Turkish equities EQUITIES TURKEY. FX risks and exposure to Russia

16 December 2015 Turkish equities  EQUITIES TURKEY FX risks and exposure to Russia  We look at the exposure of our coverage to FX volatility an...
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16 December 2015

Turkish equities

 EQUITIES TURKEY

FX risks and exposure to Russia  We look at the exposure of our coverage to FX volatility and Russia  TRY weakness has resurfaced lately but 4Q15e may still be a relief quarter in terms of FX impact on profits  Exposure to Russia is mostly limited, with some exceptions in construction services, beverages, glass and airlines With a Fed rate decision approaching, we revisit FX exposure of our coverage As we move towards the long-awaited US rate decision (due on 16 December evening CET), the TRY continues to be highly volatile. This, coupled with high geopolitical tension in the region surrounding Turkey, has led to a resurfacing of TRY weakness lately, despite a short-lived recovery around the general elections on 1 November. We therefore reassess the FX exposure for our coverage (ex-financials) using the latest (9M 2015) financial reports.

Cenk Orcan* Analyst HSBC Yatırım Menkul Değerler A.Ş. [email protected] +90 212 376 4614 Bulent Yurdagul* Analyst HSBC Yatırım Menkul Değerler A.Ş. [email protected] +90 212 376 4612 Levent Bayar* Analyst HSBC Yatırım Menkul Değerler A.Ş. [email protected] +90 212 376 4617 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations

We calculate an aggregate net FX short position of nearly USD20bn as of end 3Q15; 59% of which is in USD. Despite recent weakness, TRY is still slightly stronger (by c3% against the USD-EUR basket) than it was at the end of Q3. Provided current levels are maintained until year-end, 4Q15e profits could see some support from a partial reversal of FX losses into FX gains. We estimate an aggregate FX net gain of cTRY1.0bn to be recorded by our universe in 4Q15, versus TRY7.9bn of net loss recorded in the first nine months. Companies with the highest FX short positions as of end of 3Q15 include: Turk Telekom, Tupras, Koc Holding, Migros, Torunlar REIT, Zorlu Enerji and Akenerji. Exposure to Russia – limited for our coverage. Tensions between Turkey and Russia exacerbate what is already a difficult geopolitical and economic backdrop for Turkey. Because of Russian economic sanctions on Turkey, we look at the exposure of our coverage to the former. On a macro level, energy is inarguably the most significant trade component between Turkey and Russia. Turkey is one of the major buyers of Russian natural gas and has recently initiated other projects in energy such as agreement to build a second gas pipeline called “Turkish Stream” and a nuclear power plant to be Turkey’s first. From a sector (and more micro) perspective, Turkish industries with the highest exposure to Russia include food (fresh produce and poultry exporters), automotive (predominantly component exporters), tourism, textiles/apparel and general contractors. Some Turkish companies in these sectors have material exposure to Russia as a percentage of their group revenues and EBITDA, but in general, exposure overall is limited.

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.

Issuer of report: HSBC Yatırım Menkul Değerler A.Ş. View HSBC Global Research at: https://www.research.hsbc.com

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EQUITIES  TURKEY 16 December 2015

FX and Russia – assessing the exposure of our coverage In this report, we take a look at the FX and Russia exposures of our coverage universe (exst financials) given continued TRY volatility after the November 1 elections in Turkey and the recent political tension between Turkey and Russia. 9M reported financial results and official company presentations are our main sources s to assess the FX risks, especially arising from balance sheet mismatch. We utilise the same sources to identify the exposure to Russia, as well as our estimations in some cases. We expect our screenings for FX and Russia exposure may serve as a general guide going into 2016 for investors to revisit depending on developments on the two fronts.

Balance sheet FX mismatch leads to bigger profit swings short term Although the November 1st general elections meant political stability in Turkey, the TRY has followed a highly volatile course since then. The risk-on mood in the run up to the elections was short lived soon after the elections. The major sources of volatility and switch to a risk-off mood have been even further rise in geopolitical unrest and potential US rate hike concerns (with FED’s pending decision on 16 December). The tension between Russia and Turkey since 24 November has been the latest addition to the already difficult geopolitics in the region surrounding Turkey. Yet, as of the date of this report, TRY is still slightly stronger (by c3% against USD-EUR basket) than it was at the end of Q3 whereas it depreciated notably within the previous three quarters (c5% in Q1 and Q2, c11% in Q3). If current levels are maintained, companies in general should benefit in 4Q15 from partial reversal of FX losses, leading to some profit recovery in their FY2015e results. Note that our coverage universe, ex-financials, has a net FX short position of nearly USD20bn as of end of 3Q15. Assuming this balance sheet FX mismatch remains stable, we estimate an aggregate FX net gain of cTRY1.0bn to be recorded by our universe in 4Q15, versus TRY7.9bn of net loss recorded in the first nine months. FX gains/losses (HSBC coverage) vs change in FX rates 2,000 1,000 0 -1,000 -2,000 -3,000 -4,000 -5,000 -6,000 -7,000 -8,000 -9,000

10% 5% 0% -5% -10% -15% -20% -25% 4Q14

1Q15

2Q15

TRY vs EUR Source: Company data, Turkish Central Bank, HSBC estimates

2

3Q15 TRY vs USD

4Q15e

9M14

9M15

FX gain/loss (TRYm)

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EQUITIES  TURKEY 16 December 2015

FX rates (y-o-y change) – TRY remains slightly stronger since 3Q15 6%

2% 2% 2%

4% 2%

2%

1%

4% 3% 2%

1%

0% -2% -4%

-1%-1%-1%

-3%

0% -2%

-6%

-5%

-8%

-7%

-10% -12%

-3% -5% -6%

-11%

-14% 1Q14

2Q14

3Q14

4Q14 TRY/EUR

-11% -11% -12%

1Q15 TRY/USD

2Q15

3Q15

3Q15-to-date

TRY/Basket

Source: Turkish Central Bank

Status of our coverage in terms of balance sheet FX mismatch Below are screens of our coverage ranked by different metrics in terms of balance sheet FX mismatches (i.e. companies with net FX short and long positions) as of end of 3Q15. Accordingly, as far as FX gain/loss impact on earnings is considered, the top chart names stand out as potential beneficiaries while the bottom chart ranks those that would be worse off from a stronger TRY in 4Q15e,. Note however that cross currency moves (such as EUR/USD, JPY/USD) are equally important for some companies (such as Turkish Airlines, TAV Airports). Companies with the highest negative balance sheet FX mismatch Net total FX position 9M 15 TRYm THYAO* (13,125) TTKOM (9,607) KCHOL** (8,536) TUPRS** (8,401) AEFES (3,996) AKENR (2,666) TRGYO (2,562) MGROS (2,301) ZOREN (2,255) FROTO (2,202)

USDm (4,339) (3,176) (2,822) (2,777) (1,321) (881) (847) (761) (746) (728)

Net Total FX pstn vs Equity (9M 15) ZOREN MGROS AKSEN TTKOM BAGFS KRDMD AKENR TUPRS** THYAO* FROTO

(8.5) (5.1) (2.6) (2.4) (1.9) (1.8) (1.7) (1.2) (0.9) (0.8)

Net FX Gain (Loss) vs. EBITDA (9M 15) TRGYO (2.6) AKENR (2.4) ZOREN (1.8) KRDMD (1.6) AKSEN (1.2) MGROS (0.9) BAGFS (0.8) AEFES (0.6) TTKOM (0.5) TUPRS** (0.5)

9M net FX gain/(loss) TRYm TTKOM (2,128) KCHOL** (1,617) TUPRS** (1,322) AEFES (968) AKENR (571) TCELL (534) TRGYO (513) AKSEN (424) MGROS (411) CCOLA (396)

Q3 net FX gain/(loss) TRYm TUPRS** (1,228) TTKOM (1,106) KCHOL** (784) AEFES (542) MGROS (293) AKENR (272) AKSEN (263) TRGYO (263) ZOREN (236) CCOLA (196)

Source: Company data * USD is the functional currency (hence EUR and TRY are FX), ** Excluding the natural hedge from Tupras’ FX-linked inventory and RUP financing loans that are subject to “cash flow hedge accounting”

Companies with the highest positive balance sheet FX mismatch Net total FX position 9M 15 TRYm USDm ENKAI* 3,174 1,049 PGSUS** 1,475 487 TAVHL* 778 257 EREGL* 581 192 SISE 471 156 TOASO 259 85 DOAS 171 57 CIMSA 95 31 ARCLK 53 18 AKCNS 10 3

Net Total FX pstn vs Equity (9M 15) PGSUS** TAVHL** ENKAI* DOAS TOASO CIMSA SISE TKNSA TATGD ARCLK

0.9 0.3 0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0

Net FX Gain (Loss) vs. EBITDA (9M 15) THYAO* 0.3 DOHOL 0.3 PGSUS** 0.2 SISE 0.2 EREGL* 0.2 GUBRF 0.1 ENKAI* 0.1 BIMAS 0.1 TKNSA 0.0 CIMSA 0.0

9M net FX gain/(loss) TRYm THYAO* 1,270 EREGL* 366 SISE 227 DOHOL 95 ENKAI* 95 PGSUS** 89 SAHOL 54 BIMAS 35 GUBRF 33 CIMSA 6

Q3 net FX gain/(loss) TRYm TCELL 425 EREGL* 130 SISE 117 ULKER 80 SNGYO 53 DOHOL 43 BIMAS 35 GUBRF 33 PGSUS** 16 AYGAZ 15

Source: Company data, * USD is the functional currency (hence EUR and TRY are FX), ** EUR is the functional currency (hence USD and TRY are FX)

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EQUITIES  TURKEY 16 December 2015

Operational currency mismatch – what matters in the long run While the earnings volatility caused by FX gains/losses (arising from balance sheet FX mismatch) can be short term (and sometimes non-cash), operational FX mismatch (i.e. the mismatch between FX revenues and FX costs) is more structural and effects on earnings usually come with lag compared to balance sheet mismatch. In the face of sustained periods of TRY weakness or strength, a company is more flexible in general to address its balance sheet mismatch (via different strategies including parking its cash in FX or use of hedging instruments) while adjusting the revenues and cost structure might be far more difficult. Many companies manage and control their FX risks via natural hedging, their business structure permitting (i.e. creating FX short position in their balance sheet if operationally they have long FX position in their P&L and vice versa). Approximately 33% of the aggregate revenues of our coverage universe are generated in hard currency (13% in USD, 13% in EUR and 7% in other FX - hence the revenue share of USD and EUR as DM currencies is c26%). If sales in the domestic market of commodity products with FX links (mostly USD such as refinery, petrochemical, steel and fertiliser products) are also included, revenues in FX and with FX links represent 54% of total revenues (34% in USD, 13% in EUR and 7% in other FX). Operational (P&L) FX mismatch 50% 30% 10% -10% -30% -50% -70%

ISGYO

TRGYO

HLGYO

TAVHL*

TUPRS

EREGL**

ZOREN

THYAO**

CIMSA

PETKM

EKGYO

SISE

AKSEN

CCOLA

KCHOL

ENKAI**

AKENR

AKCNS

TTKOM

SAHOL

KRDMD

MGROS

BIZIM

BIMAS

FROTO

SNGYO

ARCLK

TOASO

TKFEN

TKNSA

TATGD

BAGFS

GUBRF

AEFES

PGSUS*

AYGAZ

TCELL

ULKER

DOAS

TTRAK

-90%

Source: Company data, HSBC estimates * Functional currency is EUR (hence FX are USD and TRY), ** Functional currency is USD (hence FX are EUR and TRY)

Revenue breakdown of coverage by currency (commodities excluded)

Revenue breakdown of coverage by currency (commodities included)

Other 7%

Other 7%

USD 13%

USD 34%

EUR 13% TRY 46%

TRY 67% Source: Company data, HSBC estimates (9M 2015)

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EUR 13% Source: Company data, HSBC estimates (9M 2015)

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EQUITIES  TURKEY 16 December 2015

Highlights of FX exposure for our covered companies Having analysed the latest reported financial results (9M 2015) of the 41 non-financial companies under our coverage and using our knowledge/estimates of approximate operational (revenue and costs) FX breakdown, we summarise our findings and conclusions as follows:



Our universe has a total FX short position (balance sheet) of approximately TRY59.3bn or USD19.6bn as of end of 9M 2015 (vs TRY49.3bn or USD18.3bn as of end of H1 2015)



The USD accounts for a c59% share of the total FX short position, EUR c36% and other FX c5% (vs USD 60%, EUR 34% and other FX c6% as of end of H1 2015)



The top five companies with the highest total FX short position represent c74% of the overall FX position (80% of the total for USD positions)



The total FX short position to total equity ratio is c0.33x (vs 0.27x as of end of H1) with nearly 40% (17 out of 41) of the companies in a higher ratio and 60% (24 out of 41) on a lower ratio



Approximately 33% of the aggregate revenues are generated in hard currency (ie sales in international markets, exports from Turkey and domestic sales in hard currency); 13% in USD, 13% in EUR and 7% in other FX (hence the revenue share of USD and EUR as DM currencies is c26%)



If sales in the domestic market of commodity products with FX links (mostly USD such as refinery, petrochemical, steel and fertiliser products) are also included, revenues in FX and with FX links represent 55% of total revenues (34% in USD, 13% in EUR and 7% in other FX) and the TRY share is only 45%

Snapshot of FX exposure (ranked by Net FX position to equity ratio – top 10 with the highest negative ratio and bottom 10 with the lowest shown)

ZOREN MGROS AKSEN TTKOM BAGFS KRDMD AKENR TUPRS THYAO** FROTO BIZIM AKCNS ARCLK TATGD TKNSA SISE CIMSA TOASO DOAS ENKAI** TAVHL* PGSUS*

Net total FX Net total FX USD share P&L gain/loss (if P&L gain/loss Actual FX Operational FX position to pstn (stated of net total TRY 10% weaker as % of 2015e gain/loss mismatch (% FX equity in USDm) FX pstn vs USD and EUR) EBITDA (9M15, TRYm) revenue - % FX cost) -8.5 -746 76% -229 -94% -368 20% -5.1 -761 -1% -241 -42% -411 -2% -2.6 -670 76% -128 -30% -424 8% -2.4 -3,176 63% -967 -18% -2,128 1% -1.9 -180 13% -55 -62% -41 -18% -1.8 -516 77% -157 -59% -211 0% -1.7 -881 96% -268 -92% -571 3% -1.2 -2,777 98% -309 -10% -1,322 25% -0.9 -4,339 0% -608 -16% 1,270 22% -0.8 -728 0% -27 -2% -82 -5% 0.0 0 11% 0 0% 0 -3% 0.0 3 105% 1 0% 3 3% 0.0 18 71% 5 0% -189 -8% 0.0 3 15% 1 1% 0 -14% 0.0 2 27% 0 0% 1 -10% 0.1 156 239% 23 2% 227 6% 0.1 31 15% 5 1% 6 18% 0.1 85 0% 31 3% -96 -6% 0.1 57 19% 19 4% -4 -84% 0.2 1,049 53% 77 3% 95 4% 0.3 257 79% 57 4% -25 38% 0.9 487 56% -2 -1% 89 -19%

Source: Company data, HSBC estimates

* Functional currency is EUR (hence FX are USD and TRY), ** Functional currency is USD (hence FX are EUR and TRY)

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EQUITIES  TURKEY 16 December 2015

Russian exposure Our universe has limited direct exposure to Russia but not immaterial in select fields Because of tensions between Turkey and Russia that have resulted in economic sanctions from Russia, we look at the exposure of our coverage to the latter. According to our economists, energy is a key component of the total trade between Russia and Turkey (Turkey’s dependence on Russia for natural gas imports is the most significant, see Russia and Turkey: Quantifying the economic links, dated 26 November). Conversely, Russia is a buyer of more diversified products from Turkey (top three being fresh fruits and vegetables, textiles, motor vehicles) but the contribution to total exports from these products is smaller compared to the natural imports from Russia. Russia has traditionally been a strong market for Turkish construction firms as well as beverage and glass producers and some of these companies under our coverage have direct operational exposure to Russia. We provide a list of direct and indirect exposures that several companies and sectors under our coverage have to Russia overleaf. Exposure more pronounced for construction services, beverages, glass producers as well as airlines in our coverage Turkish industries with the highest exposure to Russia are: food (fresh produce and poultry exporters), automotive (predominantly component exporters), tourism, textiles/apparel, general contractors. The following are companies in our Turkish coverage with direct exposure to Russia via their own operations in the local market: Enka Insaat, Anadolu Efes and Sisecam. rd Enka for instance generates nearly 1/3 of group EBITDA from rental operations (office space and shopping malls) in Moscow and construction projects in the country. The company has c12% of its project backlog in Russia as of end of 9M 2015, although this predominantly consists of its own projects (shopping mall expansion projects).

Anadolu Efes has 14% share in Russian beer market where the company generates c9% of EBITDA based on our estimates. Turkey’s glass conglomerate Sisecam on the other hand operates a number of glass packaging (glass bottles) lines in Russia/Ukraine/Georgia as well as float and auto glass lines giving way also to material exposure, which we project as c10% of group revenue and c4% of group EBITDA. These are then followed by Arcelik which also operates white goods plants in Russia and exports from Turkey, altogether generating 2.7% of total revenues. The two airlines (Turkish Airlines and Pegasus) which are exposed via the passenger traffic to/from Russia, generate c2% of their total revenues from relevant traffic, including transfer passengers in THY’s case.

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EQUITIES  TURKEY 16 December 2015

Snapshot of exposure to Russia – select companies under coverage (9M 2015) 40% 35% 30% 25% 20% 15% 10% 5% 0% Enka

Anadolu Efes

Sisecam*

% of revenue

Arcelik

Turkish Airlines

Pegasus**

% of EBITDA

Source: Company data, HSBC estimates * Russia/Ukraine/Georgia, ** Russia/Ukraine

Exposure to Russia Industry

Relevant company Exposure (Company data Comment under coverage and HSBC estimates) Conglomerates Enka Russia c10% of revenues, Enka operates c634k sqm of office and shopping mall space in Moscow + undertakes several c35% of EBITDA construction projects) (12% of total project backlog in Russia as of 9M 2015 - USD270m worth of projects in total) Beverages Anadolu Efes Russia c12% of revenues, Anadolu Efes has 14% market share in Russia’s beer market. Russia beer sales revenues make up c9% of EBITDA c60% of Efes International Beer Business. (int'l beer business makes up c20% of consolidated revenues and c18% of EBITDA) Glass Sisecam Russia/Ukraine/Georgia Russia/Ukraine/Georgia altogether represent 10% of Sisecam Group revenues and c4% of EBITDA c10% of group revenue, with most of the exposure coming from glass packaging unit Anadolu Cam (for which c4% of EBITDA Russia/Ukraine/Georgia is c35% of revenue and 18% of EBITDA). Sisecam's exports to Russia is c2% of total and is mainly glassware products (by Pasabahce) Arcelik Russia c3% of revenues Arcelik has a refrigerator and washing machine plant in Krizhach/Russia with total c1m capacity White goods (exports from Turkey c20% of total Russia revenues; hence c0.5% of total revenue) Turkish Airlines Russia c2% of revenues THY’s O&D (origin and destination) passengers to/from Russia add up to c0.4m (c1m when transfer traffic included - THY to serve c62m passengers in 2015e) Airlines Pegasus Russia/Ukraine less than 2.5% of revenues Aksa Turkey is the second-largest export market for the Russian company Gazprom, second only to Akenerji Germany. Turkey imports 58% of its natural gas from Russia, and uses 40-45% of the total gas in Zorlu Enerji power generation, making c25% of Turkey's power production capacity directly linked to Russia. 1/3 Utilities/gas Enerjisa/Sabanci of gas fired generation capacity has quick-switch capability to alternative fuel (H/LFO) but that would also bring logistics issues (as the gas pipeline cannot be used in transfer of liquid fuels). Real estate Emlak REIT We estimate Russians Emlak Konut REIT sold 1,283 units to foreigners out of 9,580 unit sales, pointing to 13.4% share in account for c1.0-1.5% total. Emlak doesn't provide country breakdown of unit sales but if we apply Turkey's overall unit share of total unit sales sales breakdown, Russia has 10% share. This would imply Russia may have a share of 1.35% in Emlak's total unit sales. However regarding foreign sales, rising security concerns might have a wider negative impact on the property sales to foreigners (similar to what we have seen in September-15) General construction Turkish construction firms are currently conducting USD8bn worth of projects in Russia services Tourism services In 2014, 4.5 million Russians visited Turkey, corresponding to c12% of total visitors (Chart 3). The number of Turkish tourists visiting Russia in 2014, meanwhile, was 360,000, only 4% of total. Energy Other than Russia's gas sales to Turkey, the two countries had also signed an MoU in December 2014 to build a second gas pipeline across the Black Sea called Turkish Stream, with a planned capacity of 63bn cubic metres. Turkey and Russia are also cooperating on a BOT project to build the first nuclear power plant in Turkey whose cost is estimated to be worth around USD22bn. Automotive Auto parts Food/agriculture Turkey imports fresh produce (fruits and vegetables - 18% of total) as well as poultry (0.3% of total) to Russia and in turn imports wheat from Russia. Source: Company data, HSBC

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EQUITIES  TURKEY 16 December 2015

Appendix – FX exposure of our coverage in details Net FX position of coverage (in TRYm)

0.0

0.0

-3.1 -2.7

-10.0 -20.0

-35.1

-1.0 -1.0

-5.0

-16.9 -21.1

-30.0 -40.0

Net FX position of coverage (in USDm)

-7.0 -6.3

-10.0

-29.6

-11.6 -11.0

-15.0

-50.0

-49.3

-60.0

-59.3

-70.0 USD

EUR

Other

Sep-15

-20.0

-18.3 -19.6

-25.0

Total

USD

EUR

Jun-15

Sep-15

Other

Total

Jun-15

Source: Company data

Source: Company data

Breakdown of FX short position – Sep 15

Breakdown of FX short position – Jun 15

6%

5% USD

USD EUR

36%

EUR

59%

Other

34% 60%

Other

Source: Company data

Source: Company data

Top 5 companies with the highest FX short position in nominal terms Sep-2015 ______ USD short (USDm) ______ ______ EUR short (EURm) ______ _______________ Total FX short________________ In TRYm In USDm TUPRS* -2,722 THYAO -2,163 THYAO -13,125 -4,339 KCHOL* -2,710 TTKOM -1,051 TTKOM -9,607 -3,176 TTKOM -1,996 MGROS -704 KCHOL -8,536 -2,822 AEFES -1,045 FROTO -646 TUPRS -8,401 -2,777 AKENR -843 AEFES -259 AEFES -3,996 -1,321 Jun-2015 TUPRS* KCHOL* TTKOM AEFES AKENR

-2,694 -2,638 -1,970 -1,063 -834

THYAO TTKOM MGROS FROTO DOHOL

-1,552 -1,271 -702 -690 -250

THYAO TTKOM KCHOL TUPRS AEFES

-9,126 -9,101 -7,507 -7,410 -3,436

Source: Company data * Excluding the natural hedge from Tupras’ FX-linked inventory and RUP financing loans that are subject to “cash flow hedge accounting”

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-3,399 -3,390 -2,796 -2,760 -1,280

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EQUITIES  TURKEY 16 December 2015

Top 5 companies with the highest FX short position to equity ratio Sep-2015 ________ USD short vs equity ________ ________ EUR short vs equity ________ ______ Total FX short vs equity ______ ZOREN -6.5 MGROS -5.3 ZOREN -8.5 AKSEN -2.0 ZOREN -2.1 MGROS -5.1 AKENR -1.6 BAGFS -1.6 AKSEN -2.6 TTKOM -1.5 TTKOM -0.9 TTKOM -2.4 KRDMD -1.4 FROTO -0.8 BAGFS -1.9 Jun-2015 AKENR -6.7 MGROS -2.6 AKENR -7.1 ZOREN -4.0 BAGFS -1.2 ZOREN -5.0 AKSEN -1.3 ZOREN -1.1 MGROS -2.6 TTKOM -1.2 TTKOM -0.8 TTKOM -2.0 AKSEN -1.7 TUPRS* -1.0 FROTO -0.7 Source: Company data * Excluding the natural hedge from Tupras’ FX-linked inventory and RUP financing loans that are subject to “cash flow hedge accounting”

Top 5 companies with the highest FX long position in nominal terms Sep-2015 __________ USD long __________ __________ EUR long __________ ________________ Total FX long ________________ In TRYm In USDm ENKAI 559 SAHOL 280 ENKAI 3,174 1,049 SISE 372 ENKAI 256 PGSUS 1,475 487 PGSUS 275 TCELL 220 TAVHL 778 257 DOHOL 225 TOASO 76 EREGL 581 192 TAVHL 202 DOAS 46 SISE 471 156 Jun-2015 ENKAI 551 ENKAI 299 ENKAI 2,753 1,025 SISE 343 SAHOL 281 PGSUS 927 345 PGSUS 297 TCELL 224 SISE 612 228 DOHOL 255 DOAS 39 EREGL 528 196 TAVHL 169 PETKM 31 TAVHL 514 191 Source: Company data, HSBC

Top 5 companies with the highest FX long position to equity ratio Sep-2015 _________USD long vs equity ________ ________ EUR long vs equity ________ _______ Total FX long vs equity _______ PGSUS 0.50 TOASO 0.12 PGSUS 0.88 ULKER 0.40 DOAS 0.12 TAVHL 0.28 DOHOL 0.26 CIMSA 0.07 ENKAI 0.20 TAVHL 0.22 ENKAI 0.06 DOAS 0.13 SISE 0.18 TCELL 0.05 TOASO 0.12 Jun-2015 PGSUS 0.65 DOAS 0.09 PGSUS 0.76 ULKER 0.29 ENKAI 0.06 TAVHL 0.24 DOHOL 0.25 TCELL 0.05 ENKAI 0.19 TAVHL 0.21 SAHOL 0.04 SISE 0.10 0.08 SISE 0.15 PETKM 0.04 TKNSA Source: Company data, HSBC

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EQUITIES  TURKEY 16 December 2015

USD short position vs Equity (as of end of 9M 2015)

EUR short position vs Equity (as of end of 9M 2015)

ZOREN AKSEN AKENR TTKOM KRDMD T UPRS T RGYO CCOLA AEFES KCHOL GUBRF SNGYO BAGFS T CELL ISGYO SAHOL PET KM T KFEN AYGAZ FROT O HLGYO EKGYO T HYAO** EREGL** T OASO BIZIM BIMAS T AT GD T T RAK ARCLK AKCNS CIMSA T KNSA DOAS MGROS ENKAI** SISE TAVHL* DOHOL ULKER PGSUS*

MGROS ZOREN BAGFS TTKOM FROTO ULKER AKSEN T HYAO** KRDMD DOHOL SNGYO T KFEN T RGYO GUBRF SISE CCOLA AEFES T T RAK AKENR EREGL** PET KM T UPRS ISGYO KCHOL AKCNS HLGYO EKGYO PGSUS* BIMAS AYGAZ ARCLK BIZIM T AT GD T KNSA SAHOL T AVHL* TCELL ENKAI** CIMSA DOAS TOASO

-6.5 -2.0 -1.6 -1.5 -1.4 -1.1 -0.6 -0.5 -0.4 -0.4 -0.3 -0.3 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.2 0.3 0.4 0.5

Source: Company data. * EUR is the functional currency (hence USD and TRY are FX)

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-5.3 -2.1 -1.6 -0.9 -0.8 -0.7 -0.6 -0.5 -0.4 -0.3 -0.3 -0.2 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1

Source: Company data. * EUR is the functional currency (hence USD and TRY are FX)

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EQUITIES  TURKEY 16 December 2015

Total FX short position (TRYm, as of end of 9M 2015)

Total FX short position vs. Equity (TRYm, as of end of 9M 2015)

THYAO** TTKOM KCHOL TUPRS AEFES AKENR TRGYO MGROS ZOREN FROTO CCOLA AKSEN KRDMD TKFEN TCELL SNGYO BAGFS SAHOL GUBRF PETKM ULKER ISGYO DOHOL TTRAK AYGAZ HLGYO EKGYO BIZIM BIMAS TKNSA TATGD AKCNS ARCLK CIMSA DOAS TOASO SISE EREGL** TAVHL* PGSUS* ENKAI**

ZOREN MGROS AKSEN TTKOM BAGFS KRDMD AKENR TUPRS THYAO** FROT O TRGYO CCOLA SNGYO AEFES GUBRF TKFEN KCHOL ULKER EREGL** PETKM TTRAK ISGYO DOHOL TCELL SAHOL AYGAZ HLGYO EKGYO BIMAS BIZIM AKCNS ARCLK TATGD TKNSA SISE CIMSA TOASO DOAS ENKAI** TAVHL* PGSUS*

(13,125) (9,607) (8,536) (8,401) (3,996) (2,666) (2,562) (2,301) (2,255) (2,202) (2,187) (2,025) (1,561) (863) (827) (569) (544) (470) (450) (352) (308) (243) (174) (75) (57) (1) 1 6 7 9 10 53 95 171 259 471 581 778 1,475 3,174

Source: Company data (functional currency for TAVHL and PGSUS is EUR)

(8.5) (5.1) (2.6) (2.4) (1.9) (1.8) (1.7) (1.2) (0.9) (0.8) (0.7) (0.6) (0.5) (0.5) (0.5) (0.4) (0.4) (0.3) 0.0 (0.1) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.3 0.9

Source: Company data (functional currency for EREGL, ENKAI and THYAO is USD)

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EQUITIES  TURKEY 16 December 2015

Currency breakdown of revenues (9M 2015, %)

Currency breakdown of costs (9M 2015, %)

TUPRS*

EKGYO

PETKM*

AKENR

EREGL*

BIZIM

ENKAI

TTKOM

THYAO

AKSEN

TAVHL

SNGYO

TKFEN*

ISGYO

GUBRF*

MGROS

KRDMD*

BIMAS

BAGFS*

TKNSA

PGSUS

AKCNS

FROTO

HLGYO

KCHOL

TRGYO

TOASO

SAHOL

ARCLK

CIMSA

AEFES

TATGD

TRGYO

ZOREN

CCOLA

ULKER

SISE

TAVHL

AYGAZ*

SISE

HLGYO

CCOLA

ISGYO

TCELL

ZOREN

KCHOL

CIMSA

THYAO

TTRAK

TTRAK

TCELL

AYGAZ*

ULKER

FROTO

AKCNS

TOASO

SAHOL

ARCLK

AKSEN

KRDMD*

EKGYO

AEFES

TATGD

TUPRS*

AKENR

EREGL*

BIMAS

PGSUS

MGROS

PETKM*

TTKOM

DOAS

DOAS

BAGFS*

TKNSA

TKFEN*

SNGYO

GUBRF*

BIZIM

ENKAI

0%

20%

40%

FX Revenues

60%

80%

100%

120%

TRY Revenues

Source: Company data, HSBC estimates. * Commodities assumed to be FX linked

12

0%

20%

40% FX Costs

60%

80%

100%

120%

TRY Costs

Source: Company data, HSBC estimates. * Commodities assumed to be FX linked

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EQUITIES  TURKEY 16 December 2015

Operational currency mismatch (companies ranked based FX % revenues – FX % costs) TRGYO ISGYO TAVHL* HLGYO EREGL** TUPRS THYAO** ZOREN PETKM CIMSA EKGYO AKSEN SISE CCOLA ENKAI** KCHOL AKENR AKCNS TTKOM KRDMD SAHOL MGROS BIMAS BIZIM FROTO SNGYO TOASO ARCLK TKNSA TKFEN TATGD GUBRF BAGFS PGSUS* AEFES AYGAZ ULKER TCELL TTRAK DOAS -100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Source: Company data, HSBC estimates

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EQUITIES  TURKEY 16 December 2015

P&L (profit) impact of 10% depreciation in TRY vs USD (in TRYm, 9M 2015)

P&L (profit) impact of 10% depreciation in TRY vs EUR (in TRYm, 9M 2015)

TTKOM AEFES KCHOL TUPRS AKENR TCELL TRGYO CCOLA ZOREN AKSEN KRDMD GUBRF SNGYO PET KM TKFEN ENKAI BAGFS TT RAK ISGYO FROT O TKNSA TOASO MGROS EKGYO BIZIM HLGYO BIMAS AYGAZ TAT GD CIMSA AKCNS ARCLK DOAS SAHOL PGSUS* ULKER TAVHL* DOHOL SISE THYAO EREGL

THYAO** TTKOM MGROS KRDMD AEFES SISE DOHOL ULKER TRGYO ZOREN BAGFS KCHOL AKSEN PGSUS CCOLA TKFEN FROT O TUPRS PET KM GUBRF SNGYO AKENR AYGAZ ISGYO AKCNS HLGYO EKGYO BIZIM BIMAS TKNSA TAT GD TT RAK TAVHL ARCLK CIMSA EREGL** SAHOL DOAS TOASO TCELL ENKAI**

Source: Company data. * Functional currency is EUR, hence analysis is for USD/EUR change

14

-607 -318 -300 -289 -256 -220 -196 -180 -173 -82 -37 -29 -26 -17 -12 -11 -7 -6 -6 -1 0 0 0 0 0 0 0 1 1 1 1 2 3 17 43 46 56 68 111 132 144

-740 -360 -241 -120 -90 -87 -85 -84 -62 -56 -48 -47 -46 -45 -44 -38 -26 -20 -17 -17 -16 -12 -6 -4 0 0 0 0 0 0 0 0 1 4 4 5 15 16 31 75 88

Source: Company data. ** Functional currency is USD; hence analysis is for EUR/USD change .

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EQUITIES  TURKEY 16 December 2015

Combined profit (P&L) impact of 10% TRY depr. vs USD & EUR (TRYm, 9M 2015)

Combined profit (P&L) impact of 10% TRY depr. vs USD & EUR as % of 2015e EBITDA

TTKOM THYAO AEFES KCHOL TUPRS AKENR T RGYO MGROS ZOREN CCOLA KRDMD T CELL AKSEN BAGFS T KFEN GUBRF SNGYO ULKER PET KM FROT O DOHOL ISGYO T T RAK AYGAZ PGSUS T KNSA EKGYO BIZIM HLGYO BIMAS T AT GD AKCNS CIMSA ARCLK DOAS SISE TOASO SAHOL TAVHL ENKAI EREGL

ZOREN AKENR TRGYO BAGFS KRDMD MGROS AKSEN SNGYO AEFES CCOLA T T KOM T HYAO T KFEN PET KM T UPRS ULKER ISGYO GUBRF KCHOL DOHOL T CELL AYGAZ FROT O T T RAK PGSUS T KNSA EKGYO BIMAS HLGYO BIZIM AKCNS ARCLK SAHOL T AT GD CIMSA SISE TOASO ENKAI TAVHL DOAS EREGL

Source: Company data

-967 -608 -408 -347 -309 -268 -258 -241 -229 -224 -157 -145 -128 -55 -50 -45 -41 -38 -34 -27 -16 -11 -6 -6 -2 0 0 0 0 1 1 1 5 5 19 23 31 32 57 77 149

-0.9 -0.9 -0.6 -0.6 -0.6 -0.4 -0.3 -0.3 -0.2 -0.2 -0.2 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1

Source: Company data, HSBC estimates

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EQUITIES  TURKEY 16 December 2015

Net total FX gain/loss recorded in 9M 2015 (TRYm)

TTKOM KCHOL TUPRS AEFES AKENR T CELL T RGYO AKSEN MGROS CCOLA ZOREN KRDMD ARCLK T OASO FROT O PET KM ULKER T KFEN BAGFS T T RAK T AVHL ISGYO DOAS EKGYO HLGYO T AT GD AYGAZ SNGYO BIZIM T KNSA AKCNS CIMSA GUBRF BIMAS SAHOL PGSUS ENKAI DOHOL SISE EREGL THYAO Source: Company data

16

(2,128) (1,617) (1,322) (968) (571) (534) (513) (424) (411) (396) (368) (211) (189) (96) (82) (78) (70) (64) (41) (25) (25) (19) (4) (1) (0) 0 1 3 6 33 35 54 89 95 95 227 366 1,270

Net FX gain/loss recorded to EBITDA ratio (9M 2015)

TRGYO AKENR ZOREN KRDMD AKSEN MGROS BAGFS AEFES T T KOM T UPRS CCOLA KCHOL T KFEN ULKER ARCLK ISGYO T CELL PET KM T OASO FROT O T T RAK T AVHL DOAS HLGYO EKGYO AYGAZ SNGYO T AT GD BIZIM AKCNS SAHOL CIMSA T KNSA BIMAS ENKAI GUBRF EREGL SISE PGSUS DOHOL THYAO Source: Company data

(2.6) (2.4) (1.8) (1.6) (1.2) (0.9) (0.8) (0.6) (0.5) (0.5) (0.4) (0.4) (0.3) (0.2) (0.2) (0.2) (0.2) (0.1) (0.1) (0.1) (0.1) (0.0) (0.0) (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3

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EQUITIES  TURKEY 16 December 2015

HSBC Turkey coverage universe (ex-financials) RIC AEFES AKCNS AKENR AKSEN ARCLK AYGAZ BAGFS BIZIM BIMAS CCOLA CIMSA DOAS DOHOL EKGYO ENKAI EREGL FROTO GUBRF HLGYO ISGYO KRDMD KCHOL MGROS PGSUS PETKM SAHOL SISE SNGYO TATGD TAVHL TKNSA TCELL THYAO TKFEN TOASO TRGYO TTKOM TTRAK TUPRS ULKER ZOREN

Company name Anadolu Efes Akcansa Akenerji Aksa Enerji Arcelik Aygaz Bagfas Bizim Toptan BIM Coca Cola Icecek Cimsa Dogus Otomotiv Dogan Holding Emlak Konut REIT Enka Insaat Erdemir Ford Otosan Gubretas Halk REIT Is REIT Kardemir Koc Holding Migros Pegasus Petkim Sabanci Holding Sisecam Sinpas REIT Tat Gida TAV Teknosa Turkcell Turkish Airlines Tekfen Holding Tofas Torunlar REIT Turk Telekom Turk Traktor Tupras Ulker Zorlu Enerji

Closing price (TRY) 18.50 13.07 0.85 2.31 14.17 9.63 12.46 12.41 53.10 37.42 15.18 10.33 0.47 2.56 4.26 3.14 30.84 5.73 0.96 1.46 1.05 11.07 16.70 16.09 4.37 7.58 2.67 0.60 5.17 18.52 6.14 10.05 6.80 3.88 17.93 3.05 5.33 65.90 66.70 17.81 1.23

Rating Hold Hold Reduce Buy Hold Buy Hold Hold Buy Buy Hold Hold Hold Buy Hold Reduce Buy Hold Buy Hold Buy Hold Buy Hold Hold Buy Buy Hold Reduce Hold Hold Hold Buy Buy Buy Buy Buy Hold Hold Hold Reduce

Source: HSBC, Company data (closing as of 14 December 2015)

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EQUITIES  TURKEY 16 December 2015

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 and Levent Bayar Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts' views and the basis for the rating. From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation or resumption of coverage, change in target price or estimates). Upside/Downside is the percentage difference between the target price and the share price. Prior to this date, HSBC’s rating structure was applied 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 target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 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, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral. *A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was 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 had 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 15 December 2015, the distribution of all ratings published is as follows: Buy 46% (30% of these provided with Investment Banking Services) Hold

40%

(30% of these provided with Investment Banking Services)

Sell

14%

(16% of these provided with Investment Banking Services)

18

EQUITIES  TURKEY 16 December 2015

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For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above. HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. Whether, or in what time frame, an update of this analysis will be published is not determined in advance. 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 This report is dated as at 16 December 2015. 2

All market data included in this report are dated as at close 14 December 2015, unless otherwise indicated in the report.

3

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.

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EQUITIES  TURKEY 16 December 2015

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Turkey Research Team [email protected]

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