abc Dogus Otomotiv Multiple pressures on profitability Global Research Flashnote Recovery still a distant prospect, maintain Neutral (V) Neutral (V)

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1 Flashnote Global Research Mid Cap Equity Turkey Neutral (V) Target price (TRY) 2.00 Share price (TRY) 1.62 Potential total return (%) 23.5 Performance 1M 3M 12M Absolute (%) Relative^ (%) Index^ ISTANBUL COMP RIC DOAS.IS Bloomberg DOAS TI Market cap (USDm) 114 Market cap (TRYm) 178 Free float (%) 35 Note: (V) = volatile (please see disclosure appendix) Cenk Orcan * Analyst HSBC Portfoy Yonetimi A.S cenkorcan@hsbc.com.tr View HSBC Global Research at: *Employed by a non-us affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations Issuer of report: HSBC Yatırım Menkul Değerler A.Ş. Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it Dogus Otomotiv Recovery still a distant prospect, maintain Neutral (V) Volume weakness remains the main investment negative; expect Turkish vehicle sales to fall more than 40% in Q4 08 TRY weakness puts further pressure on margins and profits; cutting e forecasts, expecting net loss in both years Current share price suggests downside is limited; maintain Neutral (V) rating with new TP of TRY2.0 (TRY6.5) Multiple pressures on profitability We have cut our year-end 2008 and 2009 forecasts for Turkey s leading vehicle importer, Dogus Otomotiv (DOAS), in light of accelerated weakness in domestic demand, a potential rise in competitive pressure (due to huge inventory build-up in the sector and a stimulus package by the government, which reportedly will support local producers such Tofas (N, target TRY2.30) and Ford Otosan (N, target TRY5.20)) and negative impact on its margins and profitability from the TRY s depreciation since the end of Q3. We expect Turkish vehicle orders to decline more than 40% y-o-y in Q and a further 15% in 2009 (higher contraction in H than in H2 2009), keeping top-line weakness as the main theme in the sector and a major negative investment catalyst for auto stocks. New model launches recently in mass segments (such as VW Golf) may support DOAS s market share, which has been falling so far in 2008; but given the competitive outlook and additional disadvantage for DOAS in pricing due to weaker TRY, we assume the base case scenario for DOAS would be a flat trend in its market share. We therefore expect its sales volume to fall by 8% this year (vs. 1% fall in 9M 2008) and by a further 15% in DOAS s vehicle imports are in EUR-terms but 75% are priced in TRY, making working capital, inventory, and FX exposure management key to financial performance. Heavy use of derivatives provides partial hedging and the TRY s depreciation causes margin erosion and profit pressure. As of end-q3, adjusted with vehicles on order, DOAS has an FX short position of ctry300m, or c70% of its equity, and has net debt of TRY117m (FX short on net debt of TRY122m), or 27% of its equity. On top of weaker revenues and margins, a weaker TRY against EUR since end-q3 will keep DOAS s bottom-line (-TRY32m in 9M) in the red zone in 2008e (-TRY47m) as well as in 2009e (-TRY11m) based on our forecasts. Our sum-of-the-parts valuation for DOAS suggests that downside is limited at the current share price. We think that the negative demand and profit outlook is mostly priced in. Only 40% of our new target price of TRY2.0 (cut from TRY6.5) comes from its core business (i.e. vehicle imports), representing a dismal short-term profit outlook for the operation. The remaining 60% is split equally among its stake value (3.9% in parent Dogus Holding) and its vehicle inspection business, (that nears full kick-off, from Q1 2009). We maintain our Neutral (V) rating based on the 24% potential return offered by our new target price.

2 Financials & valuation Financial statements Year to 12/2007a 12/2008e 12/2009e 12/2010e Profit & loss summary (TRYm) Revenue 2,552 2,425 2,198 2,540 EBITDA Depreciation & amortisation Operating profit/ebit Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (TRYm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (TRYm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets 1,157 1,202 1,245 1,354 Operating liabilities Gross debt Net debt Shareholders funds Invested capital Ratio, growth and per share analysis Year to 12/2007a 12/2008e 12/2009e 12/2010e Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Key forecast drivers Year to 12/2007a 12/2008e 12/2009e 12/2010e Domestic vehicle demand gr. -4% -10% -15% 8% DOAS unit vehicles sales gr. -8% -8% -15% 8% GDP growth 5.3% 2.0% -0.9% 4.3% EUR/TRY year average EUR/TRY year end EUR/USD year average Valuation data Year to 12/2007a 12/2008e 12/2009e 12/2010e EV/sales EV/EBITDA EV/IC PE* 2.8 NM NM 4.9 P/Book value FCF yield (%) Dividend yield (%) Note: * = Based on HSBC EPS (fully diluted) Price relative Dogus Otomotiv Rel to ISTANBUL COMP Source: HSBC Note: price at close of 01 Dec Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/ebitda (x) Per share data (TRY) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS Book value

3 Deep value play, but not in our investment horizon Catalysts needed for a re-rating but outlook remains dim at least until mid-2009 As a high-beta pure Turkish vehicle demand play, importer DOAS might be offering huge value on the longterm prospect of a recovery in Turkish vehicle demand but what we instead see in the short-term outlook is a deteriorating operating environment for the company. Such view might appear contradictory with the easing cycle that the Central Bank signalled last month via its unexpected rate cut (by 50bp) and a softer tone for its rate policy going forward, thanks to its expected disinflationary trend. HSBC s macro team believes that the bank s room for notable rate cuts is limited due to TRY weakness and inflationary pressures. A slight easing in monetary policy on the other hand would be insufficient in our view to provide a big relief for vehicle demand, which is currently under heavy pressure. As an importer, DOAS is immune to the risk of plummeting volumes in Europe (which is hurting exporters) but sales in Turkey are proving even weaker. In October, vehicle orders in Turkey were down by 37% y-o-y (deeper than the decline in European markets) and, among many factors such as tough credit environment and very low consumer confidence, base effect alone (i.e. very strong sales in Q and in H1 2008) should make y-o-y comparisons even more difficult at least until H We expect Turkish vehicle demand to decline by 40% y-o-y in Q4 and by 15% in 2009 (more pronounced weakness in H1 2009). Can DOAS achieve better sales performance than the rest of the market and recover its market share losses year-to-date? We would normally expect so, thanks to the speed up lately in DOAS s new model launches (such as the new VW Golf, and the Seat Ibiza) that sell in mass segments and in particular application of small diesel engines to the models (representing c30% of the market where DOAS has not been operational). However, three factors urge us to be more cautious on DOAS s market share outlook. the pricing disadvantage from weaker TRY against EUR (although weaker EUR against USD benefits DOAS against USD-based importers, such competition is not significant in Turkish vehicle sector) an economic stimulus package currently being designed by the Turkish Government, which will support local producers (such as Tofas and Ford Otosan). Based on media reports, interest payments on consumer loans will be partially (30-50%) paid by the Treasury during 2009 falling demand leading to a huge inventory build-up in the sector (some newspapers e.g. Sabah - dated 1 December 2008 argue that accumulated inventories of 160k vehicles, or c38% of total domestic demand y-t-d) are causing players to launch increasingly more aggressive sales campaigns Monthly Turkish vehicle sales Turkish banks monthly avg. auto loan rates (1-yr TRY loans) 120, ,000 80,000 60, % 2.6% 2.4% 2.2% 2.0% 40,000 20,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1.8% 1.6% 1.4% 1.2% 1.0% Apr-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Source: Association of Turkish Auto Manufacturers (OSD) Source: Association of Turkish Auto Manufacturers (OSD) 3

4 Currency depreciation double negative impact for DOAS DOAS s business is still predominantly reliant on new vehicle sales (vehicle import and distribution account for c70% of revenues and EBIT, while after sales services and other automotive services account for the remaining 30%) although after-sales services and new business lines (such as vehicle inspection services and production of trailers) will gradually take up more share of profits from In the meantime, the business will remain highly vulnerable to FX rates, despite the use of derivative instruments to cushion the impact. In view of these factors, we assume DOAS will at best maintain its market share in 2009 rather than increase it; hence we assume 15% lower volumes compared with As far as margins are concerned, we think they should keep deteriorating in the face of the TRY depreciation and toughening competition. As an importer of vehicles, DOAS suffers from margin pressure, on top of falling volumes, when TRY depreciates especially against EUR, despite the use of derivatives (which provide partial hedging only). The opposite is true during periods of TRY strength. On the other hand, inventory build-up also suggests sectors players will increasingly forego margins and focus more on diminishing their stocks as much as possible before the new year. We think that no matter the efforts, excess inventory will continue to be a problem for the sector in at least the initial months of 2009, keeping margins under pressure. Our forecast revisions, considering these factors (and given the fact that the TRY has depreciated by 11% against EUR since end-q3 and HSBC forecast of 19% depreciation in Q4 and a further 5% in 2009), result in a 42% cut in 2008e EBITDA and 63% cut in 2009e EBITDA. We expect the 9M net loss of TRY32m to increase to TRY47m by the end of the year and stay in the red territory (TRY11m) by end Despite lower forecasts for 2010 as well, we expect a partial recovery in Turkish vehicle demand (by around 8%) moving DOAS into positive profits driven by also our macro team s forecast of moderate TRY strength. DOAS Forecast revisions TRYm 9M 07 9M e 2009e 2010e actual actual chg. old new diff. chg. old new diff. chg. old new diff. chg. Unit sales 45,134 44,859-1% 70,000 65,144-7% -8% 75,600 55,372-27% -15% 82,528 59,802-28% 8% Revenues 1,711 1,741 2% 2,629 2,425-8% -5% 2,980 2,198-26% -9% 3,405 2,540-25% 16% EBITDA % % -56% % -24% % 73% margin 4.8% 2.6% -46% 3.0% 1.9% -37% -54% 3.2% 1.6% -50% -16% 3.2% 2.4% -25% 50% Net profit % nm nm nm nm % nm Source: Company data, HSBC estimates Capex, gearing and balance sheet One clear advantage DOAS has over manufacturers such as Tofas (N, target TRY2.30) and Ford Otosan (N, target TRY5.20) is its low capex needs and flexibility in postponing capex program. As such, the company postponed the majority of its planned investments for this year, comprising mainly of new showroom openings in Turkey. The two main ongoing capex items with total value of cusd40m (most of which has been spent in 2008) are the production plant for Krone trailers in Turkey (due to start of operations in Q2 2009), Porsche showrooms, and an after-sales services investment in Switzerland (also scheduled to kick off in Q2 2009). For 2009, we have assumed TRY33m (USD20m) total capex, which is unlikely to require new borrowing given the company, as of end of Q3, has TRY121m cash. Its total debt is TRY238m, and hence net debt is TRY117m, implying net debt /equity (as of end of Q3) of 0.3x. However, gearing looks high in terms of net debt/ebitda, which we estimate at 2.8x for 2008e and 3.6x for 2009e. Of total outstanding debt (which is almost fully in FX), TRY128m or 54% is due within one year. For a business that generates 75% of revenues 4

5 in TRY (but mostly pegged to EUR although not at spot rates) versus 90% of total costs in FX, we think that working capital terms will need to be improved notably (which is an unlikely scenario) for DOAS to generate additional cash and not to depend on new borrowing in servicing existing debt during However, the backing of parent Dogus Holding and VW AG notably mitigates any risks in relation to debt service, in our view. DOAS has a cross ownership in parent Dogus Holding of 3.86% (worth TRY175m in the Q3 books), which effectively is an indirect 0.85% stake in Garanti Bank (O/W, target TRY3.14), worth ctry77m at the bank s current share price. Valuation and risks While the outlook of Turkish auto sector remains highly negative along with short-term newsflow (monthly sales plummeting), we believe that this is mostly priced in and that at current valuations, there is limited downside. Its 0.85% indirect stake in Garanti Bank alone (ignoring the value from the rest of group assets held through its 3.86% stake in Dogus Holding) comprises c40% of the company s current market value. Our sumof-the-parts valuation points to a new target price of TRY2.0 (previously TRY6.5) due to the use of conservative estimates in valuation of its core business (via DCF model), value from its 33% stake in vehicle inspection rights business in Turkey (DCF as well), and the stake value as explained above. Only 40% of our new target price comes from its core business (i.e. vehicle imports), representing dismal short-term profit outlook for the operation. The remaining 60% is split equally among its stake value and its vehicle inspection business, (that nears full kick-off, from Q1 2009). Our DCF parameters with a more cautious approach are: a risk free TRY rate of 15% (vs. 13%), cost of debt of 16% (vs. 15.5%), terminal growth rate of 4% (vs. 5.5%) and WACC of 17.9% (vs. 16.5%). The potential return offered by our new target price is 24%, based on which we maintain our Neutral (V) rating on the stock. In HSBC s rating system, the Neutral band for Turkish stocks with volatility (V) indicator is 10.5% %. Our sensitivity analysis below suggests demand decline of around 10% in 2009 or less would yield an upside sufficient to justify an Overweight (V) rating on the stock (at fixed 15% risk free rate). But if demand weakness is 20% or more, then the implied upside falls into the Underweight (V) rating zone. Sensitivity analysis sensitivity of upside potential to RFR and vehicle sales volume growth (2009e) Sales volume growth (2009e) RFR rate -25% -20% -15% -10% -5% 16.0% -22% -4% 18% 28% 46% 15.5% -19% -1% 20% 32% 51% 15.0% -16% 3% 24% 36% 55% 14.5% -14% 6% 29% 41% 60% 14.0% -11% 9% 33% 45% 65% Source: HSBC estimates We see two key downside/upside risks to our valuation and Neutral (V) rating: (i) weaker/stronger-thanexpected domestic vehicle demand (depending on CBRT s rate poicy and if economic growth is much lower/higher than in our forecasts); and (ii) the TRY depreciating/appreciating sharply against EUR (hurting/supporting DOAS s import business). 5

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7 Disclosure appendix Analyst certification The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Cenk Orcan Important disclosures Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice. Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate, regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, 7

8 stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change. Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the analysts' valuation for a stock. From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take. Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts. For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The target price was the level the stock should have traded at if the market accepted the analysts' view of the stock. Rating distribution for long-term investment opportunities As of 01 December 2008, the distribution of all ratings published is as follows: Overweight (Buy) 47% (31% of these provided with Investment Banking Services) Neutral (Hold) 34% (34% of these provided with Investment Banking Services) Underweight (Sell) 19% (23% of these provided with Investment Banking Services) Share price and rating changes for long-term investment opportunities Dogus Otomotiv (DOAS.IS) Share Price performance TRY Vs HSBC rating history Dec-03 Source: HSBC Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 HSBC & Analyst disclosures Jun-07 Recommendation & price target history From To Date N/A Overweight 03 April 2006 Overweight Overweight (V) 29 December 2006 Overweight (V) Neutral (V) 17 April 2007 Neutral (V) Overweight (V) 10 August 2007 Overweight (V) Neutral (V) 08 May 2008 Target Price Value Date Price April 2006 Price April 2006 Price August 2006 Price January 2007 Price April 2007 Price August 2007 Price October 2007 Price February 2008 Price April 2008 Price May 2008 Source: HSBC None of the below disclosures applies to any of the stocks featured in this report. Dec-07 Jun-08 Dec-08 1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. 4 As of 31 October 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 8

9 5 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 31 October 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. 11 At the time of publication of this report, HSBC is a non-us Market Maker in securities issued by this company and/or in securities in respect of this company Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company, please see the most recently published report on that company available at * HSBC Legal Entities are listed in the Disclaimer below. Additional disclosures 1 This report is dated as at 0. 2 All market data included in this report are dated as at close 01 December 2008, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 9

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