abc Equity Turkey Global Research Turkish top-picks Political tensions and tighter monetary conditions represent market headwinds Looking for resilience and outstanding value in a low growth environment However, valuations are attractive and risk-reward profile positive in our view Top picks: BIM (new target TRY53), Ulker (new target TRY16.5), Kardemir and Halkbank, all rated Overweight Top picks summary Company Ticker Halkbank Ulker Kardemir BIM HALKB TI ULKER TI KRDMD TI BIMAS TI Target Mcap Price (TRY) (USDm) (TRY) old 6,348 11.20 1,923 12.40 867 1.17 5,919 43.00 17.20 16.00 1.55 51.00 Target (TRY) Potential new return* Rating 17.20 16.50 1.55 53.00 54% OW(V) 33% OW 32% OW(V) 23% OW Priced as at close 5 March 2014. Our Turkish top picks are designed to highlight Overweight ideas that we think are particularly worthy of attention for the coming months. These are not necessarily the stocks with the greatest potential return* on the date of publication. *Potential return equals the percentage difference between the current share price and the target price Source: HSBC estimates, Thomson Reuters Datastream. 7 March 2014 Cenk Orçan* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 46 14 [email protected] Bülent Yurdagül* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 46 12 [email protected] Tamer Şengün* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 46 15 [email protected] Levent Bayar* Analyst HSBC Yatırım Menkul Değerler A.Ş. +90 212 376 46 17 [email protected] John Lomax* Head of Global Emerging Market Equity Strategy HSBC Bank plc +44 20 7992 3712 [email protected] View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Yatirim Menkul Degerler A.S. Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Turkish equities continue to face headwinds in the form of political tensions and tighter monetary conditions. However, we argue that most of these developments are already reflected in the price now. Valuations are looking attractive and the market is under-owned by foreign institutional investors by historical standards. Our top picks list is a mix of businesses that offer growth in a slowing economy with some defensive qualities (resilience) and those that we believe represent outstanding value: BIM: Resilient business against slowing economy, beneficiary of rising inflation as leading hard discounter and debt-free balance sheet. We project c13% space growth and c21% sales growth in 2014e; among the best in the region. We raise our target to TRY53 from TRY51, remain OW. Kardemir: Good product diversification, nearing completion of extensive investments, improving profitability and deep discount to global peers (51% on 2014e PE). We expect EBITDA CAGR of 20% during 2013-2016. We have a target price of TRY1.55 and OW(V) rating. Ulker Gida: Margin improvement from higher margin SKU sales, more efficient distribution system, lower sales returns and increasing contribution from high margin chocolate business. Stock down more than 20% over the last three months and currently trades at a discount to peers. We raise our target price to TRY16.5 (from TRY16), remain OW. Halkbank: Among the best positioned banks in Turkey for mid-to-long term lending growth (low loan to deposits ratio, high Tier-I and high internal capital generation). Trading at 2014e PBV of 0.87x, with a sustainable ROE above 18%. Our target price is TRY17.2 and rating OW(V). Halkbank is a GEMs Super 15 portfolio stock. abc Equity Turkey 7 March 2014 Equity market strategy Political tensions and tighter monetary conditions represent headwinds for the market However, valuations are attractive, the market is under-owned and stabilisation in currency is a positive Owing to a positive risk-reward balance, we are overweight on the market in the GEMs context Why we overweight Turkey Turkish equity market continues to face headwinds in the form of political tensions and tighter monetary conditions. However, we argue that most of these developments are already reflected in the price, even assuming some further earnings downgrades. Valuations look attractive and the market is underowned by historical standards. After a significant downward adjustment in the currency, FX risk for equity investors also appears reduced. In addition, Turkey remains one of the strongest secular stories. We are overweight Turkey in our EM portfolio. Table-1: HSBC EM country portfolio Recommendation CEEMEA Czech Republic Egypt Greece Hungary Poland Russia South Africa Turkey EM Asia China India Indonesia Korea Malaysia Philippines Taiwan Thailand Latin America Brazil Mexico Chile Colombia Peru Frontier Markets DM plays on EM consumer* Underweight Neutral Overweight Overweight Neutral Underweight Neutral Underweight Overweight Underweight Underweight Underweight Overweight Neutral Overweight Overweight Overweight Underweight Overweight Neutral Overweight Underweight Underweight Overweight Off Benchmark Off Benchmark MSCI benchmark wt. (%) HSBC wt. (%) 18.0 0.3 0.2 0.5 0.2 1.9 5.8 7.6 1.4 63.7 19.4 6.4 2.6 16.1 4.0 1.0 11.9 2.3 18.3 10.2 5.1 1.6 1.0 0.5 - 16.7 0.3 1.0 1.5 0.2 0.8 5.8 4.5 2.6 59.8 17.0 4.0 3.3 16.1 4.3 1.3 13.0 0.8 19.3 10.2 6.8 0.8 0.8 0.7 3.2 1.0 Note:*We would like to implement this through Austrian banks and dual-listed stocks in South Africa. Weights may not sum to 100% because of rounding. Source: MSCI, Thomson Reuters DataStream, HSBC estimates 2 John Lomax* Head of Global Emerging Market Equity Strategy HSBC Bank plc +44 20 7992 3712 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Valuations look attractive, even in the event of further earnings downgrades Equity market is under-owned by foreign institutional investors At the end of 2013, a new political crisis erupted in Turkey in relation to a bribery and corruption scandal. And this continued into the current year. In our view, most of the impact of the political crisis is already priced in. Turkish equities are trading at attractive valuations not just in relation to its history but also in relation to other EMs. GEMs funds (those with broad mandate to invest across EMs) are currently overweight Turkey by about 50bps. However, it is worth noting that in the past, Turkey enjoyed a structural overweight position in the GEMs portfolios and the current level is the lowest seen in about eight years. Chart 1: Turkey – active weight in GEM equity funds 1.8 The table below shows that on a relative basis, Turkey currently trades at 3%, 7% and 12% discounts to the average of EM relative over the past five years on PE, PB and dividend yield respectively. On the sector-neutral basis (ie after adjusting for sector biases in composition of the market), Turkey is currently trading at 10.6x its 12m forward earnings compared with 12.6x for EMs overall. 2014e consensus earnings have already been cut by c8% in the last 6m, owing to interest rate hikes and economic slow-down. But Turkey would still remain relatively cheap in the event of further downgrades of up to c16%. ppt 1.6 Mean + 2 Stdev 1.4 1.2 Mean 1.0 0.8 0.6 0.4 Jun-04 Mean - 2 Stdev Jun-06 Jun-08 Jun-10 Jun-12 Jun-14 Source: MSCI, EPFR Global, Thomson Reuters Datastream, HSBC Table 2: Consensus 12-month forward PE, PB, DY, EY and sector-neutral PEs relative to EM versus five-year history by market Current PE rel. to Current PB rel. to Current DY rel. to Sector neutral current EM / 5 year avg. EM / 5 year avg. EM / 5 year avg. PE rel. to EM/ 5 year rel. to EM rel. to EM rel. to EM avg. rel. to EM Greece South Africa Czech Rep. Poland Mexico Philippines Egypt Hungary Malaysia Peru Indonesia Thailand India Taiwan Korea Turkey Chile Brazil Colombia Russia China EM 1.29 1.28 1.26 1.25 1.21 1.19 1.19 1.12 1.11 1.09 1.08 1.07 1.01 1.00 1.00 0.97 0.94 0.93 0.89 0.86 0.86 1.00 1.01 1.36 0.97 1.17 1.12 1.22 1.07 0.96 1.18 0.77 1.06 1.12 1.12 1.14 0.98 0.93 0.94 0.88 1.06 0.85 0.88 1.00 0.45 0.89 0.85 0.93 0.62 0.76 0.69 0.78 0.90 0.71 0.91 0.98 1.15 0.85 0.90 1.12 0.96 1.21 0.95 1.52 1.12 1.00 NA 1.22 1.10 1.19 1.24 1.15 0.96 1.02 1.22 1.03 1.12 1.27 0.98 1.17 0.87 1.02 0.91 0.90 0.78 0.88 0.98 1.00 Current DY rel. to bond Current EY rel. to bond yield / 5 year avg. rel. to yield / 5 year avg. rel. to bond yield bond yield NA 0.80 1.24 1.14 0.65 1.16 0.48 0.97 0.82 0.72 0.87 1.00 1.02 0.77 1.05 1.10 1.12 1.14 1.02 1.53 0.92 0.96 NA 0.71 1.15 0.98 0.87 1.29 0.74 1.13 0.86 0.98 0.90 0.98 0.89 0.93 1.26 1.01 1.31 1.02 1.19 1.17 0.99 1.01 Current sector neutral PE NA 14.0 14.5 14.2 17.9 21.4 10.1 11.1 18.1 9.7 15.0 15.4 15.9 19.9 10.5 10.6 14.7 13.2 18.5 10.7 13.7 12.6 Source: MSCI, IBES, Thomson Reuters Datastream, HSBC calculations 3 abc Equity Turkey 7 March 2014 Currency stabilisation following heavy downward adjustment We think exchange rate risk has reduced in that the currency has already adjusted strongly. Although we think EM currency fears may be exaggerated, we agree few investors are likely to want to position wholeheartedly for an EM currency rebound. However, in our recent note (GEMs equity strategy: Selectively playing EM currency stabilization, 21 February 2014) where we analysed how equity markets have behaved as EM currencies have found a trough in the post-2001 period, we found that equity markets have not waited for visibility on the impact of the exchange rate depreciation on growth and inflation – once the currency finds a trough, the equity market bounces, and on average rather sharply. In this context, our equity strategy team believes excessive caution against the fragile five countries (Brazil, India, Indonesia, South Africa and Turkey) may also be inappropriate and we recommend a selective exposure. Here, Turkey (along with Indonesia) stands out with a better secular underpin. 4 Domestic versus International Periods of heightened political risk in the past have often created good buying opportunities. If some degree of political compromise can be established, Turkish equities have the scope to rise strongly from current levels. A sharp hike in the interest rate by central bank towards end of January 2014 is likely to impact the equity market in different ways. In the shortterm, however, by raising the one-week repo rate, the bank has eliminated an important source of uncertainty and concern for markets. Also, the rate hike is likely to support the TRY (see Turkey hikes rates sharply, 29 January 2014) The international environment also has scope to affect the Turkish equity outlook. Clearly the market would be adversely impacted by a sharp further rise in US bond yields – but HSBC believes that the worst part of this rise in now behind us. A lot of the negative impact on Turkey from tapering is therefore already reflected in equity prices. Overall, it seems to us that though the market is not void of risks, it also presents decent rewards which could outweigh the risks. Therefore, given the positive risk-reward balance, we rate Turkey at an overweight in our GEMs portfolio. abc Equity Turkey 7 March 2014 Top-picks We look for relative growth plays; businesses that have resilience against slowing domestic economy Our top picks are; BIM, Kardemir, Ulker and Halkbank… … a list that we believe combines outstanding value with resilience Top picks BIM – Consumer retail, OW, target price TRY53, Mcap USD5,919m BIM is a resilient business against slowing economy, and we believe that hard discounters are the best format to be in in Turkey. BIM is the market leader in Turkish food retail as well as the only listed and probably the only profitable hard discount operator in the country. A weakness in consumer sentiment in Turkey could in our opinion help BIM gain further market share as consumers start looking for cheaper options which could in turn improve traffic. Even though there is increasing competition in this segment BIM’s sales are still growing at close to 20% per year, with EBITDA margins stable at around 5% despite dilution from its international expansion strategies. On the back of c13% space growth in 2014e, we project c21% sales growth; among the best in the region. We raise our target price to TRY53 (up from TRY51) and OW rating. The increase in our target price reflects the changes to our estimates accounting for larger number of store openings planned for 2014e. Following the recent sell-off BIM’s shares are trading at 15% discount to its historical average one-year forward PE which in our opinion presents a good buying opportunity. Kardemir-D – Steel, OW(V), target price TRY1.55, Mcap USD867m Kardemir is in our top picks list as a high beta but a notably cheap stock with a high growth profile as heavy investment near end. The company has been running an extensive capital investment programme, which will not only increase its capacity but also bring in the cost savings. We should start seeing the results of the programme in the second half of this year especially with growing sales volumes. We expect EBITDA CAGR of 20% during 2013-2016 period. Another benefit of the extensive capital expenditure programme is improving product mix. The share of value added products have started to increase. We expect a better product mix and a favourable cost structure as well as growing capacity to drive profit growth in 2014-16. Kardemir D is currently trading at a steep discount of c51% discount to 2014e global PE and c17% on EV/EBITDA to global peers. Ulker – Consumer (F&B), OW, target price TRY16.5, Mcap USD1,923m Ulker should benefit from strong structural growth in chocolate market in Turkey which continues to remain well below developed markets in terms of per capita consumption. Over the last few quarters Ulker has seen significant improvements in margins on the back of on favourable raw material pricing, increasing 5 abc Equity Turkey 7 March 2014 contribution from higher margin products, more efficient distribution systems, lower sales returns and increasing contribution from high margin chocolate business. Although increasing cocoa prices and an unfavourable TRY/USD exchange rate should imply margin pressures in the short term, we believe that the company will continue to see strong margin improvements in 2014-16e coupled with sales price increases. Furthermore, Ulker is planning to acquire the biscuits, chocolates and cake operations owned by its parent in Saudi Arabia and Egypt by the end of H1 2014. Depending on the valuation, the transaction may be value accretive, in our view. The stock is down more than 20% over the last three month period and currently trades at an average 20% discount to peers on 2014e PE and EV/EBITDA, which in our opinion is a good entry point. We raise our target price to TRY16.5 (from TRY16.0), reflecting changes to our estimates following the strong Q4 13 results. 6 Halkbank, Banks – OW(V), target price TRY17.2, Mcap USD6,348m Halkbank is among the best-positioned banks in Turkey for mid-to-long term lending growth (low loan to deposits ratio and high internal capital generation). In addition, we rate the bank as the least exposed bank to the recent and expected regulatory changes in Turkey. The key theme surrounding Halkbank, since 17 December, has been the involvement of Halkbank's former CEO to a large scale corruption investigation. Although Halkbank officially announced that the bank had not been into any illegitimate banking transactions and the regulators had not opened any investigations against the bank, the uncertainty surrounding the investigation led to a significant underperformance of the stock, which currently trades at 2015e PE of 4.4x and 2014e P/BV of 0.76x, with an expected 2015e ROAE of 19%. We reiterate our OW(V) rating and a target price of TRY17.2. abc Equity Turkey 7 March 2014 Our 2014 dividend payment forecasts 2014e dividends To be announced RIC TCELL* TTKOM SNGYO EKGYO TUPRS KOZAL HALKB BIMAS AEFES KRDMD TRGYO SAHOL THYAO CCOLA SISE Announced** DOAS EREGL CIMSA AKGRT AYGAZ AKCNS TOASO ISGYO TKNSA ARCLK TAVHL ULKER ISCTR ANHYT YKBNK ALBRK AKBNK KCHOL PETKM GARAN BIZIM ENKAI VAKBN ANSGR BAGFS FROTO TATGD Company Net profit (2013, TRYm) Pay-out Dividends (TRYm) DPS (TRY) Yield Turkcell Turk Telekom Sinpas REIC Emlak Konut REIT Tupras Koza Gold Halkbank BIM Anadolu Efes Kardemir Torunlar REIT Sabanci Holding Turkish Airlines Coca-Cola Icecek Sisecam Holding 2,170 2,707 97 1,040 1,324 548 2,610 401 2,729 100 136 1,988 939 453 406 369% 44% 35% 40% 50% 28% 20% 70% 10% 25% 20% 13% 0% 30% 10% 8,007 1,200 34 416 662 155 522 281 273 25 27 258 0 136 41 3.640 0.579 0.057 0.166 2.644 1.016 0.418 0.924 0.461 0.024 0.054 0.127 0.102 0.535 0.026 33% 10% 8% 7% 7% 5% 4% 2% 2% 2% 2% 2% 2% 1% 1% Dogus Otomotiv Erdemir Cimsa Aksigorta Aygaz Akcansa Tofas Is REIT Teknosa Arcelik TAV Ulker Isbank Anadolu Hayat Yapi Kredi Bankasi Albaraka Akbank Koc Holding Petkim Garanti Bank Bizim Toptan Enka Insaat Vakifbank Anadolu Sigorta Bagfas Ford Otosan Tat Gida 224 920 302 168 268 153 434 90 60 598 336 189 3,305 86 2,023 231 3,341 2,680 84 3,006 40 1,248 1,689 74 13 641 2 98% 89% 52% 36% 65% 94% 75% 35% 74% 50% 59% 71% 17% 58% 19% 14% 14% 15% 56% 14% 32% 22% 6% 0% 0% 0% 0% 220 820 156 61 175 144 325 32 44 300 199 133 555 50 388 32 467 407 47 425 13 272 100 0 0 0 0 1.000 0.234 1.154 0.198 0.583 0.754 0.650 0.050 0.402 0.444 0.548 0.389 0.123 0.143 0.089 0.035 0.117 0.160 0.047 0,101 0.317 0.085 0.040 0.000 0.000 0.000 0.000 14.1% 9.7% 9.7% 7.1% 7.1% 6.6% 6.1% 3.9% 3.8% 3.7% 3.5% 3.1% 2.9% 2.9% 2.6% 2.3% 2.0% 1.9% 1.9% 1.6% 1.5% 1.4% 1.2% 0.0% 0.0% 0.0% 0.0% Source: Company data, HSBC estimates * Assumes resolution to shareholder dispute within 2014 and distribution of accumulated dividends since 2011 ** Announced as of 5 March 2014 7 abc Equity Turkey 7 March 2014 FX exposure and valuation multiples FX exposure Net FX pstn (TRYm - 2013) Net cash pstn (TRYm - 2013) FX gain/(loss) from 10% weaker TRY Net profit impact* (of 10% weaker TRY) 0 -562 -114 354 -836 -95 0 -56 -12 0% -33% -5% BIM Kardemir Ulker Source: Company data, HSBC estimates * Impact on 2014e profits Net profit impact from 10% weaker TRY Net FX position as % of total assets Ulker -5% -33% Kardemir BIM -40% -30% -20% Ulker -4% -10% 0% BIM 0% 0% 10% Source: Company data, HSBC estimates Peer comparison – 2014e PE 25.0 29.6 26.8 21.4 17.8 20.0 13.8 15.0 7.3 10.0 6.0 7.8 5.0 0.0 BIM Kardemir 2014e PE -25% -20% -15% -10% Ulker Peer group Halkbank Peer comparison – 2014e EV/EBITDA 20.0 17.3 16.8 18.0 16.0 14.0 11.1 10.5 12.0 8.5 10.0 7.4 8.0 6.0 4.0 2.0 0.0 BIM Kardemir Ulker 2014e EV/EBITDA Source: HSBC estimates 8 -5% 0% Source: Company data, HSBC estimates 35.0 30.0 Kardemir -22% Source: HSBC estimates Peer group 0.9 0.8 Halkbank* Equity Turkey 7 March 2014 abc Sectoral outlook 2014 9 abc Equity Turkey 7 March 2014 Automotive Tough times ahead, particularly in H1, and for passenger car sales in Turkey Weak outlook in H1 We expect a weaker TRY, higher interest rates, increased auto taxes on 1 January and limitations imposed on car loans starting 1 February to hit passenger car sales, particularly imports, in Turkey in 2014. Consumer confidence plummeted to its lowest level in Feb-2014 since Feb-2010, down also 4.4% from January. We assume a 24% contraction in the Turkish car market this year after a 20% surge last year. For light commercial vehicles (LCV) we expect an 11% decline after a 15% decline in 2013. Overall, including heavy commercial vehicles, we project total market sales of 710k units, down 20% y-o-y. We are closer to the optimistic end of the 20-30% decline that automotive sector players project this year. H1 will likely see deeper contraction y-o-y to be followed by a relatively better H2, depending on also macro and political backdrop in the face of local (31 March) and presidential (June or July 14) elections. January saw domestic demand slide by 8% y-o-y, exports 11% and total production 10% y-o-y. Growth is likely to worsen in upcoming months as 2013 inventories (sold at big discounts) deplete and prices are adjusted up starting February. A potential positive development would be the introduction by state of a scrap incentive within the year, designed in particular to support sales of locally manufactured vehicles. We believe that local manufacturers (especially LCV) with relatively limited import business are at a relative advantage in this backdrop against others in terms of domestic market exposure. Given prospects of recovery in European vehicle markets, exporters offer the support against weaker domestic operations. Turkish autos – industry forecasts (x 000 units) Domestic sales Exports Production Passenger cars Light commercial vehicles Total demand* Passenger cars Light commercial vehicles Total exports Total Source: OSD, HSBC estimates 10 2013 % chg. 2014e % chg. 2015e % chg. 2016e 665 189 893 485 335 828 1,126 19% -15% 9% 17% 9% 14% 5% 507 168 710 533 369 911 1,179 -24% -11% -20% 10% 10% 10% 3% 570 190 800 576 398 984 1,286 13% 13% 13% 8% 8% 8% 9% 615 205 865 622 430 1,063 1,390 % chg. Jan-14 % chg. 8% 8% 8% 8% 8% 8% 8% 24 8 34 36 15 51 75 -6% -14% -8% 28% -48% -11% -10% Cenk Orcan* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 14 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Consumer durables Exports to compensate for sluggish domestic sales in 2014 Rising competitiveness with Lira may support exports Turkish white goods market grew by 6% in 2013 while industry exports declined by a slight 1%. Our expectations in 2014 are a flat domestic demand (6.8m units) and 5% growth in exports (16.9m units). Our sluggish domestic demand forecast is based on a slower economic growth this year (2.2% vs. 3.9% in 2013), especially consumer spending. A new legislation that took effect from 1 February 2014 has brought limit to credit card instalments in purchases of white goods and TVs, which is now maximum 10. Given that prior to this legislation the market practice was 10-12 months of instalments, this is likely to cause very limited impact on demand, which is why we do not project a decline in demand for white goods this year. That we said we would expect the replacement demand (which is said by industry players to represent roughly half of the total white goods sales in Turkey) to be negatively affected from weaker Lira, higher rates and declining consumer sentiment. goods manufacturers, 60-65% of total costs are in FX, which means the remaining TRY based 35-40% provides them with some competitive advantage against international competitors, particularly in Europe. For TVs, since more than 80% of costs are in FX, the need for price adjustments are higher than for white goods to pass on the currency impacts. However, volumes are likely to be supported by sports events such as the FIFA World Cup in Brazil in June-July 2014. Cenk Orcan* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 14 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations The start of 2014 by white goods industry was weak with January domestic sales down by 14% y-o-y versus a 7% rise in exports. Domestic demand was lower mainly because of the 51% fall in imports (vs 4% decline in domestically manufactured products). Exports were up by 7% and total production down 2%. Note that all data belongs to the members of BESD, White Goods Manufacturers' Association, therefore imports represent the products imported and sold in Turkey by the manufacturers themselves (i.e. pure-importers and non-BESD members such as Samsung, LG etc are not represented in this data). TRY’s depreciation supports local manufacturers against importers in the Turkish market as well as in exports via higher competitiveness. For white Turkish white goods – industry forecasts (in m units) 2013 yoy chg. Domestic sales (imports ratio) Exports Production 6.8 16% 16.1 21.9 6% 2pp -1% 1% 2014e yoy chg. 6.8 15% 16.9 22.7 0% -1pp 5% 3% 2015e yoy chg. 7.2 15% 17.9 24.0 5% 0pp 6% 6% 2016e yoy chg. Jan-14 yoy chg. 7.5 15% 18.8 25.1 4% 0pp 5% 5% 0.4 11% 1.2 1.5 -14% -9pp 7% -2% Source: BESD, HSBC estimates 11 abc Equity Turkey 7 March 2014 Aviation Overcoming obstacles in delivering high growth Growth momentum in place The Turkish aviation industry posted 14% growth in 2013 in terms of total airport passengers. Despite global phenomena such as the 2009 global financial crisis, Swine Flu in 2010 and Arab Spring in 2011, the 5-year CAGR over 2008-2013 was 13% and 10-year CAGR was 14%. Turkey demonstrates the power of emerging market growth as a driver of global air travel, capitalising on its advantageous geographical location, right at the heart of the East-West corridor of global air traffic. So far, domestic travels has propelled growth at 16% (5-year CAGR) annually versus international traffic growth of 11%, but the latter is gaining momentum thanks to Turkey’s growing status as an international transfer hub. Turkey offers notable upside potential for growth thanks to the underpenetrated air travel market with a “propensity to fly” ratio of 1.5 (the ratio of total passengers to a country’s population) versus 3.2 in Europe and 5.8 in the US. The Turkish Ministry of Transportation expects total passenger traffic to reach 375m by end-2023. This implies 10-year CAGR of c10% versus global industry forecasts of c5% for the next 10 years. Other than low penetration of air travel in Turkey, key long-term drivers are: supportive macro/demographic factors, growing tourism sector (number of foreign tourists up 10% in 2013), advantageous geographical location, aggressive growth by flag carrier Turkish Airlines and leading low-cost carrier Pegasus (with 300 total firm aircraft orders until 2022), lack of alternate transportation systems and competition (post liberalisation in 2003) bringing down fares for travellers. Key challenge is the airport capacity, particularly in Istanbul. The start to year 2014 was encouraging with strong passenger growth in January: 23% y-o-y in domestic, 21% in international and 22% total. Evolution of Turkey’s aviation market (number of airport passengers* in million] 120 100 10 yr CAGR domestic: 24% CAGR international: 11% CAGR total: 14% Iceland volcano Swine Flu Global financial crisis 38 32 80 29 Avian Flu 25 SARS 60 18 21 16 40 7 10 14 5 20 25 31 35 33 38 2004 2005 2006 2007 44 44 2008 2009 52 59 65 73 0 2003 International Domestic Source: DHMI, Ministry of Transportation * DHMI counts domestic passengers twice, numbers in chart corrected in that respect 12 2010 2011 2012 2013 Cenk Orcan* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 14 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Utilities Higher profitability under limited demand growth but strong pricing Supply problems on the rise see a second wave of increases in the latter part of the year due to TRY weakness. Turkish Utilities sector enters 2014 with significant supply related problems. In Q1, Turkey’s limited gas imports during a cold-related boost in consumption have resulted in spikes in spot market. Although gas volume availability will improve in Q2 onwards, lack of rainfall may result in lower hydro power output and will result in elevated spot market pricing. We expect gas-fired generators to benefit most from this environment due to their ability to operate swiftly in the spot market (fast startup/shut-down capability). Despite superior margins we expect hydro power generators to be affected adversely due to falling hydro potential with lower rainfall and snows. It is also possible for government to declare a force majeure and halt hydro power generation to preserve agricultural and potable water resources. In addition to movements in spot market, we expect a sharp hike in regulated gas and power tariffs in Q2 (in post-election term) due to covering for the FX losses of state-run gas entity BOTAS. Our base case for Q2 is 15% increase in gas prices and a following 10% increase in power prices. Although we do not include additional hikes in our base case, it is possible that we might Levent Bayar* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 17 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations The TRY’s sharp depreciation in the last three months also adversely affects the IRR of new investments and potential acquisitions (via privatisation) and could delay these types of deals in our view. Spot prices increased by 13% in Jan-Feb 2014 y-o-y with gas supply problems. We expect this trend to continue in Q2 and Q3 with hydro power problems 25.00 25,000.0 20.00 20,000.0 15.00 15,000.0 10.00 10,000.0 5.00 Power demand posted 5.1% growth in 2012 with 15% growth in spot prices 5,000.0 Power demand posted 1.5% growth in 2013 with flat spot prices 0.00 Power Consumption (GWh), RHS Feb-14 Jan-14 Dec-13 Oct-13 Nov-13 Sep-13 Jul-13 Aug-13 Jun-13 May-13 Apr-13 Mar-13 Feb-13 Jan-13 Dec-12 Nov-12 Oct-12 Sep-12 Jul-12 Aug-12 Jun-12 Apr-12 May-12 Mar-12 Feb-12 Jan-12 0.0 Spot Power prices (TRc/kwh) Source: TEIAS 13 abc Equity Turkey 7 March 2014 Real Estate Facing both political and financial challenges in 2014 Weathering the storm Under the higher rates, we look for 10% growth in mortgage volumes this year. Based on this assumption we look for 30% contraction in new mortgage loans y-o-y and 32% drop in mortgage financed house sales. Turkish real estate faces two big challenges in 2014: politics and financing. Political tension which has started with Dec-2013 events has links to real estate projects and contractors and can cause unforeseen risks to the companies that are developing projects in our view. We believe market is applying a political risk related on real estate companies and this will remain in place as long as uncertainty continues. The second significant problem that the sector faces is deteriorating financial affordability conditions. Following the TRY’s weakening in the last 3m and CBRT’s sharp rate hike on January 29 to compensate for that has caused a significant rise in mortgage rates (from 0.8% levels to 1.05% levels monthly). Although the level is still affordable for a sizeable chunk of the population, combined with the political uncertainty we believe financing deterioration will cause drops in sales numbers. On the commercial and retail operators’ side, we expect two main problems. First, recently changed credit card instalment regulation (which reduces or removes instalments on credit cards) will adversely affect footfall, mall turnover and therefore rental income. Second, the TRY’s depreciation will adversely affect FX-short positioned operators due to slower adjustment of FX operated assets. All in all, we look for a tough year for real estate sector and companies in 2014. We believe operators will be better positioned against developers as their operations are more resilient compared to developers. New mortgage volumes will drop sharply in 2014 following the increase in mortgage rates New Mortgage Volume (TRYbn) Source: BRSA, HSBC estimates 14 Mortgage Rate (7yr, fixed) Q4'2014e Q3'2014e Q2'2014e Q1'2014e Q4'2013e 0.00% Q3'2013 0 Q2'2013 2.00% Q1'2013 4.00% 2,000 Q4'2012 4,000 Q3'2012 6.00% Q2'2012 8.00% 6,000 Q1'2012 8,000 Q4'2011 10.00% Q3'2011 12.00% 10,000 Q2'2011 12,000 Q1'2011 14.00% Q4'2010 16.00% 14,000 Q3'2010 16,000 Q2'2010 18.00% Q1'2010 18,000 Levent Bayar* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 17 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Consumer Retail Consumption growth to slow, but discounters should gain Weakness apparent, but see opportunities from re-rating We see a risk of slowdown in consumption during H1 2014 for Turkish consumer companies as the unstable political environment along with the depreciating lira has led to a fall in consumer confidence. However, we believe that even in these hard times there are stocks that offer strong growth potential and many of them are currently trading at relatively cheaper valuations. We argue that the stocks with certain qualities (strong space growth, margin upside, consolidation gains) should return to trading at premium valuations when the macro outlook again turns positive. Food retailers: Our economists expect inflation levels in Turkey to remain high. This could be negative for players who have a presence solely in the supermarket format like Kiler, as inflation leads consumers to cut consumption. However, on the other hand, periods of high inflation have generally been beneficial for hard discounters in the country as consumers look for bargains. Weaker consumer sentiment should also intuitively lead to relatively better traffic for discounters. We see strong correlation between BIM’s like-for-like traffic growth and inflation levels in Turkey. Hence we see BIM outperforming its peers in terms of LfL growth and gain further market share in Turkey. Food & beverage producers: Weakening consumer sentiment in the country would hit food and beverage (F&B) producers negatively during 2014e. We prefer F&B producers with strong exposure to international markets for 2014 as consumption Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 12 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations levels in Turkey slow. Among the Turkish F&B producers under our coverage, Coca-Cola Icecek stands out as we estimate more than 40% sales and EBITDA to be generated from international operations in 2014e. Although Anadolu Efes has a larger share of revenues from international operations, its major market outside Turkey is Russia (more than 60% of international operations in 9M 13) and Russian beer sales are seeing a slowdown worse than Turkey. On the other hand, we expect weaker consumer sentiment to hit Ulker during 2014e, and forecast significantly lower volume growth for the company during the year. However, in our opinion Ulker should see further improvement in its margins during 2014e on the back of increasing contribution from the high-margin chocolate business, further efficiency gains from distribution system and lower sales returns. 15 abc Equity Turkey 7 March 2014 Steel Enjoying tail winds from a more competitive TRY Riding high on currency depreciation The Turkish Iron and Steel Producers' Association expects Turkish Steel production to grow 8% in 2014 driven by huge infrastructure spending and urban redevelopment projects along with a recovery in global economy. We expect domestic demand to remain strong and incremental production volumes to move out of the domestic market in the form of exports. TRY depreciation has translated into strong domestic steel prices for the domestic producers in 2013, despite declining steel product prices in USD terms. We believe TRY volatility has already peaked towards the end of January. That said, we expect higher realisations for domestic steel producers in 2014 based on the currency remaining at current levels along with expectations of HSBC's metals and mining team of further rises in steel products prices. The steel producers in our Turkey coverage (Kardemir and Erdemir) are primarily focussed on the domestic market. We currently don’t see the potential for a sharp deterioration in domestic demand despite the weaker TRY and higher interest rates. Even if that happens, we do not think the slowdown will impact volumes for these two producers given the increasing share of valueadded products, but it might force competitors to focus more on export markets. 16 On the other hand, Erdemir and Kardemir have the flexibility to price products in line with hard currency fluctuations; therefore, they enjoy increasing revenues when TRY depreciates. On the cost front, 30% of costs, such as personnel, energy and depreciation, are in TRY terms, therefore margins tend to expand during periods when the Turkish currency weakens. All in all, we expect 2014 to be a strong year for Kardemir, owing to TRY depreciation and increasing volumes as a result of strong demand and better product mix. Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 12 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Banks Trading at attractive valuations with headwinds within 2014 We see the weakness in 2014 earnings (20% lower than consensus; implying 16% fall in adjusted earnings) being negative for the sentiment, yet having low impact on valuations. We believe that Turkish banks’ average ROE should improve from 11.3% in 2014e to 16% by 2016e, despite a potentially slower lending growth (15% CAGR) NIM and ROAE forecasts for the large-cap banks under our coverage 4.5% 20.0% 15.9% 16.3% 14.9% 4.0% 15.5% 15.0% 3.5% 3.82% 2.5% 10.0% 3.72% 3.26% 3.85% 4.06% 3.0% 11.3% 2015e 2016e 2.0% 5.0% 0.0% 2012 2013e 2014e NIM new (LHS) Source: HSBC estimates ROAE new (RHS) Tamer Sengun* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 15 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations In our view the market is pricing in at least some of the following: a higher CoE, owing to macro and political risks attached to Turkey; a lower sustainable ROAE for Turkish banks; and/or attaching higher weight on 2014 earnings outlook than the sustainable earnings of Turkish banks. Unless we see further deterioration in macro estimates for Turkey for 2015 and onwards, we believe the current valuation levels are attractive in a long-term cyclical valuation approach. Net CoR and NPL ratio assumptions – we expect a rise in net CoR despite potentially lower NPL coverage in 2014 4.5% 1.00% 0.88% 0.87% 0.85% 0.90% 4.0% 0.71% 0.80% 3.5% 0.70% 3.0% 0.60% 2.5% 0.50% 2.0% 0.40% 1.5% 0.30% 1.0% 0.20% 0.5% 0.10% 0.0% 0.00% 2013e 2014e 2015e 2016e NPL ratio (LHS) 3.8% We see value in Turkish banks… …but market prices in a much negative macro scenario 3.4% There is much debate about how to value Turkish banks, with the sector having fallen c50% from the peaks of May 2013 and now trading at one of the lowest valuation multiples since 2009. The issues concern in particular the 2014 earnings outlook, potential sustainable earnings, the CoE attached to Turkish banks, the impact of potential macro and political risks on banks and how to differentiate banks in the current environment. 3.1% Current debate on Turkish banks… compared to the last five years. We use CoE of 15.5% (RfR: 10%, ERP: 5.5%), which already reflects most macro and political risks. Trading at a ‘14e PBV of 0.84x and ‘15e PE of 5.3x, large-cap Turkish banks are attractively valued. 2.5% A tough year ahead, but valuations are attractive CoR (net LLP/average loans) Source: HSBC estimates 17 abc Equity Turkey 7 March 2014 This page has been intentionally left blank 18 Equity Turkey 7 March 2014 abc Company Sections 19 abc Equity Turkey 7 March 2014 BIM (BIMAS TI) BIM should continue to see strong top-line growth in 2014 on the back of strong openings as well as increasing traffic considering a weak consumer sentiment as well as high inflation BIM’s robust growth, high profit returns, strong cost efficiency and a strong balance sheet justifies a premium in our opinion We raise our target price to TRY53 (from TRY51) reflecting the changes to our estimates and maintain our Overweight rating Investment case In 2014 we see BIM to benefit from continuing high inflation in Turkey, which our economists forecast to average at 7.5%. We believe that it will continue to benefit from high inflation levels as its prices are among the lowest even when compared to other hard discounters in the country. We believe that high private label penetration and market leader position should help the company to continue offering competitively lower prices. We estimate more than 13% selling space expansion for BIM in 2014. This, along with strong traffic and ticket growth, should yield c21% sales growth which we see as among the best in the region. We believe that hard discounters are the best format to be in in Turkey. BIM is the market leader in Turkish food retail as well as the only listed and probably the only profitable hard discount operator in the country. A weakness in consumer sentiment in Turkey could in our opinion help BIM gain further market share as consumers start looking for cheaper options which could in turn improve traffic. Even though there is increasing competition in this segment BIM’s 20 sales are still growing at close to 20% per year, with EBITDA margins stable at around 5% despite dilution from its international expansion strategies. We believe it has one of the best investment themes in the CEEMEA universe, given its potential to consolidate/ replace the unorganised food retail segment (still 55% of the food retail market) via organic expansion. BIM’s share price has seen significant weakness during last 3M due to increasing market concerns about the political risk in Turkey. The stock trades at a premium to peers (25% on 2014e PE) which we believe is justified considering the company’s better growth profile and stronger profit returns. However, following the recent sell-off BIM’s shares are trading at 15% discount to its historical average one-year forward PE which in our opinion presents a good buying opportunity. Financial outlook Following the Q4 13 results we have revised our estimates for BIM. During the results conference call the management guided that it plans to open 500 new stores in Turkey during 2014. Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 12 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 Historically, BIM has been able to achieve its store opening guidance and hence we raise our new store openings in Turkey to 500 (from 400 earlier) in 2014e. Although the management has guided for 15% to 20% top-line growth for 2014e, we believe that BIM should be able to achieve stronger growth on the back of larger number of openings during the year and estimate 21% topline growth for the company. This has a knock-on effect on our medium-term forecasts for the company. We keep our EBITDA margin estimates unchanged for the medium term. We have also raised our capex estimates for the company for 2014e in line with management guidance of TRY400m. We now estimate TRY402m capex in 2014e compared to TRY324m earlier. It is worth highlighting that of the TRY402m capex earmarked for 2014e, TRY80m will be spent on land acquisitions for warehouses to be opened from 2015 onwards while TRY90m will be spent on construction of warehouses to be operational in 2014e. Valuation and risks Our DCF-based valuation for BIM, using a WACC of 13.4%, a risk-free rate of 9.5%, an ERP of 5.5%, and beta of 0.70 (all unchanged), leads to a target price of TRY53 (up from TRY51). The increase in our target price reflects the changes to our estimates. Under our research model, for non-volatile Turkish stocks, the Neutral band is 5pp above and below the hurdle rate of 12.5%. Our target price of TRY53.0 implies a potential return of 23%, which is above the Neutral band; therefore, we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Risks The main downside risks include lower-thanexpected store expansion and LfL sales growth. Also, a possible failure in the international expansion could create pressure on the bottom-line. BIM – changes to estimates Key items (TRYm) ______ 2014e _______ ______ 2015e _______ Old New Chg. Old New Chg. Sales EBITDA Net profit EBITDA margin 14,039 14,379 705 723 487 457 5.0% 5.0% 2.4% 16,561 17,086 2.6% 822 847 6.6% 530 563 5.0% 5.0% 3.2% 3.0% 6.2% Source: HSBC estimates 21 abc Equity Turkey 7 March 2014 Financials & valuation: BIM Overweight Financial statements Year to Valuation data 12/2013a 12/2014e 12/2015e 12/2016e Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit 11,849 596 -111 485 17 526 526 -113 413 413 14,379 723 -135 588 17 616 616 -129 487 487 17,086 847 -165 682 18 712 712 -150 563 563 20,367 1,025 -195 830 22 865 865 -182 683 683 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 146 -238 -235 -220 -15 297 723 -402 -402 -289 -32 311 835 -344 -344 -341 -150 480 1,010 -372 -372 -394 -244 628 4 1,000 1,576 405 2,697 1,671 13 -392 999 503 5 1,267 1,820 437 3,210 1,985 13 -424 1,197 669 6 1,446 2,195 587 3,765 2,319 13 -574 1,419 741 6 1,623 2,714 831 4,462 2,727 13 -818 1,708 786 Balance sheet summary (TRYm) 12/2013a 12/2014e 12/2015e 12/2016e 1.1 21.1 24.9 31.6 13.1 2.3 1.8 0.9 17.3 18.7 26.8 10.9 2.4 2.2 0.7 14.6 16.7 23.2 9.2 3.7 2.6 0.6 11.8 15.4 19.1 7.6 4.9 3.0 Target price (TRY)53.00 EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Issuer information Share price Cash flow summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital Year to (TRY)43.00 Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst BIMAS.IS 5,919 55 Turkey Bulent Yurdagul 51 51 46 46 41 41 36 36 31 31 26 26 21 2012 2013 BIM 12/2013a Source: HSBC 12/2014e 12/2015e 12/2016e Note: price at close of 05 Mar 2014 Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS 19.6 21.3 22.0 25.4 24.6 21.4 21.3 21.1 17.2 17.9 18.8 17.2 16.1 15.6 15.6 19.2 21.1 21.8 21.4 21.4 25.2 80.9 45.6 17.1 5.0 4.1 24.5 79.2 44.3 16.5 5.0 4.1 24.2 76.4 43.0 16.1 5.0 4.0 26.7 85.9 43.7 16.6 5.0 4.1 -39.3 -0.7 -35.4 -0.6 -40.4 -0.7 -47.9 -0.8 1.36 1.36 0.76 3.29 1.60 1.60 0.95 3.94 1.85 1.85 1.12 4.67 2.25 2.25 1.30 5.63 Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 22 Bloomberg (Equity) BIMAS TI Market cap (TRYm) 13,055 Enterprise value (TRYm) 12513 Sector Multiline Retail Contact +90 212 3764612 Price relative Ratio, growth and per share analysis Year to 2 3 . 3 2014 Rel to ISTANBUL COMP 21 2015 abc Equity Turkey 7 March 2014 Kardemir (KRDMD TI) Kardemir ended 2013 on a strong note despite the difficulties faced in 1H13; the momentum gained in 4Q13 should sustain in 2014 as well The results of investments should start to take effect and abate the costs pressures and impact of the TRY depreciation Maintain OW(V) rating and target price of TRY1.55; offers good buying opportunity at current levels Investment case Kardemir has good product diversification, the impact of extensive capital spending should start to kick in and it is currently, even after the recent rally, trading at a steep discount to global peers and its own trade range. Kardemir D’s share prices have increased by c20% in the past month owing to strong 4Q13 performance, but are still 32% below from the peak of 2013 attained during month of April. The market had punished the stock prices as a result of dismal performance during H1 2013 owing to increase in operating costs. However, the operating performance improved significantly in second half of 2013. Though, we expect upside pressures on the costs to prevail in 2014 as well, due to higher inflationary scenario in Turkey, but the management’s costs cutting efforts should keep costs in check. The company has been running an extensive capital investment programme, which will not only increase its capacity but also bring in the cost savings. We should start seeing the results of the programme soon. We expect EBITDA CAGR of 20% during 2013-2016 period. Another benefit of extensive investments is improving product mix. The share of value added products have started to increase. We expect a better product mix and a favourable cost structure as well as growing capacity to drive profit growth in 2014-16. TRY weakness should result in higher domestic steel prices. We don’t see any major negative impact of the TRY depreciation on the top-line unless it starts to negatively impact the demand for the construction and /or railway investments in Turkey. We note that Kardemir has a net balance sheet short FX position and thus, impact of weaker TRY should affect the bottom-line. However, we believe that the benefits of the cost-cutting programs and better product mix should more than offset for the negative impact of TRY depreciation and difficult macro conditions in FY14. Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 12 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations At current levels, we see it as a good buying opportunity into Kardemir shares as the worst is past us and the recovery is underway. Kardemir D is currently trading at a steep discount of c51% discount to 2014e global steel sector PE and c17% on EV/EBITDA. 23 abc Equity Turkey 7 March 2014 Financial outlook We forecast revenue to grow at a CAGR of 23% over 2013-16, driven particularly by a 21% rise in sales volumes. We expect EBITDA growth at 20% CAGR, which is in line with revenue growth as we see margins to remain strong at 15-17% levels primarily driven by volume growth, better product mix and costs savings. Our HSBC economist expects the TRY to remain at the current weak levels in 2014, especially during the first half of the year. HSBC's metals and mining team have recently revised their price forecasts for the base metals, and the bulk commodities. There are no significant revisions in the outlook for the iron ore and coking coal prices, but have turned slightly positive on the outlook for the steel prices. The impact of higher steel prices in 2014 should be offset by higher raw materials costs in TRY terms and our higher assumptions of labour and wage costs in Turkey. The net profit should be negatively impacted due to the net FX short positions. We expect EBITDA margins to remain strong at 15% in 2014 and increase to 17% in 2015 as benefits of cost-cutting efforts and capital spending program starts to kick in. Our estimates for next two years (FY14-15) are well above consensus estimates. Though, we saw few consensus upgrades post robust 4Q results, but we believe that consensus is still not factoring in any benefits of the investment plans in the next two years. Valuation and risks We value Kardemir based on a 50-25-25 blend of its DCF value and global peer average 2014e PE and EV/EBITDA multiples to arrive at our 12- month target price of TRY1.55. Our DCF implies a 12-month value of TRY1.66/share, using a WACC of 14.2%, terminal growth rate of 7%, risk premium of 5.5%, beta of 1.1. In our multiple valuation, we 24 use the global peer average of PE and EV/EBITDA for 2014e and apply a 30% discount (to reflect Kardemir’s reliance on long steel) to the sector average PE of 15.2x and EV/EBITDA of 6.9x, which results in a value of TRY1.38/share. Thus, we arrive at a blended per share value of TRY1.52. We raise it by the cost of equity (15.5%) and apply a 12% D-share discount (based on the last 12-month average discount to other share types) to reach our 12-month target price of TRY1.55. Under our research model, for volatile Turkish stocks, the Neutral band is 10ppts above and below the hurdle rate of 12.5%. Our target price of TRY1.55 implies a potential return of 32%, which is above the Neutral band; therefore, we reiterate our Overweight (V) rating on Kardemir D shares. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Risks Kardemir’s earnings are highly sensitive to steel prices, and lower steel prices due to a possible downturn in macro conditions would be the main risk to our valuation and rating. Only four products make up 90% of Kardemir’s revenue and of this, c70% comes from rebar and billets alone. Any sudden fall in demand for these two products could be negative for Kardemir’s shares. Any negative developments in MENA markets could negatively affect the long steel market in these regions, where Turkish producers are the main players, even though Kardemir’s revenues are mainly driven by the Turkish market. Kardemir has net short FX position (ie higher FX liabilities in its balance sheet than assets) and potential weakness in TRY could be negative for the company. abc Equity Turkey 7 March 2014 Financials & valuation: Kardemir Karabuk Demir Financial statements Year to Overweight (V) Key forecast drivers 12/2013a 12/2014e 12/2015e 12/2016e Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit 1,812 329 -95 234 -57 122 122 -22 100 100 2,694 404 -107 297 -17 198 198 -30 168 168 2,758 474 -119 355 -19 320 320 -64 256 256 3,339 563 -121 441 -22 409 409 -82 327 327 Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 432 -485 -484 0 410 -311 313 -400 -400 -25 228 -120 402 -200 -200 -42 -95 154 423 -120 -120 -64 -179 254 15 1,584 776 8 2,585 385 844 836 1,243 1,982 15 1,877 1,091 156 3,192 474 1,220 1,064 1,386 2,352 15 1,958 1,199 252 3,382 450 1,220 968 1,600 2,471 15 1,957 1,410 331 3,591 497 1,120 789 1,863 2,554 Year to Average TL/USD Sales (mt) Average Rebar price (USD/t) Average Billet price (USD/t) Average Profile price (USD/t) Average iron ore price (USD/t) 12/2013a 12/2014e 12/2015e 12/2016e 1.90 1,567.9 596 532 697 136 2.16 2,017.8 611 581 713 125 2.08 2,267.8 579 545 676 105 2.00 2,777.8 603 567 703 101 Valuation data Year to 12/2013a 12/2014e 12/2015e 12/2016e 1.5 8.3 1.4 12.3 1.0 -16.3 0.0 1.1 7.4 1.3 7.3 0.9 -6.3 2.0 1.0 6.1 1.2 4.8 0.8 8.0 3.4 0.8 4.8 1.0 3.8 0.7 13.5 5.2 EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital Issuer information Share price (TRY) 1.17 Target price (TRY) Reuters (Equity) KRDMD.IS Market cap (USDm) 867 Free float (%) 48 Country Turkey Analyst Bulent Yurdagul 3 2. 5 1.55 Bloomberg (Equity) KRDMD TI Market cap (TRYm) 1,911 Enterprise value (TRYm) 2975 Sector METALS & MINING Contact +90 212 3764612 Price relative Year to 12/2013a 12/2014e 12/2015e 12/2016e 7.4 6.5 3.3 -49.0 -48.5 48.7 22.7 26.8 62.9 68.4 2.4 17.3 19.6 61.4 51.9 21.1 18.7 24.3 27.8 27.8 1.5 1 1 0.5 0.5 0 2012 2013 Kardemir Karabuk Demir Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt 2 2 1.5 Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS 2.5 2.5 Ratio, growth and per share analysis 1.0 10.8 8.4 6.3 18.2 12.9 5.8 67.2 2.5 51.7 1.2 11.6 12.8 6.3 15.0 11.0 24.3 76.7 2.6 29.5 1.1 11.8 17.1 8.4 17.2 12.9 24.4 60.5 2.0 41.6 1.3 14.1 18.9 9.9 16.8 13.2 25.7 42.4 1.4 53.6 0.09 0.09 0.00 1.18 0.16 0.16 0.02 1.31 0.24 0.24 0.04 1.52 0.31 0.31 0.06 1.77 2014 0 2015 Rel to ISTANBUL COMP Source: HSBC Note: price at close of 06 Mar 2014 Stated accounts as of 31 Dec 2005 are IFRS compliant Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 25 abc Equity Turkey 7 March 2014 Ulker (ULKER TI) We see robust top-line growth in the medium term which along with further margin improvements and potential international expansion should support the share price The stock is down more than 20% over the last three month period and currently trades at a discount to peers which in our opinion is a good entry point We raise our target price to TRY16.5 (from TRY16.0) and maintain our OW rating Investment case We have long maintained that we see strong long term growth potential for Ulker Biskuvi. The company should benefit from strong structural growth in chocolate market in Turkey which continues to remain well below developed markets in terms of per capita consumption. We believe that the growth of this sector in Turkey will benefit Ulker the most since it is the market leader by a significant margin. During 2013, Ulker saw strong volume growth of 13% on a y-o-y basis. Although we continue to see strong growth potential we remain conservative and estimate 6% volume growth for 2014e. However the company should continue to see strong margin improvements in the medium term. Over the last few quarters Ulker has seen significant improvements in margins on the back of on favourable raw material pricing, increasing contribution from higher margin products, more efficient distribution systems, lower sales returns and increasing contribution from high margin chocolate business. Although increasing cocoa 26 prices and an unfavourable TRY/USD exchange rate should imply margin pressures in the short term, we believe that the company will continue to see strong margin improvements in 2014-16e together with product price increases. We estimate 50bp y-o-y EBITDA margin improvement in 2014e for the company. Furthermore, Ulker is planning to acquire the biscuits, chocolates and cake operations owned by its parent in Saudi Arabia and Egypt by the end of H1 2014. These operations should add around USD150m net sales revenues (c12% of 2014e Ulker sales) with slightly lower margins compared to Ulker’s existing businesses. However, prospects are stronger with 2013 sales growth exceeding c20% levels. Depending on the valuation, the transaction may be value accretive, in our view. Financial outlook Following the Q4 13 results we have revised our estimates for Ulker. Although we keep our topline growth forecasts for the company more or Bulent Yurdagul* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 12 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations abc Equity Turkey 7 March 2014 less intact stronger-than-expected 2013 revenues led to a knock on impact on our medium term estimates. We now see c2% higher revenues for Ulker compared to our earlier estimates. We have also slightly raised our 2014e EBITDA margin estimates. We now see 12.0% EBITDA margin for Ulker in 2014e compared to 11.9% we estimated earlier considering the strong show in 2013. We keep our net profit estimates more or less intact as we now see higher financial expenses for the company in the medium term compared to our earlier forecasts. Risks The major downside risk that we see for Ulker is a drop in its biscuits and chocolate market shares, which may lead to weaker-than-expected top-line growth. Another significant risk is a weaker-thanexpected margin improvement due to increased raw material prices and intensified competition. Ulker – changes to estimates Key items (TRYm) ______ 2014e _______ ______ 2015e _______ Old New Chg. Old New Chg. Sales EBITDA Net profit EBITDA margin 2,969 3,023 353 363 238 239 11.9% 12.0% 1.8% 3.0% -0.6% 3,243 3,301 437 447 321 318 13.5% 13.5% 1.8% 2.1% -0.8% Source: HSBC estimates Valuation and risks We use an equally weighted DCF and peer multiples valuation to derive our target price of TRY16.5 (up from TRY16.0). Our DCF assumptions are: WACC of 11.3%, a risk-free rate of 9.5%, an ERP of 5.5% and a beta of 0.7 (all unchanged) lead to a per share valuation of TRY19.3 (up from TRY18.2). Our peer multiples valuation uses EV/EBITDA and P/E multiples based on market-cap weighted average multiples for EM peers leads to a per share valuation of TRY13.7 (down from TRY13.8). The increase in our target price reflects the changes to our estimates. Under our research model, for non-volatile Turkish stocks, the Neutral band is 5pp above and below the hurdle rate of 12.5%. Our target price of TRY16.5 implies a potential return of 33%, which is above the Neutral band; therefore, we reiterate our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. 27 abc Equity Turkey 7 March 2014 Financials & valuation: Ulker Biskuvi Overweight Financial statements Year to Valuation data 12/2013a 12/2014e 12/2015e 12/2016e Profit & loss summary (TRYm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit 2,748 315 -52 263 -240 279 279 -52 189 189 3,023 363 -57 307 -122 326 326 -60 238 238 3,301 447 -62 385 -45 432 432 -80 318 318 3,589 538 -67 470 -41 521 521 -97 384 384 Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 161 -78 306 -173 -136 -126 235 -91 -95 -133 -35 41 329 -99 -104 -166 -92 169 394 -108 -112 -223 -99 232 1 543 2,129 1,165 3,162 589 1,260 95 1,130 918 1 577 2,149 1,100 3,221 627 1,160 60 1,234 1,000 1 614 2,227 1,092 3,341 662 1,060 -32 1,386 1,088 1 654 2,413 1,190 3,572 692 1,060 -131 1,548 1,186 Balance sheet summary (TRYm) 12/2013a 12/2014e 12/2015e 12/2016e 1.4 12.3 4.2 22.5 3.8 -3.3 4.1 1.3 10.5 3.8 17.8 3.4 1.1 3.1 1.1 8.4 3.4 13.3 3.1 4.5 3.9 1.0 6.8 3.1 11.0 2.7 6.2 5.3 Target price (TRY)16.50 EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Issuer information Share price Cash flow summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital Year to (TRY)12.40 Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst ULKER.IS 1,923 40 Turkey Bulent Yurdagul Ratio, growth and per share analysis 12/2013a 20 18 16 14 12 10 8 6 4 2 2012 2013 Source: HSBC 12/2014e 12/2015e 12/2016e Note: price at close of 05 Mar 2014 Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS 17.4 44.5 54.5 14.6 13.0 10.0 15.4 16.4 16.7 26.0 9.2 23.0 25.5 32.5 33.9 8.7 20.3 22.2 20.6 20.7 2.9 22.4 18.1 7.2 11.5 9.6 1.3 7.5 0.3 170.6 3.2 26.0 20.1 8.3 12.0 10.1 3.0 4.3 0.2 392.2 3.2 30.0 24.3 10.7 13.5 11.7 10.0 -2.0 -0.1 3.2 33.7 26.2 12.3 15.0 13.1 13.1 -7.3 -0.2 0.55 0.55 0.50 3.30 0.70 0.70 0.39 3.61 0.93 0.93 0.49 4.05 1.12 1.12 0.65 4.53 Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (TRY) EPS Rep (fully diluted) HSBC EPS (fully diluted) DPS Book value 28 Bloomberg (Equity) ULKER TI Market cap (TRYm) 4,241 Enterprise value (TRYm) 3832 Sector FOOD PRODUCTS Contact +90 212 3764612 Price relative Ulker Biskuvi Year to 3 3 . 1 2014 Rel to ISTANBUL COMP 20 18 16 14 12 10 8 6 4 2 2015 abc Equity Turkey 7 March 2014 Halkbank (HALKB TI) The stock underperformed significantly due to the corruption investigation involving the former CEO of the bank in December 2013 The bank is one of the best positioned banks in Turkey from capacity to lend, regulations and interest rate sensitivity angles We reiterate our Overweight (V) rating and a target price of TRY17.2; the stock trades at significantly depressed valuation multiples of 2014e PBV of 0.87x and 2015e PE of 4.2x Investment case The key theme surrounding Halkbank, since 17 December, has been the involvement of Halkbank’s former CEO to a large-scale corruption investigation. Although Halkbank officially announced that the bank had not been involved in any illegitimate banking transactions and the regulators had not opened any investigations against the bank, the uncertainty surrounding the broader investigation led to a significant underperformance of the stock, which currently trades at 2015e PE of 4.2x and 2014e P/BV of 0.87x, with an expected 2015e ROAE of 19%. In the meantime, the bank’s plans to establish an Islamic banking subsidiary and sell a stake in its insurance subsidiaries are two positive developments for Halkbank. However, we believe that those positive catalysts have been overshadowed by the aforementioned event. Fundamentally, Halkbank is among the best positioned banks in Turkey for mid-to-long term lending growth (low loan to deposits ratio and high internal capital generation). In addition, we rate the bank as the least exposed to the recent and expected regulatory changes in Turkey. Having faced a relatively slower NIM expansion in declining interest rate environment in early 2013, we see Halkbank as having a relatively lower negative exposure to rising interest rates. Tamer Sengun* Analyst HSBC Yatirim Menkul Degerler A.S. +90 212 376 46 15 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Given that it has the highest 2015e ROAE (internal capital generation) among our Turkish banks coverage, as well as the lowest loan-todeposit ratio (84% as at Q4 2013), Halkbank has the ability to grow faster than the sector average without sacrificing margins. The same analysis is also valid within the CEEMEA universe, as the bank scores higher than average in our capacity to lend analysis. As we analysed in detail in our sector note on Turkey, dated 25 September 2013, Halkbank (thanks to a relatively high share of SME lending and lower share of credit card lending) scored the best (along with Bank Asya) and we judge it to be almost immune to the recent and proposed regulatory changes. 29 abc Equity Turkey 7 March 2014 Forecast changes Similar to our Turkish banking sector estimates, for Halkbank we look for NIM contraction (c30bps) and asset quality deterioration in 2014e to hit the bottom-line of Halkbank in 2014. We look for 15% fall in net income in Halkbank in 2014, which will result in ROE to fall to 16% from 21% in 2013. For 2015, on the other hand, we assume a rise in NIM (which will be still short of 2013) and flattish CoR y-o-y for Halkbank. Those estimates will bring up Halkbank’s 2015e ROE to 19% (higher than sector average estimated at 15%). Valuation and risks Despite the bank’s CEO being part of the corruption allegations initiated on 17 December 2013, there have been no investigations against the bank entity. Since 17 December, the stock has underperformed the BIST-banks index by c10%, which we believe is hard to justify with fundamentals. Essentially, Halkbank is among the most attractive Turkish banks with the lowest loan-to-deposit ratio, highest ROE and being almost immune to recent regulatory changes. The stock currently trades at a 2014e PBV of 0.87x (with an expected sustainable ROAE of 19%) and 2015e PE of 4.4x. We maintain our target price to TRY17.2, implying to a potential return of 54%. We rate the stock at Overweight (V). Halkbank is a Super GEMs Super 15 stock. We value Halkbank using a residual income valuation methodology, in which the intrinsic value of the bank is the sum of its current NAV and the present value of future residual income (returns achieved over the cost of equity). The model consists of three stages: the first includes residual income based on an explicit forecast period (2014e-17e), the second (maturity/ transition stage) assumes a constant growth rate for net profit (2018e-33e) and the final (declining stage) assumes a convergence of returns towards 30 the cost of equity (2034e-43e). Our cost of equity assumptions incorporate a 10.0% risk-free rate and a 5.5% equity risk premium. We use a beta of 1.0, which implies a cost of equity of 15.5% until the end of our valuation horizon in 2043e. Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate of 12.5% for Turkish stocks. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Risks We see Halkbank’s plans to establish its own credit card brand and scheme as the key downside risk to our forecasts and valuations. Although the bank’s management believes the credit card business will support profitability, we believe it could hurt the bank’s asset quality and cost-toincome ratio, which have been among the key drivers of Halkbank’s success so far. Although we see the spread of the investigation to Halkbank business entity as a low probability, a potential investigation and penalty owing to a wrongdoing by the bank is a key downside risk. abc Equity Turkey 7 March 2014 Financials & valuation: Halkbank Overweight (V) Financial statements Year to Core profitability (% RWAs) and leverage 12/2013a 12/2014e 12/2015e 12/2016e 4,829 930 244 865 6,869 -2,655 -436 -413 3,365 0 3,365 -614 0 2,751 2,751 5,247 1,062 -89 801 7,021 -2,885 -899 -321 2,916 0 2,916 -583 0 2,333 2,333 6,628 1,275 -214 929 8,618 -3,166 -1,005 -432 4,016 0 4,016 -803 0 3,213 3,213 7,616 1,491 -243 1,093 9,957 -3,482 -1,279 -490 4,706 0 4,706 -941 0 3,765 3,765 14,146 14,146 84,848 28,559 100,756 116,992 139,944 15,572 15,572 99,020 26,820 107,161 134,324 152,587 18,319 18,319 115,921 25,533 121,267 152,830 173,361 21,617 21,617 134,468 26,043 138,244 173,734 196,916 P&L summary (TRYm) Net interest income Net fees/commissions Trading profits Other income Total income Operating expense Bad debt charge Other HSBC PBT Exceptionals PBT Taxation Minorities + preferences Attributable profit HSBC attributable profit Balance sheet summary (TRYm) Ordinary equity HSBC ordinary equity Customer loans Debt securities holdings Customer deposits Interest earning assets Total assets Capital (%) RWA (TRYm) Core tier 1 Total tier 1 Total capital 105,431 12.7 12.7 13.9 119,177 12.8 12.8 14.4 137,538 13.0 13.0 14.7 157,533 0.0 13.4 14.9 12/2013a 12/2014e 12/2015e 12/2016e 8.8 26.6 -0.1 6.0 0.8 39.5 14.8 2.2 8.7 -1.8 -15.2 -15.2 -5.4 10.1 22.7 9.7 31.8 37.7 37.7 -10.6 17.6 15.5 10.0 18.7 17.2 17.2 37.7 18.0 38.7 0.6 84.2 2.6 2.1 1.7 0.0 80.6 20.8 41.1 1.0 92.4 3.1 2.7 2.1 0.0 80.0 15.7 36.7 0.9 95.6 3.4 2.9 2.3 0.0 80.0 19.0 35.0 1.0 97.3 3.7 3.2 2.6 0.0 80.0 18.9 2.20 2.20 0.44 11.32 11.32 1.87 1.87 0.42 12.46 12.46 2.57 2.57 0.37 14.66 14.66 3.01 3.01 0.51 17.29 17.29 Year to 12/2013a 12/2014e 12/2015e 12/2016e 5.2 0.3 0.9 -2.9 4.6 -0.5 3.0 7.0 20.6 4.7 -0.1 0.7 -2.6 3.7 -0.8 2.1 7.6 15.3 5.2 -0.2 0.7 -2.5 4.2 -0.8 2.5 7.6 17.9 5.2 -0.2 0.7 -2.4 4.4 -0.9 2.6 7.4 17.9 Net interest income Trading profits Other income Operating expense Pre-provision profit Bad debt charge HSBC attributable profit Leverage (x) Return on average tier 1 Valuation data Year to 12/2013a 12/2014e 12/2015e 12/2016e 5.1 3.3 1.0 6.5 3.9 6.0 3.4 0.9 9.8 3.7 4.4 2.6 0.8 13.8 3.3 3.7 2.2 0.6 16.9 4.6 PE* Pre-provision multiple P/NAV Equity cash flow yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Issuer information Share price (TRY)11.20 Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst HALKB.IS 6,348 25 Turkey Tamer Sengun Target price (TRY)17.20 Bloomberg (Equity) Market cap (TRYm) Sector Contact 5 (%) 3 . 6 HALKB TI 14,000 COMMERCIAL BANKS +90 212 376 4615 Notes: price at close of 06 Mar 2014 Ratio, growth & per share analysis Year to Year-on-year % change Total income Operating expense Pre-provision profit EPS HSBC EPS DPS NAV (including goodwill) Ratios (%) Cost/income ratio Bad debt charge Customer loans/deposits NPL/loan NPL/RWA Provision to risk assets/RWA Net write-off/RWA Coverage ROE (including goodwill) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS NAV NAV (including goodwill) 31 Equity Turkey 7 March 2014 Notes 32 abc Equity Turkey 7 March 2014 abc Notes 33 Equity Turkey 7 March 2014 Notes 34 abc Equity Turkey 7 March 2014 abc Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Cenk Orcan, Bulent Yurdagul, Tamer Sengun, Levent Bayar and John Lomax Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. 35 abc Equity Turkey 7 March 2014 *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Rating distribution for long-term investment opportunities As of 06 March 2014, the distribution of all ratings published is as follows: Overweight (Buy) 45% (33% of these provided with Investment Banking Services) Neutral (Hold) 38% (31% of these provided with Investment Banking Services) Underweight (Sell) 17% (29% of these provided with Investment Banking Services) Share price and rating changes for long-term investment opportunities Kardemir Karabuk Demir (KRDMD.IS) Share Price performance TRY Vs HSBC Recommendation & price target history rating history From Overweight (V) Overweight Neutral Target Price Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 To Date Overweight Neutral Overweight (V) Value 28 March 2011 15 May 2013 19 September 2013 Date 0.87 0.92 1.04 1.08 1.17 1.21 1.54 1.92 1.50 1.55 28 March 2011 27 April 2011 16 May 2011 24 October 2011 03 February 2012 04 October 2012 18 January 2013 15 May 2013 19 September 2013 21 October 2013 Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Price 10 Source: HSBC Source: HSBC Recommendation & price target history BIM (BIMAS.IS) Share Price performance TRY Vs HSBC rating history From Neutral Overweight Neutral Target Price 54 44 34 24 14 Source: HSBC Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 4 Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Price 10 Price 11 Price 12 Source: HSBC 36 To Date Overweight Neutral Overweight Value 28 November 2011 26 March 2012 15 May 2013 Date 29.50 31.00 32.00 36.10 38.00 40.60 48.00 49.00 57.00 46.00 50.00 51.00 19 May 2011 28 November 2011 11 January 2012 26 March 2012 16 May 2012 20 September 2012 18 February 2013 29 April 2013 15 May 2013 05 September 2013 21 October 2013 03 March 2014 abc Equity Turkey 7 March 2014 Halkbank (HALKB.IS) Share Price performance TRY Vs HSBC rating history Recommendation & price target history From Overweight (V) Overweight Overweight (V) Overweight Neutral Overweight Target Price 28 23 18 13 8 Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 3 Source: HSBC To Date Overweight Overweight (V) Overweight Neutral Overweight Overweight (V) Value 20 July 2011 01 December 2011 26 June 2012 24 September 2012 30 October 2012 07 February 2014 Date 16.30 17.40 14.00 15.00 16.10 17.00 20.00 16.70 22.00 23.00 24.50 28.50 23.00 20.50 17.50 17.20 15 April 2011 26 September 2011 01 December 2011 02 February 2012 02 April 2012 26 June 2012 03 September 2012 24 September 2012 30 October 2012 29 November 2012 25 January 2013 15 May 2013 17 July 2013 25 September 2013 23 January 2014 07 February 2014 To Date Neutral Overweight Underweight Neutral Overweight Value 28 November 2011 01 February 2013 29 April 2013 05 September 2013 03 March 2014 Date 5.90 6.00 6.40 8.90 11.75 12.00 13.00 14.20 12.30 16.70 16.00 28 November 2011 26 March 2012 16 May 2012 19 September 2012 01 February 2013 19 February 2013 29 April 2013 15 May 2013 05 September 2013 07 November 2013 31 January 2014 Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Price 10 Price 11 Price 12 Price 13 Price 14 Price 15 Price 16 Source: HSBC Ulker Biskuvi (ULKER.IS) Share Price performance TRY Vs HSBC rating Recommendation & price target history history From 17 N/A Neutral Overweight Underweight Neutral Target Price 15 13 11 9 7 5 3 Source: HSBC Mar-14 Mar-13 Mar-12 Mar-11 Mar-10 Mar-09 1 Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7 Price 8 Price 9 Price 10 Price 11 Source: HSBC 37 abc Equity Turkey 7 March 2014 HSBC & Analyst disclosures Disclosure checklist Company BIM HALKBANK KARDEMIR KARABUK DEMIR Ticker Recent price Price Date Disclosure BIMAS.IS HALKB.IS KRDMD.IS 43.00 11.20 1.17 05-Mar-2014 05-Mar-2014 05-Mar-2014 6 5, 6, 7 4, 5 Source: HSBC 1 2 3 4 5 6 7 8 9 10 11 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 31 January 2014 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. As of 31 January 2014, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. Additional disclosures 1 2 3 4 38 This report is dated as at 07 March 2014. All market data included in this report are dated as at close 05 March 2014, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. As of 21 February 2014, HSBC owned a significant interest in the debt securities of the following company(ies) :HALKBANK Equity Turkey 7 March 2014 abc Disclaimer * Legal entities as at 8 August 2012 Issuer of report ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, HSBC Yatirim Menkul Degerler A.S. 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MICA (P) 118/04/2013, MICA (P) 068/04/2013 and MICA (P) 077/01/2014 [407456] 39 abc Turkish Research Team Cenk Orcan Co-Head of Turkey Equity Research +90 212 376 46 14 [email protected] Tamer Sengun Analyst +90 212 376 46 15 [email protected] Bulent Yurdagul Co-Head of Turkey Equity Research +90 212 376 46 12 [email protected] Melis Metiner Economist +90 212 376 46 18 [email protected] Levent Bayar Analyst +90 212 376 46 17 [email protected]
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