May 22, 2008

MUTLU AKU

BUY

EQUITY RESEARCH

(Initiating Coverage) YTL2.21

Current Price (Mar 21, 2007)

RAYMOND JAMES - TURKEY

Ready to be charged •

Leader of the Turkish battery market… Mutlu Aku is the largest battery producer in Turkey and Eastern Europe. 85% of battery sales to the OEM market in Turkey are made by Mutlu Aku, while the company’s market share in the replacement market is around 40%.

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70K sqm land in Kartal region of Istanbul… Mutlu Aku has 70K sqm land in Kartal, where an urban transformation project is expected to be started by 2009. The company is in negotiations with parties to sell the land, which will generate at least US$70mn revenues according to conservative estimates.

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Focusing on exports to increase the capacity utilization rate... The company targets to increase its current capacity utilization rate of 60% by increasing its focus on exports. We expect that the company’s exports will grow by 9% CAGR until 2013E and the share of exports in total sales revenues will increase to 38% from its current level of 27%.

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We foresee 20% CAGR EBITDA growth until 2010E… According to our estimations the company’s sales revenues will grow by 7% CAGR until 2010E. With reduced average costs thanks to increasing economies of scale and assuming more stable lead price levels, we expect the EBITDA to grow by 20% CAGR until 2010E.

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Low near term multiples… Mutlu Aku’s 08E EV/EBITDA at 4.7x is 23% lower than the ISE-Industrial average of 6.1x. On the other hand, company shares trade at 7.4x 08E earnings at a 16% discount to the ISEIndustrial average of 8.8x.

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Risks… Significant lead price movements, vulnerability to fx rate changes and low trading volume are major potential risks.

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66% upside potential, BUY recommendation… We initiate coverage of Mutlu Aku giving a BUY recommendation with a 12mth target Mcap of US$168mn based on DCF valuation, which indicates 66% upside potential from current levels. However, if we include the real estate value in Kartal our target would increase by 48% to US$248mn.

US$101 Current Mcap (mn) YTL3.65 12-mth Target Price Target Mcap (mn) US$168 12-mth Forecast Returns (US$) Dividend Yield 0.0% Capital Appreciation 66.1% 12-mth Total Return 66.1% Stock Data MUTLU TI Ticker MUTLU.IS Sector Electric Products-Misc # of Shares (mn) 57 3M Avg. Trd. Vol. (mn) US$0.6 52-week Range YTL 1.76 YTL 2.94 Market Data 41,011 ISE 100 YTL/US$ 1.2374 Shareholder Structure Mutlu Holding 75% Free Float 25% Foreign Holding as % of Free Float 32% Financials (US$ mn) 2006 2007 2008E 2009E Net Sales 124 198 222 230 % ch yoy 16 60 12 3 Operating Profit 6 11 20 22 % ch yoy 257 85 84 14 EBITDA 12 18 28 30 % ch yoy 59 52 54 10 Net Income 7 11 14 16 % ch yoy 739 55 26 14 Operating Margins 2006 2007 2008E 2009E Operating Margin 4.6% 5.4% 8.8% 9.7% EBITDA Margin 9.5% 9.1% 12.4% 13.2% Net Profit Margin 5.6% 5.4% 6.1% 6.8% Dividend Yield 0.4% 0.0% 0.0% 0.0% Financial Ratios 2006 2007 2008E 2009E P/E (US$, x) 14.6 9.4 7.4 6.5 EV/EBITDA (US$, x) 10.5 8.4 4.7 4.2 EV/Sales (US$, x) 1.0 0.8 0.6 0.6 Debt/Equity (x) 0.39 0.58 0.39 0.42 Price Performance 1M 3M YTD YoY US$ Absolute 21% 0% 43% 14% ISE-100 Relative 20% 16% 28% 21% MUTLU-YTL

ISE-100 Relative

2.5

1.7 1.2

1.5 0.7 0.5 M-06

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"This publication has been prepared by Raymond James Yatirim Menkul Kiymetler A.S. and may be distributed by it and its affiliated companies (collectively "Raymond James") solely for the information of the customers of Raymond James. While reasonable care has been used in its preparation, this report does not purport to be a complete description of the securities, markets or developments referred to herein, and Raymond James does not warrant its accuracy or completeness. The information contained herein may be changed without notice. To the extent permitted by law, Raymond James, or its officers, employees or agents, may have bought or sold the securities mentioned in this report, or may do so in the future. Raymond James may perform investment banking or other services (including acting as adviser, lender or manager) for, or solicit investment banking or other business from, any company mentioned in this report. This report is not an offer, or solicitation of an offer, to buy or sell any security mentioned herein. This publication is for distribution in the United Kingdom only to persons of the kind described in Article 11 (3) of the Financial Services Act 1986 and may not be distributed to or passed on to any other class of persons, including private investors."

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0.2 M-08

Umut Ozturk [email protected] Tel: +90 212 349 2210

RAYMOND JAMES SECURITIES - TURKEY

TABLE OF CONTENTS

Investment Positives

3

Investment Risks

4

Valuation

5

Company Overview

8

70K sqm land in Kartal region

11

Analysis of 2007 financials

13

Turkish Battery Sector

14

Forecasts

16

Financials

18

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

INVESTMENT POSITIVES Strong market position… Mutlu Aku, the 75% subsidiary of Mutlu Holding, is the largest battery producer in Turkey and Eastern Europe. 85% of sales to the OEM market in Turkey are made by Mutlu Aku, while the company’s market share in the replacement market is around 40%. Declining lead prices ytd… Lead prices have declined by 13% ytd in 2008 and according to market expectations, they will continue to decline in the remainder of the year. Lead constitutes around half of cost of sales of the company and thus any decrease in lead prices affects the company’s gross margin positively. 70K sqm real estate in Kartal region… Mutlu Aku has a land of around 70K sqm within the Kartal Urban Transformation Project which is considered as the largest urban transformation project on a 555-hectar area in the world. The bill for urban transformation, which is currently at the stage of presentation to the Prime Ministry, is awaited to become law. The project is estimated to be started by January 2009. The value of Mutlu Aku’s land is estimated to be at least US$1,000 per sqm according to conservative estimates. Thus, if Mutlu Aku, which has been in negotiations with various parties for a long time, intends to sell the area, we should comfortably assume revenues of at least US$70mn from the sale. This amount is significantly high considering that the current Mcap of the company is at US$101mn. Focusing on exports to increase capacity utilization… Mutlu Aku’s capacity utilization rate is at around 60%. Since the domestic demand is not enough to fill the production capacity, the company intends to increase its exports. We expect that the company’s exports will grow by 9% CAGR until 2013E and the share of exports in total sales revenues will increase to 38% from its current level of 27%. Insignificant competition from imports… Although import brands were allowed to enter the Turkish battery market after 1983 in line with the expansion policy, share of imports in the Turkish battery market is still below 5%. The insignificantly low presence of imports can be linked to the quality difference in the favor of domestic producers. Growing Turkish automotive production is hope giving… As around 45% of battery production is sold to automotive companies, growth in automotive production also implies growth in battery sales. We expect that sales to OEM will grow by 7% CAGR until 2015E. The replacement market is also attractive… Around 55% of battery sales are made to the replacement market in which a battery is replaced every 4 years on average. We expect a 3% CAGR growth in sales to the replacement market parallel to the car park growth. Low near term multiples… Mutlu Aku trades at 7.4x 08E earnings at a 16% discount to ISE-Industrial average of 8.8x. On the other hand, the company’s 08E EV/EBITDA at 4.7x is 23% lower than the ISE-Industrial average of 6.1x.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

66% upside potential, BUY recommendation… We initiate coverage of Mutlu Aku with a BUY recommendation indicating a 12mth target Mcap of US$168mn based on our DCF valuation, which represents a 66% upside potential from current levels. Note however that we have not included the possible sale of the land in Kartal in our valuation, which is expected to bring at least US$70mn revenues with conservative estimations. If included, this would increase our target Mcap by 48% to US$248mn.

INVESTMENT RISKS Changes in lead prices… As the company’s main raw material is lead, which constitutes around 50% of its cost of sales, lead price changes have direct impact on Mutlu Aku’s costs. Although the company can reflect lead price increases to its sales prices to a great extent, any dramatic increase in lead prices affects the company’s gross margin negatively. Vulnerability to fx rate changes… Around 70% of sales revenues are in YTL, while the remaining 30% mostly in USD. On the other hand, around 60% of cost of sales are in USD and the remaining mostly in YTL. Thus the company’s margins are negatively affected from a depreciation of YTL against USD. Average USD/YTL rates have decreased by 15% yoy in 1Q08. Therefore, we expect that the favorable impact of fx rates together with raw material cost decreases thanks to declining lead prices will boost the profit margins in 1Q08. Significant short fx position… The company has a short fx position of US$33mn as of end of 2007. Thus, any devaluation of Turkish Lira against Euro and USD deteriorates the bottom line profitability with increased financial expenses. Increasing smuggled battery production… The biggest threat for the Turkish battery sector is the high presence of smuggled battery production, which constitutes around half of total battery sales. These small workshops, which produce low quality products, create unfair competition in the sector and operate without fulfilling the tax, insurance and quality requirements. Low trading volume… The stock is not very liquid given that it has a 3-month average daily trading volume of US$0.6mn. No dividend payout… Despite the increase in its profitability, Mutlu Aku has not paid any dividends in the last two years due to increased modernization and technology investments. With continued investments in coming years, we assume no dividend payments going forward. Sensitivity to the cyclical auto business… As around 98% of the battery production is sold to be used in automobiles, the battery industry is closely related with the developments in the auto sector. Thus, battery market is negatively affected when there is a downturn in auto industry i.e. a decline in auto production or sales.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

VALUATION Initiating coverage with a BUY rating... We value Mutlu Aku using a DCF analysis and calculate the 12-mth market capitalization as US$168mn. At the current market capitalization of US$101mn, the shares show a 66% total return potential over the next 12 months. Therefore, we initiate our coverage of Mutlu Aku with a BUY rating. DCF Valuation suggests a target market capitalization of US$168mn… Free Cash Flows (US$mn) Net Revenues Domestic Export COGS Gross Profit Gross Profit Margin Operating Expenses Operating Profit Operating Profit Margin Net other non-operating income Financial Expenses Profit Before Tax Tax Net Income Net Profit Margin EBITDA EBITDA Margin Depreciation Taxes Capital Expenditures Change in W/C Free Cash Flow PV of Free Cash Flow Net Present Value Terminal Growth Terminal Value Net Debt Fair Value - US$ Target Value - US$ Current Mcap dividend yield Upside Potential Source: ISE, RJS estimates

2006 2007 2008E 2009E 2010E 2011E 2012E 124 198 222 230 240 252 264 86 144 152 153 158 162 167 39 54 71 76 83 89 96 -94 -159 -171 -176 -183 -190 -198 30 39 51 54 57 61 65 24.3% 19.8% 23.0% 23.5% 23.9% 24.3% 24.8% -24 -29 -31 -32 -33 -35 -36 6 11 20 22 24 26 29 4.6% 5.4% 8.8% 9.7% 10.0% 10.5% 11.0% 3 4 4 4 4 4 4 -3 -1 -6 -6 -6 -6 -6 6 13 17 19 22 24 26 1 -2 -3 -4 -4 -5 -5 7 11 14 16 17 19 21 5.6% 5.4% 6.1% 6.8% 7.3% 7.6% 8.0% 12 18 28 30 33 35 38 9.5% 9.1% 12.4% 13.2% 13.5% 14.0% 14.4% 6 7 8 8 8 9 9 1 -2 -4 -4 -5 -5 -6 -4 -9 -10 -10 -10 -11 -11 -13 -26 10 -1 -2 -2 -2 -5 -20 23 15 16 17 20 -5 -20 20 12 11 11 11 98 1% 99 50 147 168 101 0% 66%

2013E 276 172 104 -207 70 25.2% -38 31 11.4% 4 -6 29 -6 23 8.3% 41 14.8% 9 -6 -11 -2 21 11

2014E 290 177 112 -215 75 25.7% -40 34 11.8% 4 -6 31 -6 25 8.6% 44 15.0% 9 -7 -11 -2 23 11

2015E 304 183 121 -224 80 26.2% -43 37 12.3% 3 -6 34 -7 27 9.0% 47 15.4% 10 -7 -11 -2 26 11

WACC Risk Free rate Risk Premium Beta Cost of Equity Risk premium for debt Cost of Debt Cost of Debt after Tax Weight of Equity Weight of Debt WACC Source: RJS estimates

2008E 2009E 7.0% 7.0% 8.00% 8.00% 6.5% 6.0% 6.00% 6.00% 90.0% 90.0% 1.0 1.0 12.9% 12.4% 14.2% 14.2%

2013E 8.00% 6.00% 1.0 14.2%

2014E 8.00% 6.00% 1.0 14.2%

2015E 8.00% 6.00% 1.0 14.2%

MUTLU AKU – Initiation of Coverage

2010E 8.00% 6.00% 1.0 14.2%

2011E 8.00% 6.00% 1.0 14.2%

2012E 8.00% 6.00% 1.0 14.2%

8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 72% 63% 72% 71% 69% 69% 69% 69% 69% 69% 28% 37% 28% 29% 31% 31% 31% 31% 31% 31% 11.0% 10.2% 12.0% 11.9% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8%

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RAYMOND JAMES SECURITIES - TURKEY

Major DCF Assumptions •

We assume a 14% yoy decrease in USD denominated global lead prices in 2008. Note that lead prices declined by 13% ytd in USD terms.

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We assume constant level of lead prices in USD terms after 2008E going forward.

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We do not include the possible contribution from the sale of 70K sqm land in Kartal region in our valuation. However, if the land is sold we should expect at least US$70mn revenues from the sale according to conservative estimates, which would increase our target Mcap by 48% to US$248mn.

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Our DCF based target market capitalization of US$168mn was calculated with an assumed WACC of 11.8%, and terminal growth rate of 1%.

Sensitivity analysis… We ran a sensitivity analysis with different terminal growth rates and WACCs. A 100 bps increase in WACC would bring a market cap of US$148mn with a perpetuity growth rate of 1%. On the other hand, a 100 bps decrease in the terminal growth rate would lead to a market cap of US$158mn, assuming a WACC of 11.8%. Sensitivity Analysis - Target Market Cap (US$ mn) WACC(%) 10.8 12.8 Growth(%) 11.8 0 181 158 140 195 148 1 168 2 211 181 159 Source: RJS estimates

Changes in lead prices have a major impact on margins and valuation… Although we assume a 14% yoy decline in global lead prices in 2008 and then keep them constant going forwards, we find it useful to make a sensitivity analysis for different lead price changes after 2008. According to our analysis, if lead prices drop by 5% yearly and settle down to US$1,500 by 2015, our target MCAP reaches US$221mn. On the other hand, if lead prices are increased by 5% yearly, reaching US$3,100 by 2015, our target MCAP declines to US$92mn. The impact of lead price changes Annual Lead Price Change -5% 0% 5% Source: RJS estimates

MUTLU AKU – Initiation of Coverage

Gross Margin 2009E 2010E 24.5% 25.6% 23.5% 23.9% 22.5% 22.2%

EBITDA Margin Target Mcap 2009E 2010E (US$mn) 14.1% 14.9% 221 13.2% 13.5% 168 12.3% 12.2% 92

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RAYMOND JAMES SECURITIES - TURKEY

Lead prices calmed down in 2008 after a jump in 2007… Lead prices doubled in USD terms in 2007 due to the change in Chinese export taxes and the termination of exports from a mine (Ivernia) in Australia, which constituted around 3% of global lead production. These two factors, which resulted in a decrease in lead supply, as opposed to increasing battery demand especially from China increased the supply shortage which in turn showed itself with an increase in lead prices. Following the substantial hike in 2007, lead prices decreased by 13% ytd in 2008, which might be related to the restart of exports of Ivernia mine in Australia. We expect 14% yoy decrease in lead prices in 2008 and assume stable lead prices going forward after 2008 in our valuation, although further decrease in lead prices are likely according to market expectations. Lead Prices (in USD per ton) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 A-08

J-08

O-07

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Source: Bloomberg

World Lead Supply/Demand (million tons) 8.5 8.3 8.1 7.9 7.7 7.5 2005

2006 Lead Supply

2007

Lead Demand

Source: Brook Hunt, ILZSG

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

COMPANY OVERVIEW 85% market share in the OEM market… Mutlu Aku is the largest battery producer in Turkey and Eastern Europe. 85% of total battery sales to the OEM market in Turkey are undertaken by Mutlu Aku. 40% market share in the replacement market… The domestic market for starter batteries is served by three big sized, approximately twenty medium and 200 small sized manufacturers. Mutlu Aku, together with the brands Celik Aku, Povver Aku and Halk Aku manufactured within the same company, is the market leader with a 40% share in the replacement market. Yigit Aku and İnci Aku together have a total of 20% market share, while small and mid-size producers form around 40% of the replacement battery market. Market shares in replacement battery market

Small producers, 10% Mutlu Aku, 40% Mid-size producers, 30% Inci Aku & Yigit Aku, 20%

A wide distribution network… Mutlu Aku satisfies the demand of its domestic customers with its 79 main dealers and 5,000 sales points all around Turkey. Mutlu Holding holds a 75% stake in the company… In 1996 Mutlu Aku was relocated from Kartal to Tepeoren-Tuzla. Mutlu Aku is the firstly established company of Mutlu Holding, and acts as the driving power of the group, which also includes Mutlu Plastik and Turker Melting and Refinery. Mutlu Aku fulfills some of its plastics needs from Mutlu Plastik and melted lead from Turker Melting and Refinery. Currently Mutlu Holding holds a 75% stake in Mutlu Aku, while the remaining 25% shares trade on the ISE. Mutlu Aku's shareholder structure

Free Float, 25%

Mutlu Holding, 75% Source: ISE

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

PRODUCTION Production capacity of 4 million units… With the opening of the new 230K sqm facilities in 1996 in Tuzla, Mutlu Aku has become a giant in the battery sector. The company has a production capacity of around 4 million units a year. Battery production takes place at the Tepeoren facilities. Within the same facilities, derivatives of lead such as red lead and litharge that are important raw materials for glass and ceramics industries are also produced. Smelting and refinery plants are located in Kutahya-Gediz and provide smelted pure lead for Mutlu Aku. Capacity utilization rate ranges between 60% and 90% within a year because of the seasonality of sales. PRODUCTS •

Starter Batteries

Starter batteries are the batteries that are used in automobiles. 12 Volt and 6 Volt starter batteries are produced for motor vehicles. Around 98% of company’s sales revenues come from starter battery sales. •

Stationary Batteries

Stationary batteries are industrial batteries. They are used for purposes that require continuous power supply such as communications, transportation, hospitals, power plants, control systems, irrigation and pump stations, safety lights, solar cells. Mutlu renders service to almost all telephone exchanges and radio-link stations of Turk Telekom throughout Turkey, and to highly strategic sites such as hydroelectric and thermal plants that belong to Turkish State Electric Company and private sector. •

Traction Batteries

Traction batteries are used in freight loading and transportation, power vehicles, packaging platforms and in lifting, automatic steering vehicles and in some other special DC moving systems. SALES Total sales volume of Mutlu Aku is shared equally by exports, sales to the OEM and sales to the replacement market. Domestic Market Two thirds of Mutlu Aku’s total sales volume comes from the domestic market. Among the company’s customers are Ford Otosan, FIAT-Tofas, Toyota, Oyak Renault, Otoyol Iveco, Hyundai, Mercedes, A.Isuzu, Otokar, Aksam Kamyon, MAN, Temsa, Turkish Armed Forces, Turk Telekom, TCDD, Turkish State Company of Electricity, Turkish State Company of Highways, as well as state owned and private coal mining companies.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

Exports 30-40% of production at Mutlu is exported and the biggest share of export goes to the Russian Federation, Turkic Republics, and CIS countries. The company also started to export to Iran in 2007. Exports which were around US$24mn in 2004 exceeded US$54mn by 2007. Mutlu Aku's export sales 60

963

1,053

988

791

40 20

23.9

27.9

2004

2005

38.7

54.4

600 400 200 0

0

Revenues (US$mn)

1,200 1,000 800

2006

2007

Volume (thousand units)

Source: ISE

Cost Structure Raw materials constitute around 75% of cost of sales, while general production costs (including energy and depreciation) 19% and direct labor 7%. Lead is the most important raw material for the company and has around 65% share in total raw material costs, while plastics and chemicals constitute around 30% and 5% of raw material costs, respectively. Around 80% of raw material costs are in USD currency, while the remaining 20% in YTL. Breakdown of Cost of Sales

Breakdown of Raw Material Costs

General production costs, 19%

Chemicals, 5% Plastics, 30%

Direct Labor, 7% Raw Materials, 74%

Lead, 65%

Source: ISE

Decreasing dependency on lead imports… With the expansion of refinery and smelting facilities in Gediz in 2006, the amount of pure lead provided by scrap batteries increased, reducing the dependency on high import lead prices, albeit to a small extent. Investments Mutlu Aku invests around US$2-3mn a year for technology modernization purposes. The company plans to invest around US$7mn in 2008 for capacity expansion in an effort to increase its exports in coming years.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

The company has 70K sqm land in Kartal region Kartal Urban Transformation Project… The worldwide famous architect Zaha Hadid won the Kartal Urban Transformation Project in 2006, considered as the largest urban transformation project on a 555-hectar area in the world. There are more than 100 plants and 40 buildings on the area which belong to companies including Eczacibasi Holding, Koc Holding, Sabanci Holding, Yapi Kredi Bank, Assan, Mutlu Aku, ABB, Habas and Family Finans. However, a large portion of the land is idle. Target of the project… The rationale behind the transformation project is to rescue and utilize the land which became idle after the industry left the region in recent years. This project for the transformation of industrial areas, carried out jointly by the Istanbul Metropolitan Municipality and the Kartal Municipality covering Kartal and Pendik regions, will create a new region in Istanbul; not only for business people and the Kartal Municipality, but also for the residents. 53% of the properties in the region are owned by the state while the remaining 47% by the private sector.

What will be built on the land? According to the project prepared by Zaha Hadid, a new metropolis will be created, binding railway, roads and residence areas. Work and residence towers are also included in the project. Around the towers, parks will be built without leaving any free space. The majority will be work towers and the minority residence buildings. There will also be social area, opera house, park, hotels, restaurants and a yacht harbor. In the coming stages of the project, which is going to provide employment opportunities for 100,000 people and residence opportunity for 2 million people, Turkish architects will also be involved. The project, which is expected to cost around US$10bn, is targeted to be completed within seven-eight years, considered to be a quite short period of time for such a project. With this transformation project, unused industry area will be transferred to trade, tourism, services and travel functions. When will the project get started? The plans of the project prepared by Zaha Hadid are expected to be finished by Istanbul Metropolitan Municipality this year. The project, which is expected to attract up to US$20bn investments, is targeted to get started by January 2009 after Kartal municipality makes the application development plan.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

Mutlu Aku has 70K sqm land within the Kartal project… Mutlu Aku has a land of around 70K sqm on the area. The bill for urban transformation, which is at the stage of presentation to the Prime Ministry, is awaited to become law. The value of the area is estimated to be at least US$1,000 per sqm according to conservative calculations. Thus, if Mutlu Aku, which has been in negotiations with parties for a long time, intends to sell the area, we should comfortably assume revenues of at least US$70mn from the sale. This amount is significantly high considering that the current Mcap of the company is at US$101mn.

MUTLU AKU – Initiation of Coverage

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ANALYSIS OF 2007 FINANCIALS Huge increase in sales prices boosted the top line… Net sales of Mutlu Aku increased by 60% yoy and reached US$198mn in 2007. The significant growth in net sales was mainly thanks to the increase in average sales prices by 50%. Sales volume also grew by 6% yoy and reached 3 million units. Doubling lead prices caused deterioration in the gross margin… Average cost of sales increased by 59% yoy, exceeding the average sales price increase of 50%. The 100% yoy increase in lead prices was the major factor behind the significant increase in cost of sales. Thus, since the increase in costs could not be fully reflected to sales prices, the gross margin declined to 19.8% in 2007 from 24.3% in 2006. EBITDA margin decreased only slightly to 9.1% in 2007 from 9.5% in 2006 thanks to increasing scale economies. High EBITDA and bottom-line growth in recent years… The significant top line growth in 2007 thanks mainly to the increase in sales prices also resulted in profitability growth. EBITDA increased to US$18mn in 2007 from US$12mn in 2006. Net income rose to US$11mn in 2007, which was US$7mn in 2006. Net debt increased to US$50mn… In an expectation of increasing lead prices Mutlu Aku stockpiled raw materials in 2007. Thus, Mutlu Aku’s inventory level increased from US$23mn in 2006 to US$61mn in 2007, which pushed up company’s short-term financial debt from US$17mn in 2006 to US$41mn in 2007. Net debt of the company rose to US$50mn in 2007 from US$22mn in 2006. Mutlu Aku Figures (US$mn) Sales Volume (mn units) Net Sales Domestic Exports Gross Profit Gross Margin (%) EBITDA EBITDA Margin (%) Net Income Net Margin (%) Net Debt Source: ISE

MUTLU AKU – Initiation of Coverage

2005 2.5 107 80 28 25 23.1% 7 7.0% 1 0.8% 17

2006 2.8 124 86 39 30 24.3% 12 9.5% 7 5.6% 22

2007 07/06 ch. 3.0 6% 198 60% 144 68% 54 41% 39 30% 19.8% 18 52% 9.1% 11 55% 5.4% 50 124%

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TURKISH BATTERY SECTOR Battery production in Turkey has a growing trend… Battery production grew by 5% CAGR in the last 3 years and reached 5.8 mn units in 2007. Provided that the capacity utilization in the battery sector is low at around 60% and the growth in exports is promising, we think that the Turkish battery sector has growth potential. Battery Production in Turkey ('000 units) 5,800 5,600 5,400 5,200 5,767

5,000 5,354

4,800 4,600

5,459

4,844

4,400 4,200 2004

2005

2006

2007

Source: Company

Battery exports increased by 20% CAGR in the last 3 years… Low capacity utilization rates and the slightly growing domestic market have motivated battery producers to focus on increasing their exports. Thus, exports increased by 20% CAGR from 2004 to 2007, while the share of exports in total sales volume increased from 19% to 28%. Battery sector sales ('000 units) Domestic sales Exports Total Sales Share of exports (%) Source: Company

2004 3,932 912 4,844 19%

2005 4,031 1,173 5,204 23%

2006 4,050 1,480 5,530 27%

2007 04-07 CAGR 4,120 2% 1,566 20% 5,686 5% 28%

Seasonality effect… Around 40% of sales are generated in the first half and 60% in the second half. Seasonality in battery sales 33%

35% 27%

30% 25%

19%

20%

20% 15% 10% 5% 0% 1Q

MUTLU AKU – Initiation of Coverage

2Q

3Q

4Q

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Problems related to the Turkish battery sector: •

Lead is imported from abroad… Since lead, the main raw material used in battery production, cannot be procured from the Turkish market in pure format or in affordable costs, it is imported from abroad to a great extent. The increase in lead prices in USD terms which are determined according to the London Metal Exchange has negatively affected the profitability of the sector in recent years.

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Scrap battery imports are forbidden… It is much more cost effective to produce new batteries from scrap batteries than to produce using imported pure lead. However, since scrap battery imports are forbidden in Turkey there is not much choice other than accepting the high priced pure lead imports.

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Increasing oil and energy prices affect the sector negatively… The major raw material in battery production after lead is plastic, which is a derivative of oil. The recent oil price hikes have increased the costs of battery production and thus affected the sector negatively. In addition, recent energy cost increases including electricity, natural gas and water prices also increased the costs in the sector.

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Unfair competition from smuggled producers… Small workshops that operate illegally with stolen energy, no tax and insurance payments create unfair competition for the big producers in the sector. Share of small and mid-size producers in the battery market is around 40%.

•

Sensitivity to the cyclical auto demand… As the battery industry is directly influenced by the developments in the auto sector, battery market is negatively affected when there is a downturn in auto industry.

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES - TURKEY

FORECASTS We expect the Turkish battery market to continue with its growth trend… Battery sales in Turkey increased to 4.1 mn units in 2007, up from 3.6 mn units in 2003. In our view, the domestic battery market will continue to grow in coming years and reach 4.5 mn units by 2010E thanks to the growing car park and increasing automotive production. Domestic battery market projections (thousand unit sales) 5,000 4,000 3,000 2,000 1,000 0 2006

2007

OEM

2008E

2009E

2010E

Replacement market

Source: Company data, RJS estimates

Battery exports are also likely to grow… With higher fx rates and the increasing battery demand in the world, we foresee that battery exports will grow in coming years. According to our estimates, battery exports will grow by 10% CAGR until 2010, exceeding 2 million units. Turkish Battery Exports (thousand unit sales) 2,500 2,000

1,480

1,566

1,782

1,944

2,098

1,500 1,000 500 0 2006

2007

2008E

2009E

2010E

Source: Company, RJS estimates

We foresee 20% CAGR EBITDA growth for Mutlu Aku until 2010E… According to our estimations the company’s sales revenues will grow by 7% CAGR until 2010E. With reduced average costs thanks to increasing economies of scale and assuming more stable lead price levels, we expect the EBITDA to grow by 20% CAGR until 2010E. CAGR estimates (US$mn) Net Revenues Domestic Export Gross Profit Operating Profit Net Income EBITDA Source: RJS estimates

MUTLU AKU – Initiation of Coverage

07-10E 07-15E 7% 5% 3% 3% 15% 11% 13% 9% 29% 16% 15% 11% 20% 12%

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RAYMOND JAMES SECURITIES - TURKEY

Increasing profit margins going forward… We foresee that the company’s profit margins will increase in 2008 thanks to a decrease in average costs through declining lead prices. We expect the gross and EBITDA margins to increase to 23% and 12% in 2008, which were 20% and 9% in 2007 respectively. Net margin will also be higher than that in 2007 in our opinion, although we expect an increase in financial expenses this year due to increasing fx losses. We assume that lead prices will remain stable after 2008 and that margins will continue to increase with the easing in pricing in the growing market. With the positive contribution of increased economies of scale, the company will have higher EBITDA margins going forward according to our forecasts. Mutlu Aku's profit margins Gross Margin Operating Margin EBITDA Margin Net Margin Source: ISE, RJS estimates

MUTLU AKU – Initiation of Coverage

2006 24.3% 4.6% 9.5% 5.4%

2007 2008E 2009E 2010E 19.8% 23.0% 23.5% 23.9% 5.4% 8.8% 9.7% 10.0% 9.1% 12.4% 13.2% 13.5% 6.1% 6.8% 7.3% 7.6%

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RAYMOND JAMES SECURITIES - TURKEY

FINANCIALS Mutlu Aku's Balance Sheet (US$mn) Current Assets Cash and Cash Equivalents Short-Term Trade Receivables Inventories Other Current Assets Long Term Assets Tangible Fixed Assets Total Assets Short Term Liabilities Short-Term Financial Loans Short-Term Trade Payables Other Short-Term Payables ST Advances Received Other Short-Term Liabilities Long Term Liabilities Long-Term Financial Loans Long-Term Trade Payables Other Long-Term Liabilities Shareholders' Equity Total Paid-in Capital Reserves and Other Items Current Year Income /(Losses) Retained Earnings /(Acc. Losses) Total Liabilities and S.holders' Equity

2006 54 4 25 23 1 57 57 111 28 19 3 1 1 4 15 7 0 7 68 40 20 7 1 111

2007 101 5 29 61 6 72 71 173 58 44 5 1 2 6 20 11 0 9 95 49 33 12 1 173

2008E 74 4 33 34 4 63 63 137 34 21 4 1 3 6 19 12 0 8 83 42 28 13 1 137

2009E 73 7 31 32 3 59 59 132 35 20 5 1 3 6 19 13 0 7 78 38 25 14 1 132

Mutlu Aku's Income Statement (US$mn) Net Sales Cost Of Sales GROSS PROFITS/LOSSES Operating Expenses NET OPERATING PROFITS Income & Expenses From Other Operations Financial Expenses INCOME BEFORE TAXES Taxation on Income NET PROFIT AFTER TAXES Source: ISE, RJS estimates

2006 123.9 -93.7 30.1 -24.4 5.7 3.2 -3.0 6.0 1.0 7.0

2007 197.9 -158.8 39.2 -28.5 10.6 3.9 -1.4 13.1 -2.3 10.8

2008E 222.3 -171.3 51.0 -31.5 19.6 3.9 -6.5 17.0 -3.4 13.6

2009E 229.6 -175.7 53.9 -31.6 22.3 3.6 -6.4 19.4 -3.9 15.5

MUTLU AKU – Initiation of Coverage

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RAYMOND JAMES SECURITIES – TURKEY

Raymond James Securities – Turkey_ Rating definitions: 1-Strong Buy

: The analyst has high conviction that the stock will appreciate and produce a total return of at least 25% in US$ terms over the next 12 months.

2-Buy

: The analyst believes that the stock will appreciate and produce a total return of at least 15% in US$ terms over the next 12 months.

3-Hold

: The analyst believes that the stock will produce a total return of less than 15% in US$ terms over the next 12 months.

4-Sell

: The analyst believes that the stock will generate a negative return in US$ terms over the next 12 months.

RAYMOND JAMES - TURKEY

EEM MEER RG GIIN NG GM MA AR RK KEETTSS TTEEA AM M

TURKEY - KAZAKHSTAN

Raymond James Securities - Turkey

Research

Phone: 90 212 349 2000 Fax: 90 212 352 5204

Ali Riza Incekara, CFA

Head of Research Strategy, Conglomerates

[email protected]

Ozgur Altug

Chief Economist

[email protected]

Berna Kurbay, CFA

Director Media, Auto, Consumer Durables, Retail

[email protected]

Basak Engin Dinckoc

Director Telecom, Steel, Electricity, Petroleum & Derivatives

[email protected]

Funda Afacan

Director Banks

[email protected]

Serap Mutlu

Director Conglomerates, REITs, Glass

[email protected]

Banu Camlitepe

Senior Analyst Insurance, Cement, Food, Textiles

[email protected]

Erdem Hafizoglu

Senior Analyst Mining, Pharmaceuticals, Small Caps

[email protected]

Umut Ozturk

Analyst Automotive, Beverage, Economy, Database management

[email protected]

Afsin Ozdemir

Analyst Database management, Logistics, Aviation, Sports

[email protected]

Can Ozcelik

Junior Equity Analyst Quantitative Analysis

[email protected]

Sales – Turkey

Phone: 90 212 349 2050 / 349 2060 Fax: 90 212 352 5204

Gulhan Ovalioglu

Head of Sales

[email protected]

Mine Onur

Director of Sales

[email protected]

Banu Buyukoguz

Director of Sales

Cenk Erdal

Director of Sales

Ali Balkan

Director of Trading

[email protected] [email protected] [email protected]

Tunc Cakan

Director of Trading

Mahmut Dermancioglu

Director of Trading

[email protected] [email protected]

Sales-New York

Raymond James & Associates, Inc.

Selim Cevikel

Manager Phone: 1 212 856 5411

Alper Uyanik

Sales Representative Phone: 1 212 297 5603

ARGENTINA

RJ Argentina Sociedad de Bolsa S.A.

Research

Phone: 54 11 4313 2554 Fax: 54 11 4313 2544

Ricardo Cavanagh Norberto Sosa

Head of Research Economist

[email protected] [email protected]

Our research may also be accessed at the following sites: Bloomberg and www.firstcall.com