abc Dogan Holding (DOHOL TI) Global Research Company report Upgrade to OW(V): All engines firing Overweight (V)

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1 Company report Mid Cap Equity Turkey Global Research Dogan Holding (DOHOL TI) Overweight (V) Target price (TRY) 1.30 Share price (TRY) 1.02 Potential return (%) 27.5 Note: Potential return equals the percentage difference between the current share price and the target price Dec 2011 a 2012 e 2013 e HSBC EPS HSBC PE Performance 1M 3M 12M Absolute (%) Relative^ (%) Upgrade to OW(V): All engines firing Media sector recovery and positive contribution from energy operations should support growth from 2013 Appetite for new acquisitions signals hope for a potential improvement in its net asset value; possible privatisations and private deals are eyed Upgrade to OW(V) (from N(V)) on a higher TP of TRY1.30 (from TRY0.9); stock is trading at a 45% discount to NAV Note: (V) = volatile (please see disclosure appendix) Bulent Yurdagul* Analyst HSBC Yatırım Menkul Değerler A.Ş bulentyurdagul@hsbc.com.tr Rohit Kadni* Associate Bangalore View HSBC Global Research at: *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 Media recovery, ample cash on balance sheet and growing energy business. DOHOL began investing in the energy sector in recent years with the acquisition of energy power projects. Currently, DOHOL has a 33% interest in two hydro projects with capacity of 633MW and a 100% share in two wind projects with capacity of 147MW. These investments are yielding results now and becoming the second-largest business after media in its portfolio. DOHOL is a market leader in the media segment with some of the best-performing assets. Diversification into energy, strong ad market growth and an ample cash position of USD1.2bn offer an attractive investment opportunity. Improving relations with the government authorities after settling tax issues further opens up the potential for new investments. Strong earnings growth driven by energy contribution; forecast 26% EBITDA CAGR. Positive contribution from energy and retail as well as growth in media profitability drives our forecast of 26% EBITDA CAGR over e. We expect the EBITDA contribution from the energy segment to rise to 20% levels in three years time. Upgrade to OW(V) (from N(V)) on a higher target of TRY1.30 (from TRY0.90). Our valuation of DOHOL s investments in the energy segment and higher target price of listed Hurriyet and Dogan Yayin drive our NAV valuation higher to TRY1.85 from TRY1.50. We apply a 30% discount to this to arrive at our new target price of TRY1.30 (TRY0.90 earlier). We believe strong earnings growth and diversification into the energy sector drive our upgrade to Overweight (V) from Neutral (V). Our target price implies a potential return of 28%. DOHOL is trading at a 45% discount to our target NAV, including unlisted investments, which we believe is unusually higher than peers and warrants a re-rating. Delays in new investment plans and macroeconomic conditions are key downside risks to our valuation. Index^ ISTANBUL COMP Index level 77,514 RIC DOHOL.IS Bloomberg DOHOL TI Source: HSBC Enterprise value (TRYm) 3,168 Free float (%) 34 Market cap (USDm) 1,384 Market cap (TRYm) 2,499 Source: HSBC

2 Financials & valuation Financial statements Year to 12/2011a 12/2012e 12/2013e 12/2014e Profit & loss summary (TRYm) Revenue 2,867 3,101 3,454 3,832 EBITDA Depreciation & amortisation Operating profit/ebit Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt 1, FCF equity Balance sheet summary (TRYm) Intangible fixed assets 1,267 1,270 1,269 1,267 Tangible fixed assets 1,218 1,452 1,641 1,843 Current assets 4,990 5,013 4,805 4,209 Cash & others 3,660 3,615 3,298 3,300 Total assets 8,644 8,929 8,931 8,558 Operating liabilities 1,929 1,952 1,996 1,784 Gross debt 3,595 3,529 3,372 3,048 Net debt Shareholders funds 3,039 3,251 3,344 3,474 Invested capital 1,886 2,168 2,421 2,234 Valuation data Year to 12/2011a 12/2012e 12/2013e 12/2014e EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Price relative Dogan Holding Rel to ISTANBUL COMP Source: HSBC Note: price at close of 25 Feb Ratio, growth and per share analysis Year to 12/2011a 12/2012e 12/2013e 12/2014e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS 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 reported (fully diluted) HSBC EPS (fully diluted) DPS Book value

3 New investments drive expansion Aggressive expansion into the energy sector and media recovery are positive for Dogan Holding; we expect 26% EBITDA CAGR over e Possible utilisation of ample cash position of USD1.2bn in new businesses should boost NAV Upgrade to OW(V) (from N(V)) on a higher target price of TRY1.30 (from TRY0.9); stock is trading at the top end of discount to NAV Summary Dogan Holding s expansion into the energy sector, strong position in the ad market through its subsidiary Dogan Yayin and net cash balance of USD1.2bn support our investment case. Though media has been Dogan s core business, its investments in the energy sector over the past two years should start yielding results, contributing 20% to group EBITDA by 2014e. We expect Turkish ad market growth to recover to 10% levels in 2013e on domestic macro recovery. We forecast net profit of TRY93m in 2013e and TRY130m in 2014e. The increase is driven mainly by the higher contribution from energy investments and stronger earnings at the media segment. A growing Turkish ad market and the conclusion of long-running tax issues remove the long overhang on Dogan Holding s share price. Also, DOHOL s recent bid into energy privatisation suggests improving relations with the government. As a result, we upgrade our rating to Overweight (V) from Neutral (V) with our new target price of TRY1.30 (from TRY0.90). Our target price rise is driven by the higher target prices of underlying assets and valuation of recently completed/acquired energy investments. DOHOL is trading at a discount to NAV of 45% including unlisted investments, which we believe is unusually higher than peers and warrants re-rating. Business outlook Media segment Dogan Holding, through its subsidiary Dogan Yayin, controls Turkish advertising market. Turkish ad spend increased by 4% in 2012e with the TV ad market commanding over half of the market share. Dogan Yayin s Hurriyet and Kanal- D remain the top-selling newspaper and leading broadcaster in Turkey, respectively. 3

4 Newspaper and magazines ad spend growth is slowing owing to stiff competition from digital media; however, Dogan Yayin maintains a top position in domestic ad spend. Broadcasting remains the major growth driver for Dogan Yayin with its main broadcasting channel Kanal-D retaining the top spot in audience share. TV ad spend, which continues to maintain 50% market share of domestic ad spend, is the prime method of advertisement. We expect Dogan Yayin s EBITDA margins to improve from 13.0% in FY12 to 14.9% in FY13 and EBITDA to grow 27% to TRY404m in FY13. Energy sector Turkey has become one of the fastest growing energy markets in the world in parallel to its economic growth registered in the past eight years. The Turkish Electricity Transmission Company estimates that Turkey s demand for electricity will increase at an annual rate of 6% until Growing energy demand in Turkey is one of the significant factors, along with market liberalisation and the country s potential role as an energy terminal in its region. These three factors play an important role in shaping investment opportunities in Turkey s electricity market. Electricity production in Turkey was c228.4bn kwh in 2011, while electricity consumption was 229.3bn kwh in the same year. Of this, 171bn kwh (74.8%) was produced from thermal plants and the remainder was produced from renewable sources such as hydro, geothermal and wind. The private sector played a key role in Turkey s electricity market, contributing to more than three-quarters of capacity additions over the past five years. And with the government mulling the privatisation of the distribution network, this should further boost investment in Turkey s energy market. Turkey s ambitious vision of 2023 targets 125,000 MW of installed power (up from c54,000 MW in 2011). We think DOHOL s timely investment into the domestic energy segment over is the next growth driver for the company. Dogan acquired two Wind Power Plants (WPP) with 126MW capacity (to reach 147MW at the end of 1H 2013) in June It holds a 33% stake in two hydroelectric power plant projects (HEPP), which together have capacity of 630MW. DOHOL s share in hydro power generation comes to 209MW. DOHOL also has a 20% effective interest in oil exploration in Iraq with recoverable reserves of 136mn bbls as of now. The company had also bid into the government s sale of Seyitomer Thermal plant but was not successful; however, this indicates to us Holding s desire to grow in energy business. Post fallout of FULL fuel distribution company takeover, Dogan now plans to increase its investments into the energy business and has bid for the 50% stake at Akcez Enerji that operates an electricity grid in western Turkey. Financial outlook Our lower net profit forecasts at Dogan Yayin are partly offset by additional earnings from energy and a positive contribution from retail operations. As a result, we cut our Dogan Holding net profit estimates for FY13e-14e by 20%-29%. We now forecast net profit of TRY93m in 2013e and TRY130m in 2014e. We believe stronger growth in the Turkish ad market from 2013 should support profitability. One of the growth drivers for DOHOL would be its energy operations. Though for 2012e the contribution from energy operation is marginal, we expect strong growth over e, contributing 20% of EBITDA in 2014e. We expect DOHOL s share of electricity generation to be 356MW in 2013e, generating revenues of TRY195m (only TRY94m from wind power will be consolidated because of new IFRS principles). 4

5 The power generation businesses are high margin, and we expect EBITDA margins to be in the range of 60%-80% in the initial years, increasing to 80%. We expect 2013e EBITDA of TRY141m from the energy business but TRY70m of this will be recorded under the consolidated figures. As a result, we forecast Dogan Holding s EBITDA margin to improve to 12.6% in 2013e from 11.3% in 2012e and further to 13.6% in 2014e. This gives us EBITDA of TRY435m for 2013e and TRY515m in 2014e. Our forecasts are 28% below consensus for 2013e and 15% below consensus for 2014e. We do not expect Dogan Holding to announce its Q4 results until 12 April Valuation and risks We value DOHOL s business through NAV valuation. We value listed investments at our target prices for Hurriyet and Dogan Yayin, and at current market prices for other listed companies. For Hydro projects, we value it at USD2m/MW capacity and Wind projects at USD3m/MW capacity. Applying these multiples to DOHOL s share of electricity generation gives us a value of TRY1,546m. We then reduce it by our estimated 2013e net debt to arrive at equity value of TRY927m. We value Dogan TV at 8.5x 2013e EBITDA to arrive at an EV of TRY1.57bn, reducing it by our estimated net debt gives us an equity value of TRY1bn. DOHOL s 8% stake (to be gained through options) is valued at TRY80m. We value its retail business at the transaction value of TRY139m and assign a value of TRY100m for its other assets. We add the net cash position of TRY2.1bn and reduce it by the DTV options liability of TRY416m to get total NAV of TRY4.52bn or TRY1.85/share from TRY1.50/share. We apply a 30% discount to NAV (reduced from 40% owing to removal of regulatory risks after settlement of tax fines with the government) to arrive at our new target price of TRY1.30 per share, up from TRY0.90. Though Dogan Holding shares have traded at an average discount to NAV of 40% historically, the discount has reduced to 30% levels in recent months owing to the change in its investment structure. As a result, we apply a 30% discount to NAV to get our new target price. Dogan Holding appraised valuation (TRYm) Ticker Direct stake No. of shares Share price Current value Value of stake Dogan Yayin Holding DYHOL.IS 75% 2, ,345 Hurriyet HURGZ.IS 11% Milpa MIPAZ.IS 86% Celik Halat CELHA.IS 79% Ditas Dogan DITAS.IS 74% Listed Companies 1,593 Dogan Energy 33%-100% 927 Dogan TV 8% 1, D&R 100% Others 100% 100 Unlisted Companies 1,246 Total Value from participations 2,839 Net (Debt) / Cash 2,100 Dogan TV options dilution -416 Total NAV 4,523 Number of shares 2450 Total NAV per share (TRY) 1.85 Holding discount 30% Target Price from NAV 1.30 Current share price (TRY) 1.02 Potential return 27.5% Source: Bloomberg, HSBC estimates 5

6 Dogan Holding discount to listed participations NAV has reduced over the last year/rising unlisted valuation and settlement of tax issues should be the drivers of this strength, in our view 0% -10% -20% -30% -40% -50% -60% -70% -80% 1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 1/1/12 7/1/12 1/1/13 Discount to NAV Av erage Discount to NAV Source: Thomson Datastream Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppt above and below the hurdle rate for Turkish stocks of 12.5%. Our target price implies a potential return of 27%, which is above the Neutral band; therefore, we upgrade DOHOL to Overweight (V) from Neutral (V). Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Risks Any deterioration in the macroeconomic environment that triggers an ad market fall would be a downside risk for our valuation. Also, utilisation of its cash position in low-return businesses may create pressure on valuation. Currently, Dogan Yayin Holding owns 79.71% of Dogan TV, while Axel Springer owns 17.27% of Dogan TV and the balance of 2.63% is owned by Dogan Holding. We now include an option liability to our valuation to be more conservative. The amount shown in 9M12 financial statements as Dogan Holding s option liability to Axel Springer is TL416mn (short-term portion is TL139mn, longterm portion is TL277mn). The options give Axel Springer the right to sell a 2.63% stake in Dogan TV for EUR50m after January 2014 and a further stake of 2.65% after January

7 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: Bulent Yurdagul 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 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. 7

8 *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 27 February 2013, the distribution of all ratings published is as follows: Overweight (Buy) 44% (29% of these provided with Investment Banking Services) Neutral (Hold) 37% (27% of these provided with Investment Banking Services) Underweight (Sell) 19% (23% of these provided with Investment Banking Services) Share price and rating changes for long-term investment opportunities Dogan Holding (DOHOL.IS) Share Price performance TRY Vs HSBC rating history Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Source: HSBC Feb-13 Recommendation & price target history From To Date Overweight (V) Neutral (V) 04 December 2008 Target Price Value Date Price February 2009 Price February 2009 Price May 2009 Price September 2009 Price September 2009 Price April 2010 Price June 2010 Price February 2011 Price July 2011 Price October 2011 Price May 2012 Source: HSBC 8

9 HSBC & Analyst disclosures None of the below disclosures applies to any of the stocks featured in this report. 1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 January 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 December 2012, 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. 6 As of 31 December 2012, 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. 7 As of 31 December 2012, 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. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-us Market Maker in securities issued by this company and/or in securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at * HSBC Legal Entities are listed in the Disclaimer below. Additional disclosures 1 This report is dated as at. 2 All market data included in this report are dated as at close 25 February 2013, 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. 9

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11 Turkish Research Team Cenk Orcan Co-Head of Turkey Equity Research Bulent Yurdagul Co-Head of Turkey Equity Research Levent Bayar Analyst Tamer Sengun Analyst Dr. Murat Ulgen Chief Economist Melis Metiner Economist