RATING CHANGE Equity TURKEY / REITs Research 6 March 2017

EMLAK KONUT REIT HOLD (Prev. BUY)

What next after the sales campaign?

. Downgraded to Hold. Reflecting sales campaign and 2016 Stock Data 03 March 2017 results, we slightly revise down Emlak Konut’s TP to TRY3.40/sh from TRY3.65. On 14% upside (inc. dividend yield of 6%), we Current price TRY3.15 downgrade the stock to HOLD from BUY. Because of pull-forward Target price TRY3.4 effect of the latest sales campaign and macro headwinds, pre-sales DPS TRY0.19 may lose momentum after strong February unless there is meaningful Total return 14% recovery in employment and GDP growth. In addition, RSM tenders, Current Mcap TRY11,970mn/ US$3216mn major catalysts for NAV, are likely to be scheduled more in 2H17. The stock trades at 39% discount to NAV, vs. 2-year average of 37%. Bloomberg Ticker EKGYO TI Number of outstanding shares (mn) 3,800 . Campaigns boost pre-sales, but come at a cost. Campaign in High / Low Price Range (12M) 3.22/2.47 August resulted in 2,405 units of presales (24% of 2016 sales) and 3-m Average Daily Turnover ($ mn) 23.2 current one reportedly led to 2,300 units (23% of 2017 target). Thus, 2017 pre-sales targets (9,900 units with TRY8bn proceeds) are Price Performance (%) 1M 3M 6M YtD achievable, in our view, under the current conditions. However, Return 2.9 11.3 7.5 5.4 August campaign delayed cashflows for Emlak (c.19% of proceeds) Relative to BIST100 -1.2 -9.2 -8.1 -8.2 while February campaign incurs cost of mortgage subsidy, which we calculate as TRY109mn and deduct from our valuation. 3.50 . Strong earnings visibility but flat yoy. With the current RSM 3.00 projects, Emlak Konut has secured TRY13.6bn revenues and 2.50 TRY7.9bn gross profit, which will be recognized over 4-5 years. 2.00 Following 85% yoy growth, we expect flattish earnings at TRY1.8bn 1.50 in 2017 and 2018 since i. Maslak 1453, heavy weight in 2016 topline 1.00 and margin, will be complete, ii. mortgage subsidy might slightly 0.50

lower margins, iii. interest expenses on trade payables to TOKI and -

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10/16 12/16 new borrowing will continue, albeit at a lower rate. Upside would 02/17 come from faster completion of projects and upward revision to Price (TRY) Relative Price (TRY) secured revenues, i.e. increase in home prices (not very likely in ST).

. NAV growth slows down. Despite strong proceeds in 2016

(TRY7.3bn) and 2.08x tender multiple, NAV growth was limited to 8% due to delayed cashflows. This year, the company may tender c. TRY1bn worth of land and buy a similar amount of land. The company has TRY3.5bn payables to TOKI and will distribute c. TRY700mn this year, as well. Thus, we reflect only 15% value add for landbank and expect 4% yoy growth in 2017 NAV.

TRYmn 2014 2015 2016 2017E 2018E Sales 1,805 1,787 3,456 4,407 3,406 EBITDA 661 768 1,650 1,603 1,450 Net income 954 953 1,761 1,827 1,810 EPS reported (TRY) 0.3 0.3 0.5 0.5 0.5 DPS (TRY) 0.1 0.1 0.19 0.2 0.2

P/E (x) 10.1 11.4 6.8 6.6 6.6 Adj. EV/EBITDA (x) 13.3 13.7 6.8 7.0 7.7 Elvin Akbulut Daglier P/BV 1.1 1.2 1.1 1.0 0.9 [email protected] Div. yield (%) 3.8 3.4 5.9 6.1 6.0 +90 212 319 83 65

IMPORTANT: Please refer to the last page of this report for “Important Disclosures” and Analyst(s) Certifications.

6 March 2017 – Emlak Konut REIT

Financial Summary (TRYmn) 2014 2015 2016 2017E 2018E Investment Case Income Statement Emlak Konut is Turkey’s largest REIT with Total revenues 1,805 1,787 3,456 4,407 3,406 COGS -1,033 -899 -1,620 -2,593 -1,728 strong earnings visibility and low risk-high Gross profit 772 888 1,836 1,814 1,678 return business model with RSM tenders. Opex -112 -123 -194 -217 -235 Because of pull-forward effect of the latest EBITDA 661 768 1,650 1,603 1,450 sales campaign and macro headwinds, pre- Depreciation 2 3 7 7 7 sales may lose momentum after strong Operating income 659 765 1,643 1,596 1,443 Financial income/expense 190 34 -160 -79 29 February unless there is meaningful Net other income/expense 105 154 279 310 338 recovery in employment and GDP growth. Pre-tax income 954 953 1,761 1,827 1,810 RSM tenders, major catalysts for NAV, are Tax 0 0 0 0 0 likely to be scheduled more in 2H17. Minority interest/other 0 0 0 0 0 Upside would come from faster completion Net income 954 953 1,761 1,827 1,810 of projects and increase in home prices,

which do not look very likely in the short Balance Sheet term. We also expect flattish earnings due Cash and liquid assets 2,843 3,149 2,642 2,868 3,076 to completion of high margin RSM projects. Real estate 740 10,330 12,085 2,286 2,406 Accounts receivable 1,160 919 683 733 968 The stock trades close to its 2-year Other current assets 707 700 1,667 1,800 1,928 average NAV discount and we expect Total current assets 5,450 15,098 17,077 7,688 8,377 limited NAV growth in line with slowdown in Real estate 8,245 16 38 9,185 9,663 housing market. Financial/equity investments 0 0 0 0 0 Other non-current assets 1,259 1,622 1,587 2,067 1,771 Stock Triggers & Risks Total non-current assets 9,503 1,638 1,625 11,252 11,434 Total assets 14,953 16,736 18,702 18,939 19,811 Strong pre-sales, new tenders and rising Short-term debt 172 231 219 174 196 earnings momentum are major triggers for Accounts payable 1,376 2,231 3,824 2,350 2,087 Advances received 3,528 3,990 3,141 3,239 3,227 Emlak. Fall in mortgage rates would be Other current liabilities 636 689 770 781 788 supportive as well. Pace of infrastructure Total current liabilities 5,712 7,140 7,954 6,544 6,298 projects, regulatory risks (abolition of Long-term debt 434 214 0 523 560 corporate tax exemption), political noises Advances received 0 0 0 0 0 and economic hiccups are major risks. Other non-current liabilities 56 56 18 19 21 Total non-current liabilities 490 270 18 542 581 Chart 1: Shareholder Structure Minority interest 0 0 0 0 0 Total shareholders' equity 8,751 9,325 10,730 11,853 12,932 Total liabilities and equity 14,953 16,736 18,702 18,939 19,811

Cash Flow Statemement Free Profit before tax 954 953 1,761 1,827 1,810 float - TOKI Depreciation 2 3 7 7 7 excl TS 49% Changes in working capital -3,183 -570 -253 -1,407 -849 48% Other -502 -638 -797 -645 -323 Treasury Operating cash flow -2,728 -252 719 -218 645 stock Capex -27 -46 -20 0 0 Asset sales & other 437 110 17 18 20 3% Investing cash flow 410 65 -3 18 20 Source: The company Change in debt -163 -162 -225 478 59 Dividends -455 -356 -356 -705 -731 Chart 2: 2016 Real estate portfolio Other 92 12 62 67 72 Financing cash flow -527 -506 -519 -159 -600 Total cash flow -2,845 -694 197 -359 64 Building Net debt -847 -315 -737 100 95 stock 2%

Key Ratios Projects 73% Gross margin 43% 50% 53% 41% 49% Land EBITDA margin 37% 43% 48% 36% 43% 25% Revenue growth (%) -23% -1% 93% 28% -23% EBITDA growth (%) -27% 16% 115% -3% -10% Earnings growth (%) -10% 0% 85% 4% -1% Tax rate (effective) 0% 0% 0% 0% 0% Net debt-to-equity (x) nm nm nm 0.0 0.0 Source: The company Net debt-to-EBITDA (x) nm nm nm 0.1 0.1

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6 March 2017 – Emlak Konut REIT

VALUATION and ESTIMATES

Reflecting the impact of recent sales campaigns and 2016 realization, we slightly revise down our 12M TP for Emlak Konut to TRY3.40 from TRY3.65. Considering 14% total return potential (including dividend yield of 6%), we downgrade the stock to HOLD from BUY. The latest campaigns and the government’s market-friendly regulatory changes are likely to be supportive for the housing market, but we remain cautious for demand until we see sustainable pick-up in the economy and employment. Our major assumptions are: - 15% value-add for landplots (project launch in mid 2018, 80% RSM, 1.75x tender multiple for RSM and 1.2x value add for turnkey projects) - No value-add for cash - Pre-sales slightly upped for the new campaign in 2017 (now:9,944 units,prev:9,638 units) - 5% upside to future RSM projects - PV of mortgage loan subsidy netted off

Table 1: Emlak Konut REIT Target NAV

SOTP valuation TRY mn Landbank - revalued 5,996 appraisal+ value add Land - Istanbul Kucukcekmece Halkalı 2,092 665 Land - Basaksehir - Hosdere-16 parsel Land - Ankara - Cankaya Muhye 546 Land- Istanbul Sisli-Teşvikiye 522 Land - Istanbul Zeytinburnu Bestelsiz 472 Land - Istanbul - Arnavutkoy Dursunlu (14 parcels) 437 1,262 Others Building stock 293 Appraisal Ongoing projects (RSM) 5,363 DCF Nidakule Kucukyali 1,155 Buyukyali 1,133 Nidapark Kayasehir - Basaksehir Kayabasi 5 362 Validebag Konaklari 293 İst Marina 181 Others 2,239 Ongoing projects (turnkey) 1,506 DCF Ayazma Emlak Konut 527 Kayabasi (Basaksehir) 449 Hosdere (Bahcekent) 222 Others 308 Future projects (RSM) 2,627 DCF Sariyer Istinye 1,116 Ankara- Yenimahalle 902 Avangart Istanbul 447 Others 162 Total real estate values 15,784

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6 March 2017 – Emlak Konut REIT

Current solo cash 956 adj 2016 PV of administrative costs -687 DCF PV of new campaign -109 Payables to TOKI (adj) -2,398 HAA debt -219 Key payment plan-2016 Treasury stock 340 @10% discount Target NAV 13,666 REIT discount 0% 12M TP (cum div) 3.59 12M TP (ex div) 3.40 Current price 3.15 Upside potential 14% *Emlak’s headquarters are not included Source: YKY Research estimates

Sales campaigns support pre-sales at a cost and may pull demand forward

Since the coup attempt in July 2016, Emlak Konut REIT initiated two sales campaigns. The first campaign (1 Aug-31 Dec 2016) was full company financing while the current one (1 Feb-31 Mar 2017) offers attractive mortgage plans at subsidized rates with longer maturity. The former one entailed default risk of the homebuyers and also delayed Emlak Konut’s casflow by one year to support developers while the current one lowers the financial risk with mortgage availability while Emlak is entitled to the cost of subsidy as per its share in the project revenues. These campaigns surely support pre-sales. In the 1st campaign, Emlak Konut was able to sell 2,405 units in just one month, more than 5 month sale, at TRY1.8bn. Likewise, 2nd campaign reportedly achieved 2,300 units of pre-sales and TRY2,600mn proceeds according to media reportings. Thus, the second campaign is likely to match the 1st campaign and exceed in terms of value. Table 2: Comparison of two campaigns Terms and costs Campaign 1 Campaign 2 Duration 1 August -31 December 2016 1 February - 31 March 2017 Type of payment Cash+company financing Cash+bank loan Maturity up to 10 years up to 20 years Monthly mortgage rates 10 years: 0.7% 5 yrs: 0% 10 yrs: 0.45%

20 yrs: 0.79%

Delayed cashflows from clients + Emlak deferred its Subsidizes differential between Cost of campaign receivables from developers campaign rates and bank rates by one year Total number of units sold in 1st month 2,405 2,300 (preliminary data) Total proceeds in 1st month (TRYmn) 1,837 2,600 (preliminary data) Source: Emlak Konut REIT, YKY Research, Anatolian Agency However, this comes with a cost, as cited above: Cost of 1st campaign (Company financing): Based on PV analysis, we calculate the

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6 March 2017 – Emlak Konut REIT cost of company financing (i.e. 1st campaign) as 17% of the current value of proceeds. As a reminder, Emlak Konut also delayed receipt of its cashflow for a year, which will be then compensated in about 2.5 years, Thus, Emlak incurs additional 2% cost for the project. Based on 30% limit on revenue targets, the actual impact for Emlak is c. 5% according to this analysis, which means c. TRY120mn cost for Emlak. Self-financing also raises the default risk as compared to mortgage sales or cash purchases. Yet, Emlak is also experienced in self-financing since turnkey projects also offer favorable financing terms under self-financing (linked to CPI with c. 10 year maturity) and NPL ratio has been very low with returns less than 1% of sales. Since title deeds are not delivered before payment is completed, in case of default Emlak Konut gets back the unit and pays only the face value (i.e. no interest accrued) netting off expenses like potential rent income and renovation. Thus, mostly homebuyer prefers to sell the unit and redeem outstanding loans to Emlak. Also note that Turkey’s NPL in mortgages is currently 0.5% and rose to 2% at most during the crisis year of 2009, when GDP contracted by 4.8%. Chart 3: PV analysis of the 1st campaign

PV of TRY100 proceeds Key assumptions Key assumptions Pre-campaign Post-campaign Unit price 100 35 Emlak's share Cost: 19% off PV Emlak's share based on average revenue share 35% 27.3 Down payment 20 35 Cost: 17% off PV 10 Emlak's share (no 1 yr deferral) Interim payment 29.0 Annual payment 5.83

100 10 years Proceeds Duration 83.0 Interest rate 9% - 20.0 40.0 60.0 80.0 100.0 120.0 WACC 14.50%

Source: YKY Research Estimates, Emlak Konut REIT Cost of 2nd campaign (Subsidized mortgage): Emlak Konut and developers need to subsidize the differential between the campaign rate and bank rate, which can be up to 11pps in 60-month mortgages (since campaign offers 0% rate) on annualized rates. As we believe the mostly utilized ones are 10-year and subsidy of 5-year mortgage is close to 10-year, our analysis takes into account 10-year and 30-year mortgages. Chart 4: Mortgage rates: Lowest available vs. campaign rates

Monthly Annualized

Lowest rates New Campaign Lowest rates New Campaign

1.14% 14.6% 240 months 240 months 0.79% 10%

0.88% 11.1% 120 months 120 months 0.45% 6%

0.88% 11.1% 60 months 60 months 0% 0%

0% 2% 4% 6% 8% 10% 12% 14% 16% 0% 0% 0% 1% 1% 1% 1%

Source: YKY Research Estimates, Emlak Konut REIT

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6 March 2017 – Emlak Konut REIT

Average size of new mortgages in Turkey is currently around TRY115,000. Thus, we base our analysis on hypothetical TRY100,000 loan. The new campaign reduces monthly payments by 20% for 10-year loans and 24% for 20 year loans. However, total interest cost of 10-year is less than one quarter of 20-year. Thus, the client preference is in favor of 10-year, as indicated by the developers. As for PV of subsidy, it stands at c.TRY25,000 in 10-year mortgage and c.TRY41,700 in 20-year.

Table 3: PV analysis of TRY100,000 mortgage loan under 2nd campaign TRY 120 months 240 months Campaign Current Campaign Current Rate 0.45% 0.88% 0.79% 1.14% Monthly payment 1,080 1,353 930 1,220 Total payment 129,600 162,360 223,200 292,800 Interest cost 29,600 62,360 123,200 192,800 Cost of subsidy 32,760 69,600 PV of subsidy 25,016 41,740

Source: YKY Research Estimates, hesapkurdu.com, Emlak Konut We calculate possible PV of subsidy in this campaign for Emlak Konut in a range of TRY109mn to TRY292mn under 35% share in revenues. Although allowed LTV limit is 80% now (previously 75%), average LTV in Turkey is 50%.

Table 4.1: PV analysis of subsidy under 80% LTV TRYmn 120 months 240 months 50-50 70-30 Target sales 2,500 2,500 2,500 2,500 LTV 80% 80% 80% 80% Mortgage loans 2,000 2,000 2,000 2,000 PV of subsidy 500 835 668 550 % of cashflow 20% 33% 27% 22% Source: YKY Research Estimates Table 4.2: PV analysis of subsidy under 50% LTV TRYmn 120 months 240 months 50-50 Base case: 70-30 Target sales 2,500 2,500 2,500 2,500 LTV 50% 50% 50% 50% Mortgage loans 1,250 1,250 1,250 1,250 PV of subsidy 313 522 417 344 % of cashflow 13% 21% 17% 14% Source: YKY Research Estimates The company guided that they will pay 25% commission on mortgages received under this campaign and this will be booked as expense in the project and will be recognized in the P&L as project is completed. Assuming TRY2.5bn is collected through this campaign under 35% LTV (average ratio in Emlak’s projects), Emlak’s share of the cost stands at TRY77mn. As the attractiveness of the campaign is driven by the mortgage scheme offered, we reflect Turkey’s average ratio of 50%. As a result, we deduct TRY109mn in our valuation to reflect the cost of subsidy.

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6 March 2017 – Emlak Konut REIT

Table 5: PV of Cost of Subsidy

TRYmn Min Base Max Target sales 2,500 2,500 2,500 LTV 35% 50% 80% Mortgage loans 875 1,250 2,000 % commission 25% 25% 25% Cost of subsidy 219 313 500 Emlak's share 35% 35% 35% Cost to Emlak 77 109 175 Source: YKY Research Estimates

Short term secured with regulations and campaigns but long term growth depends on macro dynamics

Homes sales in 2016 were robust (up 4% yoy) against all odds, however devil is in the detail. Sales in Istanbul are declining (down 3% yoy in 2016) and stock depletion ratio is at low rates. Downward momentum in capital appreciation (12% price increase in new homes vs. 18% in 2015 and 11% growth in 2nd hand vs. 13% in 2015) also signal possible inventory build-up in Turkey. Based on permit data, we calculate c. 685,000 new units stocked up in the last 4 years vs. c. 500,000 sold annually (each year c. 115,000-150,000 units out of new completions remain unsold). Apart from developer campaigns, the government has also stepped in to liven up demand in the housing market since 2H16: - Against high inventory of luxury homes: The VAT for units above 150sqm is lowered to 8% from 15% until September 2017 (previously March 2017). These units should be either complete or ready for delivery by the end of the deadline. - Against potential increase in residential returns: Homebuyers now have 24 months, rather than 36 months, to cancel their pre-sale agreement and they face higher fine than previous 2% except for the first three months: 2% for the first 3 months, 6% in 6-12 months and 8% in the 12-24 months vs. flat 2% previously. In addition, the contractor now has 6 months (prev. 3 months) to pay back the buyer. - Against lower affordability: LTV is raised by 5pps to 80%. In addition, banks are called verbally to keep mortgage rates low. - Against declining foreign sales: Home sales to foreigners shrank by 20% yoy in 2016 on security concerns and volatility in the markets. In response, the government offers citizenship to foreigners who spends at least US$1mn on residential. In addition, foreigners are now exempted from VAT (1%, 8% or 18% depending on value or size). - Against cost pressure: The government lifted 0.948% tax on purchase agreement between developer and buyer. The property tax value brackets for VAT are also adjusted upwards for projects with permits or tenders after 31 Dec 2016: VAT of units smaller than 150sqm in the metropolitan areas will be 8% if the property tax value of the land is between TRY1,000 and TRY2,000 per sqm (prev. TRY500- 1,000) and it will rise to 18% if the property tax value is above TRY2,000/sqm (prev. TRY1,000). Note that projects in reserve areas or reurbanization projects are also subject to 1% or 18% based on the size. In addition, the cabinet is authorized to differentiate the title deed fee (currently 4% of the total selling price). These initiatives are surely supportive for the housing market, however, some of them are limited to short term and sustainability of demand is likely to depend on affordability and consumer sentiment as Turkey’s demographics, low quality of housing and

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6 March 2017 – Emlak Konut REIT changing life styles require at least 600,000 new units per annum. However, our two basic tenets for healthy housing market, i.e. “strong GDP growth” and “no increase (real or fear) in unemployment”, are under threat by the current macro conditions. Whether the government’s efforts like new employment package will be effective and whether economic growth will gain momentum are keys for better consumer sentiment and higher profitability for developers, in our view.

Thanks to the campaign and turnkey projects, 2017 targets can be reached

Emlak Konut (pre-)sold 10,053 units in 2016 at TRY7.3bn and met 91% of its unit target and 96% of revenue target for the year, including 187 units it acquired from the ongoing RSM projects to its portfolio (thus adjusted for self-purchase 9,866 units at TRY7.1bn). For this year, the company targets 9,900 units, which implies flattish to 2% lower pre-sales. Despite lower yoy guidance in unit and sqm sales, proceeds are expected to be slightly above 2016 thanks to launch of new luxury projects. Table 6: Emlak Konut REIT’s 2017 Targets 2017 pre-sales guidance Units Proceeds (TRYmn) SQM '000 Unit price SQM price 2016 - Realization 10,053 7,329 1,453 729,016 5,043 2017 - Guidance 9,900 8,005 1,280 808,578 6,256 2017 - YKYe 9,944 8,625 1,458 867,305 5,914 YKYe vs. Guidance 0% 8% 14% 7% -5% 1Q17 1,350 1,056 184 781,888 5,747 2Q17 2,615 2,224 335 850,618 6,635 3Q17 2,292 1,929 295 841,430 6,548 4Q17 3,643 2,796 466 767,622 6,000 Source: YKY Research Estimates, Emlak Konut REIT The pre-sales guidance is back to 2014-2015 levels and hence we do not perceive it very aggressive. The sales campaign should also be supportive. Note that 1H16 also creates a low base due to lack of new projects and 2H16 has its own headwinds, supported largely by sales campaign and launch of a large turnkey project in 4Q16. Chart 5: Emlak Konut REIT’s Pre-sales per month/quarter

2016 monthly presales 2017 guidance vs. 2016 quarterly realization

2016 2016 2017G 3,000 4,500 4,196

4,000 3,643 2,500 2,405 2,105 3,500 3,217 2,000 3,000 2,615 2,500 2,292 1,500 1,227 2,000 1,350 1,440 1,000 864 1,500 1,200 552 558 1,000 424 444 451 437 500 332 254 500

0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1Q 2Q 3Q 4Q

Source: YKY Research Estimates, Emlak Konut REIT

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6 March 2017 – Emlak Konut REIT

Especially with the sales campaign and new project launches, we believe the company can achieve its full year targets for both unit sales and proceeds. There have been 4 new RSM project launches ytd: Nidakule Kucukyali (2,025 units), Ebruli Ispartakule (776 units), Validebag Konaklari (352 units) and Avangart Istanbul (367 units). However, we think that luxury projects will be harder to sell and thus we expect average sqm price to be less than implied by Emlak Konut’s guidance. Table 7: Emlak Konut REIT’s RSM projects sorted by tender implied avrg sqm price

Appraisal Tender Ytd # of % of RSM % of Pre-sales Project value implied avrg average unsold projects in available ratio (TRYmn) TRY/sqm TRY/sqm units value units

Sariyer Istinye 1,876 20,950 1,948 14% 8% Validebag Konaklari 440 14,031 0 0% 366 3% 1% Avangart Istanbul 637 13,715 367 5% 1% Buyukyali 1,569 13,460 14,905 13% 1,335 12% 5% Nidakule Kucukyali 1,527 11,377 0 0% 2,025 11% 8% Kagithane-Eyup 168 11,023 401 1% 2%

Fatih Yedikule 106 9,805 309 1% 1%

Atasehir Financial District 29 9,684 1,442 0% 6%

Köy 476 7,640 7,077 49% 508 4% 2% Karat 34 172 7,352 7,129 48% 273 1% 1% Koordinat Cayyolu 180 6,687 4,210 31% 297 1% 1% Agaoglu Maslak 1453 576 6,648 6,747 92% 443 4% 2% Ankara- Yenimahalle 1,258 6,240 3,230 9% 13% Tual Adalar - Kartal Yakacik 124 6,964 5,237 32% 320 1% 1% Ebruli 132 6,073 0 0% 776 1% 3% Hosdere Phase 6 151 5,654 1,065 1% 4%

Sofaloca (ankara Etimesgut) 54 5,357 3,781 49% 80 0% 0% Park Mavera 420 5,107 4,835 90% 175 3% 1% Avcilar Ispartakule Phase 6 86 5,039 680 1% 3%

Hosdere Phase 5 157 5,032 1,244 1% 5%

Avrupa Konutlari Basaksehir - 350 5,006 4,424 21% 766 3% 3% Temasehir Konya - Meram 212 4,090 2,716 34% 597 2% 2% İst Marina 672 4,032 7,146 91% 143 5% 1% Tual Bahcekent 275 4,025 3,235 38% 1,190 2% 5% Evvel Istanbul 189 3,718 4,141 62% 536 1% 2% Kocaeli Derince 83 3,682 1,046 1% 4%

Metropol-Istanbul 445 3,338 7,604 77% 505 3% 2% Nidapark Kayasehir 408 3,261 4,386 24% 938 3% 4% Avrupark 157 2,904 2,923 78% 330 1% 1% Gol Panaroma Bahcesehir 148 2,781 3,729 72% 409 1% 2% Bulvar Istanbul 40 2,700 2,975 100% 1 0% 0% Sarphan Finanspark 172 2,600 10,168 83% 166 1% 1% Evora Denizli 93 2,529 2,851 11% 1,373 1% 5% Bakirkoy Yenimahalle 62 21,390 94 0% 0%

Bahcekent Flora 119 2,008 3,022 92% 102 1% 0% Total RSM projects 13,770 25,362 Source: YKY Research Estimates, Emlak Konut REIT

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6 March 2017 – Emlak Konut REIT

In order to meet tender value, 66% of RSM projects in terms of value should be priced above TRY7,000/sqm for Istanbul and above TRY6,000/sqm for other cities, which we set as the threshold for high-end of the market (see table on the previous page) while projects priced above TRY10,000/sqm could be seen as luxury, in our view. They also account for 51% of unsold units (both ongoing and future projects). Of these, Sariyer Istinye, Buyukyali and Nidakule Kucukyali are the largest in size both in terms of value and possible units for sale. Thus, pre-sales performance of these projects will set the tone for proceeds. Buyukyali started pre-sales in 2H16 last year and reached 14% pre- sales (including 2.5% acquired by Emlak Konut itself). Nidakule Kucukyali is just launched while Istinye project’s launch may lag in to 2018. The latest campaign might improve affordability for these projects and support pre-sales. Yet, once the campaign is over, their pre-sales momentum may decline.

Leverage slightly rises on slowing net cashflow

Emlak Konut REIT holds TRY2,642mn total cash on its balance sheet as of 2016, which is adjusted to TRY956mn by netting off blocked developer money of TRY575mn and TRY1,111mn payables to TOKI for land. Due to self-financing campaign that also included delayed cash receipts from developers by 1 year, net cash is at TRY737mn as of year-end. Table 8: Emlak Konut REIT’s cash position TRYmn 2013 2014 2015 2016 Total cash 5,448 2,843 3,149 2,642 Blocked developer money (-) 1,150 695 481 575 TOKI's receivables (-) 694 1,908 1,111 Emlak Konut only cash 4,298 1,453 759 956 Financial debt 770 606 445 219 Net cash 3,528 847 315 737 Payables to TOKI 0 0 2,398 Financing requirement 3,528 847 315 -1,662 Source: YKY Research Estimates, Emlak Konut REIT Separately, Emlak Konut has further TRY2.4bn payables to TOKI for land acquisitions. In addition, the company plans to acquire c. TRY1bn plots this year and will almost double its dividend payment to c. TRY700mn this year on significant level of deliveries. As a result, the company borrowed TRY620mn at the beginning of 2017 with a 4 –year maturity and 1 year grace period. Note that the loan rate is quite favorable at 12.4% and there is only TRY219mn outstanding financial debt as of year-end.

Upcoming tenders?

Emlak Konut has tendered 7 projects in 2016 at average multiplier of 2.08x based on TRY1bn base value and TRY2.28bn company share. We find the multiplier still strong at 2.08x, but it has declined 5% vs. 2014 multiplier and 10% vs. 2015.

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6 March 2017 – Emlak Konut REIT

Chart 3: Implied tender multiples

Appraisal Value Tender Value Tender multiplier (x)

7.00 6.45 3.00 5.87 6.00 2.50 2.30 5.00 2.18 2.15 2.03 2.08 3.98 2.00 4.00 1.62 3.04 1.50 3.00 2.55 2.41 2.28 1.00 2.00 1.61 1.38 1.11 1.09 0.79 1.00 0.50

0.00 0.00 Pre-2012 2013 2014 2015 2016 2013- YTD and 2012 Average

Source: Emlak Konut REIT, YKY Research Coupled with 2 landplots that were deferred to 2017, the company has set 4 plots to tender in 2017 with appraisal value of TRY450mn. The planned tenders are likely to be scheduled in late 2Q17. Depending on the market conditions post-referendum, there can also be some additions with progress in preparation of some plots for tender as the company targets to tender TRY1-1.5bn plots per annum via RSM, which is the major propeller of both NAV and earnings growth. Former Marmara University campus well located in Sisli- Tesvikiye (TRY455mn) might be added, while the company also plans to tender part of newly acquired Halkali plots (TRY1.8bn). Assuming a similar tender multiple, this can raise NAV by 5% yoy in 2017 (excluding Halkali plots).

Table 9: RSM tenders for 2017 Appraisal Potential % increase Upcoming tenders % of NAV (TRYmn) value add* in NAV Istanbul Tuzla Icmeler 25 0% 27 0% Istanbul Zeytinburnu Bestelsiz 419 2% 454 2% Istanbul Sisli Tesvikiye (tbd) 455 2% 493 2% Kocaeli Korfez Yarimca 11 0% 12 0% Kocaeli Gebze Guzeller 2 0% 3 0% Total 913 5% 989 5% * Assuming same average multiplier (2.08x) Source: YKY Research Estimates, Emlak Konut REIT Still, to be on the conservative side, we pencil in 1.75x multiplier in land re-valuation and reflect only 15% value add to the current landbank as slow-down in tenders either due to lower amount of tenders or lower multipliers may pull down future growth potential.

11

6 March 2017 – Emlak Konut REIT

Earnings visibility still remains strong, but at flattish levels

Total proceeds and tender results set the tone for valuation while earnings are the basis for dividends. As of 2016, Emlak Konut REIT has minimum guaranteed revenues of TRY13.6bn and TRY7.9bn of gross profit. It normally takes around 2-3 years for the ongoing projects to deliver units and 4-5 years for the newly tendered projects. Thus, for the next 2 years, earnings momentum is quite visible. Even if we were to assume some delay, this corresponds to c.TRY1.5bn-TRY2bn annual gross profit, excluding the contribution from turnkey projects. Table 10: Guaranteed minimum revenues and implied gross profit as of 2015

TRYmn 2016 BV Emlak's share Implied gross profit RSM projects on sale (ongoing) 3,659 9,586 5,927 RSM projects to be launched (future) 1,977 3,976 1,999 Total gross profit (2017E-2021E) 5,636 13,561 7,926 Source: Emlak Konut REIT, YKY Research 2016 was the first harvest year with TRY1.3bn gross profit from RSM projects, almost doubling yoy. As a result, earnings totaled TRY1.8bn in 2016 vs. TRY953mn in 2015, including contribution from turnkey projects and interest income despite additional cost of discount for turnkey projects due to early payment campaign. We project more project completions this year but expect a similar contribution from RSM in 2017 on lower margin: TRY1.5bn gross profit on TRY2.4bn RSM revenues since Maslak 1453, which enjoys a robust gross margin of 81% accounts for 24% of topline vs. c65% in 2016 as it nears completion. In addition, cost of mortgage subsidy will start to be reflected on the cost of the projects. Thus, gross margin of RSM projects is set to decline to 62% in 2017 and 61% in 2018 from 77% in 2016. Turnkey projects are also set to have a sizable contribution to the topline in 2017 but halve in 2018. In addition, their gross profitability is lower as Emlak incurs both construction and marketing costs unlike RSM projects. Accordingly, we expect total gross profit to decline by 1% yoy to TRY1,814bn in 2017 with 41% gross margin and to TRY1,678mn in 2018E with 49% gross margin. We expect 2017 OPEX increase to be lower than 2016 due to lower number of tenders, up 12% yoy. Accordingly, EBITDA is set to decline 3% to TRY1.6bn in 2017E. Due to lower revenues from turnkey projects (revenues down 12% yoy), we reflect 10% decline in 2018 EBITDA. Interest expenses are likely to come down with payments of outstanding payables to TOKI and installment sales may compensate for borrowing costs to some extent. Accordingly, there is additional c.TRY230mn to TRY380mn non- operating income per annum. As a result, we expect the company to maintain TRY1.8bn earnings in the next two years unless project completions speed up. Since the company policy is to distribute c. 40% of the distributable income, this should lead to TRY700mn dividend for 2017 and 6% dividend yield.

12

6 March 2017 – Emlak Konut REIT Table 11: Earnings outlook for Emlak Konut REIT

TRY mn 2014 2015 2016 2017E 2018E Net revenues 1,805 1,787 3,456 4,407 3,406 % change -23% -1% 93% 28% -23% Gross revenue breakdown 1,806 1,788 3,461 4,413 3,411 RSM projects 1,052 1,512 1,744 2,357 2,450 PPM projects & building stock 630 276 1,652 2,055 960 Vacant land sale 122 0 64 0 0 Other 2 1 1 1 1 Gross profit 772 888 1,836 1,814 1,678 % change -24% 15% 107% -1% -7% Gross margin (%) 43% 50% 53% 41% 49% RSM projects 54% 55% 77% 62% 61% PPM projects & building stock 32% 18% 27% 18% 21% Vacant land sale 1% n.a. n.a. n.a. n.a.

OPEX -112 -123 -194 -217 -235

% change 0% 10% 57% 12% 8% EBIT 659 765 1,643 1,596 1,443

EBITDA 661 768 1,650 1,603 1,450 % change -27% 16% 115% -3% -10% EBITDA margin 37% 43% 48% 36% 43% TRYmn 2014 2015 2016 2017E 2018E Net income 954 953 1,761 1,827 1,810 Payout ratio 38% 39% 40% 40% 40% Dividend 367 368 705 731 724 Dividend yield (%) 3.8% 3.4% 5.8% 6.1% 6.0% Source: Emlak Konut REIT, YKY Research estimates

With these estimates, we are more conservative than Bloomberg consensus especially for 2018, which we attribute to the differences in timing of revenue recognition and possibly our more conservative margin estimates for turnkey projects. Table 12: YKY estimates vs. consensus (Bloomberg) for Emlak Konut REIT

2017E 2018E Old YKY

TRYmn Consensus YKY Difference Consensus YKY Difference 2017E 2018E

Net Sales 3,362 4,407 31% 3,861 3,406 -12% 3,989 3,211

EBITDA 1,687 1,603 -5% 1,888 1,450 -23% 1,496 1,615

Net Income 1,821 1,827 0% 2,090 1,810 -13% 1,800 1,941

EBITDA margin 50% 36% 49% 43% 38% 50%

Net margin 54% 41% 54% 53% 45% 60% Source: YKY Research estimates, Bloomberg

13

6 March 2017 – Emlak Konut REIT

Deep discount implies negatives more than priced in

Emlak Konut REIT is currently trading at 39% discount to its 2016 NAV. Though we believe its less risky structure with RSM projects and low leverage deserve lower discount under normal market conditions, latest volatility in the markets and politics have expanded the average discount to 42% levels in the last 1 year vs. 3-year average of 32% and 2 year average of 37% (last 5-year average is 24%). Chart 6: Emlak Konut REIT’s discount to NAV over years

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Source: Turkstat, GYODER, REIDIN Moreover, past NAV growth rate is hard to replicate given the current size and possible slowdown in the housing market. Table 13: Emlak Konut REIT’s NAV

TRYmn 2014 2015 2016 2017E 2018E NAV (TRYmn) 13,652 18,269 19,758 20,601 21,771 % change 12% 34% 8% 4% 6% Land 5,237 3,950 5,219 5,851 6,535 Building stock 89 28 484 353 221 Projects 8,560 15,312 15,449 14,352 14,041 Total real estate value 13,886 19,290 21,152 20,556 20,797 Marketable securities 2,148 2,668 2,067 1,291 1,430 Net other assets 3,821 3,722 4,512 5,841 6,423 Payables 6,202 7,411 7,972 7,086 6,879 NAV/sh 3.59 4.81 5.20 5.42 5.73 Source: Emlak Konut REIT, YKY Research estimates

This translates into TRY5.42/sh for 2017E vs. our cum-div TP of TRY3.60, which implies a c.30% inherent discount. The major reason of difference is in RSM tenders developers bid for a 3-4 year horizon while in our DCF we discount it to today.

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6 March 2017 – Emlak Konut REIT

4Q16 Earnings review

Emlak Konut REIT reported TRY236 earnings in 4Q16, down by 56% yoy and 74% qoq. Interest expenses for payables to TOKI for land plots were booked as TRY127mn, which led to the miss at the bottomline (YKYe:TRY307mn, consensus: TRY293mn). But note that tax financials that were released earlier indicated TRY247mn net profit and the company met its 2016 guidance of TRY1.8bn. EBITDA was slightly lower than estimates at TRY239mn, but in line with ours (YKYe:TRY232mn, consensus:TRY259mn). However, NAV/sh rose just 8% yoy to TRY5.20/sh.

Table 14: Emlak Konut REIT- 4Q16 Summary financials

Income statement 4Q16 4Q15 Chg yoy (%) 2016 2015 Chg yoy (%) 3Q16 Chg qoq (%) Revenues 394 1.118 -65 3.456 1.787 93 1.794 -78 COGS 101 598 -83 1.620 899 80 817 -88 Gross profit 293 520 -44 1.836 888 107 977 -70 OPEX 56 46 23 194 123 57 54 4 Operating profit 237 474 -50 1.643 765 115 923 -74 EBITDA 239 475 -50 1.650 768 115 924 -74 Other income, net 113 48 132 279 154 81 49 130 Financial income, net -113 13 n.m. -160 34 n.m. -78 46 Minority interest 0 0 n.m. 0 0 n.m. 0 n.m. Taxes 0 0 n.m. 0 0 n.m. 0 n.m. Net profit 236 536 -56 1.761 953 85 894 -74

Margins (%) 4Q16 4Q15 2016 2015 3Q16 Gross 74,4 46,5 27,9 pp 53,1 49,7 3,4 pp 54,5 19,9 pp EBITDA 60,8 42,5 18,2 pp 47,7 43,0 4,8 pp 51,5 9,2 pp Net 60,0 47,9 12,1 pp 51,0 53,3 -2,3 pp 49,9 10,1 pp

Balance Sheet 4Q16 4Q15 Chg yoy (%) 2016 2015 Chg yoy (%) 3Q16 Chg qoq (%) Cash and cash equivalents 2.642 3.149 -16 2.642 3.149 -16 3.214 -18 Trade receivables 2.150 2.402 -10 2.150 2.402 -10 2.536 -15 Inventories 12.085 10.330 17 12.085 10.330 17 1.427 n.m. LT assets 1.625 1.638 -1 1.625 1.638 -1 12.164 -87 Total assets 18.702 16.736 12 18.702 16.736 12 18.642 0 Financial debt 219 445 -51 219 445 -51 275 -20 Trade payables 3.824 2.267 69 3.824 2.267 69 4.068 -6 LT liabilities 18 270 -93 18 270 -93 64 -72 Equity 10.730 9.325 15 10.730 9.325 15 10.494 2 Total liabilities 18.702 16.736 12 18.702 16.736 12 18.642 0

Financial ratios 4Q16 4Q15 Chg yoy (%) 2016 2015 Chg yoy (%) 3Q16 Chg qoq (%) Net debt* -2.423 -2.704 -10 -2.423 -2.704 -10 -2.939 -18 Debt/equity 43 44 -1,7 pp 43 44 -1,7 pp 44 -1,1 pp Receivable days 502 198 304 228 491 -263 130 372 Inventory days 11.036 1.590 9.446 2.731 4.195 -1.464 161 10.875 Payable days 3.492 349 3.143 864 921 -57 458 3.034 Net working capital days 8.046 1.439 6.607 2.094 3.765 -1.671 -167 8.213 * Includes contractors’ shares Source: Emlak Konut REIT, YKY Research

Topline fell 65% yoy to TRY394mn in 4Q16. RSM projects (mainly Maslak 1453) accounted for 83% of the total. Since this project has strong profitability, gross margin improved 20pps qoq to 74%. Operating expenses were just 4% up qoq to TRY56mn in

15

6 March 2017 – Emlak Konut REIT

4Q16. As a result, EBITDA totaled TRY239mn with EBITDA margin of 61%.

Since the sales campaign that involved self-financing was extended to 4Q16 as well, cashflow from strong pre-sales vs. 1H16 did not reflect on the cash position. Net cash stayed flattish at TRY956mn at the year-end vs. TRY1bn as of Sep 2016. Moreover, acquisition of TRY2.28bn worth of land from TOKI in installments led to TRY127mn interest expenses as cited above. However, interest income on installment sales also soared to TRY89mn. As a result, Emlak Konut booked TRY1mn non-operating loss vs. TRY29mn loss in 3Q16 (driven by TRY94mn discount for early payment of turnkey projects) and TRY62mn income in 4Q15.

Table 15: Emlak Konut REIT – NAV

TRY mn 2016 9M16 Chg qoq (%) 2015 Chg yoy (%) Landbank 5,219 5,462 -4% 3,950 32% Buildings 484 469 3% 28 1632% Projects 15,449 14,937 3% 15,312 1% Total real estate value 21,152 20,869 1% 19,290 10% Participations 0 0 n.m. 0 n.m. Marketable securities 2,067 2,544 -19% 2,668 -23% Total portfolio value 23,219 23,413 -1% 21,957 6% Net other assets 4,512 4,175 8% 3,722 21% Payables (-) 7,972 8,148 -2% 7,411 8% Net asset value 19,758 19,440 2% 18,269 8% Source: YKY calculation on Emlak Konut REIT data

Table 16: Emlak Konut REIT – Pre-sales data

Chg yoy Chg yoy (%) 4Q16 4Q15 2016 2015 3Q16 Chg qoq (%) (%) Number of units (pre)-sold 4,196 2,456 71% 10,053 10,453 -4% 3,217 30% 000 sqm of units (pre)-sold 620 347 78% 1,453 1,438 1% 488 27% Revenues (TRYmn) 3,144 1,608 96% 7,329 6,324 16% 2,481 27% Average sqm price (TRY) 5,074 4,630 10% 5,043 4,399 15% 5,083 0% Average unit price (TRY) 749,383 654,711 14% 729,016 604,987 21% 771,154 -3% Source: Emlak Konut REIT, YKY Research

Table 17: Emlak Konut REIT – 2016 Guidance vs. realization

2016 pre-sales guidance Units Proceeds (TRYmn) SQM '000 Unit price SQM price 2016 guidance 11,000 7,600 1,500 690,909 5,067 2016 - realization 10,053 7,329 1,453 729,016 5,043 % difference -9% -4% -3% 6% 0% 1Q16 1,200 739 159 615,658 4,646 % of target/% difference 11% 10% 11% -11% -8% 1H16 2,640 1,704 346 645,299 4,929 % of target/% difference 24% 22% 23% -7% -3% 9M16 5,857 4,184 834 714,426 5,019 % of target/% difference 53% 55% 56% 3% -1% Source: Emlak Konut REIT, YKY Research

16

Coverage Cluster Company Ticker Analyst BUY Akbank AKBNK Oğuzhan Vural Akcansa AKCNS Evrim Dairecioğlu Aksa Enerji AKSEN Elvin Akbulut Daglier Anadolu Hayat ANHYT Sezgi Bice Ozener Aygaz AYGAZ Elvin Akbulut Daglier Bolu Çimento BOLUC Evrim Dairecioğlu Cimsa CIMSA Evrim Dairecioğlu Coca-Cola CCOLA Gizem Celik Celebi CLEBI Gorkem Goker Enka Insaat ENKAI Elvin Akbulut Daglier Garanti Bankasi GARAN Oğuzhan Vural Is REIT ISGYO Elvin Akbulut Daglier Kardemir (D) KRDMD Gizem Celik - Elvin Akbulut Daglier Migros MGROS Gorkem Goker Park Madencilik PRKME Mehmet Aydin Agyuz Pinar Et PETUN Gizem Celik Sabanci Holding SAHOL Elvin Akbulut Daglier Selcuk Ecza SELEC Gizem Celik Tekfen Holding TKFEN Elvin Akbulut Daglier Torunlar REIT TRGYO Elvin Akbulut Daglier Tofas TOASO Mehmet Aydin Agyuz TSKB TSKB Oğuzhan Vural Tupras TUPRS Elvin Akbulut Daglier Turkcell TCELL Mehmet Aydin Agyuz Turk Telekom TTKOM Mehmet Aydin Agyuz Turk Traktor TTRAK Mehmet Aydin Agyuz Ulker Biskuvi ULKER Gizem Celik HOLD Alarko REIT ALGYO Elvin Akbulut Daglier Anadolu Efes AEFES Gizem Çelik Adana Cimento ADANA Evrim Dairecioğlu BIM BIMAS Gorkem Goker Bizim BIZIM Gorkem Goker Bagfas BAGFS Evrim Dairecioğlu Eczacibasi İlac ECILC Gizem Celik Emlak Konut REIT EKGYO Elvin Akbulut Daglier Erdemir EREGL Elvin Akbulut Daglier - Gizem Celik Ford Otosan FROTO Mehmet Aydin Agyuz Isbank ISCTR Oğuzhan Vural Halkbank HALKB Oğuzhan Vural Mardin Cimento MRDIN Evrim Dairecioğlu Otokar OTKAR Mehmet Aydin Agyuz Pegasus PGSUS Gorkem Goker Pinar Sut PNSUT Gizem Celik Sinpas REIT SNGYO Elvin Akbulut Daglier TAV Havalimanları TAVHL Gorkem Goker Tat Gıda TATGD Gizem Celik Turk Hava Yollari THYAO Gorkem Goker Vakifbank VAKBN Oğuzhan Vural UNDERPERFORM Ak Enerji AKENR Elvin Akbulut Daglier Albaraka Turk ALBRK Oğuzhan Vural Ayen Enerji AYEN Elvin Akbulut Daglier Arcelik ARCLK Mehmet Aydin Agyuz Avivasa AVISA Sezgi Bice Ozener Gubre Fabrikalari GUBRF Evrim Dairecioğlu Tumosan TMSN Mehmet Aydin Agyuz UNDER REVIEW / NOT RATED Aksigorta AKGRT - Anadolu Sigorta ANSGR - Koza Altin KOZAL Mehmet Aydin Agyuz Dogan Holding DOHOL -

Research Rating and Important Disclosures

1. Important Disclosures

This research report was prepared by Yapi Kredi Yatırim authorized to engage in securities activities in Turkey amongst other jurisdictions. Yapi Kredi Yatırim is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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KCM may accept responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.

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A. Analyst Disclosures

The functional job title of the person(s) responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover.

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affiliates and/or their respective officers, directors or employees have [no] interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein.

KCM or its affiliates [do not] ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of the equity securities of the company referenced in this report. KCM, its affiliates and/or their respective officers, directors or employees have [no] interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein.

C. Compensation and Investment Banking Activities

Yapi Kredi Yatırim or any of its affiliates have not managed or co-managed a public offering of securities for the subject company in the past 12 months. Yapi Kredi Yatırim or any of its affiliates have not received compensation for investment banking services from the subject company in the past 12 months. Yapi Kredi Yatırim or any of its affiliates do not expect to receive or intends to seek compensation for investment banking services from the subject company in the next 3 months.

KCM or any of its affiliates have not managed or co-managed a public offering of securities for the subject company in the past 12 months. KCM or any of its affiliates have not received compensation for investment banking services from the subject company in the past 12 months. KCM or any of its affiliates do not expect to receive or intends to seek compensation for investment banking services from the subject company in the next 3 months.

D. Market Making

Yapi Kredi Yatırim, at the time of this publication, does not make a market in the Emlak Konut REIT .

KCM, at the time of this publication, does not make a market in the Emlak Konut REIT .

E. Rating System

Stock ratings are based on the analyst’s expectation of the stock’s total return during the twelve to eighteen months following assignment of the rating. This view is based on the target price, set as described below, and on the analyst’s opinion, general market conditions and economic developments.

Rating System As fro As from 31/12/2012, the formula is: As fro As from 12/10/2015, the formula is: Buy: expected total returns of 10% or more over the next 6-Buy: expected total returns of 15% or more over the next 6- 12 months 12 months Hold: expected total returns of +/- 10% over next 6-12 Hold: expected total returns of 0-15% over next 6-12 months months Underperform: expected total returns of - 10% or less over Underperform: expected total returns of 0% or less over the next 6-12 months the next 6-12 months

F. Distribution of Ratings

Coverage Universe Count Percent Percent Inv. Banking Relationships Count Percent Buy 27 46% 0% 0 0 Hold 21 36% 0% 0 0 Underperform 7 12% 0% 0 0 Not Rated 1 2% 0% 0 0 Under Review 3 5% 0% 0 0

G. Price Target

Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two (2) methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there is a significant risk that the target price will not be achieved

within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions. This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

H. Price Chart

TP & RatingBUY BUY BUY 5,00 BUY 4,55 BUY BUY 4,15 4,20 BUY 3,70 3,90 4,00 BUY HOLD 3,50 BUY 3,65 2,95 3,05 4,20 3,00

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2. Additional Disclosures/Disclaimers

A. Additional Disclosures

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