3% yoy). Moreover, manufacturing growth eased to 1.5% yoy (s-a) from 3.8% yoy in June. Following a negative impact on net trade in GDP already in 2Q, we see slower EU demand in the aftermath of the Brexit having a dampening effect on goods export. The latter along with stronger inventory build-up (+9.4% yoy in July) and subdued industry employment suggests slower IP dynamics in 2H16, despite sound local demand. For now, we keep our FY16 IP growth forecast at 3%.

• ... but consumer spending surprises on the upside. The strong real retail trade performance continued in July with the working-day-adjusted 4.5% yoy growth, matching our expectations. Before 12 September full data, we see retail trade driven by 7.6% stronger new car sales, stronger tourism-related spending at the peak of a stellar tourist season, ongoing employment growth and decent consumer sentiment. While we see personal consumption dynamics moderating later this year on fading positive effects of lower oil prices and slowing real net wage growth, we expect the hefty impact of tourist season on coastal citizens’ real incomes, rosier employment outlook, stronger non-purpose cash loan dynamics and declining pre-cautionary savings to support consumption going forth. We see personal consumption rising by 2.7% on average for the FY16.

• Today we get merchandise trade data for July, whereas we see exports slightly lower on the backf o moderating EU demand and high base effect. As for imports, we see June's decline as an outlier and expect a mid-single-digit growth on stronger domestic demand underpinned by strong tourist season. That said, following a negative net trade surprise in Q2 GDP, we see a case for further goods trade gap widening in 2H16, with net trade having a moderate negative contribution to GDP growth. Meanwhile, next week brings us August CPI release, whereby we see stagnation on a monthly level amid still seasonally lower clothing prices and somewhat lower prices of oil (approximately -2.5% mom). On a yearly level, we expect to see -0.9% yoy decline on the back of lower gas prices caused by administrative retail gas price cut in April and approximately 12% lower oil prices. SEE Weekly Economic Highlights

Serbia

• Following a no cut in August, the NBS once again decided to keep the key rate unchanged at 4.00%, in line with ours and Bloomberg consensus expectations. The NBS outlined the effects of past rate cuts and the inflation outlook as the key reason behind such decision. To be precise, the NBS expects the yoy inflation to return within the target tolerance band in the first half of 2017 on the back of stronger domestic demand and inflation abroad as well as low base effects. In addition, the NBS has also warned on the persistent uncertainties in the international markets and their potential impact on inflation and capital flows to emerging market economies. For more insight on NBS rate decision please see Serbia: NBS staying on hold.

• Looking ahead, August CPI inflation report is scheduled to be released on Monday, whereby we expect a modest 0.5% mom (vs. prev -0.1% mom) increase given the tentative oil price recovery. On a yearly level, we see inflation slowing to 0.8% yoy (vs. prev 1.2%) amid fading push up effect from higher electricity prices upon administrative price hike in August 2015 and still significantly lower oil prices on a yoy level. Looking ahead, we see inflation increasing slightly in the rest of 2016 only to crawl back into the NBS target tolerance band (4+/-1.5%) in 1H17, whereas inflationary pressures arise from the weaker RSD spillovers, still decreasing negative output gap, expected oil price increase and possible electricity price hike, in line with the IMF precautionary deal. Downside pressures mainly arise from what currently appear to be a good agricultural season and subdued global food commodity prices that will keep food prices low for some time, and still relatively contained domestic demand. All in all, we expect an 1%-alike average CPI inflation in 2016, and 2.8% average inflation in 2017. SEE Weekly

Equity Highlights

Podravka signed EUR123m loan with EBRD

• Podravka has signed an EUR123m syndicated loan with the EBRD's lead (EUR21.6m) and four banks. The funds will be used for refinancing, capex and possible acquisitions, with Podravka allegedly eying targets in Europe, Russia and Middle East within Food section and the focus is on healthy food segment in order to keep track with trends in industry. The loan allows Podravka to straighten financial position and create stable platform for further growth and integration into the global value chains. The management did not disclose funding conditions and just hinted interest rate is 100bps lower than the existing one, and will save ca.HRK3.5m annually on interest costs. Bearing in mind the global record low rate environment, favorable lending conditions can be only partly attributed to Podravka’s business performance. •If the take a clearer grasp on Podravka’s financial structure, its latest 1H16 financials show net debt at HRK1,027m or 2.1x net debt/EBITDA, 0,1pp higher compared to YE15, but 0,6pp lower on YE14. Financial leverage is relatively low when compared to the leverage of Global Packaged Food industry (3.3x), but slightly above European Packaged Food industry (1.9x), showing there is room for improvement especially if low interest environment continues. The average cost of debt at YE15 was 3.0% or 0.4pp lower than the year before. To put this into perspective, Atlantic Grupa faced a bit higher average cost of debt of 3.65% according to FY15 financials (vs 3.80% at YE14). As our readers can remember, Atlantic Grupa recently signed EUR191.5m syndicated loan with the EBRD and the IFCs maturing 2021 but considering that they didn’t specified loan terms either, it is impossible to compare them. However, Atlantic’s HRK200m domestic bond issued in late spring recorded 3.135% YTM and bearing in mind cheaper euro than HRK borrowing, we can only assume they managed to borrow at interest rate lower than 3.0%. Nonetheless, we are currently doing a revision on our estimates regarding Podravka, which required us to put our target price and recommendation UNDER REVIEW.

Adris continues with investments in tourism

•Adris confirmed they have redeemed claims on so-called Annex Hotel Marjan in Split and claims from 72 ex-employees of the hotel through their tourism arm Adria Resorts. The annex of hotel is newly built part with 58 rooms which account for one-fifth of total property area, while the old part of hotel has 270 rooms. Heta Asset Resolution, as principal creditor initiated procedure of selling its claims on old part of hotel that amounted to around HRK300m. According to media, Adris plans to open a new hotel consistent with standards of its previous investments, in category of 5 plus stars and eventually employ 150-200 workers. All said, Adris now stands as the main contender for acquisition of this unfinished hotel.

•This goes in line with Adris' HRK1.6bn capex plan in tourism sector until 2018 and expansion out of Istria to Split and Zagreb. In case of successful completion of the acquisition it remains to be seen will the new hotel work under franchise of Hilton, like Adris’ Hilton Imperial hotel in Dubrovnik, or under Marriott franchise that is rumored to enter Croatian market through some of Adris’ planned new hotels in Zagreb. Price of ordinary and preferential shares went up 1.8% and 0.4%, respectively, from the Adris announcement till Thursday.

•Elsewhere, Adris is investing in its other business segment, insurance, as CO and Adris got permission from the Slovenian Insurance Supervision Agency to buy more shares of Sava Re, whereby CO holds 19.04% shares. Earlier this year Adris announced they set aside HRK1bn for investments in insurance business, where it aims to become the regional leader in non- organic way.

SEE## Weekly

Key FI, FX & MM data

BONDS SPREADS Coupon ASK YTM 1W Δ (bp) 1M Δ (bp) YTD Δ (bp)* Level 1W Δ (bp) 1M Δ (bp) YTD Δ (bp)* SLOREP 25/03/2022 2,250% 0,033% 0 -12 -97 28 3 -10 -4 SLOREP 09/09/2024 4,625% 0,418% -7 -13 -109 71 1 -8 -23 EUR SLOREP 28/07/2025 2,125% 0,615% -8 7 -89 86 -2 7 -8 SLOREP 30/03/2026 5,125% 0,686% -5 -14 -99 100 1 -10 -11 SLOREP 25/03/2035 1,500% 1,585% -2 9 -72 145 3 10 36 SLOVEN 10/05/2018 4,750% 1,386% -5 -14 -48 67 2 -13 1 SLOVENIA SLOVEN 18/02/2019 4,125% 1,678% -7 -22 -50 88 1 -22 10 USD SLOVEN 26/10/2022 5,500% 2,573% -10 -29 -93 129 0 -28 -14 SLOVEN 10/05/2023 5,850% 2,656% -13 -29 -95 132 -4 -28 -18 SLOVEN 18/02/2024 5,250% 2,760% -12 -28 -93 137 -3 -26 -15 CROATI 09/07/2018 5,875% 0,119% -9 -39 -181 80 -4 -36 -145 EUR CROATI 30/05/2022 3,875% 2,201% -30 -45 -152 276 -23 -40 -83 CROATI 11/3/2025 3,000% 2,687% -26 -35 -140 300 -20 -30 -52 CROATI 27/04/2017 6,250% 1,474% 16 4 -121 87 17 4 -86 CROATI 05/11/2019 6,750% 3,023% -13 -13 -150 208 -4 -13 -79 CROATI 14/07/2020 6,625% 3,253% -14 -15 -144 227 -3 -14 -71 CROATIA** USD CROATI 24/03/2021 6,375% 3,352% -17 -29 -158 222 -8 -29 -81 CROATI 04/04/2023 5,500% 3,584% -19 -28 -166 225 -10 -27 -88 CROATI 26/01/2024 6,000% 3,730% -5 -13 -151 234 -13 -25 -68 SERBIA 21/11/2017 5,250% 1,930% -8 -27 -107 126 -4 -26 -69 SERBIA 03/12/2018 2,875% 2,756% -15 -21 -101 197 -8 -23 -48 USD SERBIA 25/02/2020 4,875% 3,218% -25 -28 -87 227 -16 -27 -16 SERBIA SERBIA 28/09/2021 7,250% 3,448% -23 -25 -104 219 -13 -24 -25 Source: Bloomberg, ** Addiko Fixing * or since date of issuance

FX MARKETS MONEY MARKETS LEVEL 1W Δ 1M Δ YTD Δ EURIBOR O/N 1W 1M 3M 12M SLOVENIA Level -0,34 -0,38 -0,37 -0,30 -0,06 EUR/USD 1,1271 1,1% 1,7% 3,2% 1W Δ (bp) 0 0 0 0 -1 EUR/CHF 1,0923 -0,2% 0,3% 0,5% 1M Δ (bp) 0 0 0 -1 -1

CROATIA ZIBOR O/N 1W 1M 3M 12M EUR/HRK 7,4855 0,1% 0,1% -2,1% Level 0,40 0,50 0,65 0,80 1,30 CHF/HRK 6,8533 0,3% -0,2% -2,6% 1W Δ (bp) 0 0 0 0 0 USD/HRK 6,6417 -1,0% -1,6% -5,1% 1M Δ (bp) 0 0 0 0 0

SERBIA BELIBOR EUR/RSD 123,2829 0,1% 0,0% 1,9% Level 2,78 3,02 3,31 3,54 3,73 CHF/RSD 113,031 0,6% -0,3% 12,4% 1W Δ (bp) -10 -1 0 -3 -4 USD/RSD 109,5945 -0,8% -1,3% 10,2% 1M Δ (bp) 1 0 0 -3 -4 Source: Reuters, Bloomberg, Hypo Fixing Source: Reuters, Bloomberg, Addiko Fixing

TREASURY BILLS

SLOVENIA 3M 6M 12M 18M Last yield -0,26% -0,22% -0,20% -0,05%

CROATIA 3M 6M 12M 3M EUR, FX-linked 12M EUR, FX-linked Last yield 0,40% 0,45% 0,87% 0,20% 0,24%

SERBIA 3M 6M 53W 2Y 3Y 53W, EUR 2Y, EUR 3Y, EUR 5Y, EUR Last yield 2,75% 2,65% 3,59% 4,95% 5,00% 0,79% 1,09% 3,40% 2,90%

Source: respective MinFin SEE###### Weekly Charts of the Week

EUR/HRK and EUR/RSD 1M movements SEE: USD total returns ytd, % 7,500 123,6 CRO ROM HUN SRB SLO 5,5 EUR/HRK (lhs) 5 123,5 EUR/RSD (rhs) 4,5 7,490 4 3,5 123,4 3 2,5 7,480 2 1,5 123,3 1 0,5 7,470 0 123,2 -0,5 -1 -1,5 -2 7,460 123,1 -2,5 8-Aug-16 18-Aug-16 30-Aug-16 8-Sep-16 Jan-16 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16

Croatia: Retail sales and consumer expectations CRO: Industrial production yoy% 10 Original data Retail sales wda, YoY, % 10 Seasonally adjusted 10 Consumer expectations, rhs 5 0 5

-10 0 0 -20 -5 -5 -30

-10 -10 -40

-15 -50 -15 Jan-06 Nov-07 Sep-09 Jul-11 Jun-13 Apr-15 Jan-06 Oct-07 Jul-09 Apr-11 Jan-13 Oct-14 Jul-16

Slovenia T-bill yields SRB: CPI inflation and NBS policy rate 4,8% 3M 6M 12M 18M 18 NBS policy rate (%, lhs) 115 4,3% CPI (%, yoy, rhs) 3,8% 15 112 3,3%

2,8% 12 109 2,3%

1,8% 9 106 1,3%

0,8% 6 103

0,3%

-0,2% 3 100 Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16 Jan-07 Aug-08 Mar-10 Oct-11 May-13 Dec-14 Jul-16

Source: respective statistical offices, MinFins, central banks; Bloomberg; Eurostat; ECB, HAAB research SEE###### Weekly

Forecasts, Calendar, Publications

SELECTED ECONOMIC FORECASTS

Export of goods EUR/local Real GDP Unemployment CPI inflation Budget balance Public debt Import of goods & External debt & services C/A (%/GDP) currency (yoy, %) rate (ILO, %) (avg, yoy, %) (%/GDP) (%/GDP) services (EURbn) (%/GDP) (EURbn) (avg)*

2014 3,0 9,7 0,2 -4,9 80,9 28,5 25,6 7,0 124,2 1,33 2015 2,9 9,1 -0,5 -2,9 83,5 30,0 26,3 7,3 116,6 1,11 2016F 1,7 8,8 -0,2 -2,6 79,5 31,2 27,3 7,6 115,7 1,11

SLOVENIA 2017F 1,9 8,4 1,2 -2,2 79,1 32,2 28,5 7,3 114,5 1,04

2014 -0,4 17,3 -0,2 -5,5 86,5 20,0 19,1 0,9 108,4 7,63 2015 1,6 16,3 -0,5 -3,2 86,7 22,0 20,8 5,2 103,7 7,61 2016F 2,0 15,4 -1,2 -2,2 86,9 23,0 20,8 3,7 103,8 7,58 CROATIA 2017F 1,5 14,8 1,0 -2,5 87,5 23,7 22,3 3,5 105,0 7,60

2014 -1,8 19,2 2,1 -6,6 68,3 14,5 18,1 -6,0 77,2 121,50 2015 0,7 17,7 1,4 -3,7 76,5 15,6 18,9 -4,8 79,9 121,75 2016F 2,5 18,2 1,0 -3,5 81,3 16,4 19,5 -4,3 78,8 123,90 SERBIA 2017F 2,1 17,7 2,8 -3,5 83,4 17,0 19,9 -3,9 75,9 126,00

2014 1,1 27,5 -0,9 -3,0 45,1 4,7 -7,9 -7,7 54,2 1,96 2015 2,4 27,2 -1,0 -2,8 48,4 5,0 -7,8 -5,9 53,9 1,96 2016F 3,1 27,3 -0,4 -2,6 45,8 5,2 -7,9 -5,4 55,1 1,96 2017F 3,0 26,7 1,5 -1,6 45,5 5,4 -8,2 -5,6 54,9 1,96 BOSNIA AND HERZEGOVINA

2014 1,5 18,0 -0,5 -2,6 59,9 1,4 -2,1 -15,5 132,9 1,33 2015 3,7 17,5 1,4 -7,9 66,5 1,5 -2,2 -13,5 137,5 1,11 2016F 4,2 17,2 1,3 -9,5 69,0 1,6 -2,3 -14,0 144,8 1,10 2017F 3,8 16,9 2,0 -8,7 75,5 1,7 -2,4 -14,6 152,8 1,06 MONTENEGRO

Source: Addiko research, as of 22 July 2016 * for Slovenia and Montenegro EUR/USD

KEY EVENTS IN THE NEXT TWO WEEKS Date Release Period Units Previous SLOVENIA 9-Sep-16 Industrial production July mom/yoy 0.4%/6.0% 9-Sep-16 Trade Balance July EURm -623 15-Sep-16 Net Wage July mom/yoy 0.2%/1.6% CROATIA 9-Sep-16 Trade Balance July EURm 165 15-Sep-16 CPI August mom/yoy -0.7%/-1.5%

SERBIA 12-Sep-16 CPI August mom/yoy -0.1%/1.2%

Recent Economic Publications Report Date NBS staying on hold 8-Sep-16 SEE Weekly: GDP growth above expectations 2-Sep-16 Croatia: Deposit collection accelerated, net foreign assets at record high 1-Sep-16 Croatia: Q2 GDP growth above consensus, but loosing quality 31-Aug-16 Slovenia: 2Q16 GDP growth better than expected 31-Aug-16 SEE Weekly: Fading Brexit influence 26-Aug-16 SEE Weekly: Muddling through politics 19-Aug-16 Serbia: NBS staying on hold 11-Aug-16 Croatia: 2Q16 trade deficit increased by 8% yoy 9-Aug-16 Croatia: The 2Q16 real retail trade rise 3.3% yoy 3-Aug-16 Serbia: 2Q16 GDP rises 1.8% yoy 2-Aug-16 Croatia: 2Q industrial production increases 3.7% yoy on average 1-Aug-16 Croatia: Deposit collection accelerated, loans still in red 1-Aug-16 Croatia: 2Q industrial production increases 3.7% yoy on average 1-Aug-16 SEE Outlook: CAN WE AVOID THE BREXIT IMPACT? 22-Jul-16 Serbia: NBS suprises with a cut 7-Jul-16 Croatia: Credit de-leveraging continued in May 5-Jul-16 SEE9.9.2016 Weekly

Equity Data & Charts

COVERAGE UNIVERSE

Dividend Rating Returns Valuation Company Ticker Last price Target price Rating yield update 1W 1M 1Y YTD Fwd P/E P/E P/B EV/Sales EV/EBITDA Adris Grupa ADRS HRK 570 - 2,6% U/R 29-Jul-16 2% 3% 25% 7% - 3,9 0,6 1,3 n/a Atlantic Grupa ATGR HRK 836 - 1,6% U/R 29-Jul-16 2% 3% 0% 3% 11,5 12,0 1,4 0,9 8,4 Ericsson Nikola Tesla ERNT HRK 1.114 HRK 1.082 9,0% ADD 26-Jul-16 4% 11% 13% 18% 16,3 16,3 6,5 1,0 9,9 Hrvatski Telekom HT HRK 154 - 3,9% U/R 29-Jul-16 2% 8% 9% 12% - 13,3 1,1 1,4 3,7 Končar elektroindustrija KOEI HRK 662 HRK 685 1,8% HOLD 28-Jul-16 -2% 1% 3% 3% 11,4 10,8 0,7 0,6 7,2 Podravka PODR HRK 360 - 1,9% U/R 25-Jul-16 1% 2% 12% 9% - 6,2 0,9 0,9 7,4 Valamar Riviera RIVP HRK 29 HRK28 1,9% ADD 27-Jul-16 0% 8% 37% 24% 34,8 17,2 2,0 3,6 10,0 Source: Bloomberg, company reports, Addiko research

MARKETS OVERVIEW

Returns Valuation Area Index Last price 1W 1M 1Y YTD Fwd P/E P/E P/B EV/Sales EV/EBITDA Croatia CROBEX 1.672 1% 4% 9% 11,5% 17,4 n/a 1,2 1,3 10,9 Slovenia SBITOP 669 0% 2% 13% 11% 9,8 10,1 0,9 0,5 5,7 Serbia BELEX15 598 1% 1% 2% 1% - - - - - B-H SASX-10 670 1% 2% 0% -1% - n/a 0,4 0,8 4,8 B-H BIRS 694 0% 0% -16% -12% - 37,5 0,2 0,9 4,8 Balkan DJS BALKAN 50 402 0% 3% -4% 1% - - - - - Emerging Markets MSCI EM 776 4% 4% 20% 19% 12,2 15,8 1,6 1,7 9,5 Europe EURO STOXX 50 3.030 2% 4% -1% -2% 13,0 23,5 1,4 1,3 9,3 Germany DAX 9.450 2% 3% 5% 0% 12,5 24,4 1,7 1,0 7,4 United States S&P500 1.884 1% 0% 13% 9% 16,4 20,5 2,9 2,3 13,3 Source: Bloomberg

CHARTS

Performance of SEE equity indices (100 = 2014-end) P/E valuation in Croatia and Slovenia relative to Emerging Markets 116

86%

111 64%

105 43%

100 21%

0% 94

Crobex -22% BELEX15 89 SASX10 BIRS -43% SBITOP vs MSCI EM Crobex vs MSCI EM SBITOP MONEX20 83 -65% 2-Jan-15 29-Mar-15 23-Jun-15 17-Sep-15 12-Dec-15 7-Mar-16 1-Jun-16 26-Aug-16 21-May-08 23-Dec-09 27-Jul-11 27-Feb-13 1-Oct-14 25-Apr-16

RECENT EQUITY PUBLICATIONS / WRITINGS

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SEE Weekly Agrokor's sales and profits declined in 1H16 (page 6) View report SEE Weekly Final stage of consolidation in telecom market (page 7) View report SEE Weekly Stellar tourist season and privatization boosted CROBEXtourist (page 6) View report Earnings update (2Q) Adris Grupa 1H16 earnings: All segments delivered strong numbers View report Earnings update (2Q) HT 1H16 earnings: Suprisingly stronger sales and profitabilitiy in 1H16 View report Earnings update (2Q) Atlantic Grupa 1H16 earnings: Deal break with key customer weighted numbers View report Earnings update (2Q) Koncar 1H16 earnings: Deteriorating sales but better profitability View report Earnings update (2Q) Valamar 1H16 earnings: RIVP is doing great while waiting for CERP decision View report Earnings update (2Q) Ericcson NT 1H16 earnings: Rise in sales, weaker profitability View report Earnings update (2Q) Podravka 1H16 earnings: Zito consolidation boosted top line View report SEE Quarterly Outlook SEE Equities: Mind the risks, look for opportunities (page 31) View report SEE Weekly Agrokor 1Q16 Earnings (page 5) View report SEE Weekly The first round of privatization (page 5) View report SEE Weekly CERP has invited binding bids for Koncar, Suncani Hvar and HTP Korcula (page 5) View report SEE Weekly Adris, Dogus and pension funds interested in ACI (page 6) View report SEE Weekly Atlantic Grupa to issue new HRK200m domestic bond (page 5) View report SEE Weekly Ericsson Nikola Tesla continues to get good deals in CIS region (page 5) View report SEE Weekly Atlantic Grupa defined more favorable financing conditions (Page 7) View report SEE Weekly Agrokor's sales soar 40% yoy in FY15 on Mercator integration (page 6) View report Earnings update (1Q) Adris 1Q16 earnings: EBITDA rises after M&A and reorganization View report Earnings update (1Q) Koncar 1Q16 earnings: Model downgrade due to weaker sales and profit View report 08-Sep-16

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Disclosures Appendix

The information and opinions in this report/investment research were prepared by Addiko Bank d.d. and/or one or more of its subsidiaries/affiliates (collectively, 'Addiko Bank') for information purposes only. This report is not investment advice or an offer or solicitation for the purchase or sale of any security/financial instrument or to participate in any trading strategy. Neither Addiko Bank nor any of its employees accept any liability for any direct or consequential loss arising from any use of this publication or its contents. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate in price and value. Past performance is not indicative of future results. Besides, the risks associated with an investment in the financial, money market or investment instrument or security under discussion are not explained in their entirety. Estimates of future performance are based on assumptions that may not be realized. Investors should make their own investment decisions without relying on this publication. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this publication.

This report is based on information available to the public. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Addiko Bank makes no representation or guarantee with regards to the accuracy, completeness or suitability of the data. Addiko Bank does not undertake to advise you of changes in its opinion or information. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. From time to time our analysts receive assistance from the issuer including, but not limited to, discussions with management of the subject company(ies). Addiko Bank policy prohibits research analysts from sending draft research including recommendations (rating, target price) and summary to subject companies. However, it should be presumed that the author(s) have communicated with the subject company to ensure factual accuracy of the (company) research report prior to publication, without mentiong recommendation and summary. Facts and views presented in Addiko research reports have not been reviewed by, and may not reflect information known to, professionals in other Addiko business units, including investment banking / treasury / corporate personnel. Any opinions and estimates contained herein reflect the current judgment of the author(s) and do not necessarily reflect the opinion of Addiko Bank or any of its subsidiaries and affiliates.

This report is disseminated and available primarily electronically to professional clients and eligible counterparties, who are expected to make their own investment decision without undue reliance on this publication, and may not be sold, redistributed, reproduced or published in whole or in part for any purpose without the prior express consent of Addiko Bank. Please always cite source when quoting. Additional information is available on request. Clients should contact and execute transactions through a Addiko Bank d.d. or group entity in their home jurisdiction unless local regulations permit otherwise.

Addiko Bank and others associated with it may be involved or seek to be involved in many businesses that may relate to companies, issuers or instruments mentioned in this report. These businesses include market making, providing liquidity and specialized trading and other proprietary trading, fund management, investment services and investment banking. Addiko Bank and others associated with it including any of its employees may have positions in securities of companies or financial instruments discussed in Addiko research, and may trade them in ways different from those discussed in this report, i.e. they are not obliged to act in accordance with investment recommendation from Addiko research.

VALUATION METHODOLOGY – FIXED INCOME Addiko’s fixed income strategies express views on the price of securities and financial markets by providing trade recommendations. These can be relative value recommendations, directional trade recommendations, asset allocation recommendations, or a mixture of all three.

The analysis which is embedded in a trade recommendation would include but not be limited to: Fundamental analysis regarding whether a security’s price deviates from its underlying macro or micro economic fundamentals. Quantitative analysis of price variations.

Technical factors such as regulatory changes, changes to risk appetite in the market, unexpected rating actions, primary market activity and supply/demand considerations.

The timeframe for a trade recommendation is variable. Tactical ideas have a short timeframe, typically less than three months. Strategic trade ideas have a longer timeframe of typically more than three months.

POTENTIAL CONFLICTS OF INTEREST Disclosures of interest and conflicts of interest relating to Addiko Bank and/or affiliate with respect to to the analyzed company, financial instruments and/or securities forming the subject to this document ar valid as of the end of the month prior to publication of this document*:

HT 6; Viadukt 6; Tehnika 6; Belje 6; Atlantic Grupa 8; Ericsson Nikola Tesla 8; Podravka 8; Valamar Riviera 8

1. Addiko Bank and/or affiliate (pursuant to relevant domestic law) owns at least 1% of the company's share capital.

2. The analyzed company owns more than 1% of the issued share capital of Addiko Bank and/or affiliate (pursuant to relevant domestic law).

3. Addiko Bank and/or affiliate (pursuant to relevant domestic law) administers the securities of the analyzed company by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company)

4. Addiko Bank and/or affiliate acted as a manager or co-manager of a public offering of securities of the analyzed company within 12 months preceding this publication

5. Addiko Bank and/or affiliate has agreed to render other investment banking services for the analyzed company within 12 months preceding this publication, in return for which the Bank received a consideration or promise of consideration.

6. The research analyst(s) own securities of the company analyzed by him or her. 7. The research analyst(s) are on the supervisory/management board of the company they cover.

8. Addiko Bank and/or affiliate extended significant amount of credit facilities to the analyzed company.

9. The research analyst(s) have received or bought securities of the analyzed company before the launch of public offering of the company

* Updating this information may take up to five working days after month end.

08-Sep-16

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EQUITY RECOMMENDATION DEFINITIONS, VALUATION METHODS AND PRINCIPLES Readers may find the history of changes to recommendation definitions on our website: https://www.addiko.hr/ under the heading 'Economic Research / Disclaimer'. We currently use a five-tier recommendation system for the stocks in our formal coverage: Buy, Add, Hold, Reduce or Sell (see definitions below): Buy: Expected total return (including dividends) of at least 20% over a 12-month period; Add: Expected total return (including dividends) of 10% to 20% over a 12-month period; Hold: Expected total return (including dividends) of -10% to 10% over a 12-month period; Reduce: Expected total return (including dividends) of -20% to -10% over a 12-month period; Sell: Expected total return (including dividends) of -20% or worse over a 12-month period;

Research published prior to 31/12/2008 were based on the following three-tier recommendation system: Buy: Expected total return (including dividends) of 15% or more over a 12-month period; Hold: Expected total return (including dividends) between -15% and 15% over a 12-month period; Sell: Expected total return (including dividends) of -15% or worse over a 12-month period.

We use two other categorizations for stocks in our coverage: Restricted: The coverage of the company has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Addiko Bank is acting as an advisor in a merger or strategic transaction involving the company.

Under review: Financial forecasts and/or target are not disclosed owing to circumstances such as changes in the research team and other market events that require additional efforts to determine the value of the company based on the used valuation methods.

Our company valuations are based on but not limited to the following valuation methods: Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA, etc.), peer-group comparisons, historical valuation approaches (e.g acquisition multiple comparisons), discount models (DCF, DVMA, DDM), break-up value approaches or asset-based evaluation methods. Furthermore, recommendations may be also based on the Economic profit approach. Although the definition and application of these methods are based on generally accepted industry practices and models developed in the financial economics literature, please note that there is a range of reasonable variations within these models. Valuation models are dependent on macroeconomic factors, such as interest rates, exchange rates, commodities, and on assumptions about the economy that are subject to uncertainty and also may change over time. Any valuation is dependent upon inputs that are based on the subjective opinion of the analysts carrying out this valuation. Investors and other recipients of this research may request further information and details with respect to the valuation models or assumptions applied to the models. Furthermore, market sentiment and the overall liquidity situation affect the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on industry-specific developments. Our recommendations and target prices derived from the models might consequently change accordingly. Recommendations generally relate to a 12-month horizon. They are, however, also subject to market conditions and can only represent a snapshot. The ratings may in fact be achieved more quickly or slowly than expected, or need to be revised upward or downward. This report may include research based on technical analysis. Technical analysis is generally based on the study of trading volumes and price movements in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying issuer or instrument and may offer an investment opinion that conflict with other research generated by Addiko Bank. Investors may consider technical research as one input in formulating an investment opinion. Additional inputs should include, but are not limited to, a review of the fundamentals of the underlying issuer/security/instrument.

Distribution of recommendations Number of recommendations from Addiko Bank, Economic Research Department, at 31.03.2016 Broken down by categories 2 (25%) Buy / Add 1 (13%) Hold 0 (0%) Sell / Reduce 6 (63%) Under review 0 (0%) Restriction

There of recommendations for companies to which investment banking services were provided during the preceding twelve months - Buy / Add - Hold - Sell / Reduce

Coverage policy A list of the companies covered by Addiko Bank is available upon request.

Frequency of reports and updates

Although it has not been determined in advance whether and in what intervals this report will be updated, if the publication is a fundamental research report, it is our intention that each of these companies are covered at least once a year, in the event of key operations and/or changes in the recommendation, subject to applicable quiet periods and capacity constraints.

SIGNIFICANT FINANCIAL INTEREST: Addiko Bank and/or affiliate (pursuant to relevant domestic law) regularly trade shares of the analyzed company(ies). Addiko Bank and/or affiliate (pursuant to relevant domestic law) acts as a market maker in government bonds issued by the Croatian Ministry of Finance (Treasury).

ANALYST CERTIFICATION The author of fundamental analyses in this report is Ines Antic. Ines Antic is employed in Addiko Bank registered in Zagreb, Slavonska Avenija 6 as junior analyst.

The research analyst(s) or analysts who prepared this report (see the first page) hereby certifies that: (1) the views expressed in this report accurately reflect their personal views about the subject securities or issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. On a general basis, the efficacy of recommendations and clients' feedback are factors in the performance appraisals of analysts. ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest arising as a result of the preparation and publication of research, Addiko Bank has established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by Addiko Bank Legal and Compliance. Department Conflicts of interest arising as a result of the preparation and publication of research are managed through its use of internal databases, notifications by the relevant employees as well as legal and physical and non-physical barriers (collectively referred to as 'Chinese Walls') designed to restrict the flow of information between one area/department of Addiko Bank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. For further details see our Policy for managing conflicts of interest in connection with investment research at http://www.addiko.com/bank/dokumenti/Politika_sukob_interesa.pdf Addiko Bank d.d. is regulated by the Croatian Financial Services Supervisory Agency (HANFA) for the conduct of designated investment business in Croatia. 08-Sep-16

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Addiko Economic Research Contacts

Name Coverage Telephone Email

Hrvoje Stojic, Economic Research Director +385-1-603-0509 [email protected]

Tajana Striga, Junior Analyst +385-1-603-3522 [email protected]

Ines Antic, Junior Analyst +385-1-603-3657 [email protected]

Marko Danon, Analyst +381-11-222-6861 [email protected]

Addiko Bank d.d. Slavonska avenija 6, 10000 Zagreb [email protected] phone: +385-1-603-3522 fax: +385-1-604-6306