Turkish Glass Sector Hefty Returns in a Glass Bottle

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1 Turkish Glass Sector Hefty Returns in a Glass Bottle April 2013 lyas Safa Urganc Nur Karabacak

2 Table of Contents Investment Summary 1 Sector Analysis 3 World Glass Industry 3 Turkish Glass Industry 4 Flat Glass Market 5 Glass Packaging Sector 9 Glass Chemicals Sector 12 Valuation and Recommendation 15 Company Reports 18 Sise Cam 18 Trakya Cam 30 Anadolu Cam 49 Soda Sanayii 62 Disclaimer 78

3 Equity / Sector Report Glass Sector 29/04/2013 Hefty Returns in a Glass Bottle All glass companies have painted a poor price performance over the past 12 months. Glass stocks underperformed the market over the past 12 months on poor results driven by i) falling profits and weaker margins following a total of 52% hike in natural gas prices during the past one year, ii) relatively lower top-line growth due to slowdown both in domestic economy and export markets and iii) the plunge in prices on poor demand and excess supply in Europe. Although the company made some price adjustments in order to pass through the impact of natural gas on costs, the hikes fell short of the rise on the cost side as demand was not alive. Accordingly, 2012 financial results were well below that of the previous year and all glass companies markedly underperformed the benchmark index. That said, SISE underperformed by 21%, TRKCM by 6%, ANACM by 22% and SODA by 40%. A difficult year is behind, better growth prospects from now on. All segments witnessed EBITDA Margin erosion in 2012, i.e. margins contracted by 12.1pp in flat glass, 7.0pp in glassware, 4.8pp in glass packaging and 5.1pp in chemicals. Accordingly, consolidated EBITDA declined massively by 21% YoY in 2012, implying a margin of 19.0%, down by 6.9pp YoY. Turning more bullish on glass sector. We anticipate growth to speed up in 2013 which will be driven primarily by the acceleration of construction and infrastructure investments and improved economic environment in Europe, owing to improving financial conditions. Considering accelerating economic activity (our 2013E GDP growth forecast 4% compared to 2.2% in 2012) and capacity expansions both in Turkey and international operations, we anticipate 12% increase in 2013 consolidated revenues. Expected recovery should now be built-in prices. We see 2013 as a recovery period as glass companies will start to adjust their prices in order to reflect sharp increases in energy costs. Starting from 1Q13, we expect gradual recovery in operating margins QoQ, through reflection of cost-base inflation on product prices. Accordingly, we expect glass conglomerate s consolidated EBITDA margin to be c.19.4% in 2013, up by 0.4pp YoY, while sharpest recovery will be seen at flat glass segment, with 4.0pp margin recovery Y-o-Y. Preferred picks: SISE and TRKCM. We prefer Sisecam over its subsidiaries due to i) relatively higher liquidity offering easy access to all glass segments ii) 7% discount to CNAV and 21% discount to TNAV; iii) the fact that the holding does not deserve such a discount with its focused portfolio and solid steps taken in the last couple of years to simplify the group structure, iv) hidden value to unlock with potential sale of the sizeable real estate portfolio and v) the highest discount to the international peers. The stock trades at 30% discount based on its 2013E EV/EBITDA of 4.6x, compared to its international peers that are trading at a median EV/EBITDA of 6.6x for the same period. Our runner-up from glass universe is TRKCM as i) it trades at very attractive levels following 6% underperformance over the past 12 months on the back of slowdown in main operational areas and poor margins stemming from higher energy bill, ii) margins bottomed out in 2012 and profitability will eventually improve in 2013, backed by product price hikes, iii) there is an impressive top-line CAGR projection of 17% between 2012 and 2015, with the completion of the ongoing investments that will almost double the capacity, and v) it trades at significant discount with respect to international peers. Please refer to important disclaimer at the end of this report. SISE TRKCM ANACM SODA Valuation Method SOTP DCF DCF DCF Target Price, TL Upside Potential 24% 17% 38% 34% Premium/Discount to peers, 2013E EV/EBITDA (30%) 13% (19%) (30%) Premium/Discount to peers, 2013E P/E (31%) 3% (11%) (57%) Premium/Discount to TNAV (21.0%) Premium/Discount to CNAV (7.0%) Last 12 Months Performance rel. to BIST (21.0%) (6.0%) (22.0%) (40.0%) Avg. Trading Volume - 3 months - USD Recommendation OP OP OP OP Ilyas Safa Urganci Nur Karabacak

4 Glass Sector Report A. Global Glass Sector Glass is a growth industry. I. World Glass Industry Global glass industry has an annual growth rate in the range of 2%-4%, outstripping GDP growth. Based on the figures of Standing Committee of the European Glass Industries, the global glass production in 2012 is estimated to be 122 million tons, growing at a CAGR of nearly 2% between 2007 and Over the past 20 years, production of global glass industry had an annual growth rate of 2%-4%, outpacing global GDP growth. And over the long term, global glass demand is expected to maintain a 4% annual growth rate. Demand growth for glass is driven not only by economic growth, but also by legislation and regulations. Demand for value-added products is growing at a faster rate than the demand for basic glass, enriching the product mix and boosting revenues. Value-added products, particularly coated, are delivering greater functionality in all application areas. FIGURE 1: World Glass Production Europe is the most mature glass market and has the highest proportion of valueadded products. mn tons Glass Packaging Flat Glass Glassware Fibre Glass Others Source: CPIV ( Standing Committee of the European Glass Industries ) Europe, China and North America together account for 75% of the total demand for glass. Europe is the most mature glass market and has the highest proportion of value-added products. According to Trade map figures, USA, China and Germany are the three largest glass importer countries whereas China, Germany and Japan are the leading glass exporters in the world. In terms of product breakdown, glass packaging has the lions share within total world production with 45% share, while flat glass is the runner-up with 37% share. Glassware and fiber glass products constitute c.4% and 3% of total production, respectively. Flat glass is the most exported and imported product type in the world. EU countries heavily import glass packaging products and export glassware and fiber glass. FIGURE 2: Global Breakdown of Segments Glassw are, 4% Fibre Glass, 3% Others, 10% FIGURE 3: Regional Breakdown of the Glass Demand Others, 7% Glass Packaging, 45% USA, 29% Europe, 30% Flat Glass, 37% Asia, 34% Source: World Glass Figures 3

5 Glass Sector Report Turkish glass industry ranks 17th in the world and 6th in EU. II. Turkish Glass Industry FIGURE 4: Turkish Glass Production Capacity Turkish glass industry ranks 17th in total world production and 6th in EU production. Turkish glass industry roots back to the establishment of Pasabahce back in 1935 with a production capacity of only 3K tons. According to Turk Stat figures, Turkey glass industry production had reached to 2.9 mn tons in 2012, 90% of which is done by Sise Cam. Total production of the country grew at a CAGR of 5.1% over the past five years, more than doubling the global growth rates. More importantly, CUR of the industry showed decisive upward trend thanks to improved technology, know-how and growing domestic and international demand. Since Turkish glass industry does not have an advantage in terms of raw material and energy costs compared to its European peers, capacity utilization rates of the industry is the key indicator of the competitive edge and profitability. Note that, Turkish glass industry pulled up its CUR to c.85% levels in 2012 (90% in 2011) from 70% in 2006 thanks to strong demand growth. The industry depicted a tremendous growth trend either through capacity additions or through new product initiations until now. Going forward it still has a long way to go, in our view, due to sound growth prospects in the sectors served, such as automotive, construction, beverages, pharmaceuticals, not to mention the growth prospects in neighbouring countries. FIGURE 5: Country Breakdown of Exports mn tons % 90% 80% 70% 60% Iraq, 8% USA, 8% France, 13% Spain, 7% Germany, 22% Italy, 15% Turkey Production Capacity mn tons / year Source: Turk Stat CUR 50% Iran, 14% Source: International Trade Center UK, 14% Based on Turk Stat figures, export volume of Turkish glass industry has reached to 764K tons in 2011, increasing at a CAGR of 8.5% over the past five years. Turkey has an advantageous position among its global competitors thanks to its proximity to main export regions in the world, Eurozone being the most prominent one. Exports to Eurozone constitute c.70% of the overall glass exports of Turkey. Among export regions, Germany has the highest share with 22% followed by Italy, UK and France. In terms of product breakdown, glassware is the most exported product type of Turkey with c.70% share within the basket, while fiber and processed glass comprise the remaining part. FIGURE 6: Turkey Glass Export Figures FIGURE 7: Breakdown of Exports Fiber Glass, 13% Processed Glass, 10% Flat Glass, 8% Glassw are, 69% Exports Volume - K ton Exports Value - mn USD Source: Turk Stat 4

6 Glass Sector Report Flat glass is a EUR 25bn global industry at primary manufacturing level. III. Flat Glass Market Flat glass market heavily depends on construction and automotive industries. The global market for flat glass in 2012 was approximately 59 million tons. At the primary manufacture level, this represents a value of around EUR 25 billion. Of total global market demand in 2012, it is estimated that 32 million tons were for high quality float glass, i.e. 54% of the total. Approximately 4 million tons constituted of sheet glass and 2 million tons were rolled glass. The remaining 21 million tons represented demand for lower quality float, produced mainly in China. Flat glass has the highest demand elasticity among the different segments due to the higher responsiveness of the sectors served to the economic growth. Being prone to economic fluctuations construction and automotive sectors are the biggest consumers of the flat glass industry. FIGURE 8: Global Flat Glass Market mn metric tons E Available Capacity Demand Utilization Source: National Glass Association, Pilkington and Flat Glass Industry 100% 95% 90% 85% 80% Russia has the largest flat glass consumption with c.1.8 mn tons followed by Turkey with 1 mn tons. Global plant capacity utilization rates of the industry has ranged between 90% and 95% over the past five years. In 2008, global capacity utilization dropped significantly towards the lower end of this range, following the nose-dive in demand due to global recession. Some recovery was seen in 2009, supported particularly by strong demand growth in China. Afterwards, a decline was observed due to new capacity coming on stream, especially in China. Capacity utilization is anticipated to be c.90% in 2012 due to lower global demand around the world, as well as new capacity additions. Being a capital intensive sector, CUR is very crucial factor for profitability. Annual global flat glass demand is estimated to grow at 4%. Exceeding the global growth annual flat glass demand is expected to grow by 4%. Not surprisingly, consuming more than one third (34% est.) of the global market, China is the largest and fastest growing market. In Eastern Europe, Russia has the largest flat glass consumption with c.1.8 million tons, followed by Turkey with 1 million tons. FIGURE 9: Flat Glass Market Breakdown FIGURE 10: Flat Glass Growth Trend 250 Low er Quality Float Glass, 36% High Quality Float Glass, 55% Index (1991=100) Rolled Glass, 4% Sheet Glass, 6% Source: National Glass Association, Pilkington and Flat Glass Industry Report Real GDP Growth Glass Demand Growth

7 Glass Sector Report Float plants need to operate at high capacity utilization rates in order to be profitable. Industrial Trends Highly capital intensive, hence considerable barriers of entry. A float plant is highly capital intensive, typically costing around EUR 70mn - 200mn depending on the capacity, location and product complexity. However, the investment amount is less costly in automotive glazing plant, costing around EUR 40-60mn with a capacity to fully glaze one million cars per year. The plants are designed to operate every day of the year and their lifetime vary between 10 to 15 years. Once in every three years a cold repair is done in order to repair and renew the plant which requires around US$ 25mn capital expenditure. Because of the sizeable initial capital investment and the maintenance investments, the segment exhibits significant barriers to entry. Requires high capacity utilization rates. Float plants need to operate at high capacity utilization rates in order to maximize profits due to high share of fixed costs. Once the plant passes minimum level of required utilization rate, which is around 70%, the inherent operational profitability starts to increase rapidly. Hence, capacity utilization rate is the most important factor in glass industry in reducing the unit costs and creating economies of scale. Raw material and energy are the major cost items. Although their shares may change depending on the product type, efficiency, and scale, it is certain that raw materials and energy are the two major cost items of glass production in general. In flat glass production, raw material costs constitute around 40% of the total costs while energy accounts for 30%. Silica sand, soda ash and dolomite are the three major raw materials required for production. While silica sand is the main component of raw material in terms of volume, soda ash is the most expensive material used in the production, representing 16% share in volume but holding around 60% share in value. FIGURE 11: Total Cost Breakdown of Flat Glass FIGURE 12: Raw Material Breakdown ( volume ) Overheads 6% Labor 9% Transport 15% Raw Materials 40% Sodium Sulphate, 1% Limestone, 4% Dolomite, 13% Recycled Glass, 15% Sand, 51% Energy 30% Soda Ash, 16% Source: Pilkington and Flat Glass Industry Report Source: Pilkington and Flat Glass Industry Report It is not feasible for most products to be transported more than kms Transportation is another key issue in determining of efficiency. The glass industry requires large amount of investment, capital and heavily depends on raw materials. As a result, in order to become a global and regional player, companies invest in key markets in order to supply growing demand in regions. In addition to raw material and energy, transportation is the another big item, determining the profitability and competitive power of a company. Note that, glass is a relatively heavy material and distribution costs are not negligible, making around 15% of the total cost base. In most cases, distributing products long distances by trucks is not economical. To say that, it is not feasible for most products to be transported more than kms. 6

8 Glass Sector Report Large portion of flat glass produced are used in construction sector. Most of the world s float glass production is used in buildings, constituting c.83% of the global glass usage. In building products, basic glass can undergo two or more stages of processing before being installed as original or replacement windows and glazing systems. While 40% of the float used for buildings are used for new construction, 40% is used for refurbishment and 20% is used for interior design. Automotive market demands 7% of the total supply. Lastly 10% of the flat glass are used in special applications, solar energy being the most notable one. FIGURE 13: Global Flat Glass Producers AGC '000 mn metric tons Saint-Gobain NSG Guardian Taiwan Glass Sise Cam China PPG Others Source: National Glass Association, Pilkington and Flat Glass Industry Report FIGURE 14: Global Glass Usage Buildings 83% New Buildings 40% Refurbishment 40% Interior 20% Automotive 7% Original Equipment 80% Replacement Market 20% Special Applications 10% Solar Energy 10% Other 90% Source: National Glass Association Sise Cam meets nearly 14% of the European flat glass demand. Four companies meet majority of the demand in the world. In terms of high quality float glass alone, the industry is relatively consolidated, with four companies accounting for the majority of glass capacity. Of the four companies two of them are from Japan, namely, Asahi Glass and NSG Group, Saint-Gobain is based in France and Guardian is the American producer. Sise Cam s flat glass arm Trakya Cam has a total production capacity of c.1.7 mn tons, meeting nearly 14% of the European flat glass demand. Europe (including Turkey, Ukraine and Belarus, but not Russia ) with a market size of over 9 mn tons in 2011, is supplied by eight main manufacturers of float glass: Saint-Gobain, NSG Group, Asahi Glass, Guardian, Sisecam, Euroglas, Sangalli and Interpane. Europe is a mature market, with the highest proportion among the eight geographic markets of value-added products, such as coated and laminated glass, which are largely produced by large float glass manufacturers. Smaller independent players are generally involved with downstream processing, rather than primary manufacturing. FIGURE 15: European Float/Sheet Capacity by Company FIGURE 16: Regional Flat & Sheet Demand Guardian, 12% Others, 8% South Rest of the America, World, 6% 4% Russia, 4% Sisecam, 13% NSG, 19% Saint-Gobain, 28% AGC, 20% Japan, 5% South East Asia, 7% North America, 8% Europe, 16% China, 50% Source: National Glass Association Source: National Glass Association 7

9 Glass Sector Report FIGURE 17: Global Flat Glass Producer Overview Country Business Lines Product Range Number of Tanks Capacity Exposure TRAKYA CAM TURKEY Flat glass Basic flat glass ( laminated and coated ), automotive, energy glass and glass for home appliances mn tons/year Europe, Russia, MENA SAINT GOBAIN FRANCE Flat glass and glass packaging ASAHI GLASS JAPAN Flat Glass Construction Products and Automotive Glazing mn tons/year Float glass, fabricated glass, decorative glass, glass for solar pow er systems mn tons / year Europe, North America, Asia, Emerging Countries America, Europe and Asia PPG INDS INC USA Flat glass Flat and fiber glass mn tons / year Europe NIPPON SHEET JAPAN Flat Glass Flat and fiber glass mn tons / year Europe,Japan,Ameri ca and Russia FIGURE 18: Flat Glass Company Figures 5yr Historic Revenue CAGR 5yr Forecast Revenue CAGR 5yr historic average EBITDA Margin 5 yr historic average EPS - USD 5 yr forecast average EPS - USD TRAKYA CAM 8% 12% 23% SAINT GOBAIN 3% 4% 10% ASAHI GLASS -6% 18% 18% PPG INDS INC 6.4% -1% 13% NIPPON SHEET -4% -2% 8% Source: Is Investment Estimates, Thomson Reuters, Company s Annual Reports 8

10 Glass Sector Report Global consumer packaging industry posts 3% growth every year IV. Glass Packaging Sector The global market size of the consumer packaging industry is valued around US$ 395bn in 2011, posting around 4% YoY growth. Given the fact that glass packaging accounts for some 30% of the total, it will not be misleading to estimate the size of the market at around US$ 120bn as of Consumer packaging business is rather defensive given the sectors served, such as food and beverage, healthcare...etc and more mature growing at around 3% annually, which is expected to continue in the coming years and estimated to reach US$ 456bn by Due to widening health and environmental concerns and easiness of recycling, glass packaging side may exceed the sector s growth at all and increase its share in total. FIGURE 19: Global Consumer Packaging Breakdown Turkey, 4% EU South - East, 5% Poland, 5% FIGURE 20: Annual Average Growth Rates Healthcare 4.50% Eu North & Central, 9% Portugal, 6% Germany, 19% France, 15% Cosmetics Food Beverage 2.80% 2.70% 4.30% Spain, 10% Source: Pira UK, 11% Italy, 16% Other Consumer Source: Pira 2.60% Food packaging is the largest sub-segment, accounting for 51% of the total market while beverage packaging accounts for 18%, followed by 6% for healthcare and 5% for cosmetics. Healthcare is the fastest growing sub-segment of the sector with a 4.5% annual growth rate; while global industry s annual average growth rate is estimated to be c.2.9% per year. Glass packaging is expected to grow c.7% every year in developing markets. Glass packaging comprises around 30% of the whole packaging sector. According to FEVE figures, total sales volume of glass packaging industry is estimated at 60 mn tons. Although it is increasingly associated with premium products, alcoholic drinks form the mainstay of glass bottle demand. For example in terms of beer packaging, glass bottles represent 62% of the global peer pack mix, while metal accounts for 23%. Glass packaging demand outpaces the growth trends of overall consumer packaging sector due to the recent shift in demand from pet to glass and consumers perception of glass as a natural, high quality and healthier material. Especially in emerging economies, glass packaging industry is estimated to post around 7% annual volume growth. FIGURE 21: European Packaged Glass Producers FIGURE 22: European Packaged Glass Production Eu North & Central, 9% Portugal, 6% Turkey, 4% Poland, 5% EU South - East, 5% Spain, 10% UK, 11% Germany, 19% Italy, 16% Source: The Euopean Container Glass Federation France, 15% '000 tons 22,000 21,500 21,000 20,500 20,000 19,500 19,000 18,500 18,

11 Glass Sector Report Glass packaging competes with plastic and paper packaging Competition from plastic and paper packaging poses a risk factor for glass packaging industry. The glass packaging market still suffers from the competition created by plastic and paper packaging as they are cheaper due to lower production costs. Nonetheless, the premium image of glass and its environment friendly characteristics are expected to support glass packaging in the years ahead. Majority of the global glass packaging products is produced by European companies. Based on The European Container Glass Federation figures, glass packaging production volumes in Europe ( EU27 + Turkey ) increased by 4.2% in 2011, reaching 22 mn tons with nearly 160 production plants, making c.35% of the total world output. Glass packaging arm of Sise Cam has 4% global market share Three companies weigh on the global glass packaging market with 40% share. Owens Illinois, Saint Gobain and Vidrala dominate the global market commanding 40% of the total, while glass packaging arm of Sise Cam group Anadolu Cam has around 4% global market share. Owens - Illinois is the largest glass container producer in the world with its 81 glass plants and 19 furnaces in 21 countries. Saint Gobain and Vidrala are the other significant players in the industry. Anadolu Cam pursues to meet the strong demand both in Russian, Ukrainian, Georgian and Turkish markets with its 10 production facilities and almost 2 million tons of production capacity. FIGURE 23: European Manufacturing Plants Source: The Euopean Container Glass Federation 10

12 Glass Sector Report FIGURE 24: Global Glass Packaging Producer Scantrack Country Business Lines Product Range Number of Production Facilities Capacity Exposure Food and Beverage, Mineral Waters, Alcoholic ANACM TURKEY Glass Packaging Drinks and Health Products mn tons / year Southern Europe, Russia, Ukraine, Georgia VIDRALA SPAIN Glass Packaging 6 FRIGOGLASS GREECE Beverage coolers and glass bottle producer OWENS-ILLINOIS USA Glass Packaging Glass bottles and containers 81 Glass operations Glass bottles and containers mn tons / year based in Nigeria and Dubai Europe, North America,South America and Asia Pacific VETROPACK HOL SWITZ Glass Packaging ZIGNAGO VETRO ITALY Glass Packaging Packaging for Food & Beverage mn tons / year Northern Europe Food and Beverage and Cosmetics 3 Europe SAINT-GOBAIN FRANCE Flat glass and glass packaging Glass bottles and jars mn tons/year GERRESHEIMER GERMANY Glass Packaging Healtcare Products Europe, North America, Asia, Emerging Countries Europe, USA and Asia VITRO MEXICO Glass Containers and Flat Glass 5yr Historic Revenue CAGR Flat glass ans all glass containers 8 America and Europe 5yr Forecast Revenue CAGR 5yr historic average EBITDA Margin 5 yr historic average EPS - USD 5 yr forecast average EPS - USD ANACM 11% 10% 24% VIDRALA 8% 3% 23% FRIGOGLASS 7% 4% 16% OWENS-ILLINOIS 2% 2% 12% VETROPACK HOL -3% 3% 25% na na ZIGNAGO VETRO 7% 5% 27% SAINT-GOBAIN 3% 4% 10% GERRESHEIMER 11% 6% 18% VITRO -4% 3% 13% Source: Is Investment Estimates, Thomson Reuters, Company s Annual Reports 11

13 Glass Sector Report V. Glass Chemicals - Soda Ash Sector Global soda ash market is expected to grow at a CAGR of c.2.2% by 2015 Global soda ash market is estimated to grow at a CAGR of c.2.2% till According to The IHS Chemical World Soda Ash Analysis report published in 2012, global soda ash capacity has reached to 65 million tons in 2011 and is expected to increase to 71 million tons by 2015, growing at a CAGR of c.2.2%. The same study reveals that world demand for soda ash stood around 49 million tons in 2011, growing slightly from 47 million tons in 2008, and despite an oversupply, it is forecasted to rise further to 58 mn tons by 2015, still remaining below total production capacity. Following a drop in demand for soda ash during the recession in 2009, demand has started to recover, despite the fact that the market is currently oversupplied. Figure 25: Global Soda Ash Demand mn tons E 2013E 2014E 2015E Global Soda Ash Demand Capacities Source: IHS Chemical World Soda Ash Analysis Turkey has the second largest trona reserves in the world Soda Ash is produced through both synthetic and natural methods. China is the world s largest producer of synthetically extracted soda ash with an annual production capacity of 28 million tons, while US is the second largest global producer with 14mn tons of capacity. Russia and India are the other two prominent soda ash producing nations. The US is the largest supplier of naturally produced soda ash, since the primary mineral, mined for soda ash, trona, is found extensively in the region. Trona is the primary mineral mined to produce soda ash, and the most exploited reserves are located in Wyoming in the U.S, while Turkey has the second largest trona reserves in the world mainly in Beypazarı region. Apart from that, Eastern European countries constitute around 16% of the global soda ash production. Figure 26: Soda Ash Production by Continents South America, 1% Africa/Middle East, 3% North America, 22% Asia, 47% Eastern Europe, 16% 12 Western Europe, 11% Source: IHS Chemical World Soda Ash Analysis

14 Glass Sector Report Soda holds 3% share in global annual soda ash production capacity. Top soda ash producers are Solvay (Belgium), which produces nearly 15% of global capacity, followed by Tata Group (India), which produces around 14%, followed by FMC Corp. and Shandong Marine, each contribute more than 9% of annual global capacity. Soda Sanayii holds 3% share in annual production capacity while Eti Soda s production has 3% share in global capacity as well. Figure 27: Major Soda Ash Producers by Capacity Figure 28: Producers in Eastern Europe region Sterlitamak, 6% Eti Soda, 3% Soda Sanayii, 5% Tangshan Sanyou, 6% Ciech, 6% Nirma, 8% Others, 9% Source: Global Industry Analysis OCI, 8% Solvay, 15% Tata, 14% FMC, 11% Shandong Marine, 9% Sterlitamak Soda Sanayii Ciech Solvay Eti Soda Kırım S Source: Global Industry Analysis Soda ash is mainly used for glass production. Similar to the worldwide usage, glass is the dominant end use for soda ash in Europe, accounting for more than half of the demand at 37 million tons in Chemical production accounts for 14% of European soda ash demand followed by detergents at 6%.The remaining 11% demand is attributed to other uses, including environmental applications, such as production of alumina and metals, pulp and paper and in acid-waste reduction. Soda ash is mainly demanded for glass production Figure 29: European Soda Ash Demand Detergents, 6% Others, 11% Chemicals, 21% Glass, 62% Source: Global Industry Analysis Increasing presence of Turkey in global soda ash market. In 2006, Turkey supplied only 10% of the total soda ash imported to the EU countries. Turkey s share had increased to 48% in 2011, and Turkish supply has maintained its dominant position in the European market in 2012 as well. 13

15 Glass Sector Report Soda ash prices drew an increasing trend in Contrary to other commodity prices, soda ash prices depicted an upward trend during 2012, up by around 15% YoY, driven mainly by soaring raw material costs. Costs of raw materials including salt, petroleum coke and energy have been continuously increasing prompting soda ash producers to hike prices. Apart from that, price increases gained pace as producers are also adjusting long term supply contract prices in order to remain profitable. Energy costs are another issue concerning the industry. China for instance faces significant energy problems forcing producers to increase prices. Soda ash prices increased by 15% YoY in dollar terms driven by soaring raw material costs Figure 30: Soda Ash and CRB Commodity Price Index ( 2004 = 100 ) Soda Ash CRB Commodity Index Source: Bloomberg, Indian Wholesale Soda Ash Index is used for Soda prices 14

16 Glass Sector Report B. Valuation and Recommendation All glass companies have painted a poor price performance over the past 12 months widely underperforming BIST. Glass companies started 2012 with a widelyexpected gloomy outlook on the back of i) meagre earnings momentum and weaker margins following a cumulative 52% hike in natural gas prices effective from October 2011, April and October 2012, ii) relatively lower top-line growth estimates due to slowdown both in domestic economy and export markets and iii) very strong returns in the previous year thanks to superior financial and operational performance. Although the company made some price adjustments in order to pass through the impact of natural gas on prices, the hikes fell short of increases as demand was not alive. Accordingly, 2012 financial results were well below that of the previous year same period. All glass companies underperformed the benchmark index last 12 months. That said, SISE underperformed by 21%, TRKCM by 6%, ANACM by 22% and SODA by 40%. It is very clear that higher dependency on energy in production turns out to be higher pressure on stocks. Figure 31: Glass Companies Share Price Performances relative to BIST ( Jan 1st, 2012 = 100 ) Source: Bloomberg SISE TRKCM ANACM SODA BIST We are buyers of all glass stocks trading at bargain multiples. At the current market valuations, all stocks in glass universe trade at significant discounts compared to their international peers especially in terms of EV/EBITDA. SISE and SODA trades at notable discounts in terms of P/E as well. 15

17 Glass Sector Report SISE and TRKCM are our top-picks in Turkish glass universe SISE is our preferred pick in the glass universe. In our base case scenario assuming a recovery in domestic economy and no further price hikes in natural gas in 2013, we prefer Sisecam over its subsidiaries due to i) relatively higher liquidity offering easy access to all glass segments ii) 7% discount to CNAV and 21% discount to TNAV; iii) the fact that the holding does not deserve such a discount with its focused portfolio and solid steps taken in the last couple of years to simplify the group structure, iv) hidden value to unlock with potential sale of the sizeable real estate portfolio and v) the highest discount to the international peers. The stock trades at 30% discount based on its 2013E EV/ EBITDA of 4.6x, compared to its international peers that are trading at a median EV/ EBITDA of 6.6x for the same period. Our runner-up from glass universe is TRKCM as i) it trades at very attractive levels following 6% underperformance over the past 12 months on the back of slowdown in main operational areas and poor margins stemming from higher energy bill, ii) margins bottomed out in 2012 and profitability will eventually improve in 2013, backed by product price hikes, iii) there is an impressive top-line CAGR projection of 17% between 2012 and 2015, with the completion of the on-going investments that will almost double the capacity, and v) it trades at significant discount with respect to international peers. Source: Is Investment Estimates SISE TRKCM ANACM SODA Valuation Method SOTP DCF DCF DCF Target Price, TL Upside Potential 24% 17% 38% 34% Premium/Discount to peers, 2013E EV/EBITDA (30%) 13% (19%) (30%) Premium/Discount to peers, 2013E P/E (31%) 3% (11%) (57%) Premium/Discount to TNAV (21.0%) Premium/Discount to CNAV (7.0%) Last 12 Months Performance rel. to BIST (21.0%) (6.0%) (22.0%) (40.0%) Avg. Trading Volume - 3 months - USD Recommendation OP OP OP OP Figure 32: Glass industry peers 2013E EV/EBITDA vs EBITDA growth NIPPON 8.0 EV / EBITDA 2013E VETROPACK PPG OI S.GOBAIN ASAHI SISE FRIGOGLASS ZIGNAGO TRKCM GERRESHEIMER ANACM EBITDA CAGR Source: Is Investment Estimates, Reuters, Bloomberg 16

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19 Equity / Large Cap. / Glass Sise Cam Bloomberg: SISE TI Reuters: SISE IS Queen of Glass Empire Glass conglomerate had a distressful year in 2012 in which demand was not at desirable levels especially in flat glass segment and margins were intensively under pressure due to 52% cumulative price hikes in natural gas prices over the past one year. EBITDA Margin erosion was seen at every operational segment in 2012, i.e. 12.1pp erosion in flat glass, 7.0pp in glassware, 4.8pp in glass packaging and 5.1pp in chemicals. Accordingly, consolidated EBITDA declined massively by 21% YoY in 2012, along with a margin of 19.0%, down 6.9pp, a slim 7% top-line growth accompanied with. A better year ahead. We are bullish on glass companies this year. We anticipate growth to speed up in 2013, which will be driven primarily by the acceleration of construction and infrastructure investments and better economic environment in Europe, owing to improved financial conditions. Considering higher growth rates in economic activity (our 2013E GDP growth forecast 4% compared to 2.2% in 2012) and capacity expansions both in Turkey and international operations, we anticipate 12% increase in 2013 consolidated revenues. Recovery period is ahead in terms of margins. We define 2013 as a recovery period as glass companies will start to adjust their prices in order to reflect sharp increases in energy costs. Starting from 1Q13, we expect gradual recovery in operating margins through reflection of costbase inflation on product prices. Accordingly, we expect glass conglomerate s consolidated EBITDA margin to be c.20% in 2013, up 0.4pp YoY, while sharpest recovery will be seen at flat glass segment s EBITDA, up by 4.0pp YoY. Heavy investment schedule to become a global player rather than a regional one. The glass conglomerate has an intensive investment program both at flat glass and glass packaging businesses till 2014 to improve its competitive power in the global arena. Apart from planned capacity expansion investments, the company announced two acquisitions in Romania and India at flat glass segment. Total investment budget of the holding stands at US$ 1.3bn for the next two years. Company Report OUTPERFORM Upside Potential* 24% Stock Data TRY US$ Price at Month Target Price Mcap (mn) 4,425 2,453 Float Mcap (mn) 1, No. of Shares Outstanding 1500 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY BIST ,112 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to BIST Price / Relative Price TRY 29/04/2013 Relative SISE Relative to ISE Week Range (Close TRY) Trading at 21% discount to its target NAV, OUTPERFORM recommendation is reiterated. At its current Mcap of US$ 2.3bn, Sisecam shares trade at 7% discount to its current NAV and 21% discount to its target NAV, versus historic discounts of 16% to the current and 20% to target NAV. Moreover at 2013E P/E of10.8x and EV/EBITDA of 4.6x, the stock trades at 31% and 30% discount to its international peers, respectively. 18

20 Sise Cam Summary of Key Financials (TL mn) Income Statement (TL mn) 2011A* 2012A* 2013E 2014E 2015E Revenues 4,979 5,342 5,983 6,462 6,979 EBITDA 1,292 1,016 1,163 1,264 1,377 Depreciation & Amortisation EBIT Other income (expense), net Financial expenses, net 82 (85) Minority Interests Income before tax Taxation on Income (126) (44) (61) (67) (74) Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (326) 8 (188) (140) (151) Cash Flow from Operations ,033 1,111 Capital Expenditure 1,204 1,156 1, ,000 Free Cash Flow (363) (259) (109) Rights Issue Dividends Paid Other Cash Inflow (Outflow ) 238 (62) 23 (73) (84) Change in net cash (171) (372) (157) (23) (64) Net Cash (596) (968) (1,125) (1,148) (1,212) Balance Sheet (TL mn) Tangible Fixed Assets 3,968 4,597 5,016 5,288 5,610 Other Long Term Assets Intangibles Goodw ill Long-term financial assets Inventories 991 1,101 1,233 1,331 1,438 Trade receivables ,088 1,175 1,269 Cash & equivalents 1,600 1,164 1,304 1, Other current assets Total assets 8,255 8,723 9,593 9,910 10,280 Long-term debt 1, ,633 1, Other long-term liabilities Short-term debt 720 1, ,166 Trade payables Total Debt 2,196 2,132 2,429 2,256 2,109 Other short-term liabilities Total liabilities 3,098 3,117 3,508 3,415 3,355 Minority Interest ,017 1,034 1,046 Total equity 4,202 5,606 6,085 6,495 6,925 Paid-in capital 1,300 1,500 1,571 1,571 1,571 Total liabilities & equity 8,255 8,723 9,593 9,910 10,280 Ratios ROE (%) ROIC (%) Invested Capital 5,750 6,518 7,143 7,572 8,063 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 0.9x 1.0x 0.9x 0.8x 0.8x EV/EBITDA (x) 3.3x 5.3x 4.6x 4.3x 3.9x EV/IC (x) 0.7x 0.8x 0.8x 0.7x 0.7x P/E (x) 6.6x 13.8x 10.8x 9.8x 9.1x FCF yield (%) -9% -6% -2% 3% 3% Dividend yield (%) 1% 2% 1.6% 1.9% 2% *based on average Mcap during the year **EBITDA calculation includes indemnity provisions 19

21 Sise Cam Investment Positives Sole leader in Turkish market as well as a leading player in the region Constant capacity expansions across all operational segments 2012 will be a growth year despite of all challenges Higher profitability compared to its peers A virtual monopoly and undisputable leader in Turkish glass sector. Serving at every sub-segment of the glass industry, namely flat glass, glass packaging, glassware and chemicals and commanding respective domestic market shares of 74%, 89%, 66% and 71%, Sisecam dominates Turkish glass market with its subsidiaries. It has a vertical integrated business structure, producing and supplying soda ash and chromium chemicals to its sister companies, as well as to third parties while operating cogeneration plants. Although there are some other small producers in the market, rest of the domestic demand is mostly met through imports. Besides, the glass holding is the 4th largest producer in Europe with 14% share in flat glass, 9% share in glass packaging, 25% share in glassware and 15% share in soda ash, respectively. Pursues to be a global player rather than a regional one with a heavy investment schedule. The glass conglomerate has an intensive investment program till 2014 to improve its competitive edge in the global arena. In flat glass segment, Trakya Cam will double its float line capacity in Bulgaria with a planned investment amount of US$180mn and the production is anticipated to start in In addition to that, the company will establish 225K tons of flat glass capacity in Russia with its JV partner St Gobain and complete its new Polatlı plant till mid 2014 which has a capacity of 560K tons/year, with an investment of US$320mn. On the glass packaging side, total domestic capacity has reached to 920K tons/year following the recent capacity expansion at Yenisehir plant with 120K tons/year new furnace and the company moved its 180K tons/year capacity in Istanbul facility to Eskisehir, located in Central Anatolia. The furnaces will become operational starting from 2013 and we expect all four furnaces with a total installed capacity of 480K tons/year to become operational by Profitability is expected to be higher in the new furnaces, since they will be brand new with more efficient production process and manufacture higher value added products. Apart from these investments, the company looks for acquisition opportunities in Russia and CIS regions. A difficult year is behind, better growth prospects are expected in After a brilliant performance in 2011, posting higher top-line and operational margins across each and every division, Sise Cam had a difficult year in 2012, recording only 7% topline growth along with 6.9pp erosion at EBITDA margin on the back of meagre demand in the markets served, declining product prices in Europe and 52% increase in natural gas prices. However, we believe that 2013 will be a better year both for growth and profitability thanks to improved demand conditions, adjustments in prices and contribution of new investments. Despite sequential increases in energy prices, Sisecam still operates with higher margins compared to its international peers. Sisecam generates a higher EBITDA margin compared to its international peers thanks to its vertically integrated business structure and rigorous cost management. Even depressed EBITDA margin of 2012 (19%) is much higher than the nearest rivals margins such as Saint Gobain (11.1%) Asahi (17.9%) and Owens - Illinois (10.6%). We expect the company to reflect cost increases on to its prices to some extent and forecast 19.4% EBITDA margin in 2013 assuming no further hike in energy prices in Hidden value to unlock with the prospective IPO of Pasabahce and potential sale of the sizeable real estate portfolio. We think that the prospective Pasabahce IPO should have a positive impact on SISE as it will unlock a significant value and enhance transparency. Apart from that, Sise Cam evaluates to dispose three idle lands in its portfolio: one in Beykoz (known as Pasabahce land), one in Cayırova owned by Sise Cam, and Anadolu Cam s Topkapı land. The two land under Sise Cam are valued at TL427mn on holding s latest financials: Pasabahce land: TL209mn; Cayırova land: TL218mn. Anadolu Cam s Topkapı land has a usable space of 85K sqm. Based on the average sqm rates in real estate portals, we value Anadolu Cam s land at around TL190mn. Idle land portfolio in total accounts for 16% of the current NAV. These land are not included in our SOTP estimate. Potential sale of the these lands will widen Sise Cam s current NAV discount from 7% to 16%. 20

22 Sise Cam Investment Negatives Vulnerable to downturns in macroeconomic environment Primary risk to our valuation is a sharp downturn in the economy. Although the glass holding is geographically diversified, it is still vulnerable to domestic economic downturns due to its exposure to the cyclical construction and automotive sectors in the domestic market. As for the glass packaging side, we are much more comfortable due to the defensive nature of the final industries, such as pharmaceuticals, beverages and food. We do not expect glassware segment to perform worse than 2012 in 2013 as its products are viewed as premium and it has a significant competitive power in underpenetrated markets. Although diversified product portfolio and geographical scale may limit negative impact of downturns in macro environment, we still see companies operations vulnerable to the changes in domestic economic activities. Margins to decline by higher energy bill Hike in natural gas prices do not leave margins in peace. Natural gas is the most important cost item having various shares in total COGS of the segments, i.e. 30% in flat glass, 20% in glass packaging, 26% in glassware and 50% in chemicals segment. Hence, hikes in natural gas prices directly has a negative impact on operational margins as product price hikes fell short of the rise in cost-base. Possible delays in projected capacity expansions may be considered another risk factor Delays in planned capacity expansions. Sisecam has an intensive investment schedule till 2014 at every operational segment. Total investment budget of the holding stands at US$1.3bn for the next two years. Lower than estimated demand following capacity additions may lead to lower CURs, which in turn may result to higher unit cash costs and lower operational performance for the company. 21

23 Sise Cam Valuation Valuation We value Sisecam via sum-of-the-parts (SOTP) method. We used DCF method to value Trakya Cam, Anadolu Cam, and Soda Sanayii. We value Pasabahce, Sisecam s unlisted glassware subsidiary, based on the average 2013E EV/EBITDA and P/E multiples of listed glass companies in ISE. We do not apply any holding discount to the target NAV due mainly to two reasons i) increased transparency of the group after the simplification of the cross shareholding through transferring the Sisecam shares held by the subsidiaries to the main shareholder at the top, Is Bank and ii) more focused portfolio, just the glass business, unlike other listed conglomerates in which we apply 20-30% holding discount. As a note over 70% of the underlying assets are listed on the ISE. Our valuation for Sisecam results in a 12-month target NAV of US$3.12bn, corresponding to a target price of TL3.65; which offers 24% upside potential. Therefore, we reiterate our OUTPERFORM recommendation for SISE shares. FIGURE 33: NAV Summary - US$ mn Sise Cam NAV Breakdown (US$ mn) Business Segment/Comp Ticker SISE's Stake Current Valuation Method Current Value SISE's Stake Weight in NAV Target Valuation Method Target Value Flat Glass 1, % 1,511 1,040 33% Trakya Cam TRKCM 69.4 Current Mcap 1, % Target Mcap 1, % Cayirova Cam 63.4 Book Value % Book Value % SISE's Stake Weight in NAV Glass Packaging % % Anadolu Cam ANACM 79.1 Current Mcap % Target Mcap % Glassw are % % Pasabahce % Multiple Comparison % Camis Ambalaj % Transaction Value % Denizli Cam DENCM % Current Mcap % Chemicals % % Soda Sanayi SODA 61.0 Current Mcap % Target Mcap % Camis Madencilik Book Value % Transaction Value % Others % % Camis Elektrik % Book Value % Available for sale assets % Book Value % Participations % Book Value % Total Value from Participations 2, % Total Value from Participations 3, % Listed 1,659 63% Listed 2,133 69% Unlisted Total % Unlisted % Holding Only Net Cash (Debt) 30 1% Holding Only Net Cash (Debt) 30 1% Current NAV 2,644 Target NAV 3,118 Premium / (Disc) to Current NAV -7% Premium / (Disc) to Target NAV -21% Historical Average Discount -16% Historical Average Discount -20% Current Mcap 2,453 Target Mcap 3,118 all figures are in US$ mn terms Target Share Price (US$) 2.08 net cash (debt) is as of 2012YE Target Share Price (TL) 3.65 Upside Potential 24% Source: Is Investment Estimates 22

24 Sise Cam FIGURE 34: Peer Comparison Source: Bloomberg We prefer Sisecam over its subsidiaries Among all glass stocks, we prefer Sisecam over its subsidiaries due to i) higher liquidity; ii) 7% discount to current and 21% discount to target NAV ; iii) the fact that it is the easiest way to get exposure to all glass segments at once and iv) has the highest discount to the international peers. The stock trades at 24% discount based on its 2013E EV/EBITDA of 4.6x, compared to its international peers trading at a median EV/EBITDA of 6.1x for the same period. It is worth mentioning here that unlike the usual trading pattern seen at other conglomerates ( first the subsidiaries perform well, and accordingly NAV discount of the holding widens and then the holding company follows suit narrowing the discount), it is typically reverse in Sisecam s case as the stock has higher liquidity than its subsidiaries and one can tap into all glass segments through buying Sisecam while diversifying the risk. Bloomberg Estimates Company EV/EBITDA P/E Country 2013E 2014E 2015E 2013E 2014E 2015E TURK SISE CAM * * * * * * TURKEY SAINT GOBAIN FRANCE ASAHI GLASS CO JAPAN OWENS-ILLINOIS UNITED STATES PPG INDS INC UNITED STATES NIPPON SHEET GLA n.a n.a 11.5 JAPAN *Is Investment Estimates Median -All Com panies Median -Turkey * * * * * * Median -Other Countries Turkey's discount prem ium -30% -35% -41% -31% -26% -21% Trades at par to its historical multiples The stock trades slightly premium based on its 2013E 4.6x EV/EBITDA multiple compared to its 3 year average historical EV/EBITDA of 4.3x, yet below the international peer s average of 6.6x at the same period. The gap between SISE s EV/EBITDA and its international peers had narrowed in 2011 with the superior operational performance and widened again starting from 2012 due to lacklustre performance. FIGURE 35: SISE vs Int Peers Historical Forward Looking EV/EBITDA multiples Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 SISE EV/EBITDA Median EV/EBITDA of Int Peers SISE Avg Int Peers Average Source: Bloomberg 23

25 Sise Cam Current NAV discount also supports our bullish stance Sisecam s current Mcap stands at US$2.3bn, trading at 7% discount to its current NAV (CNAV) compared to last 3 years historic CNAV discount of 16%. We think that the stock does not deserve any discount given its fully-integrated structure and the recent transactions which significantly increased the transparency. Besides, the stock trades at 21% discount to its TNAV, at par to historic target NAV discount of 20%. FIGURE 36: SISE Last 3 years CNAV discount vs average 20% 10% 0% -10% -20% -30% -40% Premium (Discount) Current NAV Historical Average -50% Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 24

26 Sise Cam Company Overview Established in 1935 by Isbank, Sisecam is the indisputable leader of Turkish glass sector. The company serves at all sub-segments of the glass industry, namely flat glass, glass packaging and glassware segments holding 74%, 89% and 66% domestic market shares, respectively. Besides, it has a vertical integrated business structure, producing and supplying soda ash and chromium chemicals to its subsidiaries, as well as the third parties. Chemicals business is no exception in terms of market dominance as the holding commands 71% of the Turkish soda ash market. Although there are some other small producers in the market both at flat glass and chemicals side, rest of the demand is mostly met through imports. Therefore, Sisecam enjoys its quasi-monopolistic position in Turkish glass sector. The holding operates in 8 other countries as well, to say Russia, Bulgaria, Egypt, Georgia, Bosnia Herzegovina, Ukraine, Romania and Italy with its own investments as well as strategic alliances with global players in the region and exports nearly 140 countries. Isbank is the major shareholder with c.66% stake while Pasabahce and Efes Holding hold c.4% shares respectively. Free float stands at 26.3%. FIGURE 37: Sisecam Shareholder Structure 4th largest flat glass, glass packaging and soda ash producer in Europe Free Float, 26.30% Others, 0.58% Efes Holding, 3.72% Paşabahçe, 3.93% Türkiye İş Bankası, 65.47% Source: Company Strong presence in European and Global glass industries. Sisecam is not a pure domestic player, instead the holding has a notable position in both Europe and global glass markets. The company is the 4th largest producer in terms of flat glass, glass packaging and soda ash in Europe holding 14%, 9% and 15% shares, respectively. In terms of glassware the company goes two steps ahead being the 2nd largest player of Europe and 3rd largest player of the world with respective market shares of 25% and 10%. FIGURE 38: Sisecam Marketshares Market Shares Turkey Europe World Flat Glass 74% 14% 4% Glassw are 66% 25% 10% Glass Packaging 89% 9% 4% Soda Ash 71% 15% 3% Source: Company FIGURE 39: Sisecam Global Ranking Global Ranking Europe World Flat Glass 4 6 Glassw are 2 3 Glass Packaging 4 5 Soda Ash 4 10 Source: Company 25

27 Sise Cam Financial Highlights FIGURE 40: Revenue Breakdown Revenues A big regional player: c.50% of turnover generated from overseas operations. Consolidated revenues of Sisecam grew at a CAGR of 7.4% between 2007 and Sisecam achieved to increase its glass production at a CAGR of 4.1% and soda ash production at a CAGR of 5.5% between 2007 and 2012 thanks to capacity expansions with investments in the region. Share of overseas production stood at 34% in 2012 and it is expected to be higher in the future due to on-going large scale investments. Growth in value terms was a result of both increasing sales volumes, not only due to new capacity additions but also due to fruitful demand and prices. Revenues are evenly distributed between the business segments. While glass packaging and glassware segments have 24% and 26% shares, flat glass and chemicals constitute 22% and 28% of the overall revenues of the holding respectively. Due to new float line additions, the equation can change in favour of flat glass segment placing it to the leadership seat....reaps the fruits of investments abroad. Export revenues reached to TL2,564mn in 2012, increasing at a CAGR of 12.8% between 2007 and 2012 thanks to consistent investment scheme in neighbouring countries where demand growth is robust. Europe comprises the highest share in international revenues with 40%. Middle East and Africa holds 20% share and its share is expected to increase further with the completion of the on-going investments in Turkey that targets these markets as well. Being the number one glass packaging player of Russia the company enjoys the growth in this market. Russia constitute 22% of the international sales. In terms of country exposure, Italy gets the lion s share from exports with 12% share. U.K, Germany and France are the other major export markets of the glass holding. FIGURE 41: Segmental Breakdown of Revenues USD mn 3,500 3, , , , ,000 1,399 1,447 1,243 1,484 1,529 1, Domestic Exports Sales from foreign production Source: Company Chemicals, 28% Glass Packaging, 26% Flat Glass, 22% Glassware, 24% Production volume reached 3.7mn tons in Total glass production of the holding reached 3.7mn tons in Parallel to the growth in the glass production total soda ash production of the holding remained at 1.8mn tons record level. FIGURE 42: Production Volumes K tons 6,000 5,000 1,894 1,827 1,460 1,696 4,000 1,400 1,347 3,000 2,000 3,018 3,483 3,437 3,757 3,683 2,693 1, Source: Company Glass Soda 26 FIGURE 43: Exports by Region America, 7% Middle East + Africa, 20% Asia + Oceania, 11% Russia, 22% Europe, 40%

28 Sise Cam EBITDA Natural gas price hikes do not give a rest to margins Enjoys higher EBITDA margins compared to its global peers. Sisecam generates higher EBITDA margins compared to its international peers thanks to its vertically integrated business structure, rigorous cost management and investments in immature markets. The company showed a solid growth performance at the EBITDA level, recording 6.8% CAGR between 2007 and EBITDA margin bottomed to 19% in 2009 due to adverse impact of global financial crisis, that led to lower demand, prices and in turn lower CURs. However, the company achieved to raise its EBITDA margin back to 25.8% in 2011 with higher demand, improved CURs and higher sales prices. EBITDA margins suffered from higher energy costs due to price hikes in natural gas in Accordingly, the company posted 19% EBITDA margin in 2012, which is still much above that of the competitors such as Saint Gobain generating 11.1%, Asahi 17.9% and Owens - Illinois 10.6% EBITDA margins in 2012 FIGURE 44: EBITDA Margins Nearly c. US$1.3bn investment budget to expand its operations in strategic regions USD mn % 23.0% 561 Capital Expenditures % % One of the heavily investing companies of Turkey. Sise Cam always made largescale investments continually to increase its capacity both in Turkey and the nearby region. During , consolidated capital expenditures of the holding was US$3.8bn, corresponding to an average consolidated cap-ex/sales ratio of 18%. In Q13, the company added a second float line in Bulgaria for flat glass and a second furnace in tableware, completed investments in Russia with its JV St. Gobain, acquired a facility for auto glass in Romania and consolidated capital expenditures of the holding was US$565mn.The company will re-locate its glass packaging plant in Istanbul to Eskisehir and build two new float lines in Polatlı. Total investment budget of the holding stands at US$1.3bn for a two-year time period % % EBITDA EBITDA Margins Source: Company % 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FIGURE 45: Cap-ex and Cap-ex / Sales USD mn % 20% % 9% % % % 17% 12% 7% 2% % Source: Company Cap-ex Cap-ex/sales 27

29 Sise Cam Glass packaging hold the lions share in total investments during Sise Cam spent around US$3.8bn during the periods of 2004 and 2012 in order to solidify its existing dominant position and make investments in the promising region. When we look at the segmental breakdown of the investments, glass packaging had the largest share with 35% in total amount as the conglomerate invested US$327mn in Russia since its first entrance in Flat glass is the second largest invested business area holding 27% while glassware is the third with 18% share in overall investments during the given period of time. For the upcoming years, largest investment is estimated to be made in flat glass segment, i.e. c.us$650mn capital expenditures in total till by 2014YE. For the glass packaging side, we calculate only US$100mn cap-ex for the planned 180K tons moving and renovation. FIGURE 46: Segmental Breakdown of Cap-ex USD mn Flat Glass Glassware Glass Packaging Chemicals Others Source: Company FIGURE 47: Regional Breakdown of Cap-ex 11% 31% 18% 6% 10% 11% 11% 8% 17% 22% 14% 29% 18% 23% 27% 42% 20% 23% 67% 77% 60% 71% 47% 46% 66% 65% 59% Turkey Russia and Georgia Europe Source: Company ROIC to exceed WACC in the future with the completion of investment cycle. One of the major concerns for Sise Cam is low Return on Invested Capital ratio despite huge amount of investments. When we compare ROIC with WACC over the past five years (Figure 49), ROIC ratio remained below WACC since the company could not be able to reach desired profitability levels in Russia and domestic demand has been volatile. However, we estimate ROIC to exceed WACC after 2014 with the end of investment process in flat glass segment in 2014 thanks to potential improvement in domestic operations with Polatlı investment and higher margins in glass packaging side with the new facility in Eskisehir. FIGURE 48: Total Investment vs Avg ROIC Total Inv. ( ), mn US$ Sise Cam Saint Gobain Asahi Vetropack Ow ens- Illinois Frigoglass Vidrala PPG Avg ROIC ( ) FIGURE 49: SISE - ROIC vs WACC 14% 12% 10% 8% 6% 4% 2% 0% ROIC WACC Source: Bloomberg Source: Company and Is Investment Estimates 28

30 Sise Cam Dividends Over the past five years due to heavy investment programs, Sise Cam did not distribute higher amounts of dividend to its shareholders. Average pay-out ratio stood at 18.8% during the year while average yield was 1.8%. No dividend distribution has been made in 2008, 2009 and FIGURE 50: Dividends TL mn Dividends Pay-out ratio Yield % 3.0% % 0.9% % 1.5% % 1.6% Average % 1.8% Source: Company Revised the dividend distribution policy. Sise Cam and listed group companies Trakya Cam, Anadolu Cam and Soda Sanayii announced to revise their dividend distribution policy in the Articles of Association in accordance with the new Turkish Commercial Code and CMB regulations. Accordingly, Sisecam Group set to distribute minimum 50% of their distributable income as cash dividends or bonus shares. However it is noted that this policy will be reviewed based on the economic conditions, investment plans and cash position of the companies. There is room for distributing higher dividends. We believe that there is room for distributing higher dividends since the 9.0% 2013E ROE ratio of SISE remains relatively lower than the sector s average of 12.8%. We made a DuPont analysis and came up with the fact that although SISE generates higher operating margin than most of the peers, lower leverage ratio is the primary reason of lower ROE. Therefore, we deem that there is room for distributing higher dividends as the company operates under the average leverage ratio of its peers. FIGURE 51: DuPont Analysis and Net Debt/EBITDA comparison ROE Breakdow n E Tax Burden Interest Burden Operating Margin Asset Turnover Leverage Ratio ROE Net Debt EBITDA (average of last 3 years) SISE 78% 100% 9% % 0.80 TRKCM 80% 114% 11% % ANACM 80% 86% 10% % 2.35 SODA 83% 101% 11% % Global Peers ROE Breakdow n Global Peers Net debt to EBITDA ratio Average 65% 64% 9% % 3.27 Source: Bloomberg and Is Investment Estimates 29

31 Equity / Mid Cap. / Glass Trakya Cam Bloomberg: TRKCM TI Reuters: TRKCM IS 29/04/2013 Company Report OUTPERFORM Upside Potential* 17% Storm is Over - Sailing to the Growth By far the leader of the Turkish flat glass market. Trakya Cam enjoys its leadership position in Turkish flat glass with over 70% market share. Since huge cap-ex requirement of the industry poses a natural barrier to entry, there are not any considerable competitors which might threaten the company s strong position in the domestic market. Heavy investment schedule till Trakya Cam has an aggressive investment program to raise its capacity by c.1mn tons to 2.6mn tons by mid In Turkey, the company will add up 560K tons additional capacity in Polatlı. The two floats in Polatlı will be operational by 2H14 with a planned investment amount of US$320mn. As for the international operations, the company will double its float line capacity in Bulgaria (adding 225K tons/ year capacity) with a planned investment of US$180mn by 2H13. In addition to that, Trakya Cam will establish 500K tons flat glass capacity in Russia with its JV partner St Gobain with a total investment of US$330mn, in which it has 70% stake. Revenues to grow at an impressive 17% CAGR between 2012 and 2015 with the completion of the aforementioned investments. Accordingly, total sales volume (CAGR: 14%) and revenues (CAGR: 17%) of the company are foreseen to take off between the years 2012 and 2015 thanks to capacity increases in Turkey, Bulgaria and Russia as well as buoyant demand. After a difficult year with meagre demand in Turkey and Europe, we expect a better year in 2013 thanks to acceleration in infrastructure and construction industries in both markets and the liquidation of excess supply in Europe. From 2014 onwards new capacity additions, which will also be diverted to export markets should lead to an upswing in volumes and accordingly revenues. Profitability plunged in 2012 leading to lacklustre stock performance, yet we expect better prospects in EBITDA margin eroded by 12.1pp in 2012 on the back 52% cumulative increase in NG prices. We think that worst is over in terms of margins and we do not expect any natural gas price hike throughout , which should prompt to improvement in margins with the help of increase in product prices. We expect EBITDA margin to improve 20% in from bottomed 16.2%, lowest level over the past five year. Stock Data TRY US$ Price at Month Target Price Mcap (mn) 2,081 1,154 Float Mcap (mn) No. of Shares Outstanding 694 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY BIST ,112 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to BIST Price / Relative Price TRY Relative TRKCM Relative to ISE Week Range (Close TRY) Re-initiated with OUTPERFORM recommendation. We are re-initiating our coverage for Trakya Cam with OUTPERFORM recommendation. Our DCF driven target share price of TL 3.52/share implies 17% upside potential from current levels. TRKCM trades at premium with its 2013E EV/EBITDA of 7.5x and P/E of 15.9x versus the peers median of 6.6x and 15.5 respectively. However, the stock trades at 3% discount on its 2014E EV/ EBITDA of 6.2x versus its international peers. Furthermore, 2015E EV/ EBITDA of 5.4x reflects the completion of all planned capacity increase investments both in Turkey and international markets. 30

32 Trakya Cam Summary of Key Financials (TL mn) Income Statement (TL mn) 2011A* 2012A* 2013E 2014E 2015E Revenues 1,255 1,249 1,463 1,668 1,982 EBITDA Depreciation & Amortisation EBIT Other income (expense), net Financial expenses, net Minority Interests Income before tax Taxation on Income (48) (10) (18) (21) (26) Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (121) 37 (103) (83) (112) Cash Flow from Operations Capital Expenditure Free Cash Flow 111 (102) (196) (549) (101) Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (3) (158) (72) (35) (37) Change in net cash 63 (261) (284) (614) (175) Net Cash 198 (62) (347) (961) (1,136) Balance Sheet (TL mn) Tangible Fixed Assets 957 1,188 1,444 2,095 2,304 Other Long Term Assets Intangibles Goodw ill Long-term financial assets Inventories Trade receivables Cash & equivalents Other current assets Total assets 2,348 2,649 3,169 3,692 4,062 Long-term debt Other long-term liabilities Short-term debt Trade payables Total Debt ,105 1,231 Other short-term liabilities Total liabilities ,047 1,419 1,600 Minority Interest Total equity 1,721 2,010 2,122 2,274 2,462 Paid-in capital Total liabilities & equity 2,348 2,649 3,169 3,692 4,062 Ratios ROE (%) ROIC (%) Invested Capital 1,505 1,767 2,162 2,918 3,273 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 1.0x 1.4x 1.5x 1.3x 1.1x EV/EBITDA (x) 3.6x 8.7x 7.5x 6.2x 5.4x EV/IC (x) 0.8x 1.0x 1.0x 0.7x 0.7x P/E (x) 8.6x 21.2x 15.9x 13.7x 11.0x FCF yield (%) 6% -7% -9% -26% -5% Dividend yield (%) 2% 0% 0.8% 1.5% 2% *based on average Mcap during the year 31

33 Trakya Cam Investment Positives Undisputable leader in Turkish flat glass market, yet... Re-initiated with OUTPERFORM recommendation. We are re-initiating our coverage for Trakya Cam with an OUTPERFORM recommendation. Our DCF driven target share price of TL 3.52/share implies a 17% upside potential from current levels. The main highlights of our investment theme for Trakya Cam are: i) undisputable leadership in Turkish flat glass market, ii) fast growth trend in unsaturated markets, iii) heavy investment period to support steady expansion in the region, iv) attractive long-term growth prospects benefiting from Turkey s increasing infrastructure and construction spending, v) potential entrance to key markets with acquisitions, vi) higher profitability compared to many other peers, vii) eye-catching revenue and EBITDA growth thereafter 2014 through c.1mn capacity additions with the investments, viii) potential sale of participations and lastly ix) 6% underperformance in the last 12 months widening the discount to the international peers. Undisputable leader in Turkish flat glass market Trakya Cam enjoys its absolute leadership in Turkish flat glass market with 74% market share. Since huge cap-ex requirement of the industry poses natural barriers to entry, there are not any considerable competitors which might threaten the company s dominant position in the domestic market. However, Trakya Cam continues its breathless growth adding up 560K tons new capacity in Polatlı ( near Ankara) with a planned investment of US$320mn. This way the company plans to command 80% of the market at least up from 70% levels....still strives to raise its market share to 80% from 73% Intensive investment program in Turkey, Russia, Bulgaria and Romania Main beneficiary of Turkey s robust long term growth prospect...and strong growth prospects in fast growing markets. Trakya Cam targets to expand its business in fast growing emerging markets such as Eastern Europe and Russia. In Eastern Europe, Russia has the largest flat glass consumption with approximately 2 mn tons followed by Turkey. Despite the 4% average growth rate in global flat glass market, Trakya Cam s markets grow around 7-8% annually. Heavy investment program till In order to improve its competitive edge both in domestic and global markets, Trakya Cam has an aggressive investment program to raise its capacity by c.1mn tons to 2.6mn tons by mid In Turkey, the company will add up 560K tons of new capacity with the completion of its Polatlı plant by 2H14 that is estimated to cost US$320mn. As for international operations, the company will double its float line capacity in Bulgaria (adding 225K tons/year capacity) with a planned investment of US$180mn by 2H13. In addition to that, the company will establish 500K tons flat glass capacity in Russia with its JV partner St Gobain with a total investment of US$330mn, in which Trakya has 70% stake. Apart from that, the company will make US$30mn investment in Romania to strengthen its penetration in auto-glass segment. Attractive long-term growth prospects: benefiting Turkey s increasing infrastructure and construction spending. Similar to the global trend, most of the company s production is used by the construction sector. Construction has 70% share in total domestic revenues of the company while automotive and consumer durables each constitute c.15% shares. Being an emerging economy, Turkey offers huge long-term growth prospects with a rapidly growing construction and automotive industry. Although we witnessed a slowdown in the construction sector in 2012, we believe that the growth in the industry will resume in 2013 with the help of both public and private investments, as well as housing demand. 32

34 Trakya Cam Pursues to be a global player rather than a regional one. Generates higher EBITDA margins compared to large players in the industry Possible entrance to new markets. The company pursues to be a global player rather than a regional one. Accordingly, in addition to intense investment schedule both in domestic and international markets, the company also considers acquisition opportunities in overseas markets. Although the company has an IRR hurdle rate of 20-22% in US$ for organic investments, acquisition opportunities are considered as strategic steps. Recently announced investment plan in India is a good example of this strategy. Trakya Cam will benefit from the robust growth trend in Indian flat glass market, which is expected to increase at 10-12% p.a. in the next five years, along with diversifying its client portfolio. Higher profitability compared to peers. As it is seen in Figure 17( Global Flat Glass Producer Overview), we compared Trakya Cam with the world s leading flat glass producers, namely Saint Gobain, Asahi, PPG and Nippon Sheet. Although each company has different business structures and product portfolios, we still made a comparison in order to get an idea about performance of Trakya Cam. Accordingly, Trakya Cam posted 10% revenue growth over the past five years while average of the international players CAGR was null at the same period. 5 year average EBITDA margin of 24.5%, on the other hand, is 36% higher than the nearest rival at 18%. Impressive revenue and EBITDA growth prospects in Revenues to grow impressively at a CAGR of 17% during 2012 and 2015 with the completion of heavy investment process. Accordingly, total sales volume ( CAGR of 14% ) and revenues ( CAGR of 17% ) of the company are expected to jump during 2012 and 2015 thanks to capacity increases in Turkey, Bulgaria and Russia. Top-line remained almost flat in 2012, due to slowdown in construction and automotive industry. However, we estimate 19% revenue growth in 2013 thanks to accelerating growth in construction sector. Worst is over, margin recovery is on the way Sale of participations may create a catalyst Margins were inevitably under pressure from the 52% increase in NG prices over the past one year, yet future prospects look shiny. Depressed by sluggish demand and significant hikes in NG prices, EBITDA margin bottomed to historical low level of 16.2% in 2012, deteriorating widely by 12.1pp YoY. However, we believe that margin recovery is on the way in 2013 with no additional hike in NG prices and with sales price increases by the company supported by improved demand conditions. Note that Trakya Cam has already made 4% hike in domestic prices in November and we anticipate further price hikes during the year as prices in Europe started to increase with elimination of excess supply and shut downs in several float lines. Therefore, we expect upcoming periods to be relieving for margins since no additional hike in energy prices is anticipated during the next years. We project normalized mid-to-long term EBITDA margin of 25%, thanks to potential improvement in domestic operations with Polatlı investment and higher CURs, still lower than last years five years average of 27%. Possible sale of participations may be a catalyst. Trakya Cam has several participations that are operating in various segments such as glassware and electricity. They have a contribution of TL362mn in our target equity value, i.e. 15% of the target Mcap and 17% of current Mcap. Therefore, a possible sale of participations in order to simplify the corporate structure may create a catalyst for the stock. 33

35 Trakya Cam Investment Negatives Highly dependent on macro econonomic conditions Negative FCF generation in 2013 and 2014 NG prices continue to weigh on margins Sluggish economic growth. Serving mainly to cyclical sectors such as construction and automotive, the company s operations are highly correlated with the macroeconomic conditions. A sharp downturn in macro environment may be seen as the major risk factor for Trakya Cam. Decline in sales volumes will in turn lower CUR due to contraction in production increasing unit costs that results in deterioration in operational profitability. Deepening Eurozone crisis. Exports constitute c.30% of total consolidated revenues and sales to Europe comprises half of the exports. Accordingly, continuation of low/ negative growth rates in Eurozone will have a negative impact on export sales of the company. However, it should be noted that the company has exposure to Germany, Bulgaria, Romania and the UK, whose economies are relatively stronger than some other EU countries. Besides, the company s strategy of diversifying its export markets will lower dependence on one region. Negative FCF during heavy investment period. We calculate c.us$650mn capital expenditures in 2013 and 2014, including investments in Turkey, Bulgaria, Russia, Romania and cold repairs in Turkey. As a result, the company will raise its production capacity by 1mn tons to c.2.7mn tons by end of 2014, and naturally will generate negative FCF in 2013 and 2014 as well. We estimate positive FCF starting from 2015 with the completion of heavy investments. Accordingly, negative FCF generation during 2013 and 2014 may deter investors interest for the stock. Margin erosion was a fate in 2012, yet 2013 will be more rosy. Energy has a share of 30% in total COGs of the company, in which natural gas and electricity hold 85% and 15% shares, respectively. Operational margins closely correlate with the changes in NG prices. According to our estimates, 10% increase in NG prices should lead to 4.0pp decline in EBITDA margin if everything else remains constant. However, its impact may be higher due to indirect relationship with the raw material costs. Note that, following 52% hike in NG prices over the past one year and higher soda ash prices, EBITDA margin eroded massively by 12.1pp in Yet, we believe that will bring some improvement since no additional utility price hikes are expected. A harsher competitive landscape, particularly in foreign operations. Having a strategy of expanding its business in fast growing emerging markets such as Eastern Europe and Russia, any large-scale investment from foreign competitors might stimulate the competition in the territory, which may in turn dent company s sales. 34

36 Trakya Cam Valuation We valued Trakya Cam by using discounted cash flow method (DCF) since we believe that it is the most appropriate method that reflects the long-term growth potential of the company. Accordingly, we came up with a 12 month target equity value of TL2,442mn, implying 17% upside potential. We believe DCF is a more appropriate valuation model compared to peer multiples analysis as peers of the company have different product composition-scale and DCF analyses better reflects intensive investment plans of the company. Therefore, we re-initiate our coverage for the stock with a target price of TL3.52/share and OUTPERFORM recommendation. FIGURE 52: DCF Summary Trakya Cam (TL mn) 2012A 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenues 1,249 1,463 1,668 1,982 2,123 2,223 2,387 2,464 2,539 2,617 2,698 Revenue growth 0% 17% 14% 19% 7% 5% 7% 3% 3% 3% 3% EBIT EBITDA EBITDA Margin 16% 20% 21% 20% 22% 25% 25% 26% 27% 28% 28% Change in Working Capital 37 (103) (83) (112) (47) (25) (57) (19) (16) (21) (21) Capital Expenditures (365) (790) (381) (121) (120) (99) (102) (154) (101) (101) (152) Tax (10) (30) (35) (44) (58) (72) (80) (90) (103) (112) (122) Free Cash Flow (135) (635) (154) Discounted FCF (135) (635) (137) PV of Discounted FCF 679 Terminal Grow th 2% PV of TV 1,582 Net Cash (Debt) 2012 (62) Unlisted Financial Investments 57 Listed Financial Investments % Source: Is Investment Estimates 155 Participations 150 Minority Interest (120) 12-Month Target Equity Value 2,442 Price Target (TL) 3.52 Upside 17% DCF Assumptions Forecast Period: Our forecast period is ten years, covering Production Capacity: Based on the company s planned investment schedule, we estimate total production capacity of the company to increase by c.1 million tons to 2.6 million tons by the end of Domestic Operations - Total domestic production capacity will reach to c.1.9mn tons following the addition of two float lines in Polatlı with a capacity of 560K tons by 2H14. In addition to that, we estimate cold-repairs at Mersin plant to be completed by the end of International operations - The company will double its float line capacity in Bulgaria (adding 225K tons/year capacity) by the end of Apart from that, Trakya Cam and Saint-Gobain jointly invest US $320mn in flat glass furnace and an auto glass line in Russia with 500K tons capacity which are expected to be operational by the end of Besides, we included investment in auto segment in Romania in our production capacity projections as well. However, we did not pencil in a capacity addition for the investment plan in India since the details of the investment are not disclosed and feasibility studies are still going on. 35

37 Trakya Cam FIGURE 53: Production Capacities Flat Glass - K tons E 2013E 2014E CAGR Domestic 1,136 1,340 1,286 1,284 1,576 1,920 11% Bulgaria % Russia - JV TOTAL 1,361 1,565 1,511 1,509 2,026 2,595 14% Source: Is Investment Estimates Revenues: We forecast total sales volume to grow at a CAGR of 6% and total revenues to increase at CAGR of 8% during our forecast period. Note that, total sales volume ( CAGR of 14% ) and revenues ( CAGR of 17% ) of the company is expected to jump during the periods of 2012 and 2015 thanks to capacity additions in Turkey, Bulgaria and Russia. EBITDA Margin: Operational margins primarily depend on energy prices having a share of c.30% in total COGS. Natural gas prices were raised by 52% during the past one year (three NG price hikes: October 2011, April 2012 and October 2012) leading EBITDA margin to deteriorate by 12.1pp YoY to 16.2% in 2012 which is the worst EBITDA margin performance over the past five years. We forecast margins to recover starting from 1Q13 thanks to price increases coupled with improved demand in end-markets. We assumed EBITDA margin contraction in 2014 and 2015 assuming lower CURs at the initial years of new capacities which will increase unit costs. 19.5% EBITDA margin recorded back in 2009 when CURs slumped to 70%s justify our assumption as well. During the rest of our forecast horizon, we foresee an average EBITDA margin of 25% thanks to potential improvement in domestic operations with Polatlı investment and higher CURs, in-line with the past five years average EBITDA margin of 25%. Cap-ex: We calculate c.us$650mn capital expenditures in total in 2013 and 2014 after US$150mn spending for investments last year. Domestic Operations - The company will add up 560K tons of additional capacity with the completion of its new Polatlı plant by 2H14 with a planned investment of US$320mn. International operations - Float line capacity in Bulgaria will be doubled (adding 225K tons/year capacity) with a US$180mn investment by 2H13. In addition to that, the company will establish 225K tons flat glass capacity in Russia with its JV partner St Gobain with a total investment of US$330mn, in which Trakya has 70% stake. Apart from that, the company will make US$30mn investment in Romania to strength its penetration in auto-glass segment. Lastly, we pencil US$34mn cap-ex for each cold repairs in Mersin and Luleburgaz. WACC Calculation - TL Risk free rate 7.0% Equity risk premium 6.0% Beta (L) 0.9 Equity 83% Cost of Equity (kel) 12.6% Debt 17.2% Cost of Debt 12.0% After tax cost of debt 9.6% WACC 12.1% Source: Is Investment Estimates Sanity check: Our DCF driven target equity value of c.us$1,321mn implies an EV/capacity of US$508/ton assuming that Trakya Cam s total production capacity will increase to c.2.6mn tons after the completion of investment period. On the other hand, US$320mn investment amount for 560K tons additional capacity increase in Polatlı plant points out to c.us$571 unit cost per ton. Since we include lower CURs at the initial stages of the investment, our implied EV/capacity is reasonably lower than the investment cost. WACC: We take risk free rate of 7.0% with 6.0% equity risk premium and 0.9x stock beta yielding a WACC of 12.1%. 36

38 Trakya Cam International Peer Multiples At current Mcap, TRKCM trades at premium with its 2013E EV/EBITDA of 7.5x and P/E of 15.9x versus the peers median of 6.6x and 15.5x respectively. However, the stock trades at 3% discount based on its 2014E EV/EBITDA of 6.2x versus its international peers. 2015E EV/EBITDA of 5.4x is cheaper reflecting the completion of all planned investments. FIGURE 54: International Peers Bloomberg Estimates Company EV/Sales EV/EBITDA P/E Country 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E TRAKYA CAM SANAY * * * * * * * * * TURKEY SAINT GOBAIN FRANCE ASAHI GLASS CO JAPAN OWENS-ILLINOIS UNITED STATES PPG INDS INC UNITED STATES NIPPON SHEET GLA n.a n.a 11.5 JAPAN *Is Investment Estimates Median -All Companies Median -Turkey * * * * * * * * * Median -Other Countries Turkey's discount premium 32% 19% 3% 13% -4% -18% 3% 3% -4% Source: Bloomberg and Is Investment Estimates FIGURE 55: TRKCM Last 3 years Historic Multiples TRKCM Enterprise Value/EBITDA Median Min. Max. 0.0 January-10 April-10 July-10 October-10 January-11 April-11 July-11 October-11 January-12 April-12 July-12 October-12 January-13 April-13 Source: Bloomberg 37

39 Trakya Cam Company Overview Sole leader of the domestic flat glass market Being Sisecam s flagship company in the flat glass segment, Trakya Cam is the largest flat glass manufacturer with 73% share in domestic market. The company produces i) basic glass (float glass, patterned glass, mirror, laminated glass, coated glass), ii) automotive glass and glass for other vehicles, iii) energy glass, iv) glass for home appliances providing input for various sectors including construction, automotive, energy, home appliances, furniture and agriculture. Undisputable leader of the Turkish flat glass market. Trakya Cam enjoys its leadership in domestic market as huge cap-ex requirement of the glass industry poses a strong natural barriers to entry. Düzce Cam is the only domestic competitor operating with one float line (600 tons/day ~ 220K tons/year) and will add another furnace of 850 tons/day capacity by the end of Apart from these two players, there are some small regional players as well. Yet, we may say that around 20% of the demand in the market are met through imports. FIGURE 56: Market Players Others, 19% Düzce Cam, 8% Trakya Cam, 73% Source: Company and Is Investment Estimates FIGURE 57: Milestones 1961 Production of flat glass started by Cayirova Cam Sanayii 2005 Fifth float line in Bursa 2006 Bulgaria Investment was completed and production started 1967 Second flat glass furnace was inaugrated in Cayirova 2003 Trakya Glass Bulgaria EAD was founded in Bulgaria th float line started the production in Bursa 1977 A license agreement was signed with Pilkington 2000 Fourth float line in Mersin 2010 Flat glass investment in Tataristan signed with Saint - Gobain 1993 Automotive Plant was started the production Source: Company Coated glassline was inaugrated with the partnership of Sisecam and the German glass company Interpane 2011 JV agreement with Saint Gobain to produce automotive glass in Russia

40 Trakya Cam Sisecam is the major shareholder. Türkiye Sise ve Cam Fabrikaları is the major shareholder of the company having 69.4% stake while free float is 30.2%. Camis Madencilik, a subsidiary of Sisecam producing industrial minerals for glass industry, has a small stake of 0.4% at Trakya Cam. FIGURE 58: Shareholder Structure Camis Madencilik, 0.4% Sisecam is the major shareholder Free Float, 30.2% Türkiye Sise ve Cam Fabrikaları, 69.4% Source: Company Sisecam is the major shareholder Ranks among the top six flat glass producers in the world and top four companies in Europe in terms of production capacity. Trakya Cam s annual production capacity reached 1.8 million tons with 7 operating float lines; 6 in Turkey ( Kirklareli Luleburgaz, Mersin - Tarsus, Bursa - Yenisehir ) and 1 Bulgaria ( Targovishte ). In order to become a regional player, the company invested in Eastern Europe, establishing first float line in 2006 in Bulgaria, targeting Eastern Europe and CIS countries. Still, it is the largest greenfield investment ever in Bulgaria. Apart from that, the company formed joint venture with Saint Gobain, one of the largest players in the industry, to build a flat glass plant with a capacity of 500K tons and an auto-glass plant in Russia. In addition to that, another JV with again Saint Gobain was formed in Egypt. Currently, the plant in Egypt has 200K tons flat glass production capacity. According to the agreement targeted shareholder structure of Egypt plant is: Trakya Cam s stake in Russia will decline to 51% while its 15% stake in Egypt is expected to increase gradually to 49% in the mid-term. For this purpose, the company s subsidiary Trakya Investment BE announced that it will raise its existing EUR17mn paid-in capital to EUR43mn in order to raise its stakes at the Egypt venture. FIGURE 59: Production Plants Source: Company 39

41 Trakya Cam Investments Heavy investment schedule to become a global player rather than a regional one. Leadership position will be strengthened through new capacity additions. In order to improve its competitive power both in domestic and global arena, Trakya Cam embarked an aggressive investment program to raise its capacity by c.1mn tons to 2.6mn tons by mid In domestic market, we don't see Duzce Cam s new investments as a threat for Trakya Cam since the company will add up 560K tons additional capacity with the completion of its new Polatlı plant by 2H14 with a planned investment of US$320mn. The company targets to increase its market share to 80% from 73% through this investment. FIGURE 60: Investment Scheme Source: Company Region Heavy investment schedule to become a global player. In international markets, the company will double its float line capacity in Bulgaria (adding 225K tons/year capacity) with a planned investment of US$180mn by 2H13. In addition to that, the company will establish 500K tons flat glass capacity in Russia through the JV with St Gobain with a total investment of US$330mn. Apart from these, the company will make US$30mn investment in Romania to strengthen its penetration in auto-glass segment, targeting a production of 1,000,000 car - sets at full capacity. Owing to its proximity to large car manufacturers in Germany, Romania has a strategic position for the company to meet its targets in auto glass. In order to enhance profitability, auto glass production in Bulgaria is planned to be moved to Romania facility. Business Line Capacity Additions ( K tons / year ) Operational Date Cap-ex ( USD mn ) Turkey - Polatlı Flat and Processed 280 x Russia ( 50% JV w ith Saint Gobain ) Flat and Auto glass 500 mid Bulgaria Flat and Procecessed 225 mid Romania Auto glass 1 mn vehicle set Always considers strategic acquisitions in the region. In addition to capacity increases, Trakya Cam, with its largest shareholder Sisecam, looks for acquisition opportunities in Russia, India and CIS regions. In-line with the strategy of penetrating in fast growing markets, Trakya Cam announced that it will enter Indian market in partnership with Hindusthan National Glass (HNGIL) back in October Accordingly, Trakya Cam will have 44% of HNG Float Glass Limited, 88% of which is owned by HNGIL and 12% owned by the International Finance Corporation. Feasibility studies for building new float lines and an automotive glazing facility have started following the MOU. Hindusthan National Glass & Industries Limited is the largest glass packaging producer in India with almost 60% market share. The company has an installed capacity of 3,600 tons per day (12 furnaces and 50 lines) with production facilities in six locations across India in glass packaging segment. The company operates in flat glass segment with its sister company HNG Float Glass with one float line having a capacity of 600 tons per day. Indian flat glass market grew at an average annual rate of 12% - 15%. We welcome Trakya Cam s investment plans in India since the flat glass market in India has been growing at a fast pace due to the lucrative demand from the construction and automotive sectors. The demand for flat glass in India has increased at an average annual rate of 12% to 15% in the past 2-3 years. Moreover, it is expected to increase at 10-12% in the next three to five years. The investments potential impact on Trakya Cam is expected to be positive given the strong growth prospects of the Indian flat glass market. The only negative impact will be on the medium term cash flows due to additional cap-ex requirement. 40

42 Trakya Cam Import Barriers Turkey had restricted imports from Russia and Iran through imposing import tariffs since 2006 following the investigation initiated on the basis of a complaint from domestic producers. Import duties of US$30/tons applied on imports from Russia and Iran expired in Similarly, volume quotas (30K tons) on Chinese imports which were put into practice in 2Q06 were renewed every 3 years. Tariffs on imports from Russia and Iran and quotas against Chinese imports were not renewed in The managements seems more concerned regarding imports from Europe and does not see imports from Iran, China and Russia as direct competitor for Trakya due to lower quality. For imports from Europe, Ministry of Foreign Trade initiated an anti-dumping investigation in November 2012 concerning cheap imports of flat glass from Romania which signals potential new measures against imports from Romania. Turkey s glass imports from Romania was 47K tons in 2011 (US$20mn) and 65K (US$12mn) tons in 2012 having a share of 9% in total glass imports in 2011 rising to 13% in

43 Trakya Cam Financial Highlights Revenues Much higher than the 4% average growth rate of the world flat glass industry, Trakya Cam achieved to increase its overall consolidated revenues at a CAGR of 8% between 2007 and 2012, thanks to robust demand in countries of operation. Being the dominant player with 73% market share, Trakya Cam was the main beneficiary of high growth rates in Turkish economy, increasing its domestic revenues at a CAGR of 7.1% during 2007 and In addition to rapid growth rates in Turkey, international operations had expanded rapidly as well. Share of exports surged to 31% in 2012 from 24% in 2007 owing to increased sales volume and penetration in fast growing export markets. Revenues remained almost flat in 2012 due to weak both in Turkey and Europe and lower prices( Average prices in Europe declined almost 10%). However, revenues are expected to bounce in 2013 with stronger demand both in Turkey and Europe, as well as price increases. In fact, the first price increase came in November, 2012 at 4%. FIGURE 61: Revenues Breakdown FIGURE 62: Flat Glass Production - K tons 17% 17% 18% 18% % 83% 82% 82% Domestic Operations Int Operations Source: Company Source: Company 70% of the revenues are generated from construction sector. Glass sales to automotive industry constitute 15% of the total domestic revenues while the remaining 15% belongs to home appliances. Therefore, the company s sales are highly correlated with the growth in construction, automotive and white goods sectors. In other words it is closely linked to GDP growth. Through the investments in Russia, Egypt and India, the company targets to diversify its markets, decreasing high dependency on the domestic market. Therefore, we believe that the company s main strategy of expanding to a wider geography through partnerships and acquisitions is viable strategy. FIGURE 63: Domestic Sales Breakdown Home Appliances, 15% Automotive, 15% Construction, 70% Source: Company 42

44 Trakya Cam Urbanization creates demand for new housing. Building permits grew at a CAGR of 16% between , while the number of modern shopping centres has increased from 44 to 294 at the same period. In 2012, with the slowdown in the economy and falling private sector investments, the Turkish construction sector grew only by 0.6%. This had a negative impact on the sales of the industries that serve to the construction sector, Trakya Cam not being an exception. However, we believe that Trakya Cam s sales will recover in 2013 with the acceleration of the growth in construction sector thanks to declined mortgage rates. For the mid-to-long term, residential market is considered to be the main growth driver of Turkish real estate industry. Population growth, demographic structure, urbanization rate, change in lifestyles and migration indicators are expected to support growth in construction sector. FIGURE 64: Construction Permits for Residential Units FIGURE 65: Construction Sector vs GDP Construction Permits Growth 100% 80% 60% 40% 20% 0% -20% 30% 20% 10% 0% -10% Construction Sector Growth GDP Growth % -20% Source: TurkStat Source: TurkStat We should also monitor automotive and consumer durables sector closely, each having c.15% share in total domestic revenues of Trakya Cam. Total automotive production grew at a CAGR of 10% over the past ten years, reaching 1,072,978 units in Weakening TL against EUR and hike in special consumption tax on passenger and light commercial vehicles had a negative impact on domestic automotive sales in Despite of increase in SCT, we expect domestic automotive sales to reach 812K units in 2013, up 4% annually, thanks to lower interest rates. Apart from that, planned scrap incentive regarding passenger cars older than 20 years (estimated to be 2 mn units) is another potential trigger for the sector. Trakya Cam will benefit mid-to-long term potential of the industry s production growth, which we estimate to be around 5%. For the consumer durables, we estimate domestic demand to recover in 2013, thanks to the increase in construction activity coupled with the declining interest rates. FIGURE 66: Automotive Production '000 units FIGURE 67: White Goods Production '000 units 25,000 20,000 15,000 10,000 5,000 0 Source: Automotive Manufacturers Association Source: White Goods Manufacturers 43

45 Trakya Cam Cost Structure Raw materials (soda ash) and energy are the two main costs items. Energy has 30% share in total COGS of the company, in which natural gas and electricity hold 85% and 15% shares, respectively. Note that, BOTAS, the States Petroleum Pipeline Corporation, raised NG prices by 9.8% effective from October, 2012 on top of previous increases in October, 2011 and April, 2012 by 15% and 19%, respectively. As a result, EBITDA margin deteriorated by 12.1pp YoY in Hike in energy prices indirectly affects raw material prices as well since energy makes some 50% of the total production cost of soda ash which is one of the main ingredients in glass production. FIGURE 68: Cost Breakdown FIGURE 69: Natural Gas Tariffs ( w/o SCT & VAT ) TL/sm Others, 21% Labor, 9% Raw Materials, 40% Energy, 30% Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Source: Company Source: BOTAS 10% increase in NG prices decreases EBITDA margin by c. 4.0pp. As it is shown in Figure 63, operational margins move in tandem with the changes in NG prices. According our estimates, 10% increase in NG prices should lead to c.4.0pp decline in EBITDA margin everything being constant. After including the recent hike in NG prices in our estimates, we anticipate 17% EBITDA margin in 2012, down by 12pp YoY. In 2013, we forecast EBITDA margin to recover to 21% with increases in product prices, assuming no further hike in energy prices. FIGURE 70: NG Tariffs vs Gross Margins and EBITDA Margins NG Prices Gross Margin EBITDA Margin TL/sm3 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: BOTAS and Company Financials 44

46 Trakya Cam EBITDA Energy price hikes spoiled last two years glorious performance. EBITDA margin improved splendidly to 28.4% in 2011 from slim 19.5% in 2009 when demand was lacklustre and accordingly CUR was low. The brilliant performance has started in 2010 actually, on the back of increase in product prices and CUR, leading 27.9% EBITDA margin in 2010 increasing to 28.3% in Following 52% cumulative hike in NG prices and higher soda ash prices in 2012, EBITDA margin eroded significantly by 12.1pp in 2012 to 16.2%, lowest level recorded over the past five years. Yet we anticipate margins to recover in 2013 as the company will increases its sales prices, partially reflecting hikes on the cost side. Therefore, we expect 20% EBITDA margin in 2013 compared to slim 16.2% in Note that our long term EBITDA margin forecast is 25% on average. FIGURE 71: EBITDA Margin TL mn % 28.3% % % EBITDA EBITDA Margin Source: Company Financials 30.0% 28.0% 26.0% 24.0% 22.0% 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% Negative FCF in 2013 and 2014 due to heavy investment schedule. We calculate c.us$650mn capital expenditures in , covering all planned investments in Turkey, Bulgaria, Russia, Romania and cold repairs in Turkey. As a result, the company will raise its production capacity by 1mn tons by the end of 2014, yet will generate negative FCF in 2013 and 2014 due to huge amount of investments. FIGURE 72: Capital Expenditures and FCF TL mn E 2014E 2015E Cap-ex FCF -635 Source: Company Financials 45

47 Trakya Cam Net Debt and F-x Position Trakya Cam had a net cash position of TL62mn as of end of The company had a financial debt of TL396mn as of end of 2012, 78% of which is EUR denominated. The company had a net long FX position of TL118mn as of end of 2012, as a result of US$65mn long position and EUR3mn short position. FIGURE 73: Net Debt and Net Debt / EBITDA TL mn % 56% % 60% 40% % 20% % 0% -20% -40% -60% -80% Net Debt Net Debt/EBITDA FIGURE 74: Currency Breakdown of the Loans and Payment Schedule Short-term Long-term TOTAL TL 9% 3% 6% USD 27% 19% 23% Euro 64% 78% 71% Source: Company Financials Within the year 23% 1-2 years 25% 2-3 years 21% 3-4 years 12% More than 4 years 19% 46

48 Equity / Mid Cap. / Glass Anadolu Cam Bloomberg: ANACM TI Reuters: ANACM IS The Saviour of Tough Times Among all glass companies, Anadolu Cam was the best performing one during 2012 in terms of profitability and top-line growth thanks to its resilient operational structure. The company managed to post 15% top-line growth along with 19.6% EBITDA margin in In 2013, we calculate a moderate revenue growth of 10% backed with both sales volume and price increases. Moreover, we project 22% EBITDA margin in 2013 assuming no further hike in natural gas prices. Buy growth: Revenue and EBITDA CAGR of 13% and 25%. During , we anticipate revenues to increase at a CAGR of 13% thanks to increased capacity with the new Eskisehir plant. EBITDA growth is expected to be higher at 25% (CAGR) during the same period including potential margin improvement with higher CUR in international operations and enhanced operational structure with the brand new facility in Eskisehir. As the Eskisehir plant will be equipped with technologically improved and efficient furnaces and manufacture higher value added products, the company s margins are anticipated to rise going forward. Ciner Group s investments to challenge dominant position. Similar to other Sise Cam companies, Anadolu Cam enjoys its quasi-monopoly position in Turkish glass packaging industry holding 89% market share. However, Ciner Group s investments - 4 furnaces having c.600k tons/year total production capacity- by 2015 compared to Anadolu Cam s 920K tons domestic capacity - would challenge the dominant presence. Pricing environment may change as well considering competitive advantage of Ciner Group s low cost natural soda capacity that make production costs lower compared to Anadolu Cam, which uses synthetic soda whose cost is higher. Aiming to lower dependency on fragile beer bottles in Russia. Beer sales depicted sluggish performance last year in Russia and it is expected to decline further over the coming periods due to ban on beer advertising on TV, radio and billboards which is valid since 2H12. We believe that the strategy of a more balanced product mix in Russia - dragging down the share of beer bottles in sales volume to 50-60% from current 70% in advantage of high alcoholic bottles - will lower the dependency on one sector. Company Report OUTPERFORM Upside Potential* 38% Stock Data TRY US$ Price at Month Target Price Mcap (mn) 1, Float Mcap (mn) No. of Shares Outstanding 398 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY BIST ,112 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to BIST Price / Relative Price TRY 29/04/2013 Relative ANACM Relative to ISE Week Range (Close TRY) Re-initiate our coverage with OUTPERFORM recommendation. We came up with a 12 month target equity value of TL1,512mn, corresponding to a target share price of 3.80TL/share, which offers 38% upside potential from current levels. Therefore, we re-initiate our coverage for ANACM shares with OUTPERFORM recommendation. The stock trades at 11% and 19% discount compared to global peers 2013E P/E and EV/EBITDA multiples, respectively. 49

49 Anadolu Cam Summary of Key Financials (TL mn) Income Statement (TL mn) 2011A* 2012A* 2013E 2014E 2015E Revenues 1,285 1,475 1,621 1,890 2,146 EBITDA Depreciation & Amortisation EBIT Other income (expense), net Financial expenses, net (14) (52) (55) (58) (58) Minority Interests (13) (20) Income before tax Taxation on Income (21) (16) (24) (43) (57) Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (72) 49 (15) (47) (46) Cash Flow from Operations Capital Expenditure Free Cash Flow (246) Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (85) (85) 51 (25) (21) Change in net cash (357) (59) Net Cash (763) (822) (771) (753) (703) Balance Sheet (TL mn) Tangible Fixed Assets 1,219 1,326 1,390 1,422 1,450 Other Long Term Assets Intangibles Goodw ill Long-term financial assets Inventories Trade receivables Cash & equivalents Other current assets Total assets 2,299 2,402 2,608 2,801 2,977 Long-term debt Other long-term liabilities Short-term debt Trade payables Total Debt ,027 1,056 1,039 Other short-term liabilities Total liabilities 1,251 1,292 1,338 1,393 1,406 Minority Interest Total equity 919 1,110 1,175 1,306 1,462 Paid-in capital Total liabilities & equity 2,299 2,402 2,608 2,801 2,977 Ratios ROE (%) ROIC (%) Invested Capital 1,635 1,763 1,880 1,979 2,072 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 1.3x 1.3x 1.2x 1.0x 0.9x EV/EBITDA (x) 5.4x 6.7x 5.2x 4.0x 3.4x EV/IC (x) 1.0x 1.1x 1.0x 1.0x 0.9x P/E (x) 8.6x 13.9x 11.4x 6.4x 4.8x FCF yield (%) -21% 3% 2% 8% 14% Dividend yield (%) 2% 0% 2% 4% 8% *based on average Mcap during the year 50

50 Anadolu Cam Investment Positives More resilient structure compared to other companies Largest glass packaging company in Turkey Market diversification in four different countries Targeting to have a more balanced product breakdown in Russia Sustainable revenue and EBITDA growth outlook We believe that Anadolu Cam offers rewarding return potential for investors thanks to its i) resilient operational structure as the demand in the sectors that the company serves are more stable and defensive compared to other glass segments, ii) promising growth prospects benefiting from Turkey s strong consumer story, iii) exposure to fast growing markets such as Russia, iv) restructuring at product mix in Russia, v) potential margin uplift for Turkey operations with the brand new facility in Eskisehir, vii) much higher profitability levels compared to its international peers, viii) 22% underperformance relative to BIST during the past one year, and lastly ix) 38% upside potential of our DCF driven target share price of 3.80 TL/share. Therefore, we re-initiate our coverage for Anadolu Cam with a OUTPERFORM recommendation. The saviour of tough times. Anadolu Cam operates in a less fragile business segment and is less dependent on economic environment as the sectors the company serve has defensive nature. Diversifying product portfolio in parallel to growing segments strengthened this solid structure, and lessened the risks associated with industry concentration. Currently, mineral waters ( main growth driver of the industry ) constitute 43% share of Turkey sales volume while beers and soft drink comprises c.13% of the sales volume. In Russia, the company targets to have a more balanced product mix via gradually dragging down the beer bottle share to c.50-60% from its current 70% levels and raising the high-margin white bottles share in expense of colour. Beneficiary of Turkey s attractive consumer story. Being the solid leader in Turkish glass packaging industry with 89% market share, Anadolu Cam benefits from Turkey s growth story in environmental friendly way. Turkish glass packaging industry is estimated to grow by 7% annually supported by population growth, changing consumption preferences in favour of glass in food & beverages due to health and environmental concerns and particularly high growth rate of mineral water segment, i.e. 10% per annum. Aiming to lower dependency on fragile beer bottles in Russia. Anadolu Cam invested some US$350mn in Russia since its first entrance in 2001 and the company targets to benefit from the huge growth potential of the market. Russian beer market grew at an impressive 11% CAGR between 1999 and However after 2008, financial crises and government limitations on beer consumption led volumes to come down by 7% in 2009 and The market contracted by 3% in 2011 and beer sales continued to depict sluggish performance last year and it is expected to decline further over the coming periods due to ban on beer advertising on TV, radio and billboards which is valid since 2H12. Anadolu Cam currently diverts its capacity from beer bottles to high alcoholic, spirit and food bottling. We believe that the strategy of a more balanced product mix in Russia - declining the share of beer bottles in sales volume to 50-60% from current 70% in advantage of high alcoholic bottles - will lower the dependency on one sector. Modest revenue and EBITDA growth outlook in On the contrary to other glass companies whose revenues either remained flat or grew at a slim pace, Anadolu Cam s revenues grew by 15% in 2012 owing to sales volume growth both in domestic and international operations. In 2013, we calculate a moderate revenue growth of 10% owing to both sales volume and price increases. Assuming no further price hike in natural gas prices, EBITDA margin is estimated to improve 22.6% in 2013 from 19.6% in We project EBITDA margin to be 28% on average during our projection period, including potential margin improvement with higher CUR in international operations and enhanced operational structure with the brand new facility in Eskisehir. As the Eskisehir plant will be equipped with technologically improved and efficient furnaces and manufacture higher value added products, the company s margins are anticipated to improve going forward. 51

51 Anadolu Cam Investment Negatives Ciner Group s investments may threat strong position in the domestic market. Pressure by the Russian government to lower alcohol consumption. Relatively more immune to increase in natural gas prices Ciner Group s investments may be a threat for strong domestic position. Ciner Group, owner of Eti Soda has an investment plan to build 4 furnaces by 2015 having a total production capacity of 600K tons/year, versus Anadolu Cam s 920K tons domestic capacity. The first phase of the investment, 150K/tons of capacity will initially start production in The production capacity will be raised to 600K tons/year by 2015 which will pose a threat for Anadolu Cam s dominant position in the market. In addition to that, Ciner Group has a competitive advantage of having huge natural soda ash capacity that will be increased by 50% to 1.6 million tons by 2014 from the current 1.1 million tons. Note that Eti Soda operates second largest Trona ( natural soda ash ) resource in the world. Besides, the Group will establish another soda ash production facility with a capacity of 2.7mn tons/year by 2016, namely Kazan Soda, joint investment with Chinese Tianchen Group in Ankara. We think that the Group would divert some of its soda ash capacity to its own glass packaging production facility. Since natural soda ash is much cheaper than synthetic one, it would create a competitive advantage for the Group, changing pricing environment in the market. Therefore, Ciner Group s investment may pose a risk factor for Anadolu Cam s sales volume, revenues and margins in the upcoming periods. Pressure by the Russian authorities to lower alcohol consumption. Although Russia is the world s 4th largest beer market, the government regulations to lower beer consumption and huge excise tax hikes constitute an impediment on the industry s growth trend. In 2012 beer production in Russia demonstrated the worst growth among other alcoholic drinks, especially in comparison to hard liquors. Apart from that, further decline in beer sales in the coming years are expected due to ban on beer advertising on TV, radio and billboards which is valid since H Increase in NG prices is a clear negative despite limited impact compared to sister companies. Constituting 20% of total COGS of the company (lowest share among sisters), hikes in natural gas prices negatively affect financial performance. Last but not least, serving relatively more defensive markets, the company has more pricing power to reflect the increase in NG prices on its products prices. Therefore, ANACM has a safer position among the glass companies with resilient business structure and comparably less usage of NG in production process. 52

52 Anadolu Cam Valuation We valued Anadolu Cam by using discounted cash flow method (DCF) as we believe that it will be a better method to gauge the growth potential of the company, as well as the potential enhancement at operational profitability in the future. We did not include peer multiples analysis into our valuation as international peers have different operational structure and product composition. Also we do not want to neglect positive contributions of investments in upcoming periods. Accordingly, we came up with a 12 month target equity value of TL1,512mn, corresponding to a target share price of 3.80TL/share, which offers 38% upside potential from current levels. Therefore, we re-initiate our coverage for ANACM shares with OUTPERFORM recommendation. FIGURE 75: Valuation Summary DCF Valuation Details - TL mn Turkey Operations 1,912 International Operations 170 Listed Net Cash Financial (Debt) Investment 2012YE (822) 14.2% Soda Sanayii 205 Unlisted Financial Investments 21 Participations Month Target Equity Value 1,512 Target Price Source: Is Investment Estimates DCF Assumptions We have run two different DCFs for company s Turkey and International operations since the company has 51% stake in its International operations except Georgia. Forecast Period: We have forecasts for the periods covering TL Upside Potential 38% Production Capacity: We estimate total production capacity to increase 2.4 million tons from the current 2.2 million tons with the capacity increase in newly moved Eskisehir plant. Domestic Capacity: We estimate production capacity of Turkey operations to increase 1.1 million tons by 2014 from existing 920K tons with the planned 180K tons capacity addition in new Eskisehir plant. We don't assume any additional capacity in Turkey going forward. International operations: We assume current 1.3 million tons production capacity to remain constant during our forecast horizon. Revenues: We believe that Anadolu Cam will benefit from 7% growth rate in Turkish glass packaging sector with its strong market position. However, Ciner Group s aggressive investments, targeting to penetrate in mineral water segment, may dent on our estimates. In international operations, we are more comfortable thanks to solid growth trend in Russian market as well as product differentials. Accordingly, we anticipate total consolidated revenues to grow at a CAGR of 7% during our forecast period. 53

53 Anadolu Cam EBITDA Margin: Operational margins depend partially on energy prices with a share of c.20% in total COGS, lowest in all glass segments. In addition to that, soda ash is another significant factor in determining profitability. We anticipate the company to preserve current high CURs above 95% thanks to strong demand with the defensive nature of the business. Therefore, we estimate average EBITDA margin to be 28% during Note that among all glass companies, Anadolu Cam was the best performing company in terms of earnings performance in EBITDA margin erosion stood limited at 4.8pp YoY to 19.6% in 2012 thanks to 15% top-line growth achieved through price increases reflecting cost inflation and capacity increases. Assuming no further hikes in energy prices, we anticipate EBITDA margin to recover to 22.6% in 2013 with price adjustments. Cap-ex: In 2014, we anticipate US$ 100mn cap-ex for the planned 180K tons capacity increase in Eskisehir plant assuming in general US$60mn spending is required for 120K tons capacity increase in a glass packaging furnace. Sanity check: Under the assumption of US$60mn capital expenditure requirement for 120K tons capacity glass packaging business, EV/ton corresponds to US$ 500. Our DCF driven valuation implies an EV/capacity of c.us$ 482 which compares conservative with US$500/ton. WACC: We took risk free rate 7.0% with 6% Equity risk premium and 0.94x stock beta yielding a WACC of 10.9%. FIGURE 76: DCF Valuation Table* Anadolu Cam (TL mn) E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenues 1,018 1,132 1,083 1,167 1,247 1,307 1,362 1,417 1,471 1,524 1,579 1,636 EBITDA Tax (62) (66) (51) (61) (67) (73) (80) (85) (90) (95) (100) (105) Change in Working Capital (20) (24) 10 (18) (17) (13) (12) (12) (11) (11) (12) (12) Capital Expenditures (191) (320) (235) (219) (232) (129) (132) (110) (114) (120) (127) (132) Free Cash Flow 36 (81) (20) Discounted FCF 36 (81) (20) PV of Discounted FCF 832 PV of Terminal 2.0% 1,250 EV TOTAL 2,082 * Numbers are adjusted with respect to Anadolu Cam s stakes at international operations TL WACC Calculation Risk free rate (Turkish Sovereign) 7.0% Equity risk premium 6.0% Beta (L) 0.94 Equity 54% Cost of Equity (kel) 12.6% Debt 46% Cost of Debt 11.0% After tax cost of debt 8.8% WACC 10.9% 54

54 Anadolu Cam Peer Comparison Based on its 2013 and 2014 EV/EBITDA multiples, the stock trades 19% and 31% discounts compared to its international peers median of 6.5x and 5.8x, respectively. In terms of P/E, ANACM trades 11% and 44% discounts with its 11.4x 2013E and 6.4x 2014E P/E multiples versus its global peer s median of 12.8x and 11.6x, respectively. FIGURE 77: Peer Comparison Bloomberg Estimates Company EV/EBITDA P/E Country 2013E 2014E 2015E 2013E 2014E 2015E ANADOLU CAM * * * * * n.a 4.8* TURKEY VIDRALA SPAIN FRIGOGLASS SA GREECE OWENS-ILLINOIS UNITED STATES VETROPACK HOL-BR SWITZERLAND ZIGNAGO VETRO SP ITALY VITRO SAB-SER A n.a n.a 33.9 n.a MEXICO GERRESHEIMER AG GERMANY *Is Investment Estimates Median -All Com panies Median -Turkey * * * * * 4.8* Median -Other Countries Turkey's discount prem ium -19% -31% -42% -11% -44% -53% Source: Bloomberg and Is Investment Estimates FIGURE 78: ANACM Last 3 years Trailing Historic Multiples ANACM Enterprise Value/EBITDA Median Min. Max. 2.0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Source: Bloomberg 55

55 Anadolu Cam Company Overview Being the representative of Sise Cam s glass packaging division, Anadolu Cam engages in the production of glass packages that are used in food, water, mineral water, milk, beer, wine and beverages (including high alcohol ones) as well as pharmaceuticals and cosmetics sectors. The company runs its operations with 10 production facilities that are located in Turkey ( Yenisehir, Mersin and Eskisehir), Russia ( Gorokhovets, Pokrovsky, Ufa, Kirishi and Kuban ), Georgia ( Mina ) and Ukraine ( Merefa). Dominates the domestic glass packaging market and has approximately 3% global market share. Expanding its operations constantly since its foundation in order to become the leading glass packaging manufacturer in the region, Anadolu Cam reached to a total production capacity of 2.2 million tons / year in The company dominates the Turkish glass packaging sector with the current 920K tons production capacity and 89% market share. The only threat for dominant position in Turkey appears to be new investments of Ciner Group. The Group plans to build 4 furnaces with a total 600K tons/ year production capacity targeting mineral water packaging segment and initial 150K tons/year capacity will be operational in Since mineral water segment is expected to be major growth driver of Turkish packaging sector (growing c.10% per annum), Ciner Group s investment may threaten Anadolu Cam s strong position. FIGURE 79: Milestones 1935 First productin plant was established in Pasabahce 2004 Pokrovsky plant was purchased 2006 Bursa plant started its operrtions 1969 Bottle production was transferred to Topkapı Plant from Pasabahce 2002 Ruscam plant started the production to enter growing beer market in Russia nd furnace of Bursa and 3rd furnace of Ufa was commissioned 1975 Mersin Bottle Plant was purchased 1998 Georgia Mina Plant was started the production 2013 Topkapı plant was moved to Eskisehir Source: Company Shareholder Structure Türkiye Sisecam Fabrikaları is the major shareholder with 79.1% stake while free float of the company stands at 20.9%. FIGURE 80: Shareholder Structure Free Float, 20.9% Türkiye Sise ve Cam Fabrikaları, 79.1% Source: Company 56

56 Anadolu Cam Total domestic capacity has reached 920K tons/year following the recent 120K tons capacity expansion at Yenisehir plant which was inaugurated in January Apart from that, the company will relocate its furnace in Istanbul plant to Eskisehir which is planned to be completed until the end of The profitability is expected to be higher since the Eskisehir plant will be a brand new one with more efficient production process and manufacture value added products. 100K tons/year capacity increase in Kirishi was completed in 1Q12. In order to capture more share in increasing beer bottle market in Russia, Anadolu Cam constantly enlarged its scale through capacity additions as well as greenfield investments. Since its entrance to the market in 1999, the company invested c.us$327mn in Russia and currently total production capacity has reached to 1.2 mn tons with the contribution of 100K tons/year capacity in Kirishi in 1Q12. There is no additional investment plan on the agenda in the near future. FIGURE 81: Production Plants / Capacity Source: Company Region Number of Plants Current Production Capacity Turkey 3 920K tons / year Russia 5 1,165K tons / year Georgia 1 30K tons /year Ukraine 1 85K tons /year Total K tons/year Most of the growth will come from mineral water packaging segment in Turkey. Similar to other emerging countries, Turkish glass packaging sector grows around 7% per annum, faster than 4% global average growth rate. Mineral water packaging segment grows even faster than total industry with 10% annual expansion. Therefore, the segment will be the main growth driver in domestic market in the forthcoming periods. Mineral waters constitute 43% of Anadolu Cam s total sales volume while beers and soft drink comprise c.13% of the total sales volume. FIGURE 82: Turkey Sales Volume Breakdown High Alcoholics, 5% Wine, 5% Water, 1% Beer, 13% Soft Drink, 12% Food, 17% Mineral Water, 43% Pharmaceuti cals, 4% Source: Company 57

57 Anadolu Cam Targeting a more balanced structure in Russia. The Russian beer market was one of the star performers before the crisis, with a CAGR of over 11% between 1999 and The market was hit harder than most of the other sectors on the back of a tripling the beer excise duty. In 2010 the tax on beer went up by a staggering 200% in Russia. That, coupled with the economic crisis, has resulted in beer sales to fall by 15% during the past two years. Russia is now the fourth largest beer market in the world, after China, USA and Brazil. In Russia, beer was marketed and consumed as a healthier alternative to vodka and incredibly was not even classified as an alcoholic drink. However, this popularity causes concern, particularly for the government. Russians' pure alcohol consumption is already twice the critical norm set by the World Health Organization, and male life expectancy is falling. The average consumer drank about 12.5 litres of alcohol in Russia last year, with beer accounting for about 4 litres and vodka more than 5 litres. FIGURE 83: Russia Sales Volume Breakdown Water, 5% Wine, 6% High Alcoholics, 11% Food, 5% Soft Drink, 4% Beer, 70% Source: Company Anadolu Cam is one of the largest high-quality-light-weight beer bottle manufacturer in Russia. The company s main theme behind entrance to Russia back in 2002 was to capture the growing demand in underpenetrated beer bottle market. Currently, beer glass packaging holds the lion s share in Russia sales volume. However, the company targets to have a more balanced product mix via gradually dragging down the beer bottle share to c.50-60% from its current 70% levels and raising the high-margin white bottles share, due to changing consumption patterns in the country. In 2012 beer production in Russia demonstrated the worst dynamics among other excisable drinks, especially in comparison to hard drinks. For instance, vodka production increased by 6.8%, production of cognac by 3.3% in volume. However, wine production declined by 3.3%. Therefore, we believe that it is a rational strategy since the consumption and production trends of Russia are changing with the new regulations. Sales Volume and Revenues Anadolu Cam has a resilient operational performance owing to relatively defensive nature of its end clients. Despite the tough times in 2009 due to adverse market conditions in Russia, the company has achieved to increase its revenues at a CAGR of 10.5% between periods thanks to regional diversification and favourable changes in product mix. Sales volume declined by 20% YoY in 2009 due to sharp contraction in demand with financial crisis, yet the company achieved to post 31% YoY sales volume growth thanks to recovery in operational regions in And last year, while all other glass companies had difficulty to raise their revenues in 2012, Anadolu Cam managed to post 15% top-line growth with the capacity additions and price increases. 58

58 Anadolu Cam Financial Highlights The strategy of diverting capacity from beer to non-beer category in Russia to lower the dependency on one sector. In 2012, beer sales depicted sluggish performance and is expected to decline further over the coming periods to be stimulated by ban on beer advertising on TV, radio and billboards which is valid since 1H12. Beer thus would lose advertising advantage over hard drinks. Turkey glass packaging industry is estimated to maintain its 7% annual growth rate, supported by rising population, changing consumption patterns in favour of food & beverage in glass due to health concerns and high growth rate of mineral water segment. We think that diversification to help company to maintain its growth. The diversification efforts will help company to post sustainable revenues in Russia as well. Accordingly, total consolidated revenues are anticipated to grow with a CAGR of 7% between 2013 and FIGURE 84: Sales Volume Breakdown FIGURE 85: Revenues - TL mn K tons Anadolu Cam Rus Cam Pokrovsky Mina Yenişehir Ufa Kirishi Kuban Merefa % 70% 67% % Turkey Russia,Georgia, Ukraine Source: Company Anadolu Cam achieved to increase its CUR s to 93% in Turkey and 78% in Russia after touching bottom of 70% and 57% in 2009 with the adverse impact of financial crises. In 2013, the company anticipates to reach 97% CUR in Turkey, 95% in Russia and 88% in Georgia respectively. FIGURE 86: Production - CUR FIGURE 87: Seasonality of Revenues K tons % 86% 86% 81% 70% 57% 93% 95% 93% 92% 78% 78% 120% 100% 80% 60% 40% 29% 28% 23% % 20% 0 0% Turkey Russia,Georgia,Ukraine CUR - TR CUR - RU 1Q12 2Q12 3Q12 4Q12 Source: Company 59

59 Anadolu Cam Raw material is the big ticket item in costs. The share of raw materials in total cost base is 30%, followed by energy with 20% and labour with 8%. Unlike other glass segments, Anadolu Cam has more ability to pass energy price hikes on product prices, due to defensive nature and lower share of energy. FIGURE 88: COGS Breakdown Others, 34% Energy, 20% Raw Materials, 30% Packaging, 8% Source: Company Labor, 8% Anadolu Cam s EBITDA margin primarily depends on capacity utilization rates which in turn related with the demand, raw material trends and energy prices. In 2009, EBITDA margin deteriorated to 21% due to low CUR with a meagre demand amid financial crises that depressed sales volumes. The company succeeded to improve its EBITDA margin to 24% afterwards through improving CUR with better demand leading to price hikes both in domestic and international operations. Price hikes in natural gas by 52% during the past one year definitely made a negative impact on margins since price hikes can be reflected on product prices with a 6 months lag by the company. Hence, despite of 6% price increase in TL terms in Turkey and 8% increase in terms of ruble in Russia, EBITDA margin eroded by 4.8pp to 19.6% in 2012 on the back of the latest 9.8% increase in NG prices effective from October, On the other hand, we believe margins will recover going forward, since no additional hike in energy prices is anticipated during the next years. FIGURE 89: EBITDA & EBITDA Margins TL mn 28% % % % 21% 24% % 20% 290 FIGURE 90: EBITDA Margin Breakdown* 30% 25% 25% 20% 20% 19% 20% 20% 16% 15% 15% 15% 14% 15% 11% 10% 10% 5% 5% EBITDA Gross Margin EBITDA Margin 0% 0% Turkey Russia,Ukraine, Georgia Source: Company *before eliminations 60

60 Anadolu Cam Anadolu Cam spent c.us$173mn cap-ex in 2012 as a result of capacity expansions in Kirishi and Yenisehir plants as well relocation of the furnace in Istanbul plant to Eskisehir. In 2013 and 2014, we calculate c. US$200mn cap-ex for the planned 180K tons capacity increase and as well as maintenance. FIGURE 91: Cap-ex & Free Cash Flow TL mn Source: Company E 2014E Cap-ex Anadolu Cam is the most leveraged company among Sise Cam Group companies due to heavy investments made during 2005 and 2009 period when the company spent around US$ 760mn in order to increase its production capacity by 70%. We estimate capital expenditures to be lower in the coming periods since large amount of required capacity expansion is already initiated and forthcoming investment amount will be relatively lower since they are not going to be greenfield investments, instead will be additions to the current facilities or in the form of acquisitions. The company had a net debt position of TL822mn as of end of Consolidated financial debt stood at TL973mn, 54% of which was Ruble denominated while 26% was EUR denominated. As for the cash and equivalents, the company had a total balance of TL151mn, more than 65% of which was US$. As of 2012YE, the company had a short FX position of TL92mn, which is stemmed from EUR56mn short position and US$ 21mn long position FCF FIGURE 92: Net Debt TL mn E Source: Company Net Debt Net Debt/EBITDA FIGURE 87: Currency Breakdown of the Loans and Payment Schedule Short-term Long-term TOTAL Within the year 55% RUR 69% 40% 54% 1-2 years 16% EURO 15% 36% 26% 2-3 years 15% USD 11% 9% 9% 3-4 years 9% UAH 5% 15% 10% 4-5 years 2% More than 5 years 4% 61

61 Equity / Mid Cap. / Chemicals Soda Sanayii Bloomberg: SODA TI Reuters: SODA IS 29/04/2013 Company Report OUTPERFORM Upside Potential* 34% A Gleaming Value Play Dominant player in the domestic market. With 1.3mn tons of production capacity Soda Sanayii is by far the leader of the Turkish soda ash market with 85% market share. Eti Soda s entrance to the market back in 2008 had been seen as a serious threat for Soda Sanayii at that time. However, since Eti Soda exports almost all of its production, its entrance to the market had not turned into a nightmare as it was thought. Indeed since 2008, despite all noise regarding the oversupply in the global soda market, Soda s margins improved significantly, thanks to higher soda ash prices. Soda ash prices may surprise on the upside. Neither European nor US producers are reporting any downward price pressure, moreover, two biggest players - Solvay and FMC had announced recently to increase their prices by c.3% effective from January 2013 in order to reflect increasing costs. There is a consensus among global industry players that soda ash prices will go up and players expect strong volumes thanks to steady demand from detergent and glass packaging manufacturers, as well as a recovering housing industry in the US. Accordingly, we may see better pricing environment in soda ash market which will in turn affect Soda Sanayii s business positively. Becoming self-sufficient in energy. Steam that is produced through cogeneration process is the major cost item for Soda with almost 50% share. The required steam is met by the 252 MW NG fired co-generation plant of Camis Elektrik located in Mersin. In order to increase efficiency, Camis Elektrik s Mersin Power Plant, owned by Sisecam group companies, was recently merged under Soda. This way, Soda started to generate electricity revenues, which we estimate to be around TL342mn in Energy prices will be the key topic in 2013 as well. Having 50% share in total production costs, hikes in energy prices had enormous negative impact on margins in On the contrary to other companies in glass universe, we don't anticipate a quick margin recovery in upcoming periods under the assumption of only 1% increase in sales prices. In addition to that, full consolidation of lower margin electricity sales will further dent on company s margins. Accordingly, we anticipate 17% consolidated EBITDA margin in 2013 remaining almost same comparing with Stock Data TRY US$ Price at Month Target Price Mcap (mn) 1, Float Mcap (mn) No. of Shares Outstanding 425 mn Free Float (%) Avg.Daily Volume (3M, mn) Market Data TRY BIST ,112 US$ Spot Rate US$ 12-Month Forw ard Price Performance (%) 1 Mn 3 Mn 12 Mn TRY US$ Relative to BIST Price / Relative Price TRY Relative SODA Relative to ISE Week Range (Close TRY) OUTPERFORM recommendation is reiterated. Although we make downward revisions in our estimates with this report, we reiterate our OUTPERFORM recommendation for SODA share with a new target share price of TL3.40/share, which offers 34% upside potential from current levels. 62

62 Soda Sanayii Sum mary of Key Financials (TL mn) Incom e Statement (TL mn) 2011A* 2012A* 2013E 2014E 2015E Revenues 872 1,182 1,453 1,502 1,529 EBITDA Depreciation & Amortisation EBIT Other income (expense), net Financial expenses, net 38 (14) 2 (3) 1 Minority Interests (1) Income before tax Taxation on Income (32) (9) (12) (10) (11) Net income Cash Flow Statement (TL mn) Net Income Depreciation & Amortisation Indemnity Provisions Change in Working Capital (26) (5) (40) (7) (4) Cash Flow from Operations Capital Expenditure Free Cash Flow 67 (15) Rights Issue Dividends Paid Other Cash Inflow (Outflow ) (6) 7 (44) (74) (87) Change in net cash 42 (8) (48) Net Cash 1 (8) (56) (42) (25) Balance Sheet (TL mn) Tangible Fixed Assets Other Long Term Assets Intangibles Goodw ill Long-term financial assets Inventories Trade receivables Cash & equivalents Other current assets Total assets 1,225 1,428 1,754 1,818 1,892 Long-term debt Other long-term liabilities Short-term debt Trade payables Total Debt Other short-term liabilities Total liabilities Minority Interest Total equity ,139 1,258 1,392 Paid-in capital Total liabilities & equity 1,225 1,428 1,754 1,818 1,892 Ratios ROE (%) ROIC (%) Invested Capital ,191 1,295 1,410 Net debt/ebitda (x) Net debt/equity (%) Capex/Sales (%) Capex/Depreciation (x) EBITDA Margin EBIT Margin Net Margin Valuation Metrics EV/Sales (x) 1.0x 0.9x 0.7x 0.7x 0.7x EV/EBITDA (x) 3.9x 5.0x 4.5x 4.8x 4.6x EV/IC (x) 1.2x 1.2x 0.9x 0.8x 0.8x P/E (x) 3.9x 7.3x 6.5x 7.4x 6.9x FCF yield (%) 9% -2% 3% 11% 12% Dividend yield (%) 3% 0% 3.0% 3.1% 3% *based on average Mcap during the year 63

63 Soda Sanayii Investment Positives Uncatchable market leader with 85% share in Turkey Completes vertically integrated structure of Sise Cam Self-sufficient in energy A way of getting exposure to all glass segments Estimates and target price are revised downwards, yet OUTPERFORM recommendation is maintained. We revised downwards our 2013 and future estimates following poor set of results in 2012 due to hikes in natural gas prices and 45-days of workers strike. With lower assumptions we still reiterate our OUTPERFORM recommendation for Soda Sanayii thanks to 34% upside potential from current levels. The stock trades at a handsome discount to its international peers, as well as to its sister group companies. To say; at the current Mcap Soda trades at 2013E P/E of 6.5x and EV/EBITDA of 4.5x versus the international peers of 15.2x and 6.4x, respectively and the group companies median of 10.3x and 5.5x. Dominant player in the domestic market. With 1.3mn tons of production capacity Soda Sanayii is by far the leader of the Turkish soda ash market with 71% market share. Eti Soda s entrance to the market back in 2008 had been seen as a serious threat for Soda Sanayii at that time. However, since Eti Soda exports almost all of its production, its entrance to the market had not turned into a nightmare as it was thought. Indeed since 2008, despite all noise regarding the oversupply in the global soda market, Soda s margins improved significantly, thanks to higher soda ash prices. 32% of the revenues are generated from group companies. Sise Cam group companies meet their whole soda ash demand from Soda buying 38% of the company s total production. Therefore 38% of the company s total production is guaranteed to be sold to the group companies. We think that this ratio will increase in the upcoming years, as Sise Cam increases its flat glass capacity by around 45% to 1.9mn tons from 1.3mn tons through two new float investment in Polatli, where Soda s capacity is also located. Currently, Soda sells 50% of its production to international markets and the rest (12%) to other domestic buyers. Becoming self-sufficient in energy. Steam that is produced through co-generation process is the major cost item for Soda with almost 50% share. The required steam is met by the 252 MW NG fired co-generation plant of Camis Elektrik located in Mersin. In order to increase efficiency, Camis Elektrik s Mersin Power Plant, owned by Sisecam group companies, was recently merged under Soda. This way, Soda started to generate electricity revenues (2012: TL187mn), which we estimate to be around TL342mn in In fact, we calculate the value of the cogeneration plant at US$174mn in our sum of the parts through equally blending DCF and replacement value methods, slightly lower than the valuation of US$210mn at the disclosed independent valuation report. The transaction value at the merger was set at US$189mn/TL343mn with 11% discount to the independent valuation. Way of getting exposed to all glass segments. Based on our calculations Sise Cam s annual soda ash demand is around 535K tons, making 38% of the company s total domestic sales volume of around 1.4mn tons. As all group companies meet their domestic soda ash need from Soda, the company offers the best exposure to the growth of all glass segments, other holding company Sise cam. Soda ash prices are driven by soaring raw material costs No downward pressure in soda ash prices up to now. Since the beginning of 2012 soda ash prices depicted an increasing trend that average prices rose by some 5% in For 2013, there is a consensus among industry players that soda ash prices will go up and two biggest players - Solvay and FMC had announced to increase their prices by c.3% effective from January 2013 in order to reflect increasing costs. Acting conservatively, we penciled in only 1% YoY increase in soda-ash prices in Enjoying TL weakness. Soda Sanayii s revenues are fully hard currency denominated. In terms of the breakdown, 75% of the revenues are in US$-terms, while the rest is in EUR terms. Therefore the company benefits from the TL weakness at the operational level. The company enjoys the depreciation of TL below the operational lines as well, thanks to its US$112mn US$-long position (total FX long position being TL214mn) as of end of

64 Soda Sanayii Highly efficient with 98% CUR, compared to global average of just 70% Higher CUR compared to peers. Soda Sanayi works at a higher capacity utilization rate (CUR) of c.88% compared to its international peers averaging at just 70%. This prompts to lower unit cash costs and higher EBITDA margin. To show even Soda s 2012 depressed EBITDA margin at 17.4% (negative impact of NG hikes and 45-days strike) was still above its peers average margin of 11%. Soda-only revenues to increase by 12% YoY in We expect Soda to generate TL1,453mn revenues in 2013, of which TL1,111mn is to come from chemicals sale and TL342mn from electricity sales was the first year that the company consolidated the energy asset since April, it will be misleading to compare consolidated financials with the previous years. We estimate the company s chemicals-only margin to improve in 2013 in absence of workers strike, yet low-margin energy business will have a dilutive impact on margins. At the current Mcap, Soda trades at 2013E P/E of 6.5x and EV/EBITDA of 4.5x which implies a deep discount over its international peers median of 15.2x for 2013E P/E and 6.4x for 2013E EV/EBITDA. Compared to the median of its listed sister glass companies the stock s 2013 P/E discount is 43% and EV/EBITDA discount is 11%. Figure 93: Domestic peers Bloomberg Estimates Ticker Company EV/EBITDA P/E 2013E 2014E 2015E 2013E 2014E 2015E SISE TI Equity TURK SISE CAM * * * * * * ANACM TI Equity ANADOLU CAM * * * * * n.a 4.8* TRKCM TI Equity TRAKYA CAM * * * * * * SODA TI Equity SODA SANAYII * * * * * * * Is Investment Estimates Median of listed subsidiaries discount/premium of Soda -11% -14% -15% 12% 1% 18% -28% -43% -26% -24% -24% -24% Source: Bloomberg, Is Investment Estimates Strong cash flow generation with an unleveraged balance sheet. As of end of 2012, the company had just TL8mn net debt position making just 4% of the 2012 EBITDA. The stock s 2013E FCF yield stands at around 18% levels, while ROIC is calculated at 14.5%, including the lower margin power plant. FIGURE 94: SODA Last 3 years Trailing Historic Multiples SODA Enterprise Value/EBITDA Median Min. Max. 3.0 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Source: Bloomberg 65

65 Soda Sanayii Investment Negatives Ciner Group s large investments might threat export sales Low trading volume compared to other glass companies Ciner Group s new investments might pose a threat for Soda Sanayii s export sales. Ciner Group s existing ETI Soda facility has a production capacity of approximately 1.1mn tons/year and the company announced capacity expansions of 0.6 million tons/year by The Group will establish a new soda ash production facility as well with a capacity of 2.7mn tons/year and a co-generation plant by 2016 with a total planned cap-ex of US$1.35bn. With the completion of the Kazan Soda facility (which is planned to be completed in 44 months), total soda ash production capacity of the group will reach to 4.4mn ton/year which will be the largest capacity in the world versus Soda s 2.0mn tons/year capacity (TR: 1.3mn tons/year, Bosnia: 300K tons/year, Bulgaria 300K tons/year) The Group targets to generate US$1.75bn export revenues from soda ash sales, which makes us to think that the company to export almost all of its production. As the investment will take 44 months to be completed, there would not be any impact on Soda s operations in the short term. However, for the longer term, it might pose a threat for the export sales of Soda, mainly in Southern Europe. Other European soda ash producers such as Solvay and CIECH believe that the addition of this capacity will be visible mostly in Southern Europe rather than in Central and Eastern Europe. Soda ash prices in Southern and Western Europe are approximately US$20 higher than Central and Eastern Europe, which could be eliminated with Kazan s penetration in the market, as Kazan will produce natural soda ash, whose production costs are way below synthetic one. Lower liquidity compared to other listed group companies. Soda Sanayii s free float is just 10% and its average daily trading volume is around US$0.6mn. Therefore, investors who want to build positions at Soda may prefer to do it through the holding company Sise Cam that has an average daily trading volume of around US$5mn. This had been the case in the last couple of years and unlike other conglomerates which reflected the price performance of their subsidiaries with a lag, Sise Cam typically rallied first while subsidiaries followed after the NAV discount had narrowed. Vulnerable to the deteriorations in macro environment Prone to FX fluctuations. The company s revenues are fully FX based, while all of its costs are TL denominated. Therefore, it is sensitive to FX fluctuations at operating lines. Serving to cyclical sectors. 54% of the company s revenues are generated through sales to the glass sector, which is a cyclical sector. Although glass packaging segment is resilient to economic shocks, flat glass segment is sensitive to the economic downturns as it mainly serves to construction and automotive sectors. High dependency on energy. Of the total costs, energy makes up 50% (96% of it is steam and 4% is electricity). Therefore, the company is vulnerable to the hikes in NG prices. Margins to decline after consolidation of Camis Elektrik Margins to be diluted due to takeover of lower margin electricity generation business. After taking over Camis Elektrik s 252 MW NG-fired power plant in April 2012, the company started to consolidate this business in its IFRS financials. As power generation business has lower margins than the chemicals business, margins camed down in 2012 to around 17.4% levels from 25% levels in Note that our average EBITDA margin forecast is 8% for the energy business versus c.16% for the soda ash production, throughout the forecast period. 66

66 Soda Sanayii Valuation We run separate DCF analysis for chemicals (production of soda ash and chromium chemicals) and energy businesses (252 MW co-generation plant) of Soda Sanayii. In sum of the parts we used the result of the DCF analysis for the chemicals business while we equally blended DCF analysis and replacement value for the electricity business. We did not include the results of international peers comparison analysis as peers are not fully comparable since they also produce chemicals other than soda ash. We nevertheless presented below the results of the peer comparison. We have also checked out the historic multiples of Soda. The company s historic P/E is 5.7x and EV/EBITDA is 4.7x versus 2013E P/E and EV/EBITDA multiples of 8.6x and 6.1x, respectively. All in all, we set our target price as TL3.40 per share for Soda, which offers 36% upside potential from the current level. At our target valuation, the stock s 2013E P/E and EV/EBITDA comes to 6.1x and 8.6x, respectively, which are far from demanding compared to BIST s respective 2013E P/E and EV/EBITDA multiples of 13.6x and 9.0x. Figure 95: Summary Valuation SOTP, US$mn EV 2013E target Chemicals Business Energy Business TOTAL EV, US$mn TOTAL EV; TLmn 1,470 Target Price, TL 3.40 Source: Is Investment Estimates Figure 96: WACC Assumptions Risk free rate 4.5% Equity risk premium 6.0% Beta (L) 1.00 Equity 86% Cost of Equity (kel) 10.5% Debt 14% Cost of Debt 6.5% After tax cost of debt 5.2% WACC 9.7% Source: Is Investment Estimates DCF Model Chemicals Business Basic assumptions of our DCF model for the chemicals business are as follows: As 75% of the company s revenues are in US$ terms (rest in EUR) and 50% of costs are in US$, we have run a dollar-based DCF model. Our projection period is ten years covering We assumed the company s CUR at 90% in Turkey and 95% in Bosnia and Bulgaria to remain constant throughout our forecast horizon. Therefore we forecast total production as well as the sales volume at around 1.9mn tons. With the completion of the 70K tons additional capacity investment in Turkey in 1Q13, we assumed total production and sales to converge to 2mn tons in 2013 and stay constant there on. We do not expect any oversupply in the domestic market given the 580K tons float line investment of Trakya Cam in Mersin, which alone absorbs the additional capacity of Soda. Soda ash prices are 5% higher y-t-d in US$ terms and around 10% higher YoY in Acting conservatively we penciled in only 1% US$ price increase in 2013 and after that we assumed prices to remain almost constant in 2014 and onwards. 67

67 Soda Sanayii EBITDA margin forecast for the chemicals business in 2013 is 17% remaining almost constant compared to Despite significant rise in NG prices in 2012, higher soda ash prices are set to partly mitigate the negative impact on margins. For 2014 and onwards, we estimate margins to moderate towards historical average levels of 16%. Our cap-ex estimation for 2013 is US$22mn which consists of mainly maintenance. As we did not assume any capacity increase for the coming years we projected a stable annual maintenance cap-ex of US$20mn between 2013 and Looking at the past years, we assumed change in working capital requirement to be 3% of the revenues in 2013 and onwards. Benchmarking to the 30 years Turkish sovereign rates, we have taken the risk free rate at 4.5%. With an equity risk premium of 6.0x, 1x Beta (much higher than the 0.6x Beta in the last three years, we nevertheless used a higher beta due to the very low liquidity of the stock) and 6.5% cost of debt, we calculated a US$ WACC of 9.7%. We took the terminal growth rate as 1%. Figure 97: Summary DCF Valuation Discounted Cash Flow s (US$ mn) E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E2022E TV Revenues ($mn) EBITDA Change in Working Capital Capital Expenditures (51) (22) (23) (23) (27) (27) (27) (27) (27) (27) (27) Tax Free Cash Flow Discounted FCF PV of Discounted FCF 366 Terminal Grow th 1% PV of TV 177 Net Cash (Debt) 2012 (*) -4 Participations (**) 83 Financial Investments 17 Soda-only EV 638 PP Month Target Equity Value Price Target (TL) 3.40 Current Mcap 596 Upside Potential 36% Source: Is Investment Estimates Sensitivity Analysis i) Sensitivity to energy and soda ash prices. In order to see the sensitivity of our model to the changes in average EBITDA margin we have carried out a sensitivity analysis, whose results were presented at the table below. Major dynamics of the company s business flow are i) energy prices, ii) US$/TL parity and iii) soda ash prices. In order to decrease the dependency on energy Sise Cam Group invested in NG-fired power plant in The 120MW capacity became operational in 4Q06 and in order to procure increasing demand of Soda another 123MW plant became operational in 4Q09. Although with the additional capacity in 2009, the company s EBITDA margin improved significantly, we did not see the same effect in 2007 margins right after the launch of 1st power plant, due to appreciation of TL against dollar by 18% in 2007 over

68 Soda Sanayii Figure 98: Sensitivity Analysis-I Avg Ebitda Margin in Forecast Horizon 12% 13% 14% 15% Base 17% 18% 19% 20% Soda-only EV, US$mn Source: Is Investment Estimates EBITDA Margin 17% 3% 4% 11% 15% 7% 15% 18% 18% 25% ii) Sensitivity to WACC and terminal growth rate. We have lowered/hiked WACC by 1pps from 10%, which we used in the model and terminal growth rate at the same rate. Terminal Growth Figure 99: Sensitivity Analysis-II WACC 7% 8% 9% 10% 11% 12% 13% 14% 15% 0% % % % % 1, Source: Is Investment Estimates Valuation of Energy Business We have blended the results of the two different models in order to reach our fair valuation for the energy asset. We have attached equal weights to the DCF model and replacement value of the asset. This yielded a target valuation of US$174mn for the 243MW NG-fired power plant compared to the transaction value of US$191mn during the merger process with Soda and fair valuation of US$210mn done by independent appraisals. While DCF model resulted in a fair value of US$153mn, replacement value analysis yielded a fair value of US$194mn. Our target valuation implies an EV/MW multiple of 0.7x versus Akenerji and Zorlu Enerji, trading at EV/MW multiples of 1.9x and 1.4x, respectively. However please note that, both Akenerji and Zorlu Eneji has intensive capacity expansion plans for the coming years, hence have leveraged balance sheets. Therefore, they may not be perfectly comparable. Figure 100: Summary Valuation Source: Is Investment Estimates US$mn Fair Value per DCF 153 Fair Value per Replacement Value 194 Equally Blended Target EV

69 Soda Sanayii DCF Model Energy Business We run a dollar-based DCF model for the 243MW power plant of the company. Our DCF period covers ten years between 2012 and We assumed annual generation of 1.7bn KW to remain constant during our forecast period. We calculated almost US$75mn revenues from steam sales, which will be eliminated in consolidation. EBITDA contribution from the steam sales are expected to be around US$5mn during the forecast horizon, implying a stagnant 6% margin estimate for the steam sales lower than the average 12% margin in electricity sales. We used our energy team s electricity and NG price estimates throughout our forecast period and assumed the company to continue selling to the DUY market. In 2012 we have seen a 7% increase in electricity prices. Starting from 2013, we expected electricity prices to remain constant during the rest of the projection period. We don't anticipate a visible margin improvement and on average 8% EBITDA margin are estimated stay constant throughout our projection period. Benchmarking to the 30 years Turkish sovereign rates, we have taken the risk free rate at 4.5%. With an equity risk premium of 6.0x, Beta of 1x and a cost of debt of 6.5%, we calculated a US$ WACC of 9.7%. We have used a terminal growth rate of 2%. Figure 101: DCF Summary US$,mn 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E Revenues (*) EBITDA tax (-) FCF PV of FCF PV of TV 72 Net Debt -12 Equity Value 153 (*) combined revenues including steam sales before consolidation eliminations Source: Is Investment Estimates Replacement Value At current prices investing in a 1MW NG fired power plant costs around US$800K, which results in US$194mn valuation for the 243MW power plant after deducting the US$12mn net debt position. 70

70 Soda Sanayii International Peers We did not include the results of the peer comparison to our target valuation calculation. Listed international peers of Soda Sanayii are also engaged in the production of chemicals other than soda ash. Thus, we have used the outcome of peer comparison for reality check. At the current Mcap of US$596mn, Soda Sanayii trades at 2013E P/E of 6.5x versus the peers median of 15.2x, i.e. a 57% discount. Based on 2014E P/E multiple, the stock s discount is 32%. Similarly based on EV/EBITDA, the stock trades at 30% discount with respect to 2013E median of peers and 7% with respect to the median of 2014E multiples. Bloom berg Estim ates Company EV/EBITDA P/E Country 2013E 2014E 2015E 2013E 2014E 2015E SODA SANAYII * * * * * * TURKEY SOLVAY SA-A BELGIUM FMC CORP UNITED STATES TATA STEEL LTD INDIA CIECH POLAND TANGSHAN SANYO-A CHINA *Is Investment Estimates Median -All Com panies Median -Turkey * * * * * * Median -Other Countries Turkey's discount premium -30% -7% -8% -57% -32% -29% Peers comparison yields a fair value of TL1,302mn for Soda, i.e. 22% higher than our DCF valuation. Soda-only margins of the company at 22% in 2012 is much higher than the average o peer s 11%. Including the energy asset in 2012, the company s EBITDA margin comes down to 17% which is still higher than the average margin of the peers. Figure 102: Peer Comparison EBITDA Margins 2011A 2012A 2013E SASA TI Equity 10% 1% 6% SOLB BB Equity 13% 14% 16% FMC US Equity 22% 22% 23% TATA IN Equity 14% 9% 9% CIE PW Equity 7% 8% 11% SODA TI Equity 25% 17% 17% Source: Bloomberg and Is Investment Estimates 71

71 Soda Sanayii Company Profile Chemicals arm of Turkey s sole glass holding. Established in 1969 as a soda plant, Soda Sanayi is the largest part of Sisecam s chemical segment and a key element of the vertically integrated group. With its production capacity, product quality, and widespread and effective marketing network, Soda Sanayii is a reliable supplier that meets not only the domestic demand, but also supply to international markets. The company produces heavy soda ash, light soda ash, technical and food grade and sodium bicarbonate to diverse industrial sectors such as glass, detergents, chemicals, paper, textile, food and animal feed. Diversifying its product portfolio with the establishment of Kromsan Plant in 1982, the company became one of the prominent suppliers of chemicals that are used in glass, leather and pharmaceutical sectors. The company sells c.38% of its total production to Sisecam group companies. Figure 103: Milestones 1969 Soda Sanayii is established 1979 Establishment of Kromsan Plant 1986 Kromsan Chromium Chemicals merged with Soda Sanayii 2000 Started to be traded in ISE 2004 Partnership aggreement is formed with Cromital Spa Italy 2006 JV is formed with Fabrika Soda Lukavac in Bosna Source: Company Soda issued new capital in order to take over the co-generation plant previously owned by other Sisecam group companies. Soda Sanayii has increased its paid-in capital from TL254.1m to TL368.8m via a 45% restricted rights issue. The company has taken over one of Camis Elektrik's co-generation plants in exchange for newly issued shares. Camis Elektrik has two power plants, one in Mersin with a capacity of 243MW and one in Marmara Region with a capacity of 31MW. Soda took over the Mersin plant in April and continues to use the steam produced at this plant. Sise Cam is the major shareholder of the company. Following the capital increase, Sise Cam is still the major shareholder of the company, holding 61% stake. Trakya Cam holds 11% stake while Anadolu Cam s stake at the company increased to 18% after the capital-increase from 14%,earlier. On the other hand, the share of free float declined to 10% from 15% following the transaction. Figure 104: Shareholder Structure Before Takeover Stake Capital Increase After Takeover Stake ANACM 36,189, % 29,950,945 66,140, % TRKCM % 39,518,855 39,518, % SISE 179,815, % 45,134, ,949, % DENCM % 91,831 91, % Camis Madencilik 97, % 0 97, % Free Float 37,997, % 0 37,997, % TOPLAM 254,100, % 114,696, ,796, % Source: Company 72

72 Soda Sanayii Works with high efficiency with outstanding utilization rates compared to world average. Being the largest company of Sise Cam s chemicals segment, Soda Sanayii has a total production capacity of around 2mn tons of soda ash at its plants located in 3 countries. The company s soda plant located in Mersin has a total production capacity of 1.3 mn tons, while chromium plant has a production capacity of 0.3 mn tons. Apart from that, Bosna Herzegovina Lucavac plant has 350 K tons and Bulgaria-Solvay plant has 350K tons production capacity. The company operates with high CURs of 99% and 95% at its production plants located in Turkey and abroad, respectively, much higher compared to global companies average rate of 70%. Targets to penetrate into new markets and increase product variety. Soda Sanayii managed to increase its total soda production to 1.2mn tons in 2011, growing at a CAGR of 6.5% over the past five years. During the same period of time, chromium production grew at a CAGR of 5.7% reaching 262K tons in The company management targets to increase its total soda ash production figure including Bosnia and Bulgaria to 1.9mn tons in 2013 and chromium plants production is expected to increase to 280K tons from 262K tons in Figure 105: Total Production - K tons K tons CAGR:6.3% - Soda 5.7% - Chromium Source: Company Annual Reports , Soda Factory Krom Factory By far the leader in the domestic market with 85% share. Soda Sanayii is the indisputable leader in the Turkish soda ash market with 1.3 mn tons of production capacity, holding c.71% market share. As we mentioned earlier, 38% of Soda s production is sold to Sise Cam group companies, 50% is exported and the remaining 12% is sold to third parties in the domestic market. The largest competitor, Eti Soda has around 1 mn tons of production capacity, exporting nearly all of its production. Hence does not pose a threat for Soda Sanayi. Eti Soda operates the second largest trona (natural soda ash) ore in the world and has around 1 mn tons soda ash production capacity. Eti Soda has significant capacity expansion plans. The group announced to increase its existing 1 million tons production capacity by 0.6 million tons by Since Eti Soda focuses to sell its products in export markets especially Southern and Western Europe due to c.20$/ton higher average sales prices, we don t consider it as a threat for Soda Sanayii in a near term. 73

73 Soda Sanayii Financial Highlights Revenues Chemicals revenues to increase three years in a row. Thanks to buoyant demand of the glass sector, coupled with higher prices and strong US$ against domestic currency, Soda s revenues grew by a significant 32% in 2011 to reach at TL872mn. The company had recorded TL995mn revenues in 2012 from its soda & chromium sales, up only by 14% YoY, on the back of meagre demand in glass sector, esp. flat glass and production losses due to 45-days strike. In 2013, we anticipate 12% growth in soda-only revenues owing to increase in sales volume. 252 MW power plant to create electiricity revenues. Soda Sanayi took over the 252 MW NG-fired power plant in Mersin, which was previously held by other group companies, in exchange for newly issued shares. Soda continues to procure all of its steam requirement, which makes 96% of the company s energy bill, from this cogeneration plant. The electricity generation of the plant was sold, hence the company had recorded electricity revenues since April Having 184mn KW production loss due to strike, the company recorded just TL187mn revenues from electricity sales in We anticipate TL342mn revenues to be recorded from the plant in Figure 106: Revenue Breakdown TL mn 1,600 1,400 1,200 1, ,111 1, E 2014E Chemicals Electricity * (*) Just electricity revenues after consolidation eliminations of steam sales revenues Source: Company Financials, Is Investment Estimates Costs 50 % of the cost base is composed of energy Energy is the major cost item of the company. Energy makes up 50% of Soda s cost base, hence the company is prone to energy price changes. 96% of the total energy costs are made up of steam and 4% is composed of electricity. The company meets all of its steam need from its cogeneration plant in Mersin. Raw material costs ( limestone, coke and salt ) are the second big ticket in cost composition with 30% share in total. While 7% of the total costs come from labour, remaining consists of others including depreciation. All of the cost base is in domestic currency, as opposed to 100% hard currency denominated revenues. Note that due to lower electricity prices in US$ terms in 2011, lower unit costs thanks to higher sales volume and TL depreciation, the company attained one of the highest gross margin ever in 2011 at 29%. However, gross margin deteriorated to 20.5% in 2012 due to 52% increase in natural gas prices and 45-days workers strike. 74

74 Soda Sanayii Dilution impact to be higher in We expect EBITDA margin to be constant in soda-only side assuming no NG price hike in We estimate the gross margin of the electricity generation asset at just 4%. Accordingly, margin dilution will be much higher in 2013 due to full-year consolidation. Figure 107: Cost Breakdown Labor, 4% Others, 16% Raw Material, 30% Energy, 50% Gross Margin 2009A 2010A 2011A E 2014E Soda-only 23% 23% 29% 24% 24% 23% Electricity - - 2% -4% 4% 4% Consolidated 23% 23% 29% 21% 20% 19% Source: Company, Is Investment estimates EBITDA Attained record high margins in Supported by lower units costs, improved CUR at 98% levels, and appreciation of hard currencies against TL, (75% of the revenues are in US$-terms and 25% in EUR terms), the company achieved one of the highest margins in its history in 2011 with 25% at the EBITDA level. However, in 2012, both Soda-only and consolidated EBITDA margins came down, due to higher energy bill for the former, dilution effect from the electricity business and negative impact of strike. Consolidated EBITDA margin to be same in 2013 compared to Electricity business was effected significantly from the strike and posted negative margins in EBITDA margin of the segment is expected to be 8% in 2013 with higher sales volume and CUR. We do not expect the company to pass fully the increase on the cost side on product prices (assumed only 1% increase in product prices) and as a result margins are forecasted to be almost constant in 2013 comparing with All in all, in consolidated basis, we estimate almost same EBITDA margin of 17% in Figure 108: EBITDA Split EBITDA, TLmn 2009A 2010A 2011A E 2014E Soda-only Electricity Consolidated EBITDA Margin 2009A 2010A 2011A E 2014E Soda-only 18% 18% 25% 20% 20% 18% Electricity - - 5% -3% 8% 8% Consolidated 18% 18% 25% 17% 17% 15% Source: Company, Is Investment estimates 75

75 Soda Sanayii Financial Income and Expenses Recorded f-x losses from hard currency depreciation in 2012 over The company reported TL14mn net financial expense in 2012FY, down from the TL39mn net financial income in 2011FY. As a result of its long position at both US$ and EUR the company recorded TL13mn net FX losses in 2012FY as opposed to TL45mn FX gains booked in 2011FY. Figure 109: Financial Income (Expenses) Financial Income/(Expenses) 2009A 2010A 2011A 2012A FX Gains/(Losses)-net Interest Income /(Expense)-net Other Financial Income/(Expenses)-net Source: Company Financials, Is Investment Estimates Cap-ex We expect US$20mn capital spent in The company s capital expenditures was around TL90mn in For 2013, we envisage US$20mn expenses for maintenance purposes. As the company does not have any certain plan for capacity increase in the foreseeable future, we assumed annual maintenance capex of US$20mn for 2013 and onwards. Net Income & ROE Bottom-line came down by FX losses and poor operational performance in Soda Sanayi disclosed TL131mn net income in 2012, down significantly by 29% Y-o-Y, due to lower operational margins with increased cost-base and 45-days strike and TL14mn net financial expenses. We anticipate higher bottom-line in with improved sales volume and prices and contribution of electricity sales in Figure 110: Net Income and ROE TL mn Net Income ROE 23% 16% % 12% 11% 9% A 2010A 2011A E 2014E 25% 20% 15% 10% 5% 0% Source: Company Financials, Is Investment Estimates 76

76 Soda Sanayii Capital Structure Soda had a net debt position of TL8mn as of end of Of the total TL167mn cash balance in 2012, all of it is in time deposits and fully hard currency denominated. More precisely, 90% is in US$ terms and remaining 10% is in EUR terms. The company had a total financial debt position of TL175mn as of end of While 34% of the debt is short -term, remaining 66% is long term with mostly 2 years maturity. As for the currency breakdown of the debt, 19% is in US$ terms and 81% is in EUR terms. In fact, the company had a net debt position of just TL8mn (turning into TL22mn net cash including the long term financial investments of TL30mn), making just 4% of the 2012 EBITDA. Figure 111: Net Debt Position TL,mn Cash and Equivalents ST Debt LT Debt Net Cash/ (Debt) TL,mn- as of 2012 US$ EUR TL Cash and Equivalents St Debt LT Debt Net Position Source: Company Financials, 77

77 This report has been prepared by İş Yatırım Menkul Değerler A.Ş. (İş Investment) solely for the information of clients of İş Investment. Opinions and estimates contained in this material are not under the scope of investment advisory services. Investment advisory services are given according to the investment advisory contract, signed between the intermediary institutions, portfolio management companies, investment banks and the clients. Opinions and recommendations contained in this report reflect the personal views of the analysts who supplied them. The investments discussed or recommended in this report may involve significant risk, may be illiquid and may not be suitable for all investors. Investors must make their decisions based on their specific investment objectives and financial positions and with the assistance of independent advisors, as they believe necessary. The information presented in this report has been obtained from public institutions, such as Istanbul Stock Exchange (ISE), Capital Market Board of Turkey (CMB), Republic of Turkey, Prime Ministry State Institute of Statistics (SIS), Central Bank of the Republic of Turkey (CBT); various media institutions, and other sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. All information in these pages remains the property of İş Investment and as such may not be disseminated, copied, altered or changed in any way, nor may this information be printed for distribution purposes or forwarded as electronic attachments without the prior written permission of İş Investment. (www.isinvestment.com) This research report can also be accessed by subscribers of Capital IQ, a division of Standard & Poor's. 78

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