A Focus on Turkey

Confidential - Do not duplicate or distribute without written permission......

A Focus on Turkey Confidential 1

Table of Contents
Economic Overview ....................................................................................................................... 2

Sector Overview ............................................................................................................................ 9

Banking .......................................................................................................................................... 9

Automotive .................................................................................................................................. 11

Consumer Durables ..................................................................................................................... 14

Retail Sector ................................................................................................................................ 16

Contracting .................................................................................................................................. 17

Cement ........................................................................................................................................ 19

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 A Focus on Turkey Confidential 2

Economic Overview
Turkey, the 17th largest economy in the world (based on PPP-adjusted GDP) and the sixth
largest in Europe has been offering a relatively high +5% growth potential. Turkeys young and
dynamic population is a key feature supporting the economy besides its exceptional
geographical location at the crossroads of Europe and Asia (four-hour flight to 60 different
countries). Turkey is by far one of the youngest countries in terms of population in Europe with
a median age of 31, while the older generation (60+) constitutes merely one tenth of the overall
population.

Currently at 78 mn, Turkeys population is expected to increase towards 84 mn in 2023 and to

peak at 93.5 million in 2050, at which point the population will be more than double what it was
in 1980.

Based on the Word Competitiveness Index, Turkey ranks 51th out of 140 economies, beating its
emerging market peers, such as Brazil, Hungary, Romania or India, but below China (28), Czech
Republic (31), and Poland (41), Russia (45), South Africa (49).

Large and rapidly growing population A younger demography with a median age of 31

Source: Turkstat

After suffering an extended period of boom-bust cycles in the past, Turkey has achieved a more
stable growth pattern with the establishment of a single-party government in 2002 after a long
history of coalition governments. As a dividend of this political stability, Turkey managed to
secure fiscal discipline as well as launch banking sector reforms. These achievements are still
being appreciated as the building stones of Turkeys more resilient economy.

Moreover, in 2004 the European Council decided to open EU membership talks with Turkey.
Since then there have been 16 chapters opened out of 35 to negotiations with Turkey, but so far
Turkey has only closed one chapter.

Between 2003 and 26 Turkey has achieved around 5.6% average real growth, evolving into a
~USD 850bn economy from ~USD 200bn, with a GDP per capita of ~USD 10,750 vs. USD ~3,500
in 2002.

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 A Focus on Turkey Confidential 3

When adjusted for the purchasing power parity, the average income in Turkey is 55% of the EU
average, at par with Romania, or 80% of Poland and Hungary. The bright side of this income gap
is that it offers a sizeable catch up potential provided that the appropriate policies are
implemented.

Potential growth rate of +5% GDP Growth Forecast in OECD Countries 2016-2025

Source: Turkstat, OECD

Turkeys economy has typically been driven by domestic demand. Private consumption has a
67% and private investment has a 20% share in the GDP.

The dominance of domestic demand in the economy is often a favorable characteristic that
feeds into the resilience of the economy. However, Turkey is a net importer and its reliance on
external financing remains a major channel that could endanger its growth stability.

Sector wise, the economy is heavily dependent on services with a 46% weight. Elsewhere, one
fourth of the economy is based on the manufacturing industry, followed by trade and
agriculture with their 13% and 9% weights, respectively. The construction sector has a 6% share.

Services and industry are the key sectors Private consumption is dominating the economy

Sector composition of GDP (Share in total) Expenditure composition of (Share of total)

Agriculture, Public
forestry & expenditures
fishing
Net exports

Services Industry
Private
investment
Private
consumption
Construction

Wholesale
and retail
trade

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The labor market in Turkey has been both a challenge and an advantage for the economy. On
the one hand, the young and growing population helps to keep the potential GDP growth on a
high trajectory, while on the other hand it makes rapid job creation compulsory rather than an
option, so as to prevent an increase in the unemployment rate.

The historic average for the unemployment rate has been around 10.0%, whereas the
impressive job creation in the services and construction sectors has helped to reduce the
unemployment rate to an average of 9.7% since 2011.

At 31%, the female labor force participation rate remains particularly low compared to the EU
average. This, however, could contribute to economic growth once it is addressed. Productivity
(output per worker) growth in Turkey has averaged to 2.3% p.a. since 2002, which is more than
many developed countries (1.8% in Austria, or 1.1% in Germany), but even faster productivity
gains (such as 4% in Poland) are needed to jump start the catch-up process.

Unemployment Private consumption is dominating the economy

16,00
90 Labor force participation ratio
14,00 80 (% of total population)
12,00 70
Turkey
10,00 60
CEE average
8,00 50
40
6,00
30
4,00
20
2,00
10
0,00
0
01/05
07/05
01/06
07/06
01/07
07/07
01/08
07/08
01/09
07/09
01/10
07/10
01/11
07/11
01/12
07/12
01/13
07/13
01/14
07/14
01/15
07/15
01/16
07/16
01/17

Male Female

Source: CBRT, IMF

Turkey managed to reduce its EU-defined debt stock to GDP ratio to 32,9% in 2015 from 74% in
2002 via maintaining fiscal discipline. This is much better than the EU average and the 60%
Maastricht criteria. With the exception of the crisis year 2009, Turkeys EU-defined budget
deficit has been surfacing below 3% since 2005.

Turkey is still one of the best performing countries in terms of its sovereign debt dynamics and
budget balance. This also provides room for the government to support economic growth when
needed via accommodative fiscal policies.

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 A Focus on Turkey Confidential 5

EU-Defined General Government Debt Stock (% of GDP) General Government Debt Stock (% of GDP) - 2015

Source: Turkstat, Eurostat

Transforming the central bank into an autonomous body in 2001 and introducing the inflation
targeting regime in 2006 were the two other major steps contributing to the countrys growth
performance. The average inflation rate dropped sharply to 9.77% between 2003 and 2016 from
an average of 72% observed between 1994 and 2002.

Although the Central Bank of Turkey has lately been criticized due to the complexity of its
innovative strategies, its international credibility has improved. The CBTs success in maintaining
financial stability which has become an important issue for emerging markets in the aftermath
of the financial crisis played an important role in this improvement. Nevertheless, the price
stability has not yet been fully established as the central bank has met the inflation target in
only two out of the nine episodes and at 11.72% inflation remains visibly above the 5% official
target.

Inflation Rates (CPI) (%) Inflation Target vs Realizwed Figures

120,00
Inflation Target Realized

100,00 40,00
35,00
80,00 30,00
25,00
60,00
20,00
40,00 15,00
10,00
20,00
5,00

0,00
0,00
2005

2012
2002
2003
2004

2006
2007
2008
2009
2010
2011

2013
2014
2015
2016
2017
2018
2019
1985

1988

1991

1994

1997

2000

2003
1986
1987

1989
1990

1992
1993

1995
1996

1998
1999

2001
2002

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016

Source: CBT

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Despite its relatively high growth potential, healthy banking sector and fiscal strength, the
Turkish economy is often cited among the fragile emerging economies due to its high current
account deficit (CAD) and high inflation. Turkeys CAD averaged to 4.1% since 2002 and climbed
as high as 8.9% in 2011, providing motivation for policy makers to prioritize this issue. Since
then, the external balance has become the hottest item in the governments medium term
program. Dependency on energy imports with a net energy bill of USD 50bn and the low
propensity to save are the key reasons behind the high CAD.

CAD as a % of GDP (%) External debt stocks (% of GNI)

4,0 External debt to GNI % ST External debt to GNI %

1,9
2,0 LT External debt to GNI %
70,0
0,0
-0,3 60,0
-2,0 50,0
-1,8
-2,4
-4,0 40,0
-3,6 -3,5 -3,7 -3,8
-4,2 30,0
-4,7
-6,0 -5,2
-5,6 -5,5 -5,8 -5,5
20,0
-8,0 -6,7
10,0
-10,0 -8,9 0,0
2011
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

2012
2013
2014
2015
2016

2008
2000
2001
2002
2003
2004
2005
2006
2007

2009
2010
2011
2012
2013
2014
2015
Source: Worldbank

Having learned its lessons from the high CAD, economic policy making has evolved towards a
strategy of maintaining balanced growth rather than only rapid growth over the last four-five
years. The idea is to align domestic demand growth with external demand so as to prevent a
visible widening in the external balance. The measures to avoid excessive loan growth and to
allocate resources more to production than consumption have so far been the key steps taken
by policymakers, while the government has also introduced a private pension system to increase
the domestic savings rate. The governments investment incentives for the domestic production
of imported goods and initiatives such as nuclear power plant projects, meanwhile, are set to
bear fruit in the medium to long-run.

Over the last five years, there were two important milestones for Turkey. The first one was the
Lehman Brothers crisis, which provided Turkey the opportunity to prove its resilience to shocks
thanks to a healthy banking sector and solid public debt dynamics. Amidst one of the severest
historic global financial crises, Turkey managed to roll a substantial portion of its gross external
debt, restored its healthy growth trajectory once the shock was over and escaped a permanent
dent in its growth potential. The balanced growth approach was the second milestone because
it showed that for the first time in history policymakers had seriously started to value the
robustness of economic growth even more than its speed.

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Agency Rating Outlook Date

Moody's Ba1 negative Mar 17 2017

S&P BB negative Jan 27 2017
Fitch BB+ stable Jan 27 2017
S&P BB stable Nov 04 2016
Moody's Ba1 stable Sep 23 2016
Fitch BBB- negative Aug 19 2016
S&P BB negative Jul 20 2016
Moody's Baa3 negative watch Jul 18 2016
S&P BB+ stable May 06 2016
Moody's Baa3 negative Apr 11 2014
S&P BB+ negative Feb 07 2014
Moody's Baa3 stable May 16 2013
S&P BB+ stable Mar 27 2013
Fitch BBB- stable Nov 05 2012
Moody's Ba1 positive Jun 20 2012
S&P BB stable May 01 2012
Fitch BB+ stable Nov 23 2011
Fitch BB+ positive Nov 24 2010
Moody's Ba2 positive Oct 05 2010
S&P BB positive Feb 19 2010
Moody's Ba2 stable Jan 08 2010
Fitch BB+ stable Dec 03 2009
Fitch BB- positive watch Oct 27 2009
Moody's Ba3 positive Sep 18 2009
S&P BB- stable Sep 17 2009
S&P BB- negative Nov 13 2008
S&P BB- stable Jul 31 2008
S&P BB- negative Apr 03 2008

FDI Inflow to Turkey (USD billion) FDI Inflow to Turkey (USD billion)

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All in all, while Turkey, on the one hand, attempted to address the low domestic savings
problem, it has also gained credit from the international investor community, eventually
contributing to the stability of the external savings that are feeding into Turkeys economic
growth. Fitch and Moodys upgraded Turkey to investment grade status during 2012 and 2013
but following the coup attempt in 2016 both Fitch and Moodys downgraded Turkey from the
investment grade status.

Turkeys stronger fundamentals have led to a deeper integration to the global financial system
with 22% foreign participation in the government bond market and 64% in the stock market.
These ratios were much more limited at 7% and 50% ten years ago. Including Eurobonds, foreign
investors presence in the capital markets has reached USD 150bn.

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Sector Overview
In this section, we only go over some must be known issues about selected industries in
Turkey. Please note that, there is no intention to provide sector and/or company specific
recommendation in this report.

Banking
After wiping out the negative effects of the 2001 crisis, Turkish banks attained 15% p.a. asset
growth in USD term between 2002 and 2016 and the banking system assets to GDP ratio
reached 92% as of 2016. In addition to strong asset base growth, Turkish banks also shifted their
focus to lending activities from investing in securities portfolios in line with the falling interest
rates on government securities and the re-vitalization of consumer financing activities. In 2002,
the securities book and loans formed 40% and 23% of the assets, while these figures were 17%
for securities and 60% for loans by 2016.

Coming from a very low base in 2002, the Turkish economy experienced a major leveraging cycle
both at the corporate and consumer level and total loans attained a CAGR of 32% between 2002
and 2016. We think that it is important to analyze the aforementioned leveraging cycle in three
time spans. In the first phase, we observed extremely strong loan growth between 2002 and
2008, which can be explained as a combination of the low base in loan penetration, no major
consumer financing activities and falling interest rates with higher loan durations causing the
affordability levels of consumers to improve significantly. The second part was the 2008-2010
period when the Turkish economy was coming out of the crisis period. Lastly, the third phase is
the period since 2010 when the Central Bank of Turkey and other regulatory bodies began
implementing macro-prudential measures to tame the loan growth. In the medium-term, it is
expected Turkish banks to deliver loan growth rates of between 15%-20% per annum.

Strong growth in banking sector assets Loan penetration (% of GDP)

Banking Sector Asset Size (bnUSD) Assets/GDP Loan Loan/GDP

100% 1000 70% 600,0

900
90% 60% 500,0
800
700 50%
80% 400,0
600
40%
70% 500 300,0
400 30%
60% 200,0
300 20%
200
50% 10% 100,0
100
40% 0 0% 0,0
2002-12

2004-12
2003-12

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

2013-12

2014-12

2015-12

2016-12

2002-12

2003-12

2004-12

2005-12

2006-12

2007-12

2008-12

2009-12

2010-12

2011-12

2012-12

2013-12

2014-12

2015-12

2016-12

Source: BRSA

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As a result of the rapid leveraging cycle at the consumer level, it is observed a massive shift from
business banking loans to consumer loans as the share of business banking loans, namely
corporate and SME loans, declined by 20pp to 69% between 2002 and 2016. In addition, we also
observed a high level of diversification in business banking loans, where the services and
manufacturing sectors formed 42% of the total loans.

Loan book composition (2016) Sectorial Breakdown (2016)

SME, 27% Construction

Utilities, 5% , 7%

Mortgage,
10% Mfg., 20%
Services,
22%
Auto, 1%
Mining, 1%
General
Purpose, Agriculture,
4%
12%

Other, 11%
Corporate, Credit
42% Cards, 8% Consumer,
31%

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Automotive
The Turkish automotive industry constitutes 5% of the overall industrial production and around
2% of the total labor force in Turkey. The start-up of local production dates back to the mid-
1950s, but automotive players reached a certain scale after 2000 via sizeable capacity and
technology investments. Turkeys share in European automotive production was 8% in 2013
with a solid c.70% capacity utilization rate. This is higher than the average 64% capacity
utilization in Europe. We believe that Turkeys geographical advantage, solid reputation, a
relatively cheap but well-trained labor force and high quality production sites will continue to
foster interest in the country.

Automotive exports accounted for c.13% of Turkeys total country exports and for 2.4% of its
GDP. Exports have grown with an 8% CAGR between 2002 and 2013, increasing almost every
year as automakers gain more production ability and a R&D edge over competitors. Between
2002 and 2013, the capacity in Western Europe fell by c.3 mn units, while it grew by c.3 mn units
in Central Europe and Turkey over the same period, according to the data by the European
Automobile Manufacturers' Association (ACEA).

Turkish auto makers ship most of their exports to the EU-15 countries. Germany and Italy are
the top two markets followed by France, the UK and Spain. Commercial vehicles account for the
bulk of Turkish exports. Turkish manufacturers originated many light vehicle models, such as
Ford Otosans Transit and Transit Connect or Tofas Doblo, Albea and Palio. Turkish companies
gained significant R&D strength, which has differentiated them from other OEM assemblers.
This has also been reflected in long-term volumes and pricing terms. Tofas achieved a first in the
Turkish automotive industry in 2008 as the company originated the intellectual property rights
for the Mini Cargo. We expect that more vehicles will be developed and even designed by
Turkish companies as R&D investments accelerate.

Automotive demand in Turkey has posted a 16% CAGR within the last decade despite the
headwinds associated with consumer sentiment, interest and exchange rates and also
governmental initiatives, such as taxation measures. Demand is set to grow given the
populations low car ownership that should change with increasing income levels, more
available financing conditions at sustained lower costs, urbanization speed and favorable
demographics with a young population at a median age of 31. Assuming that macro-economic
challenges ease (due to political instability, global concerns or an unsustainable current deficit),
consumption should increase at a steady pace to catch up with the European average.

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Barring any structural changes, like revisions to the tax system or supporting mechanisms, such
as a scrap incentive, we estimate that light vehicle demand will average at c.900K units for the
next five years, which is c.35% higher than the last ten years average (post-2001 crisis period).
Although annual demand is likely to remain under the psychological 1 mn units, the Turkish
demand outlook will continue to look more attractive than its developed peers.

Turkish consumers have a strong appetite for imported cars with a 78% share in total. Since the
current nature of local OEM manufacturing has limited model availability in Turkey, consumers
are enjoying a wider choice of imported cars. On the other hand, as delivery periods have
shortened with effective inventory management, those consumers reluctant to buy imported
cars out of time concerns now have an incentive. We do not expect this picture to change much
over the long term. The high share of imports in the total market also results in volatility in
demand depending on FX rates. Interest rates, likewise, affect automotive sales given that 58%

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of car purchases are financed through bank loans (based on GFK research). Note that this was
65-67% last year.

Looking at the product composition in the car market, the tax-efficient mid-priced C (compact)
segment has the highest share at 52%. The entry level (B) was the second largest segment with a
34% share in total sales. For engine size, the least -taxed small-engine cars (below 1600cc)
account for 94% of the market. With the current taxing scheme and also high fuel prices (again
due to taxation), those two segments should continue to be the top choices. We also expect
new projects for local car production to focus predominantly on these segments due to
sustained demand. On the other hand, importer companies are working on bringing additional
availability for those segments via negotiating with OEMs.

In the passenger car segment, the top three brands are VW, Renault and Fiat. VW branded cars
are imported and distributed by Dogus Otomotiv, while Renault produces 66% of its total
volumes in Turkey (based on FY13 data). The top three players make up 38% of the car market,
which indicates a low concentration and strong competition in the segment.

The light commercial vehicle market is dominated by local producers and imported vehicles
remain expensive in this rather price-sensitive segment. The top two brands in this segment are
historically Fiat and Ford, while the third brand VW has been performing strongly despite its
relatively expensive imported models. VW AG has been supporting the pricing of Dogus
Otomotiv light commercial vehicles since the beginning of 2013, increasing their affordability for
Turkish consumers. The top three companies have a 75% aggregate market share in LCV sales,
which suggests medium concentration and weaker competition relative to the passenger car
market.

For the heavy commercial market, we see that 93% of the market is shared by the top three
players. The composition has not changed in the recent past with Mercedes commanding by far
the largest market share. Ford Otosan holds the second place, again with a wide gap compared
to the third player. We could see Ford Otosan being more aggressive in the market with new
product launches and engine choices.

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Consumer Durables
Turkey has six major producers of white goods, more than 50 medium-scale manufacturing
companies and around 500 parts and components supplier firms. Turkeys total production
capacity is more than 24mn units per annum, which is the largest capacity in Europe, followed
by Poland. Around 22mn units were produced in 2013 of which approximately 16mn were
exported.

Company Capacity (mn) Production (mn, 2012) CUR (%)

Arcelik 10.9 8.1 74
Vestel Beyaz Esya 7.9 4.9 63
Bosch-Siemens 3.9 3.6 93
Indesit 1.5 1.1 72
Source: Company web sites

The domestic white goods market is sensitive to GDP via new purchases (c.40% of sales) and
replacement demand (c.60% of sales). The last 10-year average suggests that white goods
demand grew broadly in line with GDP growth, which is reasonable given the high penetration
levels. On the other hand, we believe its sensitivity is lower compared to the other cyclical
industries like the automotive sector due to: i) its low exposure to the corporate sector and ii)
individual items being relatively smaller tickets. Sales of durables are not as elastic to interest
rates as the automotive sector. Around half of the purchases are financed with credit cards and
the remaining are financed via dealer financing. An indirect impact could be expected through
the housing market.

Turkish white goods market vs. GDP growth

80% 12%

60% 8%
40%
4%
20%
0%
0%
-4%
-20%

-40% -8%

-60% -12%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

WG market growth GDP growth (RHS)

White goods demand is linked to the number of households. With a young population at a median age of
29 coupled with a high urbanization rate, the Turkish white goods market offers strong growth prospects.
The annual household formation rate has hovered at around 2.2% in the past few years compared to 1%
in developed countries. Around 70% of the population is under the age of 35 and 35% is between 15 and
34. Turkeys young population causes higher marriage rates, approximately half a million annually, and
eventually results in more households. The average household size is going down due to the increasing
number of marriages, divorces and single individual dwellings.

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Average household size

4.3
4.2
4.1
4.0
3.9
3.8
3.7
3.6
3.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Urbanization is also increasing, stimulating demand for modern household goods for contemporary
lifestyles. The urban population increased from 59% in 1990 to 77% in 2012.

Replacement demand remains the main driver of sales. Based on the unofficial data provided by dealers,
the replacement rate in Turkey is around seven-10 years, while the average age and replacement cycle is
different for markets that are going through increases in penetration levels. We estimate replacement
market sales to form 60% of sales. We believe higher per capita income and energy-efficient devices have
been the driver of faster replacement cycles. On the other hand, we do not expect the replacement
demand to be a major driver until 2018 since 2011 was the recent peak replacement year with 19% y/y
growth in the market.

On a separate note, the government is reportedly working on incentivizing the consumption and
production of energy efficient white goods products via reducing the Special Consumption Tax (SCT). The
timing, however, is not certain as they have just started the feasibility studies. Note that currently the SCT
on white goods is 6.7%. The latest tax incentive was back in 2009 when the government reduced the tax
to zero in 1Q09 and then shifted it up to 2% in 2Q09. The impact on the market had not been visible as
the market contracted by 5% in FY09. This time, however, a possible incentive will only be limited to
energy-efficient products, which are estimated to account for c.85% of refrigerator sales and c.70% of
washing machine sales. We should note, however, that a stricter certification process could reduce these
levels. The impact on overall domestic white goods sales could be limited since the implemented tax is
relatively small, but white goods manufacturers could benefit if there is more demand for high-margin
products.

Turkish white goods market (000 units)

9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2014E
2015E
2016E
2017E
2018E
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

2008
2009

2011
2012
2007

2010

2013

Monday, July 3, 2017

WG market in Turkey ('000 units) 5-year MA
A Focus on Turkey Confidential 16

Source: White Goods Manufacturers Association

The penetration of basic necessity items, such as washing machines and refrigerators, is very
high in emerging markets, but not many households possess discretionary items like dryers and
dishwashers. As per capita wealth increases, consumption patterns shift. The share of spending
on basic goods shrinks and spending on discretionary products increases substantially. In Turkey,
penetration is close to the saturation level for refrigerators and washing machines. On the other
hand, there is still room for growth in the penetration of cookers and dishwashers. We believe
that lower water and energy consumption compared to hand-washing can be an important
support for the increase in the penetration of dishwashers. Dryers have a very low level of
penetration, mainly due to the warmer climate; however, urbanization is expected to lead to an
increase in penetration levels. For the major five goods, we expect the penetration to increase
from an estimated 67% in 2012 to 74% in 2020.

Retail Sector
The Turkish food retail sector can be characterized by its defensive nature and growth
prospects, especially for modern retailers.

The total food & beverage and tobacco consumption in Turkey registered a 3.3% CAGR between
2003 and 2013 in real terms, remaining slightly lower than the Turkish GDP growth of 4.8% in
the same period, but never experiencing negative growth.

The sectors low beta, better predictability in revenues and earnings and higher cash flow
generation ability make it less vulnerable to economic downturns.

The Turkish retail sector has a very fragmented structure. The top four players share of the total
organized market hovers at around ~30%. Other than national retail chains (e.g. BIM, Migros)
operating throughout the country, there are many small- to mid-sized chains characterized as
organized retailers operating regionally.

The total FMCG market in Turkey is still dominated by unorganized players due to the late
entrance of modern retailers to the market starting from the 1990s. Despite the ongoing
transition, the retail market still has a conventional structure, where only ~40% of the FMCG
market is dominated by organized players (such as Migros, Bim), vs. ~30% in 2004.

Unlike the trends we have been observing in the last decade, we expect fast growing local retail
chains to put a brake on their new store openings in the near term. Recall that new store
openings have been the main driver behind their turnover growth in the last decade.

In tandem with our lower physical growth expectation, we expect retailers to focus on
profitability to maintain their cash flow, which is the foremost key performance indicator for
many relatively less institutionalized players. However, since the retail business is like cycling
and once you stop pedaling you fall, the slowdown in store openings will trigger difficulties if not
bankruptcies for many of those local chains which used to grow rapidly.

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Consequently, the environment is becoming more challenging for those not benefiting from
economies of scale and operating in a single region with fewer than 20 stores. Consequently, we
anticipate the number of players in the market to gradually diminish through M&A activities and
there are credible inorganic growth opportunities in the market going forward.

Sectors main growth drivers

The main growth drivers of the Turkish food retail market are:

The rising disposable income of Turkish citizens,

Higher proportion of Turkish household expenditure allocated to food, beverages and
tobacco compared with Western standards,
Turkeys inherent advantages in the retail business rendering the country an attractive
major market for retailers (i.e. favorable demographics with a changing lifestyle in favor
of modern retailing and improving urbanization),
Potential of female labor force participation,
Expected support from governments for modern retailers with the goal of higher tax
collection and a useful means of combating unemployment

Contracting
The construction sector plays a crucial role in Turkeys economic development since it accounts
for 5.9% of GDP and employs approximately 1.8 mn workers. Considering the direct and indirect
impact on other sectors, the share of the construction sector in the Turkish economy is
estimated at 30% and the employment rate excluding agriculture has reached 10%.

Based on the 2013 data, 42 Turkish contracting companies ranked among The Worlds Top 250
International Contractors" list published on August 2014 by the leading international industry
magazine "ENR Engineering News Record." With this number Turkey ranked second in the
world after China.

Polimeks, Renaisance, Gama, Enka, Tekfen, TAVC, STFA, Nurol, Yuksel, Mapa, Ant Yapi, Nata
Cons.,Yapi Merkezi, Sembol, Cengiz, Baytur, Atlas, Kayi Ins., Tepe Ins., Onur Taah., Alarko, Dogus
Insaat, Resen Ins., Guris Ins., IC Ictas, Summa, Gap, Beta Tek, Mak-Yol are the major Turkish
companies among the ENR-250 companies.

Annual international contracting services (USD mn)

35 32
29
30
25 25
24 23
25 22
21
20

15 11 12
10
10
5
5 2 3

0 Monday, July 3, 2017

 A Focus on Turkey Confidential 18

Source: Ministry of Economy of Turkey

Turkey's unique geographical location (being close to fast developing regions, such as the MENA,
Caspian, Russia and Gulf) contributes a great deal to the global competitiveness of Turkish
contracting services abroad.

The Turkish contracting sectors strength is not only due to its location, but also the cost
effective service it provides at international standards, high client satisfaction, credibility in
partnerships, extensive knowledge and vast experience in a wide variety of projects, familiarity
with the business environments in the neighboring regions, qualified manpower and a
calculated risk-based approach to business.

The strong investment appetite in the MENA region (approx. a USD 800bn planned investment
in the region for the 2013-2017 period, which is 25% higher than the USD 650bn in 2008-2012),
will be positive for Turkish contractors.

Distribution of international projects by country Distribution of international projects by sector

Others, Housing,
28% 13%
Others,
Russia, 29% Road-
17% Bridge-
Tunnel,
12%

Railw ay,
Other 4% Airport,
MENA , 8%
17% Turkmenis Pow er
tan, 14% Plants, 5% Com.
Bldg., 7%
Petrochem Social
Kazakhsta Libya, ical, 5% Tourism, Cultural, Industrial
n, 6% Iraq, 7% 10% 5% 6% plants, 7%

Monday, July 3, 2017

A Focus on Turkey Confidential 19

Cement
As a part of the domestic contracting business, the cement sector is very important. Turkey is
the fifth biggest cement producer in the world and the biggest producer and exporter in Europe.
According to the 2013 figures, Turkey has a 2.1% share in global cement production, following
China, India, U.S. and Brazil. Although domestic demand is the main driver of cement
consumption in Turkey, the strong export network decompressed the price pressure in domestic
sales.

Cement sales rose to 75.1mn tons in 2013 and roughly doubled from the 2000 levels. We expect
strong domestic demand to continue in both the short and mid-terms thanks to urban
transformation and large-size infrastructure projects. As a result, we expect cement sales in
Turkey to exceed the 80mn tons level in 2015. The governments construction-based growth
plans (new regulations in force in relation to residential buildings with regards to the earthquake
risk, urban transformation and increased construction activities to follow the new law on 2B
specified land) supported the sector in the last five years and will continue to support the
sector.

Urban transformation will be the main driver for the cement consumption in the short and mid-
term in Turkey. The government targets to renew 7mn homes over the next 20 years nearly 25%
of total housing stock. Accordingly, USD 4bn in annual expenditure is expected over the next 20
years and the cement sector will be one of the key beneficiaries of urban transformation.

In addition to urban transformation, big infrastructure projects support cement consumption in

Turkey. In the next three years, big projects are expected to support cement consumption, such
as the Izmit-Izmir highway, Canakkale bridge, the Bosphorus tunnel project and third airport
project. We expect the governments focus on new infrastructure projects to continue in the
mid-term and new highway and tunnel projects to continue in addition to nuclear power plant
projects.

The cement sector has a fragmented structure because of the strict Competition Board rules and
the nature of cement production. The main reason for the fragmented structure is the
transportation cost of cement. Transportation of 1 tons of cement for 20 km increases the
margin cost by nearly 10-30%, hence companies do not prefer this option. There are 20 players,
66 plants and 48 integrated plants in the cement sector.

The Sabanci Cement Group is the biggest player in the sector with an 18% share in the market.
In addition to the Sabanci Group, Oyak Group, Limak Group and Nuh Cement are other local
important players. Meanwhile, French, German and Italian players are also in the sector.
Lafarge, Set Italcement, Cementir, Vicat, Cimpor and Heidelberg are important foreign players in
the sector.

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A Focus on Turkey Confidential 20

Cement production capacity breakdown by companies

Oyak, 13%

Others, 31%
Akcansa, 10%

Cimsa, 7%

Sanko-Barbetti, Nuh, 7%
5%
Vicat, 6% As, 7%
Limak, 7% Cementir, 7%

Source: Akcansa, Turkish Cement Producers Association

Monday, July 3, 2017