strategy report turkey strategy - bnp paribas · 2013 is 0.906. 2 orderly devaluation of the...

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27 DECEMBER 2016

STRATEGY REPORT

TURKEY STRATEGY

2017– Prefer banks over non-financials

MSCI Turkey has underperformed MSCI EM by 18% YTD in USD terms, driven predominantly by the coup attempt that resulted in negatives such as Moody’s downgrading Turkey’s sovereign rating to non-investment grade, weakening consumer confidence, and the introduction as well as extension of emergency rule. Turkey’s underperformance since the coup attempt on 15 July is a hefty 22% in USD terms. Consequently, we think the domestic issues are largely priced in.

At just 5.4x 2017E P/E with barely any downside risk on earnings, Turkish banks are trading at a discount of over 30% to both to their own five-year average and their EM EMEA peer group average P/E, a valuation discount that is difficult to ignore. Our 1-year forward BIST100 target of 91k, derived using 16.25% CoE, implies 18% upside potential.

We are cautiously upbeat on the stock market and recommend an OVERWEIGHT position on Turkish banks vs Manufacturers and the BIST100 for the following reasons: 1) their valuation discount; 2) recovering syndicated loan rollovers; 3) the underweight positioning of foreign investors in the fixed income market; 4) the limited impact of NPL-inflows on the back of the recently introduced Treasury Guarantee scheme; and 5) continued upward revisions of 2016 and 2017 earnings estimates of banks versus downward revisions for those of non-financials. As for individual stocks for 2017, we prefer Akbank, Garanti, Emlak REIT, Enka, Migros, Sabanci, TAV and Vestel whereas our least preferred are Pegasus and Arcelik. Our TPs, estimates and ratings are unchanged.

Key domestic issues to tackle in 2017:

1 Referendum for constitutional amendments: Executive presidency referendum likely to take place in April 2017.

2 Geopolitical problems: Syria and Iraq uncertainties, Turkish armed forces in daily confrontation with ISIS.

3 Emergency rule: Foreign direct investment appetite may be low and tourists may refrain from visiting Turkey as long as emergency rule prevails. We fear the emergency rule may be extended for another three-month period on 15 January.

4 Delinquent loans: We believe the negative P&L impact will be limited as the BRSA encourages banks to restructure these loans, Treasury guaranties provide relief and banks have enough general reserves to counterbalance the negative impact.

5 Potential Fitch downgrade: If Fitch downgrades, syndicated loan costs would increase by 15bp and bank CARs should decline by 120bp.

Key international issues in 2017:

1 Fed rate hike pricing: TRY’s positive correlation with 2-year UST rate since May 2013 is 0.906.

2 Orderly devaluation of the renminbi: China growth stabilising above 6.5% and orderly devaluation of RMB vs USD may lead to another uptrend in EM equities.

Non-banks’ financial highlights

---------- Change (y-y %) ----------

2016 2017

Revenues 11 21

EBITDA 0 18

Net profit (20) 31

KCHOL TI and SAHOL TI excluded in order to avoid double counting in aggregate earnings and their substantial banking businesses Source: TEB Investment/BNP Paribas estimates

Banks’ financial highlights

-------- Change (y-y %) --------

2016 2017

Net ınterest in. 18 20

Net OP. inc. 32 18

Rep. net profit 43 9

Rec. net profit 33 11

Source: TEB Investment/BNP Paribas estimates

Mete Yuksel [email protected] +90 216 636 4536

Our research is available on Thomson One, Bloomberg, TheMarkets.com, FactSet and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page.

PREPARED AND PUBLISHED BY NON-US BROKER-DEALER(S): TEB INVESTMENT. THIS REPORT IS DISTRIBUTED IN TURKEY BY TEB INVESTMENT AND OUTSIDE TURKEY JOINTLY BY TEB INVESTMENT AND BNP PARIBAS. THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 39

mailto:[email protected]

TURKEY STRATEGY Mete Yuksel

Top-down strategy outlook --- Isik Okte

Investment themes

We expect the constitutional reform and executive presidency referendum to be two of the critical themes in 2017. The ruling Justice and Development Party (AKP) submitted a 21-article constitutional amendment that will change the parliamentarian system into an executive presidency. Nationalist Movement Party (MHP) moved along with the AKP in submitting the amendments to the Parliament. If the bill is passed by the parliament, a public referendum to vote on these amendments is expected by April 2017.

Among the constitutional amendments that were submitted by AKP and MHP in the third week of December are:

Prime Minister position is going to be abolished;

Presidential and parliamentary elections will be held on the same day in 2019 (3 November) and going forward;

Number of deputies in the Parliament will be raised to 600 from 550;

The President can maintain ties with his/her party (President Erdogan may restore ties with the AKP until the transition period up to November 2019 elections);

The President can serve two five-year terms;

The President will have the right to issue decree laws;

The President will have the right to declare a state of emergency and rule the country during the state of emergency by exercising Presidential decrees;

The President will appoint the Cabinet and all high-ranking public officials;

The President will have the right to dissolve Parliament, which would require new Presidential and parliamentary elections;

Six of the 12 members of the Supreme Board of Judges and Prosecutors (‘’HSYK’’) will be appointed by the President (including Minister of Justice)

Parliament will have the right to set up a commission for an inquiry into a potential President impeachment — a secret ballot vote of 360 is needed. For the President to be tried in Supreme Court, a secret vote of 400 out of 600 is needed; and

Parliament’s right to audit the Cabinet and ministers will be abolished.

Source: Local dailies, HDN, Anatolian Agency, WSJ

We will closely watch developments regarding the change of political system in Turkey; however, we still believe that global liquidity conditions and rates picture will still be the main determinants of Borsa Istanbul (BIST) equities in 2017.

Since Mr. Trump won the Presidential elections, 10-year U.S yield is up 70bp and Turkish equities main index BIST100 sold off 9% in USD terms underperforming EM equities by 3%. But, when we analyse the BIST100 index performance in TRY terms, we see a different picture. Since Mr. Trump won the Presidential elections, BIST100 index has gained 1% in TRY terms. Thus, it is actually the deteriorating dynamics of the currency (down 10% vs USD and the worst EM FX performer along with Mexican peso) and not the equity dynamics that led to the underperformance.

2 BNP PARIBAS 27 DECEMBER 2016


Going into 2017, we are more upbeat on Turkish equities for the following reasons:

1 Turkish equities de-rated in the last 2 years: In 2015, MSCI Turkey sold off 34% and underperformed EM equities by 17%. In 2016 ytd, MSCI Turkey sold off 11% and underperformed EM equities by 17%.

We believe there are a myriad of reasons for this de-rating of Turkish equities—geopolitics, concern over the independence of the CBRT, failed coup attempt, loss of tourism revenues, worsening growth dynamics, Moody’s downgrade to non-investment grade, just to name a few.

MSCI Turkey’s 12-month forward P/E discount to MSCI EM now stands near post-GFC highs (i.e., 34%; post-GFC highs: 38%) 2 years ago, MSCI Turkey’s EM discount stood at only 5%. Post-GFC, the P/E discount averaged 18% on an annual basis.

Main index, BIST100 rallied 7% off December lows and has been trading in a narrow range for the last 6 months since the failed coup attempt. In USD terms, however, the index is trading at 2009 June levels and psychological support level of “2 cents’’ was tested in December (USD2.2 last trade)

With two years of major underperformance vs EM equities and the P/E de-rating story, we see most of the above negatives are already known and priced in by the investment community.

2 Positive themes:

A. Appealing bank valuations: Banks trade at 5.4x 2017E P/E, implying 30% discount to 5-year historical average of 7.7x and 35% discount to EM EMEA average of 8.3x. BRSA encouraging loan restructuring and TRY250b Treasury Guarantee are set to limit a visible worsening in asset quality, while, general provision reversals are set to provide a cushion on earnings against any one-off surprises. Overall, we see no major risk to our 9% y-y 2017 EPS growth for banks.

B. Lifting of the state of emergency: Despite President Erdogan’s statement that the state of emergency is likely to extend another three months after January 2017, Prime Minister Yildirim said the emergency rule may be lifted before the upcoming referendum in April.

C. Syria: After the trilateral talks between Turkey, Russia and Iran on Aleppo, there is an increasing possibility that a cease fire will be called in Syria, with the continuation of the Essad regime. Turkish authorities have been working toward a different solution in Syria all along; however, a ceasefire in Syria would be a major positive for Turkish equities.

D. Politics: Improving relations between the U.S and Turkey increases the likelihood of Fethullah Gulen’s release. One of Mr. Trump’s top advisors, General Flynn, called for a re-adjustment of foreign policy to recognise Turkey as a top priority, and suggested the handover of Fethullah Gulen. (Source: Anatolian Agency, Sabah) This may be a significant positive for TRY assets, in our view. We also note that Turkey is getting closer to Russia again as both parties have stated their intentions to continue the “normalisation’’ process after the assassination of Russia’s Ankara convoy.

E. Expansion of the Customs Union with the EU: Brussels has been taking new steps to bolster trade ties with Turkey. The EU is Turkey’s largest trade partner and EU trade commissioner, Cecilia Malström, has recently sought the approval of member states to update the Customs Union accord which was signed in 1996. As it stands, the Customs Union does not include agriculture, dairy, services and public procurement goods. Only tariffs on industrial and processed farm products were eliminated in 1996. The EU



Commission has opened talks on expanding the Customs Union negotiations to include the subjects of human rights and open democracy; the negotiations are expected to last anywhere between 1 to 2 years. We view this development as a positive in light of the recent negative events, especially Austria’s failed bid to stop Turkey’s accession talks. (Sources: Financial Times, EurActiv.com, Daily Sabah)

F. Normalisation in volatility of the currency: Turkish lira short-term implied volatilities (1-week to 1-month) are above post-failed coup attempt and post-China renminbi devaluation levels. They are also among the highest four in EM currency space along with the South African rand, Brazilian real and Colombian peso. (Source: Bloomberg)

Normalisation of short-term implied volatilities after the Trump election is crucial for foreign investor demand for Turkish equities. BNP Paribas FX strategist expects USDTRY at 3.70 at year-end 2017—this represents 5.1% depreciation of the TRY on top of the 16.9% ytd depreciation in 2016.

Risk factors

Downside risks to our constructive call for Turkish equities include:

1 Currency: BNP Paribas economists expect two rate hikes by the FOMC in 2017, while, the FOMC “dot plot” has moved to three rate-hike possibility from two. If the US fiscal expansion through infrastructure projects led to an upward revision in inflation expectations and the “dot plot” to four rate hikes in 2017; TRY dynamics will continue to worsen because Turkey is still a deficit nation that needs liquidity. This would further dampen foreign investors’ demand for Turkish equities.

2 Credit rating agency action: Fitch is maintaining Turkey’s sovereign rating at lowest investment-grade category, BBB– with a negative outlook. There is a country review on January 27 and we expect Fitch to lower Turkey’s sovereign rating one-notch to non-investment grade, similar to Moody’s.

After Moody’s downgrade of Turkey’s sovereign rating to non-investment grade on September 23, a downgrade by Fitch is widely expected in the investment community and we envisage that if Fitch were to keep Turkey at investment-grade in their January review, this would be only a short-term positive for Turkish equities.

Exhibit 1: Real Effective Exchange Rate (REER) for TRY at historical lows

Exhibit 2: TRY has been significantly underperforming EM currencies for the last two years

Sources: CBRT, BNP Paribas Sources: Bloomberg

*** JP Morgan EM FX index currently includes: 11.1% of BRL, MXN, CLP, CNH, INR, SGD; 8.33% of TRY, RUB, HUF, ZAR

85

95

105

115

125

135

Jan-

03Se

p-03

May

-04

Jan-

05Se

p-05

May

-06

Jan-

07Se

p-07

May

-08

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09Se

p-09

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11Se

p-11

May

-12

Jan-

13Se

p-13

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15Se

p-15

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-16

Daily REER for TRY

0.029

0.034

0.039

0.044

0.049

0.054

0.059

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

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Nov

-15

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Mar

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Relative performance of TRY vs JPM EM FX index



Fitch announced that their second review date for 2017 will be 21 July. Standard & Poor’s, which already has Turkey’s sovereign rating two notches below investment grade, announced that their review dates are 5 May and 3 November. Moody’s did not specify any review dates for Turkey due to a change in their coverage of continental Europe.

3 Worsening growth dynamics: After 3Q16 contraction in the economy, 2016 fourth quarter macro data is not promising. One factor that keeps us more comfortable for 2017 growth is the fact that fiscal expansion will continue after TRY13b inflows into Turkish Treasury with the tax restructuring which makes the budget figures better than expected.

4 Geopolitical risks: ISIS and PKK terrorism may continue in vital tourist areas, resulting in a further drop in tourism revenues.

5 A sustained rally in energy commodities markets: MSCI Russia is up 44% and outperforming MSCI Turkey by 55% ytd (since 2015, MSCI Russia’s outperformance over MSCI Turkey stands at 85%)

The above risks are all well documented and we see no reason to explain these in detail.

We just want to highlight one political risk factor for 2017—if the Presidential referendum and constitutional amendments were to result in a “No” vote, uncertainties will rise in the short term and markets may get jittery if the CBRT decides to stay put and does not act to reduce the volatility of the currency.

Exhibit 3: 12-month forward looking P/E of MSCI Indices Exhibit 4: 12-month forward looking P/E of MSCI Indices

MSCI TR MSCI World MSCI EM MSCI EMEA

(x) (x) (x) (x)

Today 7.6 16.4 11.7 10.0

1Y average 8.1 15.8 11.8 10.3

3Y average 9.1 15.6 11.4 9.9

5Y average 9.4 14.4 10.9 9.1

Sources: Bloomberg; TEB Investment/BNP Paribas Sources: Bloomberg; TEB Investment/BNP Paribas

0

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-11

Jun-

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Jun-

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(x) MSCI TR MSCI World

MSCI EM MSCI EMEA



Top picks

Exhibit 5: Historical discount / premium of MSCI Turkey Exhibit 6: Historical discount / premium of MSCI Turkey

MSCI World MSCI EM MSCI EMEA

(%) (%) (%)

Today (54) (35) (24)

1Y average (49) (32) (21)

3Y average (42) (20) (7)

5Y average (34) (13) 5


Exhibit 7: Key ideas detailed view

Name BBG code

Page numbers

BIST-30 weight

BIST-100 weight

Mkt cap

Curr. Price

Targ. Price

Upside Free Float

3m ADV 2- Year β (weekly)

(%) (%) (USD m) (TRY) (TRY) (%) (%) (USD m) (rel. BIST-100)

BIST-100 XU100 - - - 140,333 77,028 - - 33 1,054.9 -

Key Ideas Portfolio - - - - 35,634 - - 26 41 331.2 1.05

Akbank AKBNK TI 16 11.7 9.8 8,824 7.73 9.68 25 52 55.2 1.19

Emlak Konut GYO EKGYO TI 19 4.2 3.5 3,210 2.96 3.85 30 51 23.0 1.20

Enka Insaat ENKAI TI 21 1.9 1.6 6,221 5.19 6.50 25 12 4.8 0.72

Garanti Bank GARAN TI 16 11.2 9.4 9,121 7.61 9.22 21 48 209.1 1.16

Migros Ticaret MGROS TI 28 0.4 888 17.48 22.00 26 19 2.4 1.04

Sabanci Holding SAHOL TI 31 6.0 5.0 5,340 9.17 10.80 18 44 15.1 1.14

TAV Airports TAVHL TI 30 1.5 1.2 1,430 13.79 24.70 79 40 9.5 0.80

Vestel Elektronik VESTL TI 25 0.3 600 6.27 8.00 28 22 12.2 1.19

Source: TEB Investment/BNP Paribas

(60)

(40)

(20)

0

20

40

60

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

(%) MSCI World MSCI EM MSCI EMEA



Banking Mete Yuksel, +90 216 636 4536, [email protected]

We expect the quarterly spread evolution in 2017 to be a mirror image of that of 2016. So, after stabilising in the final quarter of 2016, we expect spreads to slide every quarter in 2017, yet lead to a flat number y-y. In line with our flattish spread forecast in 2017, we foresee only a marginal (6bp y-y) increase in NIM.

Exhibit 8: Deposit costs have eased significantly since April Exhibit 9: NIM trend

Sources: CBRT; TEB Investment/BNP Paribas Sources: Company financials; TEB Investment/BNP Paribas estimates

Exhibit 10: Quarterly L/D spread increased through 2016 Exhibit 11: Sector loans to deposits

Sources: Company financials; TEB Investment/BNP Paribas calculations Sources: BRSA; TEB Investment/BNP Paribas calculations

While banks and investors are cautious about asset quality, we believe impact of rising NPLs on 2017 net profit will be limited. Soft GDP growth, TRY depreciation and rising unemployment are expected to take a toll on asset quality, but we anticipate banks will resort to restructuring of loans of the companies, perceived to be in short-term stress, as BRSA has eased the restrictions on restructuring. Consequently, we believe any possible impact on profitability will be limited. We foresee 8bp y-y increase in average specific CoR for the banks in our coverage. The banks also have room to reverse some general provisions to offset an unexpected surge in specific provisions as BRSA lowered the minimum general provision rates banks have to set aside. The Treasury Guarantee for a total consideration of TRY250b of loans will also relieve the banks on the asset quality front.

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Average deposit rate (%)

benchmark bond rate (%)

Weighted Average Cost of CBRT Funding

4.05

3.83

3.62

3.773.83

3.4

3.5

3.6

3.7

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3.9

4.0

4.1

2013 2014 2015 2016E 2017E

(%)

4.374.20

4.45

4.66

3.0

3.5

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5.0

4Q15 1Q16 2Q16 3Q16

(%)

111%

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113

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16Fe

b-16

Apr-1

6M

ay-1

6Ju

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Nov

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(%)




Exhibit 12: NPL ratio of the banking sector Exhibit 13: Seasonally-adjusted unemployment

Source: BRSA Sources: TurkStat; BRSA; TEB Investment/BNP Paribas calculations

Loan growth was relatively weak in 2016 due to uncertainty in the economy and low demand for investment loans. To support the loan growth, BRSA lowered the general provision requirements in the recent months, while CBT lowered reserve requirement rates. State banks were also very active in lending market. Consequently, we see a mild acceleration in consumer loan growth since August. We do not expect a significant acceleration in lending in 2017 as we foresee 12% y-y FX adjusted loan growth (13% in nominal terms) loan growth.

While rollover ratios in some syndication loan deals remained below 100% in September-October period, roll-overs in the most recent transactions even surpassed 100%, easing any concern regarding banks’ ability to borrow.

All in all, we expect the sector’s net profit to go up by high single digits and ROE to be 14%. We see no material risk to bottom-line earnings as the banks have sufficient cushion to counterbalance any unexpected negatives through the general provision reversals.

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-16

(%)

9.7 8.9 9.2

12.0 11.9

10.0 8.5 8.8 9.1

10.4 10.3 11.3

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(%)(%) Seasonally-adj unemployment rate (LHS)

Specific CoR (RHS)

Exhibit 14: Consumer loan growth picked up recently Exhibit 15: Capital strong enough to absorb any possible

shocks

Source: BRSA Source: BRSA

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20.0

6.1

(5)

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(%) 13w loan growth13w consumer loan growthfx-adj y-y loan growth

15.0 16.4

15.0 15.8

13.5 14.4

0

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8

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18

AKBNK GARAN YKBNK ISCTR HALKB VAKBN

(%)



We are not expecting a notable increase in the bond yields due to the CBRT’s ongoing resistance not to hike the policy rate as well as to the two factors detailed in the two charts below. Foreign ownership in TRY bonds has come down from 29% down to below 19% in the last 3 years pricing in most negatives. Finally, the 10y bond is yielding at par with the mortgages that consume capital and bear cost of risk, which should lead Turkish banks to stick to their bond positions.

Exhibit 16: y-y restructured loan growth Exhibit 17: q-q restructured loan growth

Source: BRSA Source: BRSA

Exhibit 18: 2016 Syndication Loan Deals in the Turkish Banking Sector

Banks Signed Matures ---------- Amount ---------- Total Amount Cost Rollover ratio

(USD m) (EUR m) (USD m) (%)

Akbank Mar-16 Mar-17 784 370 1,253 EUR 75bp/ USD 85bp 99

Vakifbank Apr-16 Apr-17 632 207 920 EUR 75bp/ USD 85bp 85

Garanti Apr-16 May-17 815 479 1,413 EUR 75bp/ USD 85bp 99

Yapi Kredi Bank May-16 May-17 959 381 1,476 EUR 75bp/ USD 85bp 100

Isbank May-16 May-17 836 462 1,417 EUR 75bp/ USD 85bp 102

Halkbank Jul-16 Jul-17 477 175 704 EUR 75bp/ USD 85bp 79

Akbank Aug-16 Aug-17 788 327 1,220 EUR 75bp/ USD 85bp 103

Isbank Sep-16 Sep-17 661 302 1,040 EUR 75bp/ USD 85bp 89

Vakifbank Oct-16 Oct-17 544 225 834 EUR 100bp/ USD 110bp 90

Yapi Kredi Bank Oct-16 Oct-17 817 234 1,149 EUR 100bp/ USD 110bp 95

Garanti Nov-16 Nov-17 626 616 1,282 EUR 100bp/ USD 110bp 101

Finansbank Nov-16 Nov-17 398 104 527 EUR 100bp/ USD 110bp 105

Source: Company announcements

15.1 16.0

59.4

16.7

87.4

40.4

0

10

20

30

40

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60

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80

90

100


(%)

3.6

0.0 3.2 2.4

28.8

6.1

0

5

10

15

20

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30

35


(%)



Exhibit 19: 2016 Non-Residents' Bond Holdings

Source: CBRT

Exhibit 20: Mortgage rates and long term bond rates converged

Source: CBRT

90,000

95,000

100,000

105,000

110,000

115,000

120,000

125,000

130,000

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16O

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6

(TRY m)(%) Non-Residents' Bond Holdings (RHS) As of Total (LHS)

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(%) 10 year bond rate Mortgage rate



Exhibit 21: Global peer comparison: Banking Country ------------- Mkt cap ------------- ----------- P/BV ----------- ----------- P/E ----------- ----------- ROE ----------- -- EPS growth -- -- EPS growth --

Current Target Upside ‘15 ‘16E ‘17E ‘15 ‘16E ‘17E ‘15 ‘16E ‘17E ‘16E ‘17E ‘16E ‘17E

(USD m) (USD m) (%) (USD) (USD) (USD) (USD) (USD) (USD) (%) (%) (%) (%) (%) (TRY) (TRY)

Turkey 36,338 43,365 19 1.00 0.74 0.66 8.59 5.93 5.48 11.7 12.4 12.0 4.5 8.1 34.6 8.1

Argentina 6,541 9,988 53 3.03 2.61 1.99 8.19 9.13 7.69 37.0 28.6 25.9 (23.5) 18.7 30.3 18.7

Brazil 128,206 154,283 20 1.38 1.40 1.26 4.61 9.07 8.00 30.0 15.5 15.8 (42.0) 13.4 (18.1) 13.4

Chile 27,643 29,751 8 2.27 2.19 2.03 11.97 13.28 12.31 19.0 16.5 16.5 1.8 7.9 4.6 7.9

Colombia 16,771 18,801 12 1.37 1.22 1.14 9.88 10.13 8.94 13.9 12.1 12.7 (7.6) 13.3 0.7 13.3

Peru 16,253 18,339 13 2.30 7.55 6.62 3.12 12.02 10.79 73.6 62.9 61.4 (0.3) 11.4 6.1 11.4

Mexico 22,903 25,669 12 2.09 1.81 1.66 16.58 15.34 12.95 12.6 11.8 12.9 (17.8) 18.5 6.3 18.5

Czech Republic 6,352 7,013 10 1.94 1.55 1.49 15.61 12.65 13.22 12.4 12.2 11.3 (3.3) (4.3) 2.0 (4.3)

Hungary 7,849 7,447 (5) 1.19 1.61 1.46 23.41 12.01 11.38 5.1 13.4 12.8 187.0 5.6 206.1 5.6

Poland 34,508 33,198 (4) 1.65 1.35 1.29 16.23 15.17 14.34 10.2 8.9 9.0 (15.5) 5.8 (5.2) 5.8

Russia 76,948 75,399 (2) 0.85 1.25 1.10 9.63 8.74 7.27 8.8 14.3 15.2 101.6 20.2 101.0 20.2

Israel 13,709 13,342 (3) 0.78 0.84 0.79 8.84 9.74 8.66 8.8 8.7 9.1 10.1 12.4 8.4 12.4

South Africa 46,933 45,857 (2) 2.16 1.86 1.70 11.20 11.07 10.17 19.3 16.8 16.7 (6.8) 8.8 1.9 8.8

Egypt 4,313 4,008 (7) 3.23 4.22 3.37 10.23 14.57 11.25 31.6 29.0 29.9 (51.8) 29.5 20.4 29.5

Morocco 8,016 7,900 (1) 2.00 2.13 1.98 15.85 17.38 16.03 12.6 12.3 12.4 (0.1) 8.5 4.3 8.5

China 902,927 1,104,066 22 0.93 0.66 0.60 7.83 5.88 5.82 11.9 11.3 10.3 (10.3) 1.1 (0.9) 1.1

Indonesia 75,452 84,121 11 2.61 1.97 1.74 13.15 13.39 11.43 19.8 14.7 15.2 0.4 17.1 0.9 17.1

India 29,187 34,163 17 1.20 1.04 0.98 20.30 20.60 11.63 5.9 5.0 8.4 (8.7) 77.1 (3.3) 77.1

Malaysia 15,055 16,235 8 1.26 1.01 0.95 14.69 11.71 10.43 8.6 8.6 9.1 5.7 12.3 21.1 12.3

Philippines 19,368 23,179 20 2.07 1.62 1.49 16.61 14.42 13.16 12.5 11.2 11.3 (1.1) 9.5 8.5 9.5

Thailand 47,854 53,118 11 1.44 1.14 1.06 11.25 10.14 9.56 12.8 11.3 11.1 (3.8) 6.1 1.2 6.1

Turkey 36,338 43,365 19 1.00 0.74 0.66 8.59 5.93 5.48 11.7 12.4 12.0 4.5 8.1 34.6 8.1

Turkey (TEB / BNPP) 40,699 47,340 16 1.00 0.79 0.69 8.59 5.93 5.44 11.7 15.6 13.3 40.1 9.1 40.1 9.1

EM EMEA excl. Turkey 176,763 173,298 (2) 1.44 1.49 1.35 12.04 10.64 9.30 10.5 14.8 15.2 30.4 14.4 nm nm

EM EMEA excl. Turkey & Russia

99,815 97,899 (2) 1.96 1.75 1.63 13.29 12.79 11.86 14.0 13.7 14.3 (6.8) 7.9 nm nm

EM EMEA* 213,101 216,663 2 1.30 1.27 1.15 10.95 9.37 8.32 10.7 14.0 14.5 22.2 12.7 nm nm

EM Asia** 1,089,843 1,314,883 21 0.99 0.73 0.66 8.30 6.49 6.33 13.4 11.0 10.9 (9.6) 2.6 nm nm

EM LatAm*** 211,776 246,844 17 1.56 1.60 1.45 6.02 10.22 9.05 23.6 16.3 16.8 (34.0) 13.0 nm nm

EM**** 1,555,125 1,815,983 17 1.05 0.84 0.77 8.19 7.25 6.91 13.9 11.6 11.6 (10.9) 4.8 nm nm

EM excl. Turkey MSCI World Banks 3,619,278 n.a. - 1.05 1.08 1.03 na 13.45 12.46 7.2 7.7 7.8 11.1 7.9 - -

MSCI Emrg Mkt Banks 1,305,174 n.a. - 1.05 1.05 0.96 na 8.60 8.03 13.0 9.2 9.7 (1.7) 7.2 - -

* : Czech Rep., Hungary, Poland, Russia, Egypt, Morocco, South Africa, Turkey ** : China, Indonesia, India, Malaysia, Philippines, South Korea, Taiwan, Thailand *** : Brazil, Chile, Colombia, Mexico, Peru ****: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey Source: Bloomberg; TEB Investment/BNP Paribas Estimates



Exhibit 22: Consensus earnings revisions in banking sector

---------------------------------------------------------------------------- Change in estimates --------------------------------------------------------------------------------

---------------------------------------- 16FY -------------------------------------- ----------------------------------------17FY ---------------------------------------

1-wk 4-wk 2-mth 3-mth 6-mth 1-wk 4-wk 2-mth 3-mth 6-mth

(%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

Argentina 0.5 (0.1) 0.9 0.9 3.1 0.0 0.6 2.7 2.7 8.9

Brazil 0.0 0.7 3.6 3.6 2.4 0.0 1.1 5.3 5.1 5.5

Chile 0.3 1.1 (0.3) (0.4) 1.3 0.4 (0.5) (0.7) (2.1) 1.1

Colombia 0.2 (0.7) (1.7) (1.4) 0.1 (0.1) (0.5) (1.5) (0.3) (0.2)

Peru 0.1 (4.2) (2.4) (2.3) 9.8 0.2 0.4 1.5 2.3 0.5

Mexico 0.3 (0.1) (3.4) (3.3) (7.0) (0.2) (1.0) (3.7) (3.9) (6.2)

Czech Republic 0.0 0.5 1.7 2.3 1.1 0.0 (0.1) (0.7) (1.8) (5.1)

Hungary 0.3 1.3 7.8 7.1 14.3 0.6 1.1 1.8 1.4 2.8

Poland 0.7 0.7 0.4 1.2 2.9 (0.2) 0.7 1.6 1.9 0.8

Russia (3.3) (2.8) 1.3 3.4 18.3 0.4 3.2 6.1 6.5 14.3

Israel (3.1) (3.1) (1.5) (1.0) (1.5) 6.0 6.0 7.1 8.2 10.1

South Africa 0.0 (0.1) (0.0) 0.2 1.0 0.0 (0.3) 1.7 2.1 2.2

Egypt 0.0 1.6 (0.2) 1.1 3.0 0.0 6.7 11.1 11.1 8.8

Morocco 0.0 0.0 0.0 0.0 0.8 0.0 0.0 (1.9) (1.9) (2.0)

China 0.0 0.2 0.1 1.7 2.7 (0.1) 0.3 0.4 1.0 0.2

Indonesia 0.1 (0.7) (0.2) (0.1) (3.3) 0.0 (0.1) 0.1 0.5 (0.3)

India (0.6) (0.6) (22.4) (22.0) (32.3) (0.3) (0.3) (2.8) (1.6) (9.7)

Malaysia 0.0 0.6 0.0 (0.0) (2.5) 0.0 0.3 (0.4) (0.3) (1.7)

Philippines 0.1 (0.2) (2.0) (1.7) (0.8) (0.2) (1.2) (3.1) (2.7) (3.5)

Thailand 0.0 (0.8) 0.2 (0.2) 0.0 0.0 (1.2) (3.1) (5.9) (6.4)

Turkey 0.0 0.5 1.3 6.1 7.3 0.0 0.5 1.0 2.7 1.0

EM EMEA* (1.1) (0.7) 1.1 3.3 8.9 0.2 1.4 3.1 3.8 5.7

EM LatAm*** 0.1 0.2 1.8 1.8 1.8 0.0 0.6 3.1 2.9 3.2

EM Asia** 0.0 0.1 (0.1) 1.2 1.8 (0.1) 0.2 0.2 0.6 (0.2)

EM**** (0.1) 0.0 0.2 1.5 2.5 0.0 0.4 0.9 1.3 0.8

Source: Bloomberg

Exhibit 23: Consensus earnings revisions for individual banks and non-financials

---------------------------------------------------------------------------- Change in estimates --------------------------------------------------------------------------------

---------------------------------------- 16FY -------------------------------------- ----------------------------------------17FY ---------------------------------------

1-wk 4-wk 2-mth 3-mth 6-mth 1-wk 4-wk 2-mth 3-mth 6-mth

(%) (%) (%) (%) (%) (%) (%) (%) (%) (%)

AKBNK (Net income) 0.0 0.2 0.8 6.6 10.8 0.0 1.0 0.7 3.2 0.8

GARAN (Net income) 0.0 0.0 0.0 5.4 3.4 0.0 0.7 0.7 6.7 3.2

HALKB (Net income) 0.0 1.6 3.3 6.1 8.7 0.0 (1.9) (0.6) (1.5) 1.1

ISCTR (Net income) 0.0 0.0 0.0 2.8 2.3 0.0 0.0 1.6 3.0 1.1

VAKBN (Net income) 0.0 0.0 0.0 10.3 15.0 0.0 0.0 0.0 (2.0) (5.0)

YKBNK (Net income) 0.0 2.2 5.9 8.2 9.4 0.0 2.8 3.4 3.2 2.0

Banks (Net income) 0.0 0.6 1.4 6.2 7.4 0.0 0.5 1.0 2.8 1.0

Non-fins (Net income) (0.7) (1.2) (4.0) (4.2) (11.5) (0.1) (0.0) (0.9) (1.1) (5.7)

Non-fins (EBITDA) (0.1) 0.1 (0.7) (0.7) 0.0 0.4 1.1 1.1 1.1 0.0

Source: Bloomberg



Exhibit 24: 12-month forward looking P/E Exhibit 25: 12-month forward looking P/E

Turkey MSCI World MSCI EM

(x) (x) (x)

Today 5.48 12.57 8.08

1Y average 5.98 10.36 7.68

3Y Average 7.07 11.02 7.77

5Y Average 7.66 10.69 7.92


Exhibit 26: Historical discount / premium of Turkey Banks Exhibit 27: Historical discount / premium of Turkey Banks

MSCI EM MSCI WORLD

(%) (%)

Today (33) (56)

1Y average (22) (42)

3Y average (9) (36)

5Y Average (3) (28)


Exhibit 28: AKBNK 12m fwd P/BV Exhibit 29: GARAN 12m fwd P/BV

Sources: Bloomberg Sources: Bloomberg

4

5

6

7

8

9

10

11

12

13

14


(x) Turkey Banks MSCI World Banks

MSCI EM Banks

(50)

(40)

(30)

(20)

(10)

0

10

20

30


(%) MSCI World MSCI EM

0.90

1.59

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) AKBNK 12m fwd P/BV P/BV avg.

0.80

1.62

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) GARAN 12m fwd P/BV P/BV avg.



Exhibit 30: ISCTR 12m fwd P/BV Exhibit 31: HALKB 12m fwd P/BV


Exhibit 32: YKBNK 12m fwd P/BV Exhibit 33: VAKBN 12m fwd P/BV


Exhibit 34: Turkish Banks’ aggregate 12m fwd P/B

Sources: Bloomberg

0.58

1.22

0.4

0.9

1.4

1.9

2.4

2.9

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) ISCTR 12m fwd P/BV P/BV avg.

0.46

1.66

0.2

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) HALKB 12m fwd P/BV P/BV avg.

0.51

1.45

0.2

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) YKBNK 12m fwd P/BV P/BV avg.

0.50

1.04

0.2

0.7

1.2

1.7

2.2

2.7

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) VAKBN 12m fwd P/BV P/BV avg

0.65

1.43

0.4

0.9

1.4

1.9

2.4

2.9

3.4

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16(x) Turkish Banks Aggregate 12m fwd P/BV P/BV avg.



Exhibit 35: AKBNK 12m fwd P/E Exhibit 36: GARAN 12m fwd P/E


Exhibit 37: ISCTR 12m fwd P/E Exhibit 38: HALKB 12m fwd P/E


Exhibit 39: YKBNK 12m fwd P/E Exhibit 40: VAKBN 12m fwd P/E


6.37

10.34

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) AKBNK 12m fwd P/E P/E avg.

5.82

8.87

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) GARAN 12m fwd P/E P/E avg.

4.86

8.19

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) ISCTR 12m fwd P/E P/E avg.

3.58

7.21

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) HALKB 12m fwd P/E P/E avg.

4.65

8.41

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) YKBNK 12m fwd P/E P/E avg.

4.18

6.88

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07D

ec-0

7Ju

n-08

Dec

-08

Jun-

09D

ec-0

9Ju

n-10

Dec

-10

Jun-

11D

ec-1

1Ju

n-12

Dec

-12

Jun-

13D

ec-1

3Ju

n-14

Dec

-14

Jun-

15D

ec-1

5Ju

n-16

(x) VAKBN 12m fwd P/E P/E avg.



Akbank (AKBNK TI; BUY; CP: TRY7.73; TP: TRY9.68)

Mete Yuksel, +90 216 636 4536, [email protected]

Akbank is by far the most efficient Turkish bank in our coverage. 12m trailing cost/income (C/I) ratio of 36.6% is the main evidence of Akbank’s praiseworthy efficiency. On the other hand, in an environment where bank capitalisations are under pressure on Basel III related regulations, Akbank is positively decoupling with one of the best Tier I ratios among peers for the upcoming years. On the other hand, the bank is also one of the most comfortable names in terms of liquidity. By far the lowest LDR among top tier banks at 102% as of 3Q16 is supportive of the management’s growth prospects. The LDR declines to as low as 71% after adjusting for free capital and TRY bond issuances, providing the bank sufficient ammunition for above-sector growth. Last but not least, we expect Akbank to deliver the best cost management in 2016. The bank has cut down its headcount by c2k in 2015 with the number of employees coming down to 14k and also curbed down the number of branches by c100 down to 900 in the same year as management is laying more emphasis on digital banking and efficiency. That said, we expect Akbank to have the best C/I ratio of 37% in 2016 among its peers. In all, we expect Akbank to have one of the best levels of core-banking income growth evolution in 2016 on the back of these differentiating factors. Although it is the best performing banking stock so far this year, we believe Akbank is still undervalued, as it is currently trading at 0.9x P/B and 6.2x P/E on 2017E.

Our 12M-forward looking TP of TRY9.68 for Akbank is derived using Gordon Growth model. Major downside risks to our call are an unexpected deterioration in asset quality, further contraction in margins and slower loan expansion in the case of a slower economic activity.

Garanti Bank (GARAN TI; BUY; CP: TRY7.61; TP: TRY9.22) Mete Yuksel, +90 216 636 4536, [email protected]

We expect Garanti to be the frontrunner in NIM, in terms of y both -y evolution and in absolute level, thanks to tamed funding costs as well as market share gains in higher yielding loan areas such as business banking in 2017. We also expect the bank to gain efficiency and limit cost growth to below-inflation levels. Garanti is among the best-positioned names with 16.4% CAR and 15.3% Tier 1 capital ratios, the highest among peers in our coverage. As Basel III buffers weigh-in on the capital ratios over the next three years, Garanti’s resilient capital base will differentiate the bank positively from peers. Garanti trades at an undemanding 0.8x P/B and 6x P/E on our 2017 estimates, with 22% upside potential to our TRY9.22 TP.

Our 12m-forward looking TP of TRY9.22 for Garanti is derived using Gordon Growth model. Major downside risks to our call are an unexpected deterioration in asset quality, further contraction in margins and slower loan expansion in the case of a slower economic activity.

Exhibit 41:Turkish Banks’ aggregate 12m fwd P/E

Source: Bloomberg

8.56

2

4

6

8

10

12

14

16

18

20

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Jun-

16

(x)Turkish Banks Aggregate 12m fwd P/E P/E avg.

5.5





Real estate

Real estate sales had a slow start to 2016, as total house sales contracted by 2.7% y-y in 7M16. However sales accelerated starting from August, leading to a 4.5% y-y increase in 11M16, thanks to declining mortgage rates benefiting from government’s support to real estate sector and special promotion campaigns initiated by major developers. The banks lowered their mortgage rates below 1.0% (monthly) and some developers provided attractive financing terms for their projects with 0.70% monthly rate extending to 10-years maturity. We believe that the momentum in house sales will continue through the rest of the year and total house sales will exceed 1.3m units in 2016.

Average mortgage rates were on an increasing trend between 4Q15 and 2Q16, but started to decline in the second half of the year. This trend brings the annual average to 13.3% in 2016, up from 12.3% in 2015. Although on a yearly comparison average mortgage rates were higher in 2016, the trend during the year indicates us a better funding environment in 2017 as mortgage rates declined to 11.4% in December, down from 14.5% in 1Q16. We believe that mortgage rates will support house sales especially in 1H17, due to the high base impact.

According to the data compiled by the Turkish Statistical Institute, total house sales increased by 4.5% y-y to 1.2m units in the first 11 months of 2016 on the back of 6.7% y-y increase in first sales and 2.7% y-y increase in second hand sales, despite a high base in 2015 where total house sales increased by 11% y-y.

The data shows the sales momentum of completed housing units, rather than the ongoing projects as it takes into account only official transactions in the title offices. Although it is not very indicative for the REICs that have ongoing projects, we think that the positive momentum in new house sales is also supportive of the presales performance of ongoing projects. Real estate sales should be positively affected from the ongoing declining trend in the mortgage rates supported by both the contractors and the banks.

Exhibit 42: Monthly home sales vs mortgage rates

Source: Central bank of Turkey, Turkish Statistical Institute (TUIK)

0

2

4

6

8

10

12

14

16

0

20

40

60

80

100

120

140

160

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep-

13N

ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-1

4Se

p-14

Nov

-14

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

May

-16

Jul-1

6Se

p-16

Nov

-16

(%)('000 units) Home sales (LHS) Mortgage rates (RHS)



The probability of buying or building a home in the next 12 months, a sub-index of the consumer confidence index, declined to 6.4 in December, lowest point in the last 5 years, while the Consumer Confidence Index continued to decline and was 63.4 in December, also the lowest point in the last five years.

The longer-term trends of the two indicators move parallel to each other although we observe countermoves in the short run, such as the divergence in 1Q16. Both indexes imply a substantial weakening in consumer appetite for buying home or increasing household spending, however the trend of monthly home sales indicates just the opposite.

Exhibit 43: Consumer confidence vs probability of buying a home

Source: Turkish Statistical Institute (TUIK)

Exhibit 44: Probability of buying a home vs home sales

Source: Central Bank of Turkey, Turkish Statistical Institute (TUIK)

6

8

10

12

14

55

60

65

70

75

80

85

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep-

12N

ov-1

2Ja

n-13

Mar

-13

May

-13

Jul-1

3Se

p-13

Nov

-13

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

Sep-

14N

ov-1

4Ja

n-15

Mar

-15

May

-15

Jul-1

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Emlak Konut GYO (EKGYO TI; BUY; CP: TRY2.96; TP: TRY3.85) Toygun Onaran, +90 216 636 4533, [email protected]

Emlak Konut offers one of the best business models in the country thanks to its privileged access to valuable land bank of the government through its parent TOKI and unique revenue sharing model with the contractors that limits the risks and maximises the return. Total size of Emlak Konut’s land bank is 11m sqm with an appraisal value of TRY6.2b. Emlak Konut has completed seven RSM tenders in 2016 so far with 2.08x tender multiplier, TRY2.28b minimum revenue and three turnkey project tenders with a TRY406m appraisal value.

In 11M16, Emlak Konut sold 8,926 units and generated TRY6.2b presales revenues, indicating 6% y-y decline in units sold and 9% y-y increase in revenues. Despite the negative developments that affect consumer sentiment negatively, new house sales remained resilient in Turkey, benefiting from strong real estate price appreciation, attractive financing packages provided by the contractors and declining mortgage rates. We expect the pre-sales momentum to continue in December as Emlak Konut’s sales campaign will end at the end of the year. Note that Emlak Konut provided two payment alternatives for 30 RSM projects (approximately 15k units) between 1 August 2016 and 31 December 2016: 1) 20% down payment and 120 months instalments, an interest rate adjusted in line with the increase in CPI with 5% max cap, 2) 20% down payment and 120-month instalments with a 0.70% interest rate (per month).

Although the company had a slow start to the year in presales performance, with the contribution of turnkey projects tendered in 4Q16 and accelerated sales in RSM projects in 2H16, Emlak Konut is likely to achieve its target of 11k units in pre-sales and TRY7.6b revenue for 2016.

We expect 2017 will be an active year for Emlak Konut in terms of RSM tenders in the pipeline as the company is planning to tender Zeytinburnu (37k sqm with TRY411m appraisal value), Nisantası (24k sqm & TRY455m), Riva (1m sqm & TRY508m) and Halkalı (1m sqm & TRY1.8b) lands in 2017.

Emlak Konut owns a 3.6m sqm land in Arnavutkoy-Istanbul, which is located in the same area where the government is planning to build Kanal Istanbul Project, a channel that will connect Black Sea and Marmara Sea. The land is also close to the third airport in Istanbul, which is projected to become operational in 2018. We believe that these two projects will bring substantial increase in the land values in the area and Emlak Konut will be the main beneficiary of these projects.

The company’s business model provides a steady stream of revenue, as Emlak Konut secured an aggregated TRY8b net income from 4Q16 to 2020 with the currently tendered RSM projects, which gives the company roughly TRY2b net income annually depending on the delivery schedule of the projects. This should also provide stable dividend income for shareholders over the next five years. Based on our 2016 estimates, we expect the company to pay TRY0.18 dividend per share, implying 6.2% dividend yield. Emlak Konut is trading at 44% discount to its NAV that stands at TRY5.2 per share as of end-3Q16, higher than 27% historical discount to NAV.




The downside risks to our SOTP-based TP are a slowdown in the local economy, a rise in interest rates and contractor failures.

Exhibit 45: EKGYO NAV discount

Sources: Company financials; TEB Investment/BNP Paribas estimates

Exhibit 46: EKGYO – SoTP Method Fair Value

(TRY m)

Tendered land DCF 2,900

RSM projects DCF 1,095

Turn-key projects DCF 592

Landbank App. Value @ 1.25x 6,911

Buildings App. Value 469

Total real estate 11,967

Net Cash 3Q16 1,300

In-house financing receivables DCF 1,240

NPV of OPEX DCF (1,647)

Treasury shares (TRY m) Market price 322

Total fair value (TRY m)

12,859

12-m-fwd target value (TRY m) 14,613

Current mkt cap (TRY m) 11,020

Upside/downside (%) 33

Current share price (TRY) 2.96

Target share price (TRY) 3.85

Sources: Emlak REIT; TEB Investment/BNP Paribas estimates

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Enka Insaat (ENKAI TI; BUY; CP: TRY5.19; TP: TRY6.50) Toygun Onaran, +90 216 636 4533, [email protected]

Enka’s Russian operations were negatively affected last year by worsening business sentiment, and the company failed to add sizeable contracting projects to its backlog, where additions remained at only USD800m in 2015, which raised concerns about growth prospects for the contracting segment. Enka is benefiting from improving relations between Turkey and Russia, as the company’s entire real estate portfolio is located in Russia, mainly in Moscow, and Enka is widely perceived as a Russian proxy. Additionally, the outlook for the construction segment is improving, given the potential projects in the pipeline. We believe the negatives are already reflected in the share price, and Enka offers 26% upside potential to our unchanged target price of TRY6.50. Additionally, Enka’s USD3.0b net cash position provides a low risk profile while giving the company a competitive edge in entering potential new investments, although the investment pace is considerably slow.

New project additions reached USD730m in 9M16, compared with USD1.1b contracting revenue generation in the same period in 2015, leading to a USD380m contraction in the backlog to USD1.6b at end-9M16 versus USD2b at end-2015. Iraq and US Embassy projects are the top contributors to Enka’s backlog at USD316m each, accounting for 21% of the backlog, followed by Russia at USD231m accounting for 14%. Following a weak project acquisition performance in the last 18 months, we expect Enka to be more active going forward. Enka's project pipeline implies backlog growth in 2017 to above USD2b as the company is bidding for several projects in different geographies, including, Indonesia (power plant), Russia, Georgia, Turkey (nuclear power plant & transportation), Iraq (power plant) and Qatar (stadium).

Enka is following the power plant tenders in Indonesia, where the government has ambitious plans to increase the electricity output of the country. Note the Indonesian government is planning to add 35GW of new generation capacity over the next years, of which 1/3 will be EPC (Engineering, Procurement and Contracting) and 2/3 will be IPP (Independent Power Producer) tenders. To that end, the Indonesian government is planning to tender power plants with various capacities for a total of 15.5GW. As the EPC contractor has to come from an OECD country, the tenders are closed to Chinese companies, helping the competitive environment. Enka is planning to get involved in both EPC and IPP tenders where the first tender is due to be held in 3Q16. We believe the Indonesian market provides substantial potential for Enka, given its technical and financial capacity as an EPC contractor. In that context, Enka has bid for a 650MW combined cycle natural gas power plant with a local partner, where Enka's share will be 70%. The technical prequalification phase was due to be finalised in 2016, followed by a financial bidding process projected by the government to be completed in 1Q17.

The real estate segment has been negatively affected by the economic turmoil and decline in consumer confidence since end-2014. Starting from 2Q16, we can see the initial signs of stabilisation in the real estate segment. Occupancy and rent rates stabilised in offices at 76% and USD725/sqm/year in 2Q16, while the retail occupancy rate increased to 89% in 2Q16 from 86% in 1Q16 at the cost of lower rent rates, which came down to USD400 from USD450/sqm/year. We expect consumer sentiment and the general economic environment to improve, which is likely to have a positive impact on occupancy rates and average rent prices, especially in 2017. Enka started the re-development of Kashirskaya shopping mall at end-2015, which includes demolishing a 21k sqm shopping mall and building of a 73ksqm shopping mall to replace it. We expect Enka’s net leasable area in retail to increase by 73k sqm to 350k sqm in 2018, which should generate an additional USD35m in rental income.




Consumer Durables Sector

Domestic white goods sales in Turkey have had resilient sales since 2010 with a 5.5% CAGR volume growth between 2010 and 2015. Domestic sales increased every year except for a 0.2% contraction in 2012 and a 1.8% contraction in 2014.

Consumer confidence index plunged to 63.4 in December 2016, which is one of the lowest readings since 2012, mostly because of uncertainty in political environment, TRY and interest rates. In addition, the decline was driven by deterioration in households’ expectations of their financial situation and a weakening of labour-market prospects. Hence, the propensity for consumers to save, rather than to consume, might have increased. The decline in the consumer confidence suggests that households could be hesitant to increase their spending. However, the decline in consumer confidence index did not have a major impact on white goods sales as domestic white goods sales maintained their positive trend in 2016 so far, with 4.6% y-y growth in 11M16.

Exhibit 47: SOTP valuation for Enka Insaat

Valuation method Enterprise value Enka's stake Stake value NAV share

(USD m) (%) (USD m) (%)

Contracting DCF (70%) & Peer EV/EBITDA (30%) 1,630 100 1,630 21.5

Real Estate Enka Invest/Enka TC DCF 1,162 100 1,162 15.3

MKH DCF 462 100 462 6.1

Mosenka DCF 106 100 106 1.4

Energy-Natural gas power plants (3,854MW) DCF 1,153 100 1,153 15.2

Trade & Manufacturing DCF 61 100 61 0.8

Net Cash (Debt) 3,015 39.7

NAV 7,589 Equity value of Founder Shares (3.5%) (266) Target NAV (Fair equity value for common shareholder) 7,324 12-m Mcap 7,690 Current Mcap. 5,775 Target Share Price (TRY) 6.50 Current Share Price (TRY) 5.19

Upside (%) 25

Sources: Enka Insaat; TEB Investment/BNP Paribas estimates

Exhibit 48: Monthly white goods sales (.000 units) vs Consumer confidence index

Sources: Turkish White Goods Manufacturers’ Association, Turkish Statistical Institute (TUIK)

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Consumer Confidence Index (RHS)



We believe white goods demand was positively affected by rising house sales, improving household income and declining interest rates. General purpose loan (GPL) rates eased to 16.1% in November 2016, from 17.6% in the beginning of the year. We expect white goods sales to increase by 3% in 2016 and the total market to reach 7.5m units per year. In line with BNP Paribas’ expectation of a slowdown in 2017, GDP growth forecast for 2017 stands at 2.5%, down from 2.7% in 2016, we have a slower growth estimate for domestic white goods market in 2017. Our calculations indicate a 2.2% growth for domestic sales next year.

Turkish producers are directing most of their production to export markets. Accordingly, on average, almost 75% of total production was exported between 2010 and 2015. White goods production in Turkey grew at a 6% CAGR between 2010 and 2015, with positive growth every year, given resilient domestic sales and strong exports. We expect total exports to increase by 7.6% y-y to 19.5m units in 2016 and 5.8% y-y growth to 20.6m units in 2017.

Imported products had a 12% market share on average between 2010 and 2015 in the domestic market. Demand for imported white goods products is sensitive to FX rates because of price sensitivity of consumers. We expect imported white goods volume to decline by 16% y-y in 2016 due to steep TRY weakness during the year, leading to a decline in their market share down to 10.5% in 2016. We believe that domestic white goods producers will benefit from the decline in imported products and increase their market share.

Exhibit 49: Monthly white goods sales (.000 units) vs GPL rates (%)

Sources: Turkish White Goods Manufacturers’ Association, Central Bank of Turkey

Exhibit 50: Domestic white goods sales Domestic sales (units) 2010 2011 2012 2013 2014 2015 2016E 2017E

Refrigerator 1,675,951 1,900,241 1,878,759 2,003,068 1,907,562 1,976,199 2,035,485 2,078,230

Freezer 256,639 292,351 437,897 587,515 535,420 571,160 616,853 647,695

Washing mach. 1,513,368 1,850,423 1,756,161 1,908,042 1,896,527 2,026,292 2,178,264 2,276,286

Dryer 73,979 98,218 101,252 83,663 64,385 81,734 98,081 109,850

Dishwashers 1,272,508 1,552,913 1,512,689 1,448,585 1,435,005 1,483,435 1,527,938 1,561,553

Ovens 632,121 776,643 768,560 799,902 867,629 956,384 1,052,022 1,136,184

Total 5,424,566 6,470,789 6,455,318 6,830,775 6,706,528 7,095,204 7,508,643 7,809,799

- - - - - - Increase (y-y %)

Refrigerator/Freezer 13.50 13.50 5.70 11.80 (5.70) 4.30 4.10 2.80

Washing mach./Dryer 8.80 22.80 (4.70) 7.20 (1.50) 7.50 8.00 4.80

Dishwashers 6.80 22.00 (2.60) (4.20) (0.90) 3.40 3.00 2.20

Ovens (3.90) 22.90 (1.00) 4.10 8.50 10.20 10.00 8.00

Total 8.20 19.30 (0.20) 5.80 (1.80) 3.40 3.00 2.20

Sources: White Goods Producers Association; TEB Investment/BNP Paribas estimates

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Exhibit 51: White goods production Production (units)

2010 2011 2012 2013 2014 2015 2016E 2017E

Refrigerator 6,310,544 6,790,078 7,588,751 7,225,799 6,658,866 6,833,284 7,202,281 7,490,373

Freezer 721,156 853,610 904,945 956,234 963,064 1,038,243 1,095,346 1,147,923

Washing mach.

5,164,531 5,357,269 5,467,625 5,754,905 6,307,848 7,466,366 8,063,675 8,547,496

Dryer 602,966 700,830 888,116 901,336 935,908 1,250,929 1,338,494 1,418,804

Dishwashers 2,537,129 2,900,211 3,204,325 3,248,152 3,483,152 3,608,652 3,825,171 4,008,779

Ovens 3,060,253 3,504,720 3,636,945 3,853,600 4,247,037 4,365,929 4,540,566 4,676,783

Total 18,396,579 20,106,718 21,690,707 21,940,026 22,595,875 24,563,403 26,065,534 27,290,158

Increase (y-y %)

Refrigerator/Freezer

13.80 8.70 11.10 (3.70) (6.80) 3.30 5.40 4.10

Washing mach./Dryer

11.30 5.00 4.90 4.70 8.80 20.30 7.90 6.00

Dishwashers 8.30 14.30 10.50 1.40 7.20 3.60 6.00 4.80

Ovens 11.80 14.50 3.80 6.00 10.20 2.80 4.00 3.00

Total 11.90 9.30 7.90 1.10 3.00 8.70 6.10 4.70


Exhibit 52: White goods exports

Exports (units) 2010 2011 2012 2013 2014 2015 2016E 2017E

Refrigerator 4,615,226 4,887,784 5,683,497 5,107,667 4,723,616 4,736,172 4,949,300 5,147,272

Freezer 706,149 786,999 886,105 880,496 847,071 879,956 916,914 949,006

Washing mach.

3,958,307 3,864,607 4,093,185 4,186,814 4,766,886 5,600,506 6,216,562 6,713,887

Dryer 561,708 633,755 814,283 821,619 909,299 1,180,833 1,298,916 1,389,840

Dishwashers 1,396,238 1,510,406 1,877,916 2,020,855 2,188,779 2,255,847 2,413,756 2,534,444

Ovens 2,493,110 2,765,235 2,942,214 3,043,863 3,467,949 3,459,846 3,702,035 3,894,541

Total 13,730,738 14,448,786 16,297,200 16,061,314 16,903,600 18,113,160 19,497,483 20,628,990

Increase (y-y %)

Refrigerator/Freezer

8.10 6.60 15.80 (8.90) (7.00) 0.80 4.50 3.90

Washing mach./Dryer

9.20 (0.50) 9.10 2.10 13.30 19.50 10.80 7.80

Dishwashers 11.60 8.20 24.30 7.60 8.30 3.10 7.00 5.00

Ovens 9.00 10.90 6.40 3.50 13.90 (0.20) 7.00 5.20

Total 0.00 5.20 12.80 (1.40) 5.20 7.20 7.60 5.80




Vestel Elektronik (VESTL TI, BUY, CP: TRY6.27; TP: TRY8.0) Toygun Onaran, +90 216 636 4533, [email protected]

Vestel is the leading ODM (original design manufacturer) of TVs, white goods and digital products for the European market and sells Vestel-branded products in Turkey. Vestel is the second largest TV manufacturer in Europe with 10m units/year production capacity and among the top-10 white goods manufacturers in Europe with 9.4m units/year of production capacity.

Vestel has been taking a series of measures to improve its operational performance, including improving product mix, shifting towards mid- to high-end products, eliminating less profitable items, upgrading its dealer network, expanding sales channels and improving aftersales services. We believe its EBITDA margin will be sustainable as a result, providing less volatility in income statement. We expect the EBITDA margin to normalize at around 7.7% in the forecast period.

Vestel is also taking solid steps to improve its presence in Europe with brand licensing agreements signed with Sharp in white goods and with Toshiba in TVs. We expect this to help it increase market share, support volume growth and maintain profitability.

We expect Vestel to post an 8.2% CAGR in total revenues between 2015 and 2019 on the back of a 12.3% CAGR in white goods revenues and a 5.8% CAGR in TVs & electronics revenues. We expect the share of white goods sale in total revenues to rise on the back of a rising domestic market share, continued strong exports and increased production capacity in 2018. Our assumptions indicate a gradual increase in white goods share of total revenues to 39.2% in 2019, from 33.7% in 2015. We expect the company’s EBITDA to increase at a 9% CAGR between 2016 and 2019 and reach TRY982m in 2019 from an expected TRY758m in 2016

We see this change as positive for Vestel as the white goods segment has more stable demand and pricing compared to TVs & electronics and has a more favourable cost base given the composition of production costs and currency breakdown. For example, white goods sales volume correlates with GDP growth providing relatively stable demand, while TV sales volume is more driven by global and regional sporting events, thus making them more cyclical.

Exhibit 53: Global peer comparison

Company BBG code --------- P/E --------- ------ EV/EBITDA ------ --------- EV/sales ---------

2016E 2017E 2016E 2017E 2016E 2017E

(x) (x) (x) (x) (x) (x)

Whirlpool Corp WHR US 12.8 11.4 8.1 7.3 0.9 0.9

Gorenje Velenje GRVG SV 29.1 14.5 6.4 6.3 0.4 0.4

Electrolux AB ELUXB SS 14.6 13.5 6.7 6.4 0.6 0.5

Haier Electronics 1169 HK 11 10 5.8 5.3 0.3 0.3

Qingdao Haier Co 600690 CH 12.1 10.1 11.5 9.3 0.9 0.7

De'Longhi Spa DLG IM 20.7 18.6 10.7 9.8 1.7 1.6

Samsung Electronics 005930 KS 12.4 9.7 3.7 3.1 0.9 0.9

LG Electronics 066570 KS 19 11.3 4.5 4.3 0.3 0.3

Toshiba 6502 JP - 11.1 - 7.3 0.5 0.5

Hisense Electric Co 600060 CH 12.7 11.5 10.2 8.8 0.7 0.6

Amica AMC PW 10.3 10.2 7.5 7.1 0.6 0.6

Arcelik ARCLK TI 12.2 13.3 9.5 8.3 1 0.9

Vestel Elektronik VESTL TI 6.8 7.7 5.4 5 0.4 0.4

Vestel Beyaz VESBE TI 15.6 13.3 9 7.8 0.9 0.8

Median 12.7 11.3 7.5 7.2 0.6 0.6

Sources: Bloomberg estimates; BNP Paribas/TEB Investment estimates




Vestel is trading at 7.7x P/E and 5.0x EV/EBITDA multiples based on our 2017 forecasts compared with the respective multiples of 11.3x and 7.2x for its peers on Bloomberg consensus forecasts, indicating 32% and 31% discounts, which we believe are unwarranted considering Vestel’s improving operational performance.

We believe that the wide discount to international peers can be attributed to volatility in Vestel’s EBITDA margin, which ranged from 2% to 12% between 2008 and 2015. However, we think the discount is unwarranted as the company stabilised its EBITDA margin over 9% in 2014 and 2015 through structural improvements and increased focus on profitability, providing a better outlook for the upcoming years.

Our target price of TRY8.0 for Vestel Elektronik is based on a weighted average of DCF valuation and international and domestic peer group comparison, where we attached a 75% weight to DCF and 25% to the peer comparison. In our DCF calculation, we use a 14.9% WACC with an 11.25% risk free rate, 5% equity risk premium and 1.1x beta, and 3% terminal growth rate. For the peer comparison we used the arithmetic average of P/E and EV/EBITDA multiples based on our 2017 estimates.

Key downside risks: 1) Vestel’s TV margins are sensitive to EUR/USD as export revenues are almost balanced between USD and EUR, while TV production costs are mostly in USD. Vestel hedges EUR/USD exposure but volatility creates fluctuations in income statement; 2) Substantial rise in cell prices would lower TV margins; 3) A slowdown in export markets and more competition in domestic market would threaten volume growth; and 4) Higher production costs in the white goods segment.



Food and Staples Retailing

Curse of discounters and the Prisoner’s Dilemma

We believe that competition will continue to remain tough in hard-discounter universe with continuation of accelerated store openings by the three major players who opened 2245 new stores y-y in 11M16 (on a combined basis), implying 17% y-y expansion in number of stores. In the discounter universe, supply is growing way ahead of the actual demand growth without any meaningful increase in average disposable income to drive basket size and traffic growth. Aggressive expansion of A101 and Sok has urged BIMAS to accelerate growth in order not to miss out on future growth opportunities, defend market leader position and remain ahead of the curve at the expense of internal cannibalisation. BIM’s strong growth has been dwarfed by the growth of A101 and Sok especially over the past two years with their successful soft discount formats. We think that aggressive growth strategies of discounters will continue in 2017 as Sok previously indicated that it was committed to a major expansion plan with intention to list by 2018 (IPO). We expect consolidation in the sector to gain pace starting from end of 2017 as small-sized retailers would find it difficult to generate additional customer traffic and will be financially distressed.

Expiration of the government support on minimum wage

The upward momentum in personnel expenses owing to 30% minimum wage hike in the beginning of 2016 has been the main drag on the profitability of the retail sector. In 2017, expiration of the government support on minimum wage hikes will put slight pressure on the opex side which we project to be absorbed by the efficiency gains and price hikes to a limited extent. That said we believe that keeping margins at the same level as in 2016 will be the primary focus of food retailers under our coverage rather than focusing on margin expansion.

Food inflation to pick up in 2017 from a low base

Process food inflation was only up 0.28% m-m in November, bringing yearly figure to 6.7% in November while y-y food inflation was 3.6% in November, one of the lowest levels seen in the last five years thanks to the strong agricultural output, weak tourism sector demand and halting food exports to Russia. Going forward we think that mean-reversion is likely in food inflation, in tandem with an expected recovery in food exports to Russia and unfavourable base effects. For 2017, we conservatively expect processed food inflation to be at 7% but with upside risks due to the aforementioned reasons.

Exhibit 54: Modern food retail value share

Source: TEB Investment/BNP Paribas

Bim26%

Migros15%

A1017%Carrefoursa

6%

Yıldız7%

Others39%



Migros Ticaret (MGROS TI; BUY; CP: TRY17.48; TP: TRY22) Kayahan Demirak, +90 216 636 4535, [email protected]

Established in 1954, Migros is the largest supermarket chain in Turkey with a keen know-how and customer base in the supermarket segment. The company has a strong brand name, which is associated with quality and strong customer service among modern food retailers, in our view.

We prefer Migros in food retails universe with its strong position capturing 14.5% and 5.7% in the modern and overall FMC market respectively, following the market leader Bim. Migros’s more customised approach compared to discounters’ featuring superior customer service, pleasing shopping experience and targeted personalised promotions with ample product offerings in addition to successfully replicating most of hard discounters private label products (basic commodities) at similar quality and price level, offers attractive investment outlook in our view in challenging retail universe. MGROS is trading at 6.5x 2017E EV/EBITDA which implies quite unwarranted 48% discount to the market leader Bim and 27% discount to international peers.

The company has expanded its number of stores at a 12% CAGR over the last four years, driven by high traffic-generating Mjet stores helping overcome relatively weak LFL growth of larger supermarkets and hypermarkets. A higher share of small- and mid-size supermarkets seems the right strategy, responding to changing consumer needs and supporting long-term organic growth. We believe the ongoing shift in distribution of sales area (hypermarket to small-mid size stores) and accelerating expansion of Mjet format will continue to support Migros’s customer traffic growth going forward.

Migros has dealt with pressure on personnel costs (minimum wage impact) by improving supply-chain efficiency and product assortment (large variety of SKUs and fresh products). Increased focus on centralised distribution channel (currently 82% of goods) is having quite a positive effect on margins, helping improve demand and inventory management, and leading to less cash tied up in inventory, better product availability at stores, and less shrinkage in fresh product categories. Despite continuously accelerating growth of the three major discounters (expanding by more than 1,500 stores per annum in total) and Carrefour SA in the supermarket channel,

Exhibit 55: Peer comparison

---------P/E ----------- -----EV/EBITDA ---- ------ EV/Sales------

Company Country Currency BBG Code Mkt Cap 2016E 2017E 2016E 2017E 2016E 2017E

(USDm) (x) (x) (%) (%) (x) (x)

X 5 Retail Group NV-REGS GDR Russia USD FIVE LI 8,663 18.8 14.4 8.7 7.2 0.7 0.5

Jeronimo Martins Portugal EUR JMT PL 9,488 22.2 20.8 10.7 9.8 0.6 0.6

Pick N Pay Stores Ltd South Africa ZAR PIK SJ 2,240 29.3 23.7 10.6 10.6 0.4 0.4

Shoprite Holdings Ltd South Africa ZAR SHP SJ 7,163 20.1 17.7 9.9 9.9 0.7 0.7

Dixy Group PJSC Russia RUB DIXY RX 576 n.a 14.0 5.2 3.9 0.2 0.2

Magnit PJSC Russia RUB MGNT RX 16,633 17.4 14.0 10.2 8.6 1.1 0.9

Abdullah Al Othaim Markets Saudi Arabia SAR AOTHAIM AB 1,128 18.1 15.3 13.8 12.2 0.7 0.6

Spar Group Limited/THE South Africa ZAR SPP SJ 2,702 19.6 17.3 10.9 10.9 0.4 0.4

Eurocash SA Poland PLN EUR PW 1,257 23.7 20.9 11.9 10.9 0.3 0.2

O'key Group SA - GDR REG S Russia USD OKEY LI 658 29.3 18.0 7.1 6.2 0.4 0.4

Lenta Ltd-REG S Russia USD LNTA LI 3,844 18.8 14.7 9.3 7.5 1.0 0.8

Weighted peer group Average 21.7 16.6 10.0 8.9 0.8 0.7

Bim Birlesik Magazalar AS Turkey TRY BIMAS TI 4,223 21.9 19.0 14.6 12.6 0.7 0.6

Bizim Toptan Satis Magazalar Turkey TRY BIZIM TI 121 19.9 11.1 4.1 3.4 0.1 0.1

Migros Ticaret A.S Turkey TRY MGROS TI 910 n.m 38.4 7.9 6.5 0.5 0.4

Sources: Bloomberg; TEB Investment/BNP Paribas




Migros managed to expand its share in the FMCG market to 5.7% in 9M16 from 5.5% in 9M15.

We think the proposed acquisition of Kipa stores could bring benefits and synergies across Migros’s operations in terms of the following: 1) applying Migros’s know-how and store format to the existing, inefficient Kipa portfolio, including store transformations (as it did from Tansas to Migros stores) and rebranding, 2) economies of scale, 3) integration and optimisation of corporate and distribution functions (single management, better overheads and logistics costs) and 4) leveraging Migros’s long-term relationships with local suppliers, promoting localised category management and staffing and state-of-the-art IT systems. That said, we expect the proposed Kipa acquisition would increase financial leverage and add to the debt burden, as well as affecting the short-term operational performance negatively. Kipa currently reports negative cash flow and EBITDA from its operations; it would likely need to add additional capex for successful restructuring. On the positive side, Kipa operations come with 37 retail properties, mainly consisting of shopping malls, which could be used to ease financial leverage. Overall, our view on the upcoming acquisition is quite positive.

Despite major challenges (e.g. relatively weak performance of the stores in tourism area, dilutive impact of international operations and deteriorating consumer sentiment and macro conditions), Migros posted quite strong 3Q16 results as a result of restructuring efforts over the last couple of years and supply chain efficiencies. We think its strong growth will be maintained in 4Q16 and 2017. We believe this will differentiate Migros positively in the retail universe in upcoming quarters where hard discounters and some supermarket chains suffer from serious traffic contraction.

Our target price of TRY22 for Migros is based on an equally-weighted average of DCF and international peer group comparison at the EV/EBITDA level. The key downside risks are 1) increasing competition from mainstream grocers and other players on the back of potential consolidation in the sector that enhances their competitive position in the market on higher economies of scale; and 2) increasing competitive forces in the supermarket channel due to successful new entrances here, particularly from players in the discount segment, as growth opportunities in the discount segment are for the most part already exploited.



Aviation

While acknowledging the low visibility in Turkish aviation market in 2017 at this time, we expect Turkish aviation by number of airport terminal passengers will grow 6% y-y in 2017 after declining an estimated 4% in 2016 on the 16% y-y decline in international terminal passengers.

We expect the growth in 2017 will be driven by similar increases in both domestic and international terminal passengers. Yet we expect the growth on the international side will mostly be due to the recovery in charter-based passengers. International charter-based passengers, which account for about 20% of international passengers, has declined c40% in 2016 according to our estimates. This implies the recovery at Turkish airports serving scheduled passengers such as Istanbul Ataturk or Istanbul Sabiha Gokcen will be at low single digits but we are not concerned on this as we expect the current valuation at TAV Airports implies a further significant contraction in 2017 rather than any growth.

TAV Airports (TAVHL TI; BUY; CP: TRY13.79; TP: TRY24.70) Alper Paksoy, +90 216 636 4524, [email protected]

We recommend TAV Airports for its defensive characteristics given the weakness of TRY. About 70% of its revenues are in FX, mostly EUR, and only 50% of its costs. It offers by far the highest upside potential (nearly 90%) in our coverage universe including other aviation stocks.

We believe the lower y-y EBITDAR and earnings expectations for 2016 have already been discounted in the stock price which has declined 43% in EUR terms over the last 12-month period, underperforming the BIST-100 by 31%. We expect TAV Airports’ earnings will grow 37% in EUR terms in 2017 on a modest 4% y-y growth in the number of passengers and 4% increase in revenues, also supported by the growth in non-Turkey airports. We expect the company’s revenue growth will also be underlined through slightly higher duty free revenues, which will be supported by the 10% to 27.5% increase in special consumption taxes on liquors and tobacco in Turkey at the beginning of December 2016.

While not in our forecasts yet, we believe there is a significant probability of the company adding at least one airport over the next 12 months to the 13 airports whose terminals it currently manages. One of the most visible opportunities is the expansion of Jose Marti airport in Havana which the company is currently negotiating exclusively with the Cuban government as part of a three-company consortium as the company announced in August 2016.

Exhibit 56: Turkish airports terminal passengers

Sources: State Airports Authority, TEB Investment / BNP Paribas estimates

50.6 58.3 64.7 76.1 85.4 97.0 103.0 109.226.6

36.144.2

51.358.7

65.4 59.5 61.5

25.723.2

21.4

22.021.6

18.6 11.213.1

0

20

40

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016E 2017E

(m passengers) Domestic International scheduled International charter




We value the company using SOTP. While the underlying individual businesses are discounted using DCF with no terminal value, we assign an overall terminal value to the group to account for new projects highly likely to be won or acquired in the long term. Downside risks to our TP are from the slowdown in regional, especially Turkish, air travel growth in Turkey on changing economic or political conditions and significantly higher fares (on higher fuel prices) and significant weakening of EUR/USD exchange rate beyond 1.10.

Sabanci Holding (SAHOL TI; BUY; CP: TRY9.17; TP: TRY10.80) Alper Paksoy, +90 216 636 4524, [email protected]

We expect Sabanci Holding’s earnings to rise c30% per annum in 2015-17E and narrow the discounts on its current SOTP valuation. We expect earnings growth to be mainly enabled by its two main businesses, banking and electricity.

We expect banking business earnings to expand through 2017 on continuing double-digit loan growth thanks to sector low LTD ratio as well as solid capitalisation, sub-CPI increase in operating expense owing to emphasis on digital banking, sector-best NPL provision coverage, declining fee rebates, and a slightly higher NIM.

We forecast electricity business’s (Enerjisa) EBITDA to grow 70% cumulatively from 2015 through 2017 after an 80% increase y-y in 2015. The realisation so far in 9M16 in the business’ EBITDA (33% y-y growth) underlines our forecasts. We expect the

Exhibit 57: SOTP valuation for TAV Airports

Valuation method 12M fair value TAV stake Consolidation discount 12M fair value of stake Weight in total

(EUR m) (%) (%) (EUR m) (%)

Airport operations 1,566 63

Turkey 1,102 44

TAV Istanbul (2021) DCF 1,074 100 0 1,074 45

TAV Ankara (2023) DCF 80 100 0 80 3

TAV Izmir (2032) DCF 32 100 0 32 1

TAV Gazipasa (2043) DCF 0 100 0 0 0

TAV Bodrum (2035) DCF 7 100 0 7 0

Non-Turkey 436 18

TAV Tunisie (2047) DCF 0 67 0 0 0

TADC/TAOC – Medina (2037) DCF 40 33 5 13 1

TAV Georgia (2027) DCF 377 80 0 302 13

Tbilisi (2027) 335 80 268 11

Batumi (2027) 42 80 34 1

TAV Macedonia (2030) DCF 122 100 0 122 5

Zagreb (2042) DCF 17 15 10 2 Other services 291 12

ATU (duty free) DCF 165 50 5 78 3

BTA (catering) DCF 157 67 0 105 4

HAVAS (ground handling) DCF 108 100 0 108 5

Total value of portfolio 1,922 81

Holding expenses & debt DCF -211 100 0 (211) (9)

Deferred tax asset (liability) Historical value 59 100 0 59 3

Terminal value (2023 and onwards) DCF 594 100 0 594 25

SOTP target value 2,364 100

12M target TRY/EUR 3.80 SOTP fair value (TRY m) 8,982 No. of shares (m) 363.3 Target share price (TRY) 24.7

Sources: TAV Airports; TEB Investment/BNP Paribas estimates




EBITDA growth to be driven by higher volumes on completion of all major investments in 2016 along with continuation of relatively high sales prices on the generation side and higher margins on the distribution side. Higher margins on the distribution side are due to favourable changes in financial terms set by the energy regulator in early 2016 for the next five years for distribution companies. The government’s plans to support local coal-based electricity production by purchasing some of their production is also likely to underline the strong growth in Enerjisa’s EBITDA in 2016 and later on.

The stock is trading at nearly 50% discount to its current market value-based SOTP, which, in our view, is quite attractive compared with its historical average discount of 39%. We also think the discount might narrow further from the current 35% on consistent and recurring EBITDA growth in the electricity business, which has been the main source of concern for investors given its weak margins previously and high leverage. We employ sum-of-the-parts (SOTP) in setting our TP for Sabanci Holding.

Key downside risks to our SOTP-based TP: Significant changes in prospects for Turkey's economic growth and interest rates across the globe, given the high domestic orientation of its participations (e.g. highly leveraged electricity business).

Exhibit 58: Sabanci Holding – discount to current SOTP history

Sources: TEB Investment / BNP Paribas estimates

Exhibit 59: Sabanci Holding – discount to current SOTP history

Sources: TEB Investment / BNP Paribas estimates

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

(60)

(50)

(40)

(30)

(20)

(10)

0

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

(index)(%) Premium (discount) to current SOTP (LHS) Latest three-year avg (LHS) BIST-100 (RHS)

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

(30)

(20)

(10)

0

10

20

30

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

(index)(%) Premium (discount) to listed businesses (LHS) Latest three-year avg (LHS) BIST-100 (RHS)



Exhibit 60: SOTP valuation for Sabanci Holding

BBG code Stake Valuation methodology Value Stake value Weight

(%) (TRY m) (TRY m) (%)

Business segments

Finance 17,062 56

Akbank AKBNK TI 40.75 Gordon growth model 38,720 15,778 52

Aksigorta AKGRT TI 36.00 Gordon + Excess equity 694 250 1

Avivasa AVISA TI 49.83 Current Mcap expanded w/ CoE 2,504 1,034 3.4

Energy 4,592 15

Enerjisa Not Listed 50.00 DCF 9,184 4,592 15

Retail 963 3

Carrefour SA CRFSA TI 50.79 0.5x EV/2016E Sales 1,750 889 3

Teknosa TKNSA TI 60.29 Current Mcap expanded w/ CoE 124 75 0

Cement 2,008 7

Akcansa AKNCS TI 39.72 DCF 2,422 962 3

Cimsa CIMSA TI 49.43 DCF 2,115 1,046 3

Other Industrials 5,926 19

Brisa BRISA TI 43.63 Current Mcap expanded w/ CoE 2,161 943 3

Kordsa Global KORDS TI 91.11 Current Mcap expanded w/ CoE 1,358 965 3

Philsa Not Listed 25.00 PM US latest qty avg P/E of 18.6x discounted at 10% expanded w/ CoE 10,848 2,712 9

Philip Morrissa Not Listed 24.75 PM US latest qty avg P/E of 18.6x discounted at 10% expanded w/ CoE 3,424 847 3

Yunsa YUNSA TI 57.88 Current Mcap expanded w/ CoE 77 45 0

Temsa Not Listed 48.71 XUSIN latest P/B of 1.8x discounted at 0% expanded w/ CoE 850 414 1

Total 30,551 100

Value of listed stakes 20,952 69

Value of unlisted stakes 9,599 31

Net cash (debt) 905 3

12-month target SOTP 31,456 Discount on target SOTP (%) (30) 12-month target SOTP 22,019 No. of shares (m) 2,040 12-month target price (TRY) 10.8

Sources: Sabanci Holding; TEB Investment/BNP Paribas estimates



Least preferred

Arcelik (ARCLK TI; HOLD; CP: TRY21.08; TP: TRY18.90) Toygun Onaran, +90 216 636 4533, [email protected]

In 4Q16, we expect Arcelik’s profitability to be negatively affected from the increase in raw materials prices especially steel and plastics. Although the company is expanding its operations geographically (Pakistan and Thailand) with new investments, it will likely take some time to see meaningful positive contributions of these investments due to the ramp-up period of the operations. Our calculations indicate that Arcelik’s current price is already reflecting the positive expectations and does not offer an upside potential. Hence we are including Arcelik in our least preferred list.

Our TP is based on an equally weighted average of DCF and 2017 EV/EBITDA and P/E multiple comparison of international peers. Upside risk: A possible incentive on energy-efficient devices (as hinted by the Ministry of Finance) could act as an important catalyst for replacement sales. Downside risk: If domestic demand weakens, Arcelik’s working capital requirement may increase as the company may extend payment terms of distributors to support domestic sales volume.

Pegasus Airlines (PGSUS TI; HOLD; CP: TRY12.66; TP: TRY13.10)

Alper Paksoy, +90 216 636 4524, [email protected]

Pegasus is in our least favourite list due to: 1) its high leverage with our estimated net debt-to-EBITDA of 16x for 2017E on an estimated net debt of TRY3.3b up from a net debt of TRY460m in 2015, even when we factor in the likely sale of five Boeing aircrafts from the fleet for about TRY0.60b and 2) unfavourable exposure to strong USD vs TRY given TRY and USD accounting for 41% and 27% of its revenues respectively vs 21% and 55% of costs.

Pegasus is valued using DCF. Upside risks are a strong TRY, weak oil prices and accelerating domestic economic growth, as well as improving consumer sentiment. Downside risks include likely failure to sell the five aircrafts, a weak TRY, high oil prices, further terrorist events in Turkey or Europe, THY continuing its fleet growth at a fast rate at Sabiha Gokcen in the rest of 2016 or 2017, creating increased competition for Pegasus.





Exhibit 61: Non-bank coverage overview

------------------------ Revenues ------------------------- -------------------------- EBITDA --------------------------- ----------------------------- Net profit ------------------------

2015 2016E 2017E Change (y-y %) 2015 2016E 2017E Change (y-y %) 2015 2016E 2017E Change (y-y %)

(TRY m) (TRY m) (TRY m) 2016 2017 (TRY m) (TRY m) (TRY m) 2016 2017 (TRY m) (TRY m) (TRY m) 2016 2017

KCHOL 69,110 70,684 76,212 2 8 na na na - - 3,568 2,921 3,130 (18) 7

SAHOL 11,657 35,786 39,906 207 12 na na na - - 2,236 2,513 3,223 44 28

EKGYO 1,787 4,026 4,211 125 5 768 1,613 1,761 110 9 953 1,873 2,093 97 12

TKFEN 3,888 4,661 7,952 20 71 242 472 762 95 61 185 268 459 45 71

TRKCM 2,118 3,122 3,511 47 12 274 560 673 104 20 159 570 383 258 (33)

TRGYO 628 739 2,152 18 191 1,345 494 796 (63) 61 954 130 490 (86) 277

KRDMD 1,527 2,369 3,328 55 40 146 375 519 157 39 (15) (42) 158 (187) nm

ARCLK 14,166 15,808 18,970 12 20 1,456 1,767 2,092 21 18 891 1,002 1,276 12 27

AYGAZ 6,420 12,318 14,685 92 19 340 386 375 13 (3) 418 353 396 (16) 12

ULKER 3,075 3,906 4,406 27 13 410 506 587 23 16 260 313 352 20 12

DOAS 10,889 11,143 12,629 2 13 484 457 550 (6) 20 303 244 325 (19) 33

FROTO 16,746 17,477 19,400 4 11 1,386 1,408 1,627 2 16 842 887 1,020 5 15

TOASO 9,921 13,332 16,122 34 21 1,069 1,305 1,564 22 20 831 793 905 (5) 14

ENKAI 12,384 11,922 14,368 (4) 21 2,038 2,194 2,610 8 19 1,440 1,749 2,116 21 21

SISE 7,415 8,459 9,420 14 11 1,405 1,652 1,828 18 11 723 601 678 (17) 13

TTRAK 3,103 3,428 3,934 10 15 416 485 566 17 17 257 337 396 31 18

MGROS 9,390 10,880 12,389 16 14 557 629 730 13 16 (370) (115) 84 69 nm

TCELL 12,769 13,775 15,525 8 13 4,120 4,401 5,017 7 14 2,070 1,495 2,095 (28) 40

BIMAS 17,428 20,585 24,403 18 19 865 1,005 1,169 16 16 583 684 787 17 15

CCOLA 6,724 6,958 7,908 3 14 1,030 1,071 1,244 4 16 117 184 299 57 63

BIZIM 2,564 2,859 3,149 12 10 71 87 96 22 11 14 21 39 49 80

TTKOM 14,523 15,668 16,808 8 7 5,101 5,558 6,008 9 8 907 749 1,656 (17) 121

ASELS 2,780 3,378 4,687 21 39 428 597 765 39 28 213 611 748 187 22

ANACM 1,552 1,992 2,069 28 4 287 391 390 36 (0) 52 313 119 506 (62)

VESTL 9,250 9,920 10,967 7 11 880 758 838 (14) 11 60 307 271 415 (12)

VESBE 2,524 2,733 3,076 8 13 345 263 305 (24) 16 164 145 168 (12) 16

TAVHL 3,026 3,509 3,978 16 13 1,521 1,309 1,478 (14) 13 633 352 528 (44) 50

AKCNS 1,469 1,501 1,610 2 7 430 414 372 (4) (10) 281 299 240 6 (20)

CIMSA 1,171 1,192 1,399 2 17 360 356 376 (1) 6 245 233 218 (5) (6)

PGSUS 3,488 3,670 4,443 5 21 353 73 207 (79) 183 113 (102) (159) nm (55)

EREGL 11,915 11,752 15,415 (1) 31 2,197 2,447 2,647 11 8 1,126 1,330 1,530 18 15

TUPRS 36,893 35,935 50,764 (3) 41 3,784 2,945 3,845 (22) 31 2,550 1,420 2,136 (44) 50

THYAO 28,752 29,092 34,760 1 19 4,458 2,403 3,654 (46) 52 2,993 (991) (771) nm 22

Sources: Companies, TEB Investment/BNP Paribas estimates



The attached table ranks non-bank stocks under our coverage based on their leverage & sensitivities to estimated weakening of TRY & Turkish GDP growth.

Stocks that rank higher have lower sensitivity to Turkish GDP and lower leverage than the rest—more favourable because of their lower sensitivity to a weakening TRY.

Everything else being the same, ASELS, ENKAI and EREGL seem to be the best positioned in relative terms in an environment where TRY is weakening, GDP growth is slowing down and interest rates are rising.

DOAS, MGROS and TRGYO seem to be the worst positioned in relative terms in the same environment.

Exhibit 62: FX and GDP sensitivity of the stocks

Overall Rank

Temp Overall

Turkish GDP

Sensitivity of Sales

Balance Sheet Long

TRY/EBIT

Net Cash /EBITDA

EBIT Expansion

Sensitivity to FX

Net Cash /Equity Total Point

Ticker As of Higher the better rank rank rank rank rank

ASELS TI 2016/09 31 31 30 28 27 30 27 28.4

ENKAI TI 2016/09 30 30 31 15 31 21 28 25.2

EREGL TI 2016/09 29 29 16 26 25 28 25 24.0

AYGAZ TI 2016/09 28 28 24 18 24 20 24 22.0

VESBE TI 2016/09 27 27 27 20 23 16 23 21.8

SISE TI 2016/09 26 26 17 25 19 27 20 21.6

BIZIM TI 2016/09 25 25 8 17 29 13 31 19.6

BIMAS TI 2016/09 24 24 8 19 28 12 30 19.4

ARCLK TI 2016/09 23 23 19 22 18 23 13 19.0

TUPRS TI 2016/09 22 22 28 23 6 26 8 18.2

TCELL TI 2016/09 21 21 26 9 21 10 22 17.6

TOASO TI 2016/09 20 19 23 31 8 19 6 17.4

EKGYO TI 2016/09 19 20 1 16 30 11 29 17.4

ANACM TI 2016/09 18 18 7 27 10 22 15 16.2

TKFEN TI 2016/09 17 17 18 6 26 3 26 15.8

AKCNS TI 2016/09 16 16 5 21 22 6 21 15.0

FROTO TI 2016/09 15 15 22 7 16 18 11 14.8

THYAO TI 2016/09 14 14 20 11 2 31 4 13.6

CIMSA TI 2016/09 13 13 6 24 11 15 12 13.6

TAVHL TI 2016/09 12 12 13 13 9 25 7 13.4

TRKCM TI 2016/09 11 10 11 10 15 9 19 12.8

TTRAK TI 2016/09 10 11 29 12 14 4 5 12.8

ULKER TI 2016/09 9 9 14 8 17 7 17 12.6

BOLUC TI 2016/09 8 7 4 14 20 5 18 12.2

CCOLA TI 2016/09 7 8 21 5 13 8 14 12.2

PGSUS TI 2016/09 6 6 15 30 1 2 10 11.6

TTKOM TI 2016/09 5 5 24 4 12 14 3 11.4

KRDMD TI 2016/09 4 4 12 1 4 29 9 11.0

TRGYO TI 2016/09 3 3 1 3 5 24 16 9.8

MGROS TI 2016/09 2 2 10 2 7 17 1 7.4

DOAS TI 2016/09 1 1 1 29 3 1 2 7.2

Sources: TEB Investment/BNP Paribas estimates



GDP Sensitivity: Ratio of domestic revenues to overall revenues multiplied by ranked sensitivity of domestic sales to Turkish GDP.

Balance sheet long TRY position: Monetary TRY assets minus monetary TRY liabilities plus/minus other FX assets/liabilities with impact on P&L such as inventories for companies selling mostly in FX

EBIT Expansion Sensitivity to FX: Immediate impact of 1% weakening of TRY on EBIT in TRY terms based on estimated share of TRY in revenues and costs. For example, if TRY weakens 1% and previous EBIT is TRY50, EBIT after weakening is estimated to be TRY50 * (1+1%). This impact has been calculated without considering other factors such as TRY inflation, or if supply and demand would allow the companies to increase their prices in TRY terms, or whether or not management would negotiate lower cost-supply agreements when faced with higher costs. If the result is positive, EBIT should expand and vice versa. When TRY weakens 1%, both non-TRY revenues and costs increase 1%, but those in TRY remain unchanged. EBIT is recalculated by subtracting incremental costs from incremental revenues.

Exhibit 63: FX and GDP sensitivity ranking metrics

GDP Sensitivity Balance Sheet Long TRY position/EBIT Net Cash/EBITDA EBIT Margin

Sensitivity Net Cash/Equity

(%) (x) (x) (% ppt) (x)

Ticker 3Q16 3Q16YE/2016E 3Q16/2016YE 2016YE 3Q16

ASELS TI 85 (1.02) 0.62 1.4 0.12

ENKAI TI 63 0.02 2.05 0.0 0.27

EREGL TI 352 (0.70) 0.06 1.1 0.01

AYGAZ TI 200 (0.05) (0.24) 0.0 (0.03)

VESBE TI 175 (0.07) (0.48) -0.4 (0.15)

SISE TI 330 (0.45) (1.27) 1.6 (0.20)

BIZIM TI 500 (0.01) 0.96 0.0 0.54

BIMAS TI 500 (0.05) 0.63 0.0 0.36

ARCLK TI 293 (0.13) (1.41) 0.6 (0.47)

TUPRS TI 163 (0.20) (2.71) 0.7 (1.02)

TCELL TI 187 0.80 (0.56) -0.1 (0.16)

TOASO TI 210 (2.87) (2.46) 0.0 (1.13)

EKGYO TI 1,000 0.00 1.82 0.0 0.28

ANACM TI 536 (0.74) (2.03) 0.7 (0.42)

TKFEN TI 295 1.93 0.24 -1.8 0.05

AKCNS TI 795 (0.13) (0.55) -0.6 (0.19)

FROTO TI 217 1.81 (1.47) 0.0 (0.63)

THYAO TI 280 0.48 (11.21) -4.5 (1.94)

CIMSA TI 594 (0.23) (1.95) -0.1 (0.53)

TAVHL TI 455 0.17 (2.22) 0.7 (1.09)

TRKCM TI 476 0.64 (1.60) -0.4 (0.27)

TTRAK TI 143 0.45 (1.74) -1.0 (1.36)

ULKER TI 403 1.17 (1.42) -0.7 (0.41)

BOLUC TI 899 0.15 (0.75) -0.7 (0.32)

CCOLA TI 258 2.88 (1.86) -0.9 (0.43)

PGSUS TI 395 (1.73) (15.86) 5.1 (0.72)

TTKOM TI 200 4.35 (1.88) 0.0 (2.23)

KRDMD TI 460 6.51 (4.67) 1.3 (0.74)

TRGYO TI 1,000 5.09 (4.31) 0.4 (0.42)

MGROS TI 485 5.34 (2.63) 0.3 (3.56)

DOAS TI 1,000 (1.42) (5.79) -19.4 (2.45)

Sources: TEB Investment/BNP Paribas estimates



Exhibit 64: Key macroeconomic assumptions

-------------------------------------- Current forecasts --------------------------------------

2014 2015 2016E 2017E

Real Sector

Real GDP (y-y %) 2.9 4.0 2.7 2.5

Nominal GDP (TRY b) 1790.0 1952.6 2176.7 2413.8

Nominal GDP (USD b) 797.7 709.9 721.7 679.8

CPI (y-y %) 8.20 8.80 7.70 8.30

CPI avg (%) 8.90 7.70 7.70 8.00

Exchange rate and Interest rates

USD/TRY, eop 2.33 2.92 3.38 3.70

USD/TRY, avg 2.19 2.75 3.02 3.55

EUR/TRY, eop 2.83 3.18 3.62 3.70

EUR/TRY, avg 2.89 3.04 3.33 3.64

EUR/USD, eop 1.22 1.09 1.07 1.00

EUR/USD, avg 1.32 1.10 1.10 1.03

EURUSD basket, eop 2.58 3.05 3.50 3.70

Real effective exchange rate (y-y %) (5.40) (5.30) (3.40) (6.20)

Policy interest rate, % eop (*) 8.25 7.50 7.75 8.75

Benchmark bond yield (eop %) 8.02 10.86 10.00 10.50

Benchmark bond yield (avg %) 9.19 9.87 9.61 10.28

Fiscal sector, % of GDP

Central government balance (1.30) (1.20) (1.80) (2.80)

Central government primary balance 1.60 1.60 0.70 (0.30)

Central government primary balance (IMF definition) 1.00 1.10 0.20 (0.80)

Central government gross debt 35.00 34.70 34.30 35.30

External sector (USD b)

Current account (46.50) (32.20) (33.80) (29.80)

% of GDP (5.80) (4.50) (4.70) (4.40)

Sources: TURKSTAT; CBRT; Turkish Treasury; TEB Investment/BNP Paribas estimates



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S): TEB INVESTMENT

ANALYST(S) CERTIFICATION

Mete Yuksel, TEB Investment, +90 216 636 4536, [email protected] The TEB Investment Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations

The individual(s) identified above certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.

IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas"). The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

BNP Paribas represents that: 1. Within the past year, it has managed or co-managed a public offering for this company, for which it received fees. 2. It had an investment banking relationship with this company in the last 12 months. 3. It received compensation for investment banking services from this company in the last 12 months. 4. It expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months. 5. It beneficially owns 1% or more of any class of common equity securities of the subject company. 6. It makes a market in securities in respect of this company. 7. The analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest position in

securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, employee or advisory board member of this company or has received

compensation from the company.

IMPORTANT DISCLOSURES REQUIRED IN KOREA The disclosure column in the following table lists the important disclosures applicable to each Korea listed company that has been rated and/or recommended in this report:

1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.

2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the

transaction does not exceed 5/100 of the total asset of the Company or the total number of outstanding shares. 5. BNPPSK has taken financial advisory service regarding listing to the Company within the past 1 year. 6. With regards to the tender offer initiated by the Company based on Item 2, Article 133 of the Financial Investment Services and Capital Market Act,

BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

7. The listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks

8. The Company that has signed a nominated advisor contract with BNPPSK as defined in Item 2 of Article 8 of the KONEX Market Listing Regulation. 9. The Company is recognized as having considerable interests with BNPPSK in relation to No.1 to No. 8. 10. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the

following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.

Company Ticker Disclosure (as applicable)

Arcelik ARCLK TI 2, 3, 4

Garanti Bank GARAN TI 2, 3, 4

Tofas Otomobil TOASO TI 2, 3, 4

Company Ticker Price (as of 22-Dec-2016 closing price) InterestN/A N/A N/A N/A



GENERAL DISCLAIMER

This report was produced by TEB Investment, member company(ies) of the BNP Paribas Group.

This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set forth herein. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Customers are advised to use the information contained herein as just one of many inputs and considerations prior to engaging in any trading activity. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. This report is not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification, or taken in substitution for the exercise of judgment by the recipient. Additionally, the products mentioned in this report may not be available for sale in certain jurisdictions. As an investment bank with a wide range of activities, BNP Paribas may face conflicts of interest, which are resolved under applicable legal provisions and internal guidelines. You should be aware, however, that BNP Paribas may engage in transactions in a manner inconsistent with the views expressed in this document, either for its own account or for the account of its clients. Australia: This report is being distributed in Australia by BNP Paribas Sydney Branch, registered in Australia as ABN 23 000 000 117 at 60 Castlereagh Street Sydney NSW 2000. BNP Paribas Sydney Branch is licensed under the Banking Act 1959 and the holder of Australian Financial Services Licence no. 238043 and therefore subject to regulation by the Australian Securities & Investments Commission in relation to delivery of financial services. By accepting this document you agree to be bound by the foregoing limitations, and acknowledge that information and opinions in this document relate to financial products or financial services which are delivered solely to wholesale clients (in terms of the Corporations Act 2001, sections 761G and 761GA; Corporations Regulations 2001, division 2, reg. 7.1.18 & 7.1.19) and/or professional investors (as defined in section 9 of the Corporations Act 2001). Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence. Hong Kong: This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities, advising on securities, dealing in futures contracts and advising on corporate finance. For professional investors in Hong Kong, please contact BNP Paribas Securities (Asia) Limited (address: 63/F Two International Finance Centre, 8 Finance Street, Central, Hong Kong; tel:2909 8888; fax: 2845 2232) for all matters and queries relating to this report. India: In India, this document is being distributed by BNP Paribas Securities India Pvt. Ltd. ("BNPPSIPL"), having its registered office at 5th floor, BNP Paribas House, 1 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai 400 051, INDIA (Tel. no. +91 22 3370 4000 / 6196 4000, Fax no. +91 22 6196 4363). BNPPSIPL is registered with the Securities and Exchange Board of India (“SEBI”) as a research analyst (Regn. No. INH000000792) and as a stockbroker in the Equities and the Futures & Options segments of National Stock Exchange of India Ltd. (“NSE”) and BSE Ltd. and in the Currency Derivatives segment of NSE (SEBI Regn. Nos.: INB/INF/NSF/NSE231474835, INB/INF011474831; CIN: U74920MH2008FTC182807; Website: www.bnpparibas.co.in). No material disciplinary action has been taken against BNPPSIPL by any regulatory or government authority. BNPPSIPL or its associates may have received compensation or other benefits for brokerage services or for other products or services, from the company(ies) that have been rated and/or recommended in the report and / or from third parties. Indonesia: This report is being distributed to Indonesia based clients by the publishing entity shown on the front page of this report. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens except in compliance with applicable Indonesian capital market laws and regulations. This report is not an offer of securities in Indonesia and may not be distributed within the territory of the Republic of Indonesia or to Indonesian citizens in circumstance which constitutes an offering within the meaning of Indonesian capital market laws and regulations. Japan: This report is being distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited or by a subsidiary or affiliate of BNP Paribas not registered as a financial instruments firm in Japan, to certain financial institutions defined by article 17-3, item 1 of the Financial Instruments and Exchange Law Enforcement Order. BNP Paribas Securities (Japan) Limited is a financial instruments firm registered according to the Financial Instruments and Exchange Law of Japan and a member of the Japan Securities Dealers Association, the Financial Futures Association of Japan and the Type II Financial Instruments Firms Association. BNP Paribas Securities (Japan) Limited accepts responsibility for the content of a report prepared by another non-Japan affiliate only when distributed to Japanese based firms by BNP Paribas Securities (Japan) Limited. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan. Malaysia: This report is issued and distributed by BNP Paribas Capital (Malaysia) Sdn Bhd. The views and opinions in this research report are our own as of the date hereof and are subject to change. BNP Paribas Capital (Malaysia) Sdn Bhd has no obligation to update its opinion or the information in this research report. This publication is strictly confidential and is for private circulation only to clients of BNP Paribas Capital (Malaysia) Sdn Bhd. This publication is being provided to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of BNP Paribas Capital (Malaysia) Sdn Bhd. Philippines: This report is being distributed in the Philippines by BNP Paribas Manila Branch, an Offshore Banking Unit (OBU) of BNP Paribas whose head office is in Paris, France. BNP Paribas Manila OBU is registered as an offshore banking unit under Presidential Decree No. 1034 (PD 1034), and regulated by the Bangko Sentral ng Pilipinas. This report is being distributed in the Philippines to qualified clients of OBUs as allowed under PD 1034, and is qualified in its entirety to the products and services allowed under PD 1034. Singapore: This report is distributed in Singapore by BNP Paribas Securities (Singapore) Pte Ltd ("BNPPSSL") and may be distributed in Singapore only to an Accredited or Institutional Investor, each as defined under the Financial Advisers Regulations ("FAR") and the Securities and Futures Act (Chapter 289) of Singapore, as amended from time to time. In relation to the distribution to such categories of investors, BNPPSSL and its representatives are exempted under Regulation 35 of the FAR from the requirements in Section 36 of the Financial Advisers Act of Singapore, regarding the disclosure of certain interests in, or certain interests in the acquisition or disposal of, securities referred to in this report. For Institutional and Accredited Investors in Singapore, please contact BNP Paribas Securities (Singapore) Ptd Ltd (company registration number: 199801966C; address: 10 Collyer Quay, 34/F Ocean Financial Centre, Singapore 049315; tel: (65) 6210 1288; fax: (65) 6210 1980) for all matters and queries relating to this report. South Africa: In South Africa, BNP Paribas Securities South Africa (Pty) Ltd is a licensed member of the Johannesburg Stock Exchange and an authorised Financial Services Providers and subject to regulation by the Financial Services Board. BNP Paribas Securities South Africa (Pty) Ltd does not expressly or by implication represent, recommend or propose that the financial products referred to in this report are appropriate to the particular investment objectives, financial situation or particular needs of the recipient. This document does not constitute advice as contemplated in the Financial Advisory and Intermediary Services Act, 2002. South Korea: BNP Paribas Securities Korea is registered as a Licensed Financial Investment Business Entity under the FINANCIAL INVESTMENT SERVICES AND CAPITAL MARKETS ACT and regulated by the Financial Supervisory Service and Financial Services Commission. This document does not constitute an offer to



sell to or the solicitation of an offer to buy from any person any financial products where it is unlawful to make the offer or solicitation in South Korea. Switzerland: This report is intended solely for customers who are “Qualified Investors” as defined in article 10 paragraphs 3 and 4 of the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) and the relevant provisions of the Swiss Federal Ordinance on Collective Investment Schemes of 22 November 2006 (CISO). “Qualified Investors” includes, among others, regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes, regulated insurance companies as well as pension funds and companies with professional treasury operations. This document may not be suitable for customers who are not Qualified Investors and should only be used and passed on to Qualified Investors. For specification purposes, a “Swiss Corporate Customer” is a Client which is a corporate entity, incorporated and existing under the laws of Switzerland and which qualifies as “Qualified Investor” as defined above." BNP Paribas (Suisse) SA is authorised as bank and as securities dealer by the Swiss Federal Market Supervisory Authority FINMA. BNP Paribas (Suisse) SA is registered at the Geneva commercial register under No. CH-270-3000542-1. BNP Paribas (Suisse) SA is incorporated in Switzerland with limited liability. Registered Office: 2 place de Hollande, CH-1204 Geneva. Taiwan: This report is being distributed to Taiwan based clients by BNP Paribas Securities (Taiwan) Co., Ltd or by a subsidiary or affiliate of BNP Paribas. Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decision. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. BNP Paribas Securities (Taiwan) Co., Ltd. may not execute transactions for clients in these securities. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of BNP Paribas.

Thailand: Research relating to Thailand and Thailand based issuers is produced pursuant to an arrangement between BNP PARIBAS (“BNPP”) and Finansia Syrus Securities Public Company Limited (“FSS”). FSS International Investment Advisory Securities Co Ltd (“FSSIA”) prepares and distributes research under the brand name “BNP PARIBAS/FSS”. BNPP is not an affiliate of FSSIA or FSS. FSS also publishes a different research product under the brand name “FINANSIA SYRUS,” which is prepared by research analysts who are not part of FSSIA and who may cover the same securities, issuers, or industries that are the subject of this report. The ratings, recommendations, and views expressed in this report may differ from the ratings, recommendations, and views expressed by other research analysts or research teams employed by FSS. This report is being distributed outside Thailand by members of BNP Paribas. Turkey: This report is being distributed in Turkey by TEB Investment (TEB YATIRIM MENKUL DEGERLER A.S., Teb Kampus D Blok Saray Mah. Kucuksu Cad. Sokullu Sok., No:7 34768 Umraniye, Istanbul, Turkey, Trade register number: 358354, www.tebyatirim.com.tr) and outside Turkey jointly by TEB Investment and BNP Paribas. Information, comments and suggestions on investment given in this material are not within the scope of investment consulting. The investment consulting services are rendered tailor made for individuals by competent authorities considering the individuals’ risk and return preferences. However the comments and recommendations herein are based on general principles. These opinions may not be consistent with your financial status as well as your risk and return preferences. Therefore, making an investment decision only based on the information provided herein may not bear consequences in parallel with your expectations. This material issued by TEB Yatırım Menkul Değerler A.Ş. for information purposes only and may be changed without any prior notification. All rights reserved. No part of this material may be copied or reproduced in any manner without the written consent of TEB Yatırım Menkul Değerler A.Ş. Although TEB Yatırım Menkul Değerler A.Ş. gathers the presented material that is current as possible, it does not undertake that all the information is accurate or complete, nor should it be relied upon as such. TEB Yatırım Menkul Değerler A.Ş. assumes no responsibility whatsoever in respect of or arising out or in connection with the content of this material to third parties. If any third party chooses to use the content of this material as reference, he/she accepts and approves to do so entirely at his/her own risk.

United States: This report may be distributed in the United States only to U.S. Persons who are “major U.S. institutional investors” (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a “major U.S. institutional investor”. U.S persons who wish to effect transactions in securities discussed herein must do so through BNP Paribas Securities Corp., a US-registered broker dealer and member of FINRA, SIPC, NFA, NYSE and other principal exchanges. Certain countries within the European Economic Area: This document may only be distributed in the United Kingdom to eligible counterparties and professional clients and is not intended for, and should not be circulated to, retail clients (as such terms are defined in the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”)). This document will have been approved for publication and distribution in the United Kingdom by BNP Paribas London Branch, a branch of BNP Paribas SA whose head office is in Paris, France. BNP Paribas SA is incorporated in France with limited liability with its registered office at 16 boulevard des Italiens, 75009 Paris. BNP Paribas London Branch (registered office: 10 Harewood Avenue, London NW1 6AA; tel: [44 20] 7595 2000; fax: [44 20] 7595 2555) is lead supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR). BNP Paribas London Branch is authorised by the ACPR and the Prudential Regulation Authority (PRA) and subject to limited regulation by the Financial Conduct Authority and PRA. Details about the extent of our authorisation and regulation by the PRA, and regulation by the Financial Conduct Authority are available from us on request. This report has been approved for publication in France by BNP Paribas, a credit institution licensed as an investment services provider by the ACPR whose head office is 16, Boulevard des Italiens 75009 Paris, France. This report is being distributed in Germany either by BNP Paribas London Branch or by BNP Paribas Niederlassung Frankfurt am Main, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Other Jurisdictions: The distribution of this report in other jurisdictions or to residents of other jurisdictions may also be restricted by law, and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report you agree to be bound by the foregoing instructions. This report is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. All research reports are disseminated and available to all clients simultaneously through our internal client websites. For all research available on a particular stock, please contact the relevant BNP Paribas research team or the author(s) of this report.

Additional Disclosures Target price history, stock price charts, valuation and risk details, and equity rating histories applicable to each company rated in this report is available in our most recently published reports available on our website: http://eqresearch.bnpparibas.com, or you can contact the analyst named on the front of this note or your BNP Paribas representative. All share prices are as at market close on 22 December 2016 unless otherwise stated.



RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. Industry Recommendations Improving (): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 27 December 2016)

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report. © 2016 BNP Paribas Group

Total BNP Paribas coverage universe 451 Investment Banking Relationship (%)

Buy 260 (57.6%) Buy 36.15

Hold 133 (29.5%) Hold 37.59

Reduce 58 (12.9%) Reduce 31.03


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