The Ever Evolving · recommendation and a TP of TL7.80 for Vestel. Our 12-month target price is...

Zorlu Enerji TRSZORN81616

EQUITY

RESEARCH, TURKEY

Initiation of Coverage

Share Price

TL6.37

TL2,137mn

Bloomberg/Reuters:

Rel. Performance: 1 mth 3 mth 12mth

1% 20% 54%

12M Range (TL):

54.8

YTD TL Return: 25%

Beta (2year, w eekly) 1.3

Weight in BIST-100 0.00

335.5

Current 12M ago

13% 13%

Zorlu Holding 77.54%

Free Float 22.46%

Financials and Ratios 2014 2015 2016E 2017E

Net Sales (TLmn) 7,767 9,250 10,375 11,624

YoY 25% 19% 12% 12%

EBITDA (TLmn) 724 880 847 894

YoY 84% 21% -4% 6%

Net Income (TLmn) 97 60 72 97

YoY n.m. -39% 21% 35%

EBITDA margin 9.3% 9.5% 8.2% 7.7%

Net margin 1.3% 0.6% 0.7% 0.8%

P/E (x) 21.9 35.8 29.7 22.0

EV/EBITDA (x) 6.0 4.9 5.1 4.9

EV/Sales (x) 0.6 0.5 0.4 0.4

EPS 0.29 0.18 0.21 0.29

DPS 0.89 1.04 0.78 1.38

Div. Yield - - - -

ROE 7% 4% 4% 6%

Analyst: Irem Okutgen Sales Contact:

+90 (212) 384 1135 +90 (212) 384 1155-58

[email protected] [email protected]

Stock Market Data

EV

Shareholders Structure

Potential Return12M Target Price

TL7.80 22%

The Company in Brief

Mcap

3.51 / 7.24

Shares Outstanding (mn):

Foreign Ow n. in Free Float :

Average Daily Vol (TLmn) 3 mth:

USD738mn TL4,350mn

Vestel, established in 1984, operates in w hite goods, TV and

digital products, being the leader ODM provider for the European

market. Vestel is the second largest TV producer in Europe w ith

10mn units/year of production capacity; one of the largest WGs

manufacturers in Europe w ith 9.4mn units/year of production

capacity. Vestel is among top 3 players in w hite goods and

market leader in TV market in Turkey w ith a domestic netw ork of

1,250 exclusive sales points. Vestel operates in an industrial

complex in Manisa, Turkey.

VESTL.TI / VESTL.IS

The Ever-Evolving

Buoyant stance both in the European TV and white goods markets

as an ODM (Original Design Manufacturer) player; market share

gains underline the resilience at home. We project 20% organic

growth and an 8.2% EBITDA margin by YE16.

We are initiating our coverage for Vestel with an Outperform

recommendation. Our TP of 7.80 indicates a 22% upside. Vestel

currently trades at a 23% discount to its peers’ average 2017E EV/

EBITDA multiple.

Resilient WGs turnover through further market invasion

We project 16.5% revenue growth for Vestel’s WGs in 2016. WGs

market demand was solid with 10% export and 6% domestic volume

growth in 5M16, while Vestel beat the sector figures. The upgrade of

its product mix, targeting the mid to high-end segment, will contribute

to sales both at home and abroad. Moreover, multichannel strategies

and the process of Regal’s, Vestel’s sub-brand, transformation will

allow it to capture a further market share in the domestic market.

European TV demand soared with the low base; set to normalize

Vestel, being the market leader in the domestic TV market, has

strengthened its position through market share gains from global

brands. After a stagnant 2015 due to weak demand, European TV

demand has started to pick up with the Eurocup. Next to the double-

digit export growth in 1H16, we project a slowdown in 2H16 and have

plugged in 7.5% revenue growth in the TV segment in 2016.

2016 and mid-term prospects seem rather positive

While solid WGs turnover is contributing to consolidated revenues in

2016, the high base of the top line due to Vestel’s Fatih Project will

lead to 12.2% yoy growth in 2016. We project 20% organic growth,

excluding the impact of the Fatih project. We expect the EBITDA

margin to normalize at 8.2% in 2016 vs. 9.5% in 2015 backed by the

positive currency impact at the gross level. We expect a 12% and 9%

CAGR in revenues and EBITDA in 2016E-2019E.

Cost dynamics may become relatively tougher, but are still lean

Commodity prices were suppressed throughout 2015, supporting

profitability margins. Raw material prices were at historic lows in both

segments last year. For WGs, we expect a slight pressure on the

margins towards YE16 with a lagged impact. Likewise, the trend

change in cell prices may spur some deterioration in TV margins.

Catalysts: i) The government’s LED street lighting project, estimated

total spending of USD1.5bn, ii) further penetration into the premium

segment in the European WGs market with the Sharp brand and iii)

its smartphone business has the potential to be unleashed in the mid-

term, yet could face challenging market dynamics.

Valuation: We are initiating our coverage with an Outperform

recommendation and a TP of TL7.80 for Vestel. Our 12-month target

price is derived from DCF analysis and a peer comparison.

Risks: Sensitivity to cyclical fluctuations in the domestic market and

Europe and a surge in input costs are the risk factors for Vestel. The

volatility in FX rates poses a risk for the financial outlook due to the

c.70% share of exports in total turnover and FX based cost items.

June 22, 2016

Vestel Elektronik Outperform

Please see the last page of this report for important disclosures.

2

Vestel

June 22, 2016

RESEARCH

SUMMARY FINANCIALS (TLmn)

Income Statement 2014 2015 2016E 2017E 2018E

Net Sales 7,767 9,250 10,375 11,624 13,000

Gross Profit 1,570 1,958 2,052 2,273 2,520

Operating Profit 454 585 515 529 570

EBITDA 724 880 847 894 972

Net Other Income/ Expense -309 -272 -181 -187 -193

Net Financial Income/ Expense -18 -238 -240 -221 -210

Profit (Loss) Before Tax 126 74 95 122 166

Tax -22 -6 -15 -15 -17

Minority Interests 7 9 8 9 9

Net Income 97 60 72 97 140

Ratios

EBIT Margin 5.8% 6.3% 5.0% 4.6% 4.4%

EBITDA Margin 9.3% 9.5% 8.2% 7.7% 7.5%

Net Income Margin 1.3% 0.6% 0.7% 0.8% 1.1%

Sales Growth 25% 19% 12% 12% 12%

EBITDA Growth 84% 21% -4% 6% 9%

Net Income Growth n.m. -39% 21% 35% 44%

Balance Sheet

Current Assets 4,867 6,248 6,575 7,331 8,160

Cash and Cash Equivalents 619 728 755 804 854

Short-Term Trade Receivables 1,932 2,767 2,843 3,185 3,562

Inventories 1,723 2,203 2,394 2,690 3,015

Other Current Assets 593 549 583 653 730

Long Term Assets 2,455 3,088 3,305 3,512 3,747

Total Assets 7,321 9,336 9,880 10,843 11,907

Short Term Liabilities 4,576 5,857 6,142 6,888 7,711

Short-Term Financial Loans 451 741 822 915 1,019

Short-Term Trade Payables 3,720 4,537 4,675 5,252 5,886

Other Short-Term Liabilities 404 580 645 722 806

Long Term Liabilities 1,375 1,905 2,093 2,309 2,550

Long-Term Financial Loans 1,198 1,720 1,908 2,124 2,366

Other Long-Term Liabilities 177 185 185 185 185

Shareholders Equity 1,371 1,574 1,646 1,646 1,646

T. Liabilities & S.holders Equity 7,321 9,336 9,880 10,843 11,907

Cash Flow Summary

EBITDA 724 880 847 894 972

WC Change -146 499 128 61 68

Operating Cash flow 870 381 718 833 904

Capex 396 350 384 442 494

Investing cash flow -396 -350 -384 -442 -494

Dividends paid - - - - -

Change in net debt 382 702 242 261 296 CF from financing activities -206 79 -307 -344 -360

,

Key metrics

Net Debt/EBITDA (x) 1.42 1.97 2.33 2.50 2.61

Net Debt/Equity (x) 0.75 1.10 1.20 1.36 1.54

Capex/Sales (%) 5.1% 3.8% 3.7% 3.8% 3.8%

WC Change/Sales (%) -1.9% 5.4% 1.2% 0.5% 0.5%

ROCE (%) 17% 17% 14% 13% 14%

ROIC (%) 36% 38% 33% 33% 35%

FCF yield (%) 16% -4% 10% 12% 13%


3

Vestel

June 22, 2016

RESEARCH

INVESTMENT THEME

European TV demand to normalize; WGs demand to be robust Exports, mainly to Europe, comprise more than half of Vestel’s sales,

while Vestel mainly operates as an ODM provider. TV & electronics sales

constituted 66% of Vestel’s consolidated revenues as of YE15. After a

stagnant 2015 due to a weak market outlook, European TV demand has

started to pick up. Sales of TV sets have sped up with the low base of

2015, supported by the European Championships and the Olympics.

Accordingly, in 1Q16, ODM sales to the vendors in Europe surged and

Vestel posted double-digit export volume growth in TV sales. However,

Vestel’s clients realized their orders at the end of 2015 and most of the

sales were completed by mid-May. Thus, we expect the strong sales to

continue in 2Q16, yet at a slightly weaker pace and to subsequently

normalize in 2H16.

In the white goods segment, we project 16.5% revenue growth in 2016 on

top of the 9% total WGs sales growth in 2015 for Vestel. The Company

has a competitive edge over Chinese ODM producers in Europe through

flexible production capabilities and a proximity advantage. Vestel’s growth

exceeded the market’s both in domestic and export sales in 4M16. The

demand outlook for the WGs sector was solid in its export markets with

9% volume growth in 4M16. However, we saw a drop in April in the

domestic WGs market, bringing the cumulative 4M growth to 7%, which is

still pretty strong. Furthermore, Vestel posted double-digit growth both at

home and abroad.

Regal’s transformation process set to pay off Vestel initiated the reorganization of its Regal brand last year. In the

reorganization of the Regal brand (the group’s second brand after Vestel,

which also has other brands like Finlux, SEG etc. in the domestic market),

there has been a switch to direct dealer sales from distributor sales.

Moreover, Vestel’s small dealers may be converted to Regal dealers in

the coming period.

During the transformation of Regal in 1H15, the Company lost some

market share on the WGs side. However, towards the end of 2015 it

returned to its 2014 market share levels and gained market share in

brands other than Regal. Accordingly, the Company expects to move on

from the volume loss impact of the restructuring and Regal sales are

expected to exhibit a yoy improvement in 2016 with the low base,

contributing to top line growth. Vestel recorded market share gains in the

first four months of 2016 yoy and also compared to YE15.


4

Vestel

June 22, 2016

RESEARCH

High base of Fatih project; 2016E: 20% organic revenue growth, 8.2% EBITDA margin

The Fatih smartboard project has a total contract value of TL1bn. While

the contribution of the Fatih project is positive for Vestel’s turnover, it has

a dilutive impact on profitability margins. Deliveries in the project started in

4Q14 and the bulk was completed as of YE15. Thus, we expect a minor

impact on the margin front in 1H16. However, the high base of the top line

is set to lead to 12.2% yoy growth in consolidated revenues in 2016. We

project 20% organic growth in consolidated revenues when we exclude

the impact of the Fatih project.

As for the margins, TL1bn of the project is fixed in TL terms. The

devaluation of the local currency since the project agreement date, delays

in obtaining the required approvals from the authorities and late

collections have led to an increase in the WC requirement through an

increase in the inventory and A/Rs. In addition, the appreciation in the

USD pressured the costs on a TL basis, in turn causing an erosion in

gross profitability and diluting margins in the consumer electronics

segment in 2015. However, the favorable cost outlook and positive

currency impact led to a five-year-high EBITDA margin of 9.5% on a

consolidated basis by YE15. We project the EBITDA margin to normalize

to 8.2% in 2016 through the rising share of low margin consumer

electronics in total revenues and higher average cost assumptions.

Cost dynamics may get relatively tougher, yet are still lean Commodity prices were suppressed throughout 2015, supporting Vestel’s

profitability margins. The sharp decline in raw material prices was behind

the 1pp yoy surge in the gross margin level in 2015 and a further 0.3pp

yoy improvement in 1Q16. The main cost items for white goods are steel

and plastics (plastic prices tend to move in line with oil prices), which were

also in a downward price trend as global demand shrank. Steel prices

were at their lowest levels in February this year, yet started to pick up

slightly in March. Moreover, commodity and oil prices have been in an

upward trend since the beginning of the year. However, Vestel fixed its

steel prices until end-September and its plastic needs until end-June from

the lowest levels in February. As the prices are fixed, with the lagged

impact of cost hikes, we expect slight pressure on the margin outlook,

especially in the last quarter of the year.

On the other hand, the main raw material cost item for the manufacture of

TV sets is open cell prices, which have been falling (decreasing from

around USD90 towards below the USD60 levels for a 32-inch panel)

starting from May 2015. By end-2015, TV open cell prices fell to historic

lows due to the unfavorable market conditions. The reason behind the fall

in open cell prices is demand tightening, the high base from 2014 and

oversupply with the additional capacities.


5

Vestel

June 22, 2016

RESEARCH

Excess supply has pressured panel makers to push out panels at lower

prices. In 1Q16, cell prices remained almost flat, while hovering at around

USD50-55 for a 32-inch panel. We have recently seen a slight pick-up in

cell prices. Accordingly, the trend change may add some pressure to the

TV segment’s profitability in 2H16 compared to the previous year.

Sharp license agreement to trigger mid-to-high-end product sales

Vestel had signed a brand licensing agreement with the Asian Sharp

Corporation, which became effective in January 2015, for the

manufacture, sales and marketing of Sharp branded household

appliances to Europe. The aim of the agreement was to make Vestel the

exclusive distributor of Sharp branded products for the European market,

which will increase the Company’s branded WGs sales.

The agreement is set to enhance additional volume growth through the

expansion of the product mix range. Sharp used to only sell refrigerators

and microwaves in Europe, but Vestel added washing machines,

dishwashers and ovens to Sharp’s product categories. Vestel started to

produce Sharp branded white goods products in 2Q15, but the product

range was finalized towards the end of 2015. Thus, the impact on its

financials will become more apparent in 2016. Vestel projects a EUR 100-

150mn contribution to export revenues in the medium term. Since

products manufactured under the Sharp brand will target mid/high-end

consumers, the premium brand will offer a better contribution to margins

than the existing products of its WGs arm.

Vulnerable to fluctuations in FX rates Vestel’s cost base is mostly FX denominated with the Company being

operationally long in EUR and short in USD. However, it hedges its EUR/

USD exposure via forward contracts. At the top line, the strong EUR is

positive for its export revenues. However, on the cost side, in the

manufacture of televisions, the cost is mostly USD based, while for WGs

the cost base is almost equally distributed between USD, EUR and TL.

Vestel hedges the risk in its EUR-based TV sales and hedges the USD

portion of its costs in the WGs segment. Vestel executes active hedging in

the EUR/USD, while 2016 was hedged around the current parity rates.

The Company has thus been hedging the exchange rate risk in its

domestic inventory since 2013, bearing in mind the movement in hard

currencies against the local currency. However, Vestel does not engage in

hedging for export related inventory as sales are recorded in EUR and

USD terms. Therefore, Vestel has a short position in line with its export

related inventory levels. Moreover, Vestel is vulnerable to fluctuations

especially in the EUR and USD below the operating line. The TL’s

appreciation against the USD and EUR is positive for the financial

expense/income line, leading to FX gains/losses mainly attributable to the

foreign currency denominated trade payables.


6

Vestel

June 22, 2016

RESEARCH

Smart phones to contribute to turnover in the mid-term Vestel started to produce Venus smart phones in 2013 and introduced

them to the market in September 2014. Moreover, smart phones were

upgraded in 2015 and third series Venus V3 phones were introduced in

November 2015. Vestel targets the mid-class consumer segment in the

smart phone business. The Company produces a specialized Vestel

branded smart phone model for Turkcell.

In the smart phone segment, the Company aims to capture a market

share of around 10% (11mn-12mn phones in the total market) in the

medium term. Turnover from smart phones was negligible on a

consolidated basis in 2015.

Nevertheless, we remain conservative and project TL150mn in

revenues in 2016 via the sale of around 300,000 units. We expect the

market share to remain low in the coming years, but in the mid-long term,

cell-phone operations may capture a further market share and make a

higher contribution to Vestel’s consolidated sales especially via the

government’s incentives for local producers. Accordingly, we expect

Vestel to reach 1mn units by 2020, recording a TL500mn turnover from

the smart phone business.

Enhancement of brand equity to further reinforce its market position Vestel went through a revolution in the last couple of years to improve its

brand perception and to enhance brand value in the domestic market.

Vestel restructured its sales and after sales services in the domestic

market. It took initiatives to apply a multi-channel strategy, introduce new

brands and extend its product offerings through new technologies, while

shifting to mid-high end products.

Vestel established Centralized Services, entered new sales channels,

standardized its dealer outlets, upgraded its stores, eliminated its

underperforming dealers and added new ones to extend its dealer

network. Furthermore, Vestel expanded its sales channels by entering

technology retailers and mass merchandisers (retailers, local department

stores), in addition to exclusive dealers. Currently, 81% of its sales in the

WG segment are conducted through its dealer network (99% in 1Q13),

while this was 53% in the TV segment (91% in 1Q13) as of 1Q16.

Moreover, Vestel implemented a new branding strategy and applied new

campaigns to capture more customers. Vestel also initiated cost reduction

and operational efficiency projects while improving its product designs,

enhancing efficiency in the usage of storage spaces, increased

automation and optimization initiatives.


7

Vestel

June 22, 2016

RESEARCH

Accordingly, Vestel became the market leader in the domestic TV market

and captured a further market share in the white goods market. On the

TV front, international players have been at a disadvantage due to the

currency impact. They recorded losses due to the depreciation of the local

currency. As a result they became less aggressive in the market and

ended up losing market share.

We expect Vestel to strengthen its market position in WGs and to ramp-up

profitability in the TV segment in the coming period. The TV segment has

relatively more complex competitive dynamics with fast evolving

technologies. However, the WGs market is more stable compared to

consumer electronics and has higher profitability margins. Thus, the

Company intends to increase its market share especially in the white

goods segment in the near future.

The switch to larger screen TVs and mid-to high-end white goods

products in the last three years has enhanced the product mix. We

expect the improvement in the product mix to positively contribute to

profitability margins offsetting cost pressures. Therefore, we expect a

slight deterioration in Vestel’s EBITDA margin going forward, estimating

an average 7.3% in our forecast horizon despite the competitive

landscape.


8

Vestel

June 22, 2016

RESEARCH

Government Tenders: LED lighting project in the offing after the FATIH project Fatih Project - Recognition of more than TL1bn The Fatih project (Movement of Enhancing Opportunities and Improving

Technology) is being carried out by the Ministry of National Education and

Ministry of Transportation, Maritime Affairs and Communications in order

to introduce state-of-the-art computer technology to Turkey’s public

education system. The Fatih project covers 42,000 schools and aims to

provide interactive boards, multifunctional printers and internet

infrastructure to all classes and moreover the delivery of tablet PCs to all

pupils and instructors in pre-school, elementary and secondary education.

Vestel has won three tenders within the scope of the Fatih project. The

first tender was for the procurement of approximately 85,000 interactive

boards with a contract value of TL340mn in 2011. The boards were

delivered at the end of 2012. The second pilot tender was for the

procurement of 49,000 tablet PCs with a contract value of TL18.7mn in

2012 which were delivered in 2013. The third tender was for 347,367

interactive boards with a contract value of approximatelyTL1bn. Deliveries

started in late 2014 and will be completed in 2016.

Moreover, Vestel is among the pre-qualified bidders for the Ministry of

National Education’s pending tablet PC tender (composed of 10.6mn

tablets). The pre-qualification bids for the PC tender were received in

June 2013.

LED lighting project - Estimated to be worth USD1.5bn Another potential catalyst for Vestel is the government’s LED lighting

project. The project is to change the street lights (covering 17K units) from

conventional street lights to LED lights, which is estimated to involve total

spending of USD1.5bn.

Vestel entered the LED lighting business in 2011 with a strategic partner,

U.S. Cree. Vestel became the market leader in the highly fragmented

domestic LED lighting market in 2013, while capturing a 20% market

share. The total domestic LED lighting market is estimated to be

USD150mn. Moreover, Vestel started exporting LED products to Europe

in 2014. Currently, the LED segment constitutes a small portion of

Vestel’s consolidated numbers, yet has a huge growth potential since it is

an underpenetrated business line. The government’s project offers a huge

potential when we consider the 6-7mn units of street lights. For now,

however, there is no clear information regarding the tender specifications

and the timeline for the project.


9

Vestel

June 22, 2016

RESEARCH

Risks

Fluctuations in commodity prices, geographical and political instability in

the Company’s operating markets, negative consumer sentiment and

exchange rate exposure pose risks for the Company. Vestel is sensitive to

cyclical fluctuations in the domestic market and Eurozone. Financial

turmoil, leading to some sort of uncertainty in the operating markets, may

trigger a downturn in WGs and consumer electronics demand.

The volatility in FX rates plays a crucial role in the financial outlook due to

the c.70% share of exports in total turnover and FX based cost items.

Vestel’s profitability margins are sensitive to the volatility in raw material

prices (cell prices, steel, plastics). Vestel is mainly exposed to the volatility

in the EUR/USD and also the USD/TL exchange rate on the cost front as

a substantial of portion of raw materials are imported in USD terms. The

Company had a TL287mn short FX position as of 1Q16 after taking into

account off-balance sheet derivative instruments (1Q16: USD760mn long

position, EUR741mn short position). Net Debt/EBITDA was at 2.0x as of

YE15.

Vestel holds related party long-term receivables of TL843mn as of 1Q16;

TL798mn (YE15:TL736mn) of those receivables are from parent

company, Zorlu Holding. The rest is from Z.F.S. Financial Services

Ireland. The annual interest rate of the related party receivable of

approximately USD300mn is at the 5-6% level in USD terms. The parent

company may consider an asset sale in the medium term to repay its debt

to Vestel, yet we do not expect that balance sheet account to change in

the short term. We perceive the ongoing internal transactions as a risk for

Vestel. Therefore, we believe the intra-group transactions could continue

to create overhang on the stock’s performance unless they are

terminated.


10

Vestel

June 22, 2016

RESEARCH

VALUATION Our target Mcap for Vestel is based on both DCF valuation and a

comparison of peer group multiples, giving an equal weight to both

methods. Accordingly, our 12-month target Mcap of TL2.62bn indicates a

22% upside potential.

We calculated a target value of TL2,643mn for Vestel based on DCF

analysis, assuming a 5.0% terminal growth rate in our DCF model. We

applied 10% as the risk free rate, while assuming a market risk premium

of 5.5% in calculating the cost of equity. Accordingly, we assume a 14%

WACC for Vestel’s cash flows.

Source: Garanti Securities

Valuation Summary

TLmn Calculated Value Weight in Valuation

Total Value

DCF Analysis 2,643 50% 1,322

Peer Comp. 2,593 50% 1,297

Target Value 2,618

Current Mcap 2,348

12M Target Share Price (TL) 7.80

Current Share Price (TL) 6.37

Upside Potential (TL) 22%

Assumptions and Results (TLmn)

Weight of equity 40% PV of FCF 2,310

Cost of Equity 17% PV of Terminal Value 2,546

Beta 1.3 Implied Firm Value 4,856

Risk free rate 10% Net Cash -2,213

Market Risk Premium 5.5% Target Mcap 2,643

Cost of Debt 12%

Tax rate 20%

WACC 14%

Terminal Value Growth 5%


11

Vestel

June 22, 2016

RESEARCH

DCF Analysis

Vestel- Free Cash Flow Projections (TLmn)

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenues 10,375 11,624 13,000 14,568 16,296 17,984 19,783 21,681 23,672 25,748

EBIT 515 529 570 640 714 775 867 918 955 1,040

Taxes 103 106 114 128 143 155 173 184 191 208

NOPLAT 412 423 456 512 571 620 693 735 764 832

Depreciation 331 365 402 443 488 529 572 627 685 745

Gross cash flow 743 788 858 955 1,059 1,149 1,265 1,362 1,449 1,576

Change in WCR 128 61 68 84 91 86 99 92 92 109

Capex 384 442 494 535 577 613 649 683 715 744

Free Cash Flow 231 286 296 337 390 450 517 587 642 724

EBITDA 847 894 972 1,083 1,201 1,304 1,439 1,545 1,640 1,784

EBITDA Margin 8.2% 7.7% 7.5% 7.4% 7.4% 7.3% 7.3% 7.1% 6.9% 6.9%



12

Vestel

June 22, 2016

RESEARCH


Peer Group Comparison

Our peer group comparison implies a fair equity value of TL2.6bn for Vestel with an equal weighting

given to valuations derived from the average 2016E-2017E EV/EBITDA and P/E multiples

of international peers.

Company Country MCAP

(US$mn)

EV/EBITDA P/E EV/Sales

2016E 2017E 2016E 2017E 2016E 2017E

Hisense Electric Co CHINA 3,396 11.20 9.98 13.62 12.32 0.68 0.64

Electrolux AB SWEDEN 8,131 6.92 6.44 14.30 12.62 0.58 0.56

SEB SA FRANCE 6,212 10.14 8.00 20.94 16.14 1.17 0.98

De' Longhi SpA ITALY 3,958 11.28 10.17 22.14 19.61 1.70 1.60

LG Electronics Inc SOUTH KOREA 7,814 4.33 4.20 11.48 10.00 0.29 0.28

Toshiba Corp JAPAN 11,070 7.57 6.12 18.97 13.80 0.42 0.41

Skyworth Digital Holdings HONG KONG 1,890 6.69 6.00 7.37 6.70 0.47 0.43

Pioneer Corp JAPAN 696 1.69 1.63 71.22 12.32 0.15 0.14

Gorenje dd SLOVENIA 164 5.58 5.13 40.00 13.33 0.39 0.38

Arcelik AS TURKEY 4,653 9.58 8.67 14.30 13.44 1.04 0.94

Vestel Beyaz Esya TURKEY 633 7.68 6.62 14.37 12.53 0.74 0.66

Average Multiples 7.51 6.63 22.61 12.98 0.69 0.64

Vestel Multiple Valuation (USDmn) 1,330 1,080 540 396 1,605 1,549

Average (USDmn) 836


13

Vestel

June 22, 2016

RESEARCH

MAIN ASSUMPTIONS & FORECASTS Volumes & Revenues In 2015, domestic revenues recorded 41.7% yoy growth reaching

TL3.4bn, including a substantial portion of the turnover from the Fatih

project. Meanwhile, organic growth in the domestic market was around

11% in 2015. In the same period, export revenues, constituting 65% of

consolidated revenues in 2015, grew by 10.1% yoy.

Breakdown of export/domestic revenues (%)

Source: Garanti Securities Estimates

Vestel won the tender for the Fatih smart boards project with a total value

of TL1bn in 2014. Deliveries for the of Fatih project started in 4Q14 and

the bulk of the deliveries was completed as of YE15.

The organic growth of the TV & electronics segment was around 10% in

2015 despite the high base of 2014 from the FIFA World Cup. When the

revenue recognition from the Fatih project is included the segment’s

revenues grew by 25.3% in 2015.

In the TV & electronics segment, the Eurocup and Summer Olympics in

2016, are set to boost ODM sales to the vendors in Europe. After a robust

1Q16 with double-digit volume growth in TV sales, a normalization is

projected in second quarter volumes. Vestel’s clients in Europe realized

their orders at the end of 2015 and most of the sales were completed by

mid-May. Thus, with a moderate volume growth projection especially in

2H, we expect single-digit volume growth for the full year.

25%

27%

29%

35%

35%

33%

75%

73%

71%

65%

65%

67%

2012

2013

2014

2015

2016E

2017E

Share of domestic revenues (%) Share of export revenues (%)


14

Vestel

June 22, 2016

RESEARCH

The Company saw a drop in its average TV prices in 1Q16 given the

approximately 50% qoq drop in 32-inch open cell prices, the main raw

material. However, the price cuts in the TV segment were much less than

the drop in open cell prices. Although the enhancement in the product mix

(trend towards larger screen, Ultra HD and 4K TVs) leads to an increase

in average prices, the cut in TV prices in 2016 will offset the marginal

contribution of the product mix.

However, in the domestic market due to the appreciation of the USD

against the local currency and mix improvements, average unit prices will

be higher on a yoy basis. Accordingly, we project 3.5% volume and 7.5%

revenue growth in 2016 in the TV and electronics segment.

White goods sales were also robust in 1Q16 thanks to the recovery in

export sales coupled with solid domestic volumes. In the white goods

segment we project 16.5% revenue growth in 2016, subsequent to the

9% growth in 2015.

For the smart phone business we project a TL150mn revenue contribution

in 2016 and remain on the conservative side with 300K units sales. We

expect Vestel to achieve its 1mn units target by 2020E.

Accordingly, consolidated revenues are expected to be up by 12% in

2016, following the 19% growth in 2015. We project an average 11%

revenue CAGR in our projection horizon of 2016E-2025E.

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

TV & Electronics 3,712 4,895 6,135 6,595 7,235 7,936 8,706 9,507

Growth (%) -17.6% 31.9% 25.3% 7.5% 9.7% 9.7% 9.7% 9.2%

White Goods 2,488 2,864 3,115 3,630 4,189 4,813 5,511 6,289

Growth (%) 2.3% 15.1% 8.8% 16.5% 15.4% 14.9% 14.5% 14.1%

Smart Phones 100 150 200 250 350 500

Total 6,218 7,767 9,250 10,375 11,624 13,000 14,568 16,296

Growth (%) -12% 25% 19% 12% 12% 12% 12% 12%

Breakdown of Revenues (TLmn)



15

Vestel

June 22, 2016

RESEARCH

Cost Structure On the white goods front, raw materials constitute 86% of COGS and the

main raw material items are steel and plastics. The Company hedges its

raw materials in order to manage the volatility in its price outlook

throughout the year.

In 2016, steel prices are hedged until the end of the third quarter. Thus,

the upward trend will be reflected in the last quarter. However, plastic

prices are hedged for a short-term horizon (fixed for a quarter) and

accordingly hedged until the end of June.

Depending on the market expectations, the Company also hedges other

raw materials (compressors, motors, copper and aluminum purchases) in

the white goods segment, which leads to a relatively more stable

profitability outlook.

In the white goods segment, 55% of the procurement is made from the

domestic market, 23% is imported from Europe and the rest 23% is

imported from other countries. In domestic purchases, there are some FX

linked procurements, which cause the costs to be almost equally divided

between TRY, EUR and USD.

Plastic Parts, 15%

Electronics Parts, 4%

Raw Material Metal Sheet,

10%

Raw Material Plastic, 11%

Motors, 8%Compressors, 7%

Metal Parts, 7%

Polyurethane, 4%

Glass/Concrete/Paper, 4%

Cable, 3%

Casted Iron, 2%

Styrofoam parts, 2%

Rubber parts, 2%

Other, 21%

Material , 86%

Labour, 7%

Overheads, 5%

Dep.& Amortisation,

3%

Source: The Company

White Goods — Breakdown of COGS (YE15)


16

Vestel

June 22, 2016

RESEARCH

On the electronics front, raw materials constitutes 92% of COGS, while

open cell is the main raw material item, with a 53% share in total.

A mere 7% of the procurement is acquired from the domestic market and

the rest is almost equally imported from European and non-Europe

countries. However, more than 90% of the cost is USD-denominated,

while 8% is TRY-based and 2% is EUR-based. This increases the

Company’s sensitivity to fluctuations in the EUR/USD and USD/TL rates.

On the TV & electronics side, both end-product and raw material prices

(open cell prices) are highly volatile. Vestel does not apply a hedging

strategy in the TV segment as suppliers of Vestel do not enter into long-

term contracts due to the sector dynamics. However, since Vestel is an

important client for panel producers, the Company receives rebates from

the suppliers when the panel prices go down.

Although open cell prices have been flat since the beginning of the year,

cell prices are expected to rise in the coming period due to tightening

supply. The expected hike is set to create pressure on margins especially

in the second half of the year.

Cells, 53%

IC/Integrated, 7%

TFT Display Panel, 4%

Raw Material-Plast/Straf,

3%

Led Bar, 2%

Metal Parts, 3%

Coated Film Sheets, 2%

T-Con Board, 2%

Others, 24%

Material , 92%

Labour, 4%

Overheads, 3%

Dep.& Amortisation,

1%

Electronics — Breakdown of COGS (YE15)

Source: The Company


17

Vestel

June 22, 2016

RESEARCH

Profit Margins

Vestel’s gross margin surged by 2.8pp in 2014 and 1pp in 2015 on the

back of the favorable raw material outlook, product mix enhancement,

continued cost cutting measures, positive currency impact and hedging

gains. TV & electronics and white goods segments’ gross margins surged

last year by 1pp and 1.1pp, respectively. However, we project the gross

profitability of both segments to normalize in 2016, but to remain above

the last four years averages.

We estimate an 18.7% gross margin for the TV & electronics segment in

2016 and a 22.5% gross margin for the white goods segment. The

consolidated gross margin will be 19.8%, according to our projections. We

project an average 19% consolidated gross margin in our projection

horizon, marking an increase of 0.5pp in the long run.

Gross Margin (%) - TV& Electronics / White Goods


12.3%

17.7%

19.3% 20.3%18.7% 18.8%

11.6%

17.2%

21.9%22.9% 22.5% 21.8%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2012 2013 2014 2015 2016E 2017E

TV & Electronics Devices White Goods

2013 2014 2015 2016E 2017E 2018E 2019E 2020E

COGS

TV & Electronics 3,055 3,950 4,892 5,362 5,875 6,441 7,060 7,703

White Goods 2,058 2,236 2,400 2,812 3,276 3,788 4,332 4,949

Total 5,133 6,197 7,292 8,324 9,351 10,479 11,742 13,136

Gross Profit

TV & Electronics 657 944 1,243 1,233 1,360 1,495 1,646 1,804

White Goods 429 628 715 818 913 1,025 1,179 1,340

Total 1,084 1,570 1,958 2,052 2,273 2,520 2,826 3,159

Gross Margin

TV & Electronics 17.7% 19.3% 20.3% 18.7% 18.8% 18.8% 18.9% 19.0%

White Goods 17.2% 21.9% 22.9% 22.5% 21.8% 21.3% 21.4% 21.3%

Total 17.4% 20.2% 21.2% 19.8% 19.6% 19.4% 19.4% 19.4%



18

Vestel

June 22, 2016

RESEARCH

The Company recorded a 21% CAGR in its EBITDA in the last five years,

propelling its EBITDA margin up to 9.5% by YE15 backed with cost cutting

initiatives, active hedging strategies, improvement in the product/price

mix, reduction in raw material cost and enhanced market dynamics.

However, we project the EBITDA margin to normalize at 8.2% in 2016

(11.0% in 1Q16, flat yoy) given the expected increase in raw material

costs.

EBITDA (TLmn) & EBITDA margin(%)


The majority of the Company’s costs are in hard currency. Thus, the

combination of a weak TL and EUR with a strong USD is negative for the

Company’s operating performance. We project an average EBITDA

margin of 7.4% over our forecast horizon, considering the dilutive impact

of the prospective government tenders and low-margin mobile phone

operations.

Capital Expenditures The Company realized TL350mn in capex in 2015, leading to a 3.8%

capex/sales ratio. R&D costs constituted 32% of the capex, machinery

and equipment was 24%, mold was 22% and stores and dealership

network constituted 11% of the capex last year. We forecast capex

spending of TL391mn in 2016 and TL449mn in 2017, corresponding to a

capex/sales ratio of 3.7% in 2016 and 3.8% in 2017. We project an

average capex/sales ratio of 3.5% throughout our forecast horizon,

decreasing from 3.9% to 2.9% in the long run.

1.6%

6.3%

9.3% 9.5%8.2%

7.7% 7.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016E 2017E 2018E

EBITDA EBITDA margin


19

Vestel

June 22, 2016

RESEARCH

Working Capital

Vestel recorded a negative cash conversion cycle of eight days and WCR

to sales ratio of 4.7% in 2015 and we project the WCR/sales ratio to stand

at around 5.3% over our forecast horizon. Receivable days increased by

around 18 days last year due to the delay in receivables from the

government regarding the Fatih project. We expect the receivables

turnover to improve by nine days this year on the back of the negligible

impact of the Fatih project.

Working Capital (WC) - Cash Conversion Cycle (days)


Accordingly, we project an average payables turnover of 205 days, while

our model assumes that the Company has a receivable turnover of 100

days and an inventory turnover of 105 days over our forecast horizon.

0

50

100

150

200

250

2012 2013 2014 2015 2016E 2017E

Inventory Days Receivable Days Payable Days


20

Vestel

June 22, 2016

RESEARCH

THE COMPANY

Vestel, established in 1984 and acquired by Zorlu Holding in 1994,

operates in the white goods, consumer electronics and digital products

segments. The Vestel Group of companies comprises 23 firms (17 based

abroad). Vestel operates with nearly 16,000 employees, 1,250 dealers at

home and 2,750 outlets & sales points abroad, while exporting to 152

countries and operating foreign trade companies in ten countries in

Europe. In line with its multiple channel strategy, Vestel also reaches

consumers through technology retailers, hypermarkets, household stores

and e-commerce web sites. Zorlu Holding, its parent company, owns 78%

of Vestel and the remaining 22% of the shares are free float. Vestel

Elektronik has been trading in the BIST since 1990.

Shareholder Structure

Source: The Company

Vestel is a competitive manufacturer in the domestic consumer electronics

and WGs market and also has a critical role in the export markets. The

Company is one of Europe’s top three manufacturers in the European

LCD TV market and one of the top 10 manufacturers in white goods. In

the domestic market, Vestel is the leader in the TV market and one of the

top three players in the white goods market.

Vestel operates in an industrial complex (Vestel City) under a single roof

with 1.1mn sqm in total space and 600K in enclosed space in Manisa,

Turkey. Vestel City, opened in 2003, is one of Europe’s largest industrial

complexes in a single location.

Its TV plant is 246K sqm, its white goods plant is 313K sqm and digital

products plant is 39K sqm. In its TV and digital products plant, Vestel

produces TVs, set top boxes, professional displays, smart phones, smart

boards and LED lighting products. In its white goods plants, it produces

refrigerators, washing machines, cooking appliances, dishwashers, A/Cs

and water heaters.

Zorlu Holding, 77.54%

Free Float, 22.46%


21

Vestel

June 22, 2016

RESEARCH

In Turkey the total production capacity is 23.4mn units/year, while TV

capacity is 10mn units. WGs are at 9.4mn units and digital products are at

4mn units. Vestel’s capacity utilization rate was 80% for the TV segment

and 68% for the white goods segment in 2015.

Vestel mainly operates as an ODM in the European market, but sells

products with its own brands in the domestic market. The Company

realizes both ODM and branded product sales in Russia, the CIS

countries, the Middle East and North Africa.

Vestel applies a multi-brand and multi-channel strategy both at home and

in its global operation network. It also applies a strategy to enhance

collaboration with global trademarks in its export markets. Vestel realizes

sales to A-brand business partners, distributors, wholesalers and retail

chains within the scope of ODM services. Moreover, the Company also

makes branded sales through the regional brands it has acquired and

global brands licensed.

Vestel acquired the trademarks of a variety of European brands (Finlux,

Luxor, Vestfost, Graetz, Telefunken, Electra, Servis, New Pol, Atlantic,

Dikom, @Dikom). The Company owns the aforementioned brands while it

holds licenses for the Telefunken, Hitachi, JVC and Sharp brands.

Vestel acquired the rights to the Finlux and Luxor brands in Scandinavia

and Northern Europe and started manufacturing and exporting those

brands in 2006. In 2008, it added Vestfost, a white goods brand in Europe

and Russia, to its trademark portfolio. It also acquired the German Graetz

brand and added it to its portfolio. Moreover, it acquired Electra, Servis,

New Pol and Atlantic white goods brands in 2011 and Dikom and

@Dikomin in 2013.

R&D and Design Facilities

Vestel is one of the pioneer companies in Turkey creating new

technologies and innovative products. R&D facilities are located in

Manisa, Istanbul, the UK and China. R&D facilities develop hardware and

software solutions with an R&D team consisting of around 1,200

employees, most of whom are engineers.


22

Vestel

June 22, 2016

RESEARCH

Vestel, which won 48 awards in 2015, was listed among the top three

Turkish companies and among 1,000 global companies in R&D spending.

Vestel’s main focus areas are higher resolution, larger screen and new

generation TVs and STBs in TV electronics. In the WGs segment, the

concentration areas of R&D department are energy efficiency, smart

home systems and user and environmentally friendly products.

Vestel allocates around 2% of its revenues to Research & Development

investments per annum. Vestel Elektronik had more than 82 registered

patented inventions, while Vestel Beyaz had more than 128 registered

patents as of YE15.

Vestel: Strategies to strengthen brand value

Vestel has taken initiatives in the last couple of years to improve its brand

perception and to strengthen its position in the domestic market.

Accordingly, Vestel undertook the restructuring of its sales and after sales

services.

The Company increased its sales towards mid-high end products, in line

with its profitable growth strategy, while reducing its exposure to lower

margin product lines. Along with this shift, Vestel improved its product/

price mix both at home and abroad.

Vestel extended its dealer network, adding 300 new dealers since 2012

while eliminating underperforming dealers. Vestel initiated a store upgrade

program by converting its stores to uniform visual and service standards.

The majority of the conversion was completed in 2014-2015. The

Company expects to enhance its store image, brand recognition and

customer shopping experience.

The Company established Central Services in Turkey’s 13 large cities.

Central Services address problems which cannot be solved by authorized

service centers, provide training to authorized service centers, carry store

spare parts inventory and audit the service quality of authorized service

centers.

Vestel expanded its sales channels by entering technology retailers and

mass merchandisers, retailers and local department stores), in addition to

exclusive dealers starting from 2H13. The Company entered the Media

Markt electronics retail chain in 2H13.

Vestel launched the first locally designed and manufactured tablet PCs

and induction ovens in 2013 followed by the Vestel Venus smartphones in

2014. Vestel lauched the Finlux brand in the domestic market in 2013 to

tap different market segments and expand its customer base.


23

Vestel

June 22, 2016

RESEARCH

Vestel implemented a new branding strategy and applied new marketing

campaigns to improve its brand image in line with the changing sector

dynamics. “Turkey is Vestelized” is the new slogan, emphasizing

homegrown production, technologies and competitive product features.

Vestel also initiated cost reduction and operational efficiency projects,

while improving its product designs, enhancing efficiency in the usage

of storage spaces and has introduced increased automation and

optimization initiatives.

Sharp Brand Licensing Agreement

In line with its strategy of enhancing collaboration with global trademarks, Vestel signed a brand licensing agreement with Sharp in order to take over the rights to develop, manufacture, sell and market white goods products under the Sharp brand in Europe in September 2014. Vestel also became the exclusive distributor of Sharp branded products in Europe, which are manufactured for the European market at Sharp’s facilities in Asia. Vestel aims to expand its product range and to enhance the brand awareness of Sharp in Europe since Sharp had limited offerings (refrigerators, microwaves) in the region. Vestel will move into the premium segment with the well-known Sharp brand and expand its branded mid-to-high end product sales in Europe. The agreement became effective in January 2015 and will be valid for five years. The production of Sharp branded washing machines, dishwashers, refrigerator and ovens started in 2015.

Venus Smart Phones

Vestel began designing and producing smart phones in 2013, targeting the domestic market initially and exports in the medium term. The highly competitive mobile phone market is approximately at 1.4bn units globally, with 11-12mn units in the domestic market. Vestel’s entrance into the smart phone business supports the integration of the Company’s product range to transform to the smart home concept. The Company targets smart phones to become a main business line in the long term. Vestel smart phones (Venus X, Venus V) were first launched in September 2014, using the Android 5.1 Kitkat operating systems. The phones were upgraded in April 2015 and the third series was introduced as Venus V3 (Venus V3 5570, Venus V3 5070, Venus V3 5040) in November 2015. The Company targets to reinforce its position in the smart phone market through the new Venus models, which were introduced last year and also with the new models planned to be launched in 2016.


24

Vestel

June 22, 2016

RESEARCH

Vestel LED Lighting

Vestel entered the LED lighthing business in 2011 with the strategic

parternship of U.S. Cree. Accordingly, Vestel became the market leader in

two years and captured a 20% market share in the highly fragmented LED

lighting market. The Company started to export its products to the

European market in 2014. Vestel’s LED business has a wide scope and

potential to grow since the market is highly underpenetrated. Declining

prices and increasing consumer awareness regarding energy

consumption will pave the way for further market penetration.

Vestel’s LED lighting product group and LED panel product group, street

lighting, industrial lighting and architectural lighting fixtures are in line with

Vestel’s product range strategy. Vestel became a member of the Lighting

Industry Association (LIA) and also participated in the DIALux program,

having the opportunity to reach lighting planners and designers worldwide.


25

Vestel

June 22, 2016

RESEARCH

Vestel Group Structure

In the Vestel Group structure, Zorlu Holding owns 77.54% of Vestel

Elektronik, while 22.46% is free float. Vestel Elektronik owns 94.62% of

Vestel Beyaz Esya and 5.38% is free float. Vestel CIS and Vestel Ticaret

are 100% subsidiaries of Vestel Elektronik. Vestel Ticaret owns foreign

trade subsidiaries in international markets.

Source: The Company

Vestel Beyaz Esya, a subsidiary of Vestel Elektronik, has been trading on

the Borsa Istanbul since 2006 under the VESBE ticker and with a market

capitalization of USD680mn as of today.

Vestel Beyaz Esya, established in 1997, is a pioneer WGs manufacturer in

Turkey and Europe with a stable growth momentum. The Company is

among the top ten WGs manufacturers in Europe and also an ODM

business partner for A-brand producers and distributors, wholesalers and

retailers. In the domestic market, Vestel Beyaz Esya is among the top

three players.

Vestel Beyaz Esya manufactures refrigerators, washing machines,

cookers, dishwashers, air-conditioners and water heaters with a

production capacity of 9.4mn units in Vestel City. 55% of its sales are to

European countries, 23% are to Turkey and the remaining 22% is directed

to other export countries as of YE15. Around 30% of Turkey’s total white

goods exports are realized by Vestel Beyaz Esya. Other than its European

focus, Vestel sells its products to Russia, the CIS countries and the MENA

region. Vestel Group’s international growth strategy is to penetrate Sub

Saharan Africa, Asia and South America.

Zorlu Holding

Vestel Elektronik(77.54%)

Vestel Beyaz Esya (94.62%)

Free Float(22.46%)

Free Float(5.38%)

Other Subsidiaries

Vestel Ticaret

(100%)

Vestel CIS Ltd.(100%)


26

Vestel

June 22, 2016

RESEARCH

ZORLU HOLDING

Zorlu Holding, established in 1953 by Haci Mehmet Zorlu in Babadag,

Denizli, is one of Turkey’s leading industrial conglomerates. The Holding

is engaged in diversified industries with more than 60 companies and

above 26,000 employees. Zorlu Group operates in the home textile,

consumer durables, consumer electronics, energy, real estate, factoring

and mining businesses.

Home Textile - Korteks & Zorluteks

The Zorlu textile group is the largest fully-integrated polyster yarn

producer in Europe and the Middle East. Being a leading name in home

textiles with TAC, Linens and Valeron brands, the Company is Europe’s

largest home textiles manufacturer. The Company’s total assets are

USD1bn with a USD790mn turnover as of YE14.

Consumer Durables and Electronics - Vestel

Vestel is the leading ODM provider of TVs, white goods and digital

products for the European market. The Company is the second largest

player and has around a 20% market share in the European TV market.

The Company’s total assets amount to USD3.4bn with a USD3.2bn

turnover as of YE15.

Energy - Zorlu Enerji

Zorlu Enerji is one of the leading IPPs in Turkey with a 619 MW installed

capacity. The Company constitutes approximately 2% of the total

electricity generation by private producers in Turkey. It has a 56.4MW

wind farm in Pakistan, a 25% stake in a 840 MW CCGT power plant and a

42% stake in the 65 MW and 126 MW NGPPs in Israel.

Real Estate - Zorlu Property Development and Investment

The Company was established in 2006 to develop, sell, lease and operate

high quality residential and office projects, business centers, shopping

malls, hospitals, hotels and complex real estate projects in Turkey and

abroad. Zorlu Center is the first mixed-use real estate project in the

domestic market with five different functions since YE13. Also, the Zorlu

Levent 199, office building, was completed in 2014. The total investment

for the completed projects was USD2.8bn.

Mining - Meta Nickel Cobalt Mining

The Company specializes in developing lateritic nickel-cobalt resources,

targeting to be a major regional supplier of nickel. It has three nickel-

cobalt laterite projects in Western Turkey, in Gordes, Eskisehir (300K tons

of proven reserves) and the HPAL plant with a 10,000t/year capacity with

a USD400mn investment) in Usak.


27

Vestel

June 22, 2016

RESEARCH

APPENDIX Vestel Elektronik: 1Q16 Financial Results

Vestel Elektronik posted TL108mn in net income in 1Q16, recording

24% yoy growth in revenues thanks to solid growth both in its

domestic and international sales and the positive currency impact on

its export revenues.

The TV & electronics segment was up by 23% yoy in the quarter

driven by its increasing market share in the domestic market before

the Eurocup surge in export orders and the positive FX impact.

The white goods segment was up 27% yoy on the back of strong

volumes both at home and in its international markets coupled with the

EUR appreciation.

Vestel Elektronik’s gross margin was up by 0.3pp yoy to 22.1% thanks

to weak raw material prices and higher volumes despite the minimum

wage increase. Accordingly, its EBITDA margin was flat yoy at 11% in

the quarter.

Below the operating line, Vestel recorded TL58mn in net FX gains in

the first quarter. wWth the adjustments for hedging transactions the

net FX gain was TL5mn.

Vestel Summary Financials Change

(TLmn) 1Q15 2Q15 3Q15 4Q15 1Q16 1Q16/1Q15 1Q16/4Q15

Net Sales 1,808 1,930 2,509 3,004 2,248 24% -25%

Gross Profit 395 470 538 555 498 26% -10%

Operating Profit 126 131 189 138 169 34% 22%

EBITDA 198 208 266 208 246 24% 18%

Net Other Income/Expense -159 11 -160 35 82 n.m. 132%

Financial Inc./ Exp. (net) -43 -106 -93 3 -133 211% n.m.

Tax 2 9 16 -32 -6 n.m. -80%

Net Income -74 42 -49 141 108 n.m. -24%

Net Cash/ (Debt) -1,693 -1,888 -1,788 -1,733 -2,213 Working Capital -30 -355 -421 -434 -990 Shareholders Equity 1,328 1,315 1,275 1,574 1,662 Ratios Gross Margin 21.9% 24.3% 21.4% 18.5% 22.1% 0.3 pp 3.7 pp

Operating Margin 7.0% 6.8% 7.5% 4.6% 7.5% 0.6 pp 2.9 pp

EBITDA Margin 11.0% 10.8% 10.6% 6.9% 11.0% 0 pp 4 pp

Net Profit Margin n.m. 2.2% n.m. 4.7% 4.8% n.m. 0.1 pp


28

Vestel

June 22, 2016

RESEARCH

Vestel Beyaz Esya: 1Q16 Financial Results

Vestel Beyaz Esya posted TL65mn in net income in 1Q16 given its

strong operational performance outlook. Inventory build-up ahead of

the strong season with a resilient consumer demand expectation

supported the first quarter performance. Vestel Beyaz Esya beat the

market growth thanks to the new campaigns launched in February.

Vestel Beyaz Esya recorded 29% revenue growth on the back of

robust growth both in its domestic operations and also abroad with the

positive impact of the appreciation of the EUR against the local

currency. The recovery in the European market and the contribution

from the new ODM projects supported the top line growth in

international markets.

Vestel Beyaz Esya’s gross margin was up by 1pp in the quarter to the

13.7% level thanks to the favorable raw material prices and higher

volumes despite lower gains from parity hedges.

Accordingly, the EBITDA margin was up by 0.4pp yoy to 12.8% thanks

to the surge in the gross profitability level despite the rising labor costs

with the minimum wage impact.

Change Vestel Beyaz Esya Summary Financials

(mn TL) 1Q15 2Q15 3Q15 4Q15 1Q16 1Q16/1Q15 1Q16/4Q15

Net Sales 477 621 700 726 617 29% -15%

Gross Profit 61 106 99 107 85 40% -20%

Operating Profit 37 77 72 74 57 53% -23%

EBITDA 59 99 94 93 79 33% -16%

Net Other Income/Expense -23 21 21 -14 13 n.m. n.m.

Financial Inc./ Exp. (net) -15 -35 -58 19 -4 -71% n.m.

Tax 2 -8 -2 -5 -1 n.m. -119%

Net Income 1 55 34 74 65 n.m. -12%

Net Cash /(Debt) -112 -76 -77 28 -162 Working Capital -340 -420 -382 -355 -411 Shareholders Equity 674 591 628 714 773 Ratios Gross Margin 12.7% 17.1% 14.1% 14.7% 13.7% 1 pp -0.9 pp

Operating Margin 7.8% 12.3% 10.4% 10.2% 9.2% 1.4 pp -1 pp

EBITDA Margin 12.4% 15.9% 13.4% 12.9% 12.8% 0.4 pp -0.1 pp

Net Profit Margin 0.1% 8.8% 4.9% 10.2% 10.6% 10.5 pp 0.3 pp


29

Vestel

June 22, 2016

RESEARCH

White Goods Monthly Data - May 2016

Domestic demand for white goods were up by 3.0% yoy to 641,000 units

in May with exports up 15.3% yoy to 1,572,000 units. In 5M16, domestic

sales grew by 5.8%, while exports were up by 10.0%.

Source: BESD (White Goods Manufacturers Association), Garanti Securities

Following the robust 11% growth in white goods demand in 1Q16, sales

growth slowed to 6% in the first five months with the high base from last

year (April, May 2015: 28%, 7% respective yoy growth). We project WGs

sales volume growth of 4% in 2016.

Export growth was pretty strong at 15% in May, beating estimates,

following the 9% growth in April thanks to strong demand in the European

market. We expect the growth to revert back to the high single digits in the

coming period. Accordingly, we project 5% growth in FY16.

In May, production growth was in the double digits due to the inventory

build up. Arcelik, holding approximately a 50% market share in the

domestic market, will halt production for three weeks in July. Thus, the

WGs production in the factories has been pulled forward to May and

June.

Production was up by 5.7% mom and 13.6% yoy in May to 2.3mn units.

Domestic demand increased by 6.8% mom and 3.0% yoy in May on the

back of the 69% yoy surge in demand for freezers.

Exports were down by 3.7% mom, but up by 15.3% yoy in May at 1.57mn

units. The yoy increase was mostly driven by the 23% increase in the

export of ovens, 18% increase in exports of dishwashers and 14%

increase in exports of refrigerators.

(000 units) Production Domestic Sales Exports

5M15 9,549 2,625 6,743

5M16 10,382 2,778 7,419

Change 8.7% 5.8% 10.0%

May'15 2,020 622 1,364

Apr'16 2,170 600 1,517

May'16 2,294 641 1,572

YoY Change 13.6% 3.0% 15.3%

MoM Change 5.7% 6.8% 3.7%


30

Vestel

June 22, 2016

RESEARCH

500

1,000

1,500

2,000

2,500

3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

White Goods Production ('000 units)

2011 2012 2013 2014 2015 2016

500

800

1,100

1,400

1,700

2,000


White Goods Export Sales Volumes ('000 units)

2011 2012 2013 2014 2015 2016

100

300

500

700

900


White Goods Domestic Sales Volumes ('000 units)

2011 2012 2013 2014 2015 2016

10

40

70

100

130

160


White Goods Import Sales Volume ('000 units)

2011 2012 2013 2014 2015 2016


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-1

1

Apr-

11

Jul-1

1

Oct-

11

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Breakdown of White Goods Products ('000 units)

Freezer

Dryer

Oven

Dish Machine

Washing Machine

Refrigerator

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan-1

1

Apr-

11

Jul-1

1

Oct-

11

Jan-1

2

Apr-

12

Jul-1

2

Oct-

12

Jan-1

3

Apr-

13

Jul-1

3

Oct-

13

Jan-1

4

Apr-

14

Jul-1

4

Oct-

14

Jan-1

5

Apr-

15

Jul-1

5

Oct-

15

Jan-1

6

Breakdown of White Goods Products (%)

Freezer

Dryer

Oven

Dish Machine

Washing Machine

Refrigerator


Disclaimer

This document and the information, opinions, estimates and recommendations expressed herein,

have been prepared by Garanti Securities Research Department, to provide its customers with

general information regarding the date of issue of the report and are subject to changes without prior

notice. All opinions and estimates included in this report constitute our judgment as of this date and

are subject to change without notice.

This document and its contents do not constitute an offer, invitation or solicitation to purchase or

subscribe to any securities or other instruments, or to undertake or divest investments. Neither shall

this document nor its contents form the basis of any contract, commitment or decision of any kind.

Investor who have access to this document should be aware that the securities, instruments or

investments to which it refers may not be appropriate for them due to their specific investment goals,

financial positions or risk profiles, as these have not been taken into account to prepare this report.

Therefore, investors should make their own investment decisions considering the said circumstances

and obtaining such specialized advice as may be necessary. The information in this report has been

obtained by Garanti Securities Research Department from sources believed to be reliable. However,

Garanti Securities cannot guarantee the accuracy, adequacy, or completeness of such information,

and cannot be responsible for the results of investment decisions made on account of this report.

The market prices of securities or instruments or the results of investments could fluctuate against

the interests of investors. Investors should be aware that they could even face a loss of their

investment. Transactions in futures, options and securities or high-yield securities can involve high

risks and are not appropriate for every investor. Indeed, in the case of some investments, the

potential losses may exceed the amount of initial investment and, in such circumstances, investors

may be required to pay more money to support those losses. Thus, before undertaking any

transaction with these instruments, investors should be aware of their operation, as well as the rights,

liabilities and risks implied by the same and the underlying stocks. Investors should also be aware

that secondary markets for the said instruments may be limited or even not exist.

This report is to be distributed to professional emerging markets investors only. This report is for

private use only and intended solely for the individual(s). No information in this report may be copied,

modified, republished or exploited in anyway without the prior consent of Garanti Securities.

Additionally, with respect to our statements above, all our claims and plea rights are covered in the

regulations which apply in the countries that this report has been sent to.

Garanti Securities

Etiler Mah. Tepecik Yolu

Demirkent Sokak No:1

34337 Besiktas, Istanbul / Turkey

Phone: +90 (212) 384-1155

Fax: +90 (212) 352-4240

RESEARCH

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