Karsan. Company Report. In the Verge of a New Era. Automotive. 12 August 2008

Company Report Karsan In the Verge of a New Era Automotive Initiated Buy 12 August 2008 Substantial growth through new agreements Karsan is Turkey s only contract manufacturer. Karsan agreed on various new projects with global auto companies in 2007 and 2008. Namely, these are: 1) Exports of the J9 model to Iran, 2) production of Hyundai light trucks, 3) production of Renault heavy trucks, and 4) production of PSA Group s end of series models. As a result, new projects should boost total unit sales by 4.2 folds from 10k in 2007 to 42k in 2009. A substantial transition: 3-year CAGR of 74% in EBITDA We expect revenues and EBITDA to grow at a CAGR of 73% and 74%, respectively between 2007 and 2010. As a result sustainable free cash generation should reach US$33mn in 2010. A new management team is likely to raise investor confidence Recently, the management team of Karsan was replaced by some key Turkish and international industrialists. Apart from the vast sectoral experience in the local and international markets, the management should also improve corporate governance. Recommendation: Buy - 60% upside While the stock trades at 5.7x P/E and 3.7x EV/EBITDA on our 2009 estimates, it trades at 3.8x P/E and 2.6x EV/EBITDA on our 2010 assumptions, a 29% and 27% discount to the local peers. Our DCF suggests a fair value of US$268mn providing a 74% upside. We believe the business model could have more upside as there are other potential projects that we have not discounted in our model. Our 12-month target fair value for Karsan is US$246mn or TRY2.90/share corresponding to an upside of 60%. US$ mn FY 2007 FY 2008E FY 2009E FY 2010E Revenues 194 277 778 994 EBITDA 15 15 54 76 Net Profit 1-6 27 41 Book Value 93 87 114 155 P/E 190.2 n.m. 5.7 3.8 EV/EBITDA 13.6 12.8 3.7 2.6 P/BV 1.6 1.8 1.3 1.0 P/Sales 0.8 0.6 0.2 0.2 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 KARSN ISE 100 Relative Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Stock Data Bloomberg KARSN.TI Reuters KARSN.IS Close (YTL)* 1.81 Target Price (YTL) 2.90 Mkt cap (US$mn) 154 Free float (%) 33% Key Owners Kiraca Otomotiv- 52.4% International Holders as a % of Free Float 4.65 Shares Outstanding 100,000,000 Avg. 6m Daily Vol. ($m) 5.45 ISE-100 (TRY) 41,733 *As of August 11th 2.10 1.90 1.70 1.50 1.30 1.10 0.90 0.70 Performance 1M 3M 12M Absolute (%) 28.1-9.2-43.0 Relative (%) 4.0-14.8-37.0 Key Ratios (%) 2007 2008E 2009E EBITDA margin 7.5 5.6 6.9 Gross margin 10.2 14.0 11.5 Net Debt/equity 36.5 93.3 87.0 ROA 0.6-2.9 8.7 ROIC -0.4 1.3 23.9 ROE 1.3-6.8 26.9 Didem Ozatalar didem.ozatalar@teb.com.tr +90 (212) 345 11 11 (x5529) TEB Investment Institutional Sales Direct: +90 (212) 345 08 80 Fax: +90 (212) 345 07 45 Mail: teb.icm@teb.com.tr tebicm@bloomberg.net

Summary and Investment Conclusion We initiate our coverage of Karsan with a Buy rating and a 60% upside Our target price is TRY2.90/share. Karsan should emerge of one of the fastest growing Turkish companies in the near future as a result of new agreements made with various global auto producers. Thanks to these agreements and substantial volume growth, revenues and EBITDA should grow at a 3-year CAGR of 73% and 74%, respectively. Another important recent event is the change of the senior management team by some key Turkish and international industrialists with vast sectoral experience. We met with the team and believe the change will improve corporate governance and transparency substantially (see below). Karsan shares outperformed the ISE-100 by 15% and rose by 25% in the last 2-weeks; however it remains a 37% relative underperformer over the last year. More importantly, the stock trades at our 2010 expected P/E of 3.8x and EV/EBITDA of 2.6x, one of the lowest multiples among our coverage universe by all means. A New Era: Karsan was established as a commercial vehicle producer in 1966 in Bursa as the only contract auto manufacturer in Turkey. Karsan positions itself as a multi-brand manufacturer serving various global auto companies with its strong supplier network, and quality and know-how in the flexible manufacturing business without a significant capital requirement. Karsan used to produce two major models, the Peugeot Partner and Karsan J9 with market shares of 4% and 24%, respectively as of Q108. The licenses of these two models were renewed in December 2002 and extended until mid 2008. Moreover, the notable development was that non-compete clauses were detached from the agreements, and hence, paved way for a new era for Karsan as a multi-brand manufacturer. The new projects: Since last year, Karsan signed four new agreements: Namely, these are: 1) Exports of the J9 model to Iran, MENA and CIS region 2) Production and distribution of Hyundai light trucks for the local market 3) Production of Renault s heavy trucks for the local and export markets 4) Production of PSA Group s (Peugeot-Citroen) end of series models in Turkey. The details of these projects will be discussed later in the company overview section on pages 11 and 12. Contributions of the new projects: The new agreements will provide more resiliency in the sales (the PSA group agreement is a take or pay, meaning that regardless of the demand PSA will buy the pre-ordered vehicles). More importantly, the ability to sign agreements with a vast number of clients will provide a diversification in sales. From a financial standpoint, the new projects will not only result in 75% higher capacity (70,000), but increase capacity utilization (CUR) to 65% in 2010 from 25% in 2007, lowering idle capacity expenses which was booked as US$10mn in 2007. We estimate the aforementioned projects to generate revenues of US$149mn in 2008, US$684mn in 2009, and US$900mn in 2010; and EBITDA of US$4.5mn, US$41mn, and US$63.6mn during the same period. Note that revenues and EBITDA generated from these new projects should comprise 54% and 88% of the total revenues and 29% and 77% of the total EBITDA in 2008 and 2009, respectively. Note due to the flexibility of the plant, the company can easily increase its annual capacity to 95k units with only EUR20mn additional investment since the company transfers the required equipment from the off-taker. The substantial growth in profitability should help Karsan to increase ROE to 30% in 2010 from 1.3% in 2007. Revenues and EBITDA should grow at a remarkable 3-year CAGR of 73% and 74%, respectively between 2007 and 2010. Total sales volume should reach 42k units in 2009 up from 10k units in 2007. As a result, Karsan s revenues should jump to US$778mn in 2009 and US$994mn in 2010 from US$194mn in 2007. Hence, at our 2010 expected P/E of 3.8x and EV/EBITDA of 2.6x, we believe the stock has an upside of 60%. Note, on average Karsan, 12.08.2008 2

local auto companies (Tofas, Ford Otosan, Anadolu Isuzu and Otokar) trade at 2010 expected P/E of 5.3x and EV/EBITDA of 3.6x. There is potential upside to our estimates. Karsan s management is in search for opportunities to sell taxi models to the US market. Initially, Karsan had signed a MoU with Standard Taxi for the production of taxi models for US market in 2007. However, both parties cancelled the deal later on as they could not agree on pricing. Karsan aims to execute the project as without a partner though capitalizing on their established relationships with US local authorities. If successful, this should create a significant upside in the stock and our valuation. Exhibit 1: Summary Income Statement 2003 2004 2005 2006 2007 2008E 2009E 2010E Revenues 114 266 187 192 194 277 778 994 chg. (YoY) 134% -30% 2% 1% 43% 181% 28% Domestic 107 260 187 186 168 219 356 465 Exports 6 8 7 6 26 59 422 529 Total Unit Sales 8,231 17,002 13,143 12,317 10,008 14,287 42,000 45,750 chg. (YoY) 107% -23% -6% -19% 43% 194% 9% Domestic 7,820 16,489 12,777 11,923 8,376 10,037 12,500 14,000 Exports 411 513 366 394 1,632 4,250 29,500 31,750 EBITDA 17 23-2 11 15 15 54 76 chg. (YoY) 36% n.m. n.m. 30% 6% 249% 42% EBITDA Margin 14.9% 8.6% -1.0% 5.8% 7.5% 5.6% 6.9% 7.7% Net Income 7 1-35 -22 1-6 27 41 chg. (YoY) -86% n.m. n.m. n.m. n.m. n.m. 50% Source: Company data, TEB Research The change in the management is good news in terms of business experience and corporate governance. The previous CEO Mehmet Can Karabag was replaced by Murat Selek, the ex-ceo of Otoyol (Not Listed), a JV of Koc Group and Iveco. (Otoyol used to be a producer of commercial vehicles in Turkey under the Iveco license but operates only as a distributor since last year). Before joining Otoyol, Mr Selek was the VP in charge of marketing at Tofas (N/R). Moreover, Jan Nahum, the ex-ceo of Tofas and Petrol Ofisi (N/R) and VP of Business Development at Fiat has been appointed as the managing director. Also, Giancarlo Boschetti (ex-ceo of Fiat and Iveco) and Antonio Bene (ex-ceo of Tofas) have been appointed as board members. This is positive since the new management is not only experienced and capable in terms of delivering shareholder value, but also prudent in corporate governance and transparency. Previously, Karsan lost substantial investor confidence on corporate governance after the ex-ceo surprisingly sold a large share of its holding while marketing the Company and the business on a road-show. Karsan, 12.08.2008 3

Valuation Our target price of TRY2.90/share corresponds to an upside of 60%. We derive our fair value estimate by applying a blended valuation approach comprising equally-weighted DCF analysis and local peer group comparison. Our US$246mn target market capitalization implies a 12-month target share price of TRY2.90 suggesting a 60% upside and Buy recommendation. Exhibit 2: Valuation Summary (US$mn) Method Equity Value Weight Weighted Equity Value (US$mn) (US$mn) DCF 268 50% 134 Peer Group Comparison 225 50% 112 Target Value (US$mn) 246 Current Price (TRY/share) 1.81 Target Price (TRY/share) 2.90 Upside Potential 60% Source: TEB Research Our DCF valuation suggests a fair value of US$268mn a 74% upside. In our DCF model, we assume that Karsan will be able to extend and/or replace the existing projects after their expiration dates. This is because we believe that the new management is capable of discovering and running new projects with their experience and connections. Our DCF analysis is based on a WACC of 12.0%, risk free rate of 7.7%, equity risk premium of 5% and a terminal growth rate of 2% (Exhibit 4). Based on all these assumptions, we believe the company s expected free cash flows should average at US$24mn between 2008 and 2012 compared to last 5-years average free cash flow of US$3mn. At 3.8x and 2.6x P/E and EV/EBITDA multiples on our 2010 estimates, Karsan trades at a 29% and 27% discount, respectively, to the local auto companies. Karsan shares trade at 5.7x and 3.8x P/E on our 2009 and 2010 estimates, a respective 11% and 29% discount to its local peers (Exhibit 3). Moreover, with our expected 3.7x and 2.6x EV/EBITDA multiples in 2009 and 2010, the stock trades at respective 8% and 27% discounts to the local peer group. While local peers such as Ford Otosan, Tofas, Anadolu Isuzu and Otokar trade on 2010E average multiples of 5.3x P/E and 3.6x EV/EBITDA, Karsan shares trade at a respective 29% and 27% discount compared to local peers. Karsan, 12.08.2008 4

Exhibit 3: Local Peer Group Comparison Company Market Cap. EV/EBITDA EV/Sales P/E US$mn 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E Turkey Anadolu Isuzu * 87 2.5 2.1 1.6 0.2 0.2 0.1 9.6 7.3 5.3 Otokar * 391 6.5 5.0 4.4 0.9 0.8 0.8 7.1 5.2 4.4 Tofas * 2,140 6.1 4.8 4.0 0.5 0.4 0.4 6.6 6.6 5.2 Ford Otosan * 2,950 4.3 4.2 4.3 0.5 0.5 0.5 7.0 6.4 6.5 Turkish Average 4.9 4.0 3.6 0.5 0.5 0.4 7.6 6.4 5.3 Karsan 154 12.8 3.7 2.6 0.7 0.3 0.2 n.m. 5.7 3.8 Peer Group Average 4.9 4.0 3.6 0.5 0.5 0.4 7.6 6.4 5.3 Karsan's premium / (discount) to Peer Group Average 164% -8% -27% 33% -47% -55% n.m. -11% -29% Source: TEB Research Exhibit 4: DCF Analysis Summary Cash Flow US$mn 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E EBITDA 15 54 76 80 63 63 58 58 57 57 - Tax 0 0 10 12 9 9 9 9 9 8 Gross Cash Flow 15 54 66 69 54 53 49 49 49 49 - Capital expenditure 53 7 6 5 5 5 5 5 5 5 - Increase / (Decrease) in WC 4 55 27-3 -23-4 -11-1 -1-1 Free Cash Flow (FCF) -41-8 33 66 72 52 55 45 44 44 Risk-Free Rate 7.7% Beta 0.9 Equity Risk Premium 5.0% WACC 12.0% Perpetual Growth 2.0% DCF Results US$mn +Present value of FCFs (2008-2017) 164 +Present value of terminal value 147 % of Terminal Value in Firm Value 47% Enterprise Value 311 -Net Debt (2008/03) 44 Equity Value 268 Source: TEB Research Karsan, 12.08.2008 5

Sector Overview The Turkish automotive sector mainly comprises of passenger car (PC) and light commercial vehicle (LCV) producers and importers. BMC, Anadolu Isuzu, Ford Otosan (Ford Motor Co), Honda, Hyundai, Dogus Otomotiv, Renault, Tofas (Fiat), and Toyota are the main players producing an array of PCs, light and medium trucks, pick-ups, buses, mini and midi-buses. In H108, Oyak Renault was the leader in the domestic PC segment with 17.7% market share, followed by Dogus Otomotiv (importer of VW, Audi, Skoda, and Seat) with 10.5% market share and Hyundai was third with 9.9%. In the local light commercial vehicles (LCV) segment, Ford Otosan, which solely acts as an importer for Ford PCs and producer of Ford s major LCV models (Transit and Transit Connect) in Turkey was the market leader with 27.6% share, followed by Tofas with 25.2% and Dogus Otomotiv with 11.3% market shares. Note, in H108, Karsan s market share has been 3.5% in the domestic LCV segment. Turkey An Export Base Turkish auto producers firstly started their production and export activities in 2000 after some of the global auto manufacturers relocated their production facilities in Central and Eastern Europe as a result of the over-capacity problem and highcosts in the European markets. Consequently, Turkey started to enjoy the reputation of a lowcost and high-quality production base for many global auto manufacturers in the last decade; Isuzu, Ford Otosan (Ford Motors Co), Tofas (Fiat SpA), Renault, Hyundai, Honda, and Toyota are among a number of automotive manufacturers producing in Turkey and considering Turkey as an export base for the European market. This was not only due to its promising local market, but also its proximity to Europe with dense distribution and supplier network, and quality and know-how in the industry. As a result, many local JV s have gone through a restructuring process through the increasing commitment of their global partners in the form of investing in the production of new models. This in turn has helped Turkish producers to maintain high capacity utilization, hence maintain lower fixed costs and production solidity during local market volatilities and downturns. Accordingly, with the increasing share of exports, the overall sales of Turkish producers should continue to grow despite local market weaknesses and/or downturns. Exhibit 5: Foreign Automotive Investments in Turkey Capacity Investment Amount Company Set-up Date Invest. Date Old New 2006 2007 2008E Current Capacity Invest. in Turkey Ford Otosan 1959 2001-2004 30,000 200,000 US$136mn US$110mn US$100mn 315,000 US$1.20bn Tofas 1971 2006-2009 250,000 360,000 EUR288mn EUR350mn EUR400mn 360,000 US$1.04bn 2000-2003 250,000 250,000 Anadolu Isuzu 1984 2008-2009 13,155 15,155 US$3mn US$2mn US$18mn 13,155 Oyak Renault 1969 2006-2008 180,000 320,000 US$100mn US$210mn US$200mn 266,000 US$1.20bn Karsan 1966 2007-2009 40,000 58,000 US$2mn US$10mn US$20mn 40,000 Toyota 1992 2003-2007 70,000 150,000 EUR100mn EUR100mn EUR100mn 150,000 EUR1.00bn Honda 1998 2008 30,000 100,000 US$90mn US$120mn 50,000 n.a. Hyundai Assan 1997 2006 60,000 125,000 US$100mn US$20mn US$20mn 100,000 US$400mn Source: Company Data, TEB Research Total Karsan, 12.08.2008 6

A significant amount of the Turkish production is exported. In 1997, export share of the light vehicles produced by the Turkish auto companies stood at around 4%, while this has increased to nearly 60% at the end of 2007 as the international partners of the local producers increased their commitment to the Turkish producers and allowed them to gain more market share. In 2006 and 2007, despite the local market weakness (-13% and -4%), light vehicles exports surged by 27% and 17%, respectively. As a result, the overall light vehicles sales of the Turkish producers increased by 4% and 7% in the respective years. Exhibit 6: Local Sales & Exports of Turkish Auto Producers (PC + LCV) (units) 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E Domestic Sales Exports share of exports (RHS) 70% 60% 50% 40% 30% 20% 10% 0% Source: AMA, TEB Research In H108, export volume of the light vehicles grew by 36% YoY. In June 2008, light vehicles export volume reached 93k units, a 24% YoY growth. Despite the threat of a global recession, exports showed a strong growth of 36% YoY in the first half reaching 547.8k units. In light of the information gathered from some of the auto companies, there has not been any order pull-backs from the European markets yet; however, in the last four-months of 2008, there can be order contractions from the EU region. Therefore, we believe export volumes should decline by 7% YoY in H208 compared to 36% YoY growth in H108 which should result in a 15% YoY growth in FY08 versus 17% in 2007. Exhibit 7: Monthly PC and LCV export volumes 105,000 90,000 75,000 60,000 45,000 30,000 15,000 0 Jan Feb Mar April May June July Aug Sept Oct Nov Dec 2005 2006 2007 2008 Source: AMA, TEB Research Karsan, 12.08.2008 7

Exhibit 8: Turkish Market Production, Local Sales and Exports 2000 2001 2002 2003 2004 2005 2006 2007 2008E Production 468,381 285,737 357,217 562,466 862,035 914,359 936,342 1,048,619 1,258,343 Domestic Sales 619,330 183,752 157,616 364,048 698,095 710,408 617,852 594,762 584,597 Exports 98,840 192,630 264,942 340,000 500,990 542,012 686,388 803,057 922,280 YoY chg. (exports) 27% 95% 38% 28% 47% 8% 27% 17% 15% Total Sales 718,170 376,382 422,558 704,048 1,199,085 1,252,420 1,304,240 1,397,819 1,506,877 share of exports (RHS) 14% 51% 63% 48% 42% 43% 53% 57% 61% Source: AMA, TEB Research Auto demand in the European region is less volatile than Turkey - Export-based agreements provide a cushion against local volatilities. As can be seen in the Exhibit 6, share of PC and LCV exports in the total sales reached nearly 60% by 2007, thanks to the take or pay agreements and cost-plus deals providing more visible outlook for the sector. Although lower-margin export sales reduce the profitability of the Turkish producers, it also reduces the exposure to local volatility and helps Turkish manufacturers to maintain their capacity utilisation. Reflecting the overall difficult economic circumstances, European new PC registrations fell by 2% in H108 mainly due to the rising inflation and soaring fuel prices. However, the largest European markets responded in different ways, with Germany and France continuing on a growth path (+3.6% and 4.5% respectively), contrasting with a sizable decline of the Spanish and Italian markets (-17.6% and -11.5% respectively). In total, 8,344k new cars were registered in H108, a 2% YoY decline. Turkish local auto demand history: Following the strong growth between 2003 and 2005, local sales volume of the light vehicles declined over the last two years. Local auto demand first started to contract in June 2006 after the global downturn and depreciation of TRY in May 2006. While local sales grew by 8% YoY in H106, it declined by 28% YoY in H206 resulting in a 13% YoY contraction. Moreover, Turkish local auto demand fell by 28% YoY in H107 prior to general and presidential elections; however bottomed-out in July 2007 and started to grow in August 2007 mainly due to the weak base effect after the settlement of the political environment. All in all, local sales fell by 4% YoY in 2007 in the aftermath of the macro contraction, political uncertainties and currency volatility. Exhibit 9: Turkish Local PC + LCV Demand (units) (units) 2002 2003 2004 2005 2006 2007 CAGR 2008E (2002-2005) CAGR (2005-2008E) PC Sales 90,615 227,036 451,209 438,597 373,219 357,465 355,500 69% -7% Domestic 35,519 73,267 139,501 136,696 117,725 120,627 116,521 57% -5% Imported 55,096 153,769 311,708 301,901 255,494 236,838 238,979 76% -7% % of total market 57% 62% 65% 62% 60% 60% 61% YoY change -31% 151% 99% -3% -15% -4% -1% LCV Sales 67,001 137,012 246,886 271,811 244,633 237,297 229,097 59% -6% Domestic 42,969 77,575 135,980 147,179 129,075 128,965 127,095 51% -5% Imported 24,032 59,437 110,906 124,632 115,558 108,332 102,003 73% -6% % of total market 43% 38% 35% 38% 40% 40% 39% YoY change 28% 104% 80% 10% -10% -3% -3% Total 157,616 364,048 698,095 710,408 617,852 594,762 584,597 65% -6% Domestic 78,488 150,842 275,481 283,875 246,800 249,592 243,615 53% -5% Imported 79,128 213,206 422,614 426,533 371,052 345,170 340,982 75% -7% YoY change -14% 131% 92% 2% -13% -4% -2% Source: AMA, TEB Research Karsan, 12.08.2008 8

Local auto demand - Recovery began in Q407 and strengthened in Q108, but started to decline in June 2008. In Q407, the growth was 31% YoY as a result of the Central Bank of Turkey s (CBT) aggressive monetary easing in H207 where the interest rates were down from 17.50% to 15.25%. Moreover, following a further 50bps rate cut in Q108, local sales increased by 28% YoY. However, in Q208, local auto demand increased by a mere 2.5% compared to Q207, mainly due to the volatile global markets and the local political tension which resulted in weakening consumer confidence. The CBT raised O/N rates further by 50bps to 16.75% in mid-july following a 50bps rate hike in mid-june and stated that it could introduce additional rate hikes in the upcoming meetings. We believe the CBT will keep O/N rates unchanged at 17.25% until mid-q309 after hiking policy rates by an additional 50bps or two consecutive 25bps rate hikes in Aug-Sept, and thereafter to cut policy rates by 100bps to 16.25% by the end of 2009. Hence, as more than 60% of the cars sold in Turkey are on noncash basis, we believe the visible negative impacts of the interest rate hikes are seen on the local auto demand starting from June 2008 which should bottom out at the end of Q408. Exhibit 10: Confidence Index vs Auto Sales Exhibit 11: Interest Rates vs Auto Sales 140 130 120 110 100 90 80 70 60 50 40 30 20 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Consumer Confidence Index Source: Cnbc-e, AMA Monthly Local Auto Sales Inde 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Source: AMA, CBT, TEB Research Benchmark Rate (%) (RHS) MoM growth (seasonally adjusted) 25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% July data - Local auto demand down by 11% YoY and 3% MoM on a seasonally adjusted basis. In July 08, light vehicles demand declined by 11% YoY and 9% MoM and 3% MoM on a seasonally adjusted basis to 42.1k units. In the first 7-months, local auto sales growth has been reduced to 9% YoY from 13% in H108. We believe the CBT will keep O/N rates unchanged at 17.25% until mid-q309 after hiking policy rates by an additional 50bps or two consecutive 25bps rate hikes in Aug-Sept. Hence, as more than 60% of the cars sold in Turkey are on non-cash basis, we believe the visible negative impacts of the rate hikes are seen on the auto demand starting from June 08 which should bottom out at the end of Q408. Exhibit 12: Monthly PC and LCV local sales volumes Exhibit 13: Seasonally adjusted MoM auto data 105,000 90,000 75,000 60,000 45,000 30,000 15,000 0 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 2005 2006 2007 2008 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 MoM growth (seasonally adjusted) YoY growth Source: AMA, TEB Research Source: AMA, TEB Research Karsan, 12.08.2008 9

KARSAN - Company Overview Karsan was founded as a commercial vehicle producer in 1966 in Bursa. Karsan was established in 1966 to produce Mercedes Benz minibuses. In 1979, the company was acquired by Koc Group. During 1981 and 1997, Karsan produced Peugeot J9 minibuses under Peugeot license with an installed capacity of 10k units. In 1998, Inan Kirac and Claude Nahum (former Koc Group senior executives who hold extensive experience in the automotive sector) took over the majority stake in Karsan. The capacity was increased to 25k units per year investing US$70mn thereafter. Following this investment, Karsan signed a new license agreement with Peugeot for the production of Partner LCV model. Karsan also added Boxer and Ducato LCV models to its portfolio in 2000. The licenses of these two models were renewed in December 2002 and recently extended until mid 2008. More importantly, the non-compete clauses were removed in the new license agreements with Peugeot and this opened a new phase for Karsan as a multi-brand commercial vehicle manufacturer. Karsan s majority shareholder is Kiraca Otomotiv (Not Listed). Kiraca Otomotiv is a holding company operating in auto spare parts and foreign trade business, and is owned by İnan Kirac, the ex-ceo and current BOD member in Koc Holding. Free-float share of Karsan is currently 32.75%. Exhibit 14: Karsan Shareholding Structure Diniz Group 13% Free Float 33% İnan Kirac 2% Others 0% Kiraca Otomotiv 52% Source: Company data Karsan s current product mix: Currently, Karsan produces Karsan J9 minibuses, Peugeot Partner Combi Van (LCV) and Hyundai light trucks. Moreover, end of series LCV production of Peugeot Partner-Citroen Berlingo and Renault heavy trucks will commence in Q408. Karsan J9 minibus: Karsan is ranked second in the minibus segment with its J9 model and has a market share of 22% YTD as of April 2008. There are 4 versions of J9 model. As Karsan uses 70% local input in J9 model s production under its own brand, this is the most profitable and highly localized product among the company s product mix. Peugeot Partner LCV: This model commands a market share of 3.8% as of 4M08 and has a local input of 22%. There are 8 versions and has a competitive pricing and a strong dealer network being the locally produced first minivan model in Turkey. Hyundai Light Truck: Since Karsan sold only 245 units in 2007, it is not proper to calculate the product s market share for 2007. The model has 3 versions and local input share is 20%. Karsan, 12.08.2008 10

Karsan also provides local industrial services besides contract manufacturing. Karsan works with several brands some of which have production plants in Turkey. Namely, these companies are Tofas (N/R), Renault Trucks, Ford Otosan (Buy), Turk Traktor (Buy), Renault, Toyota, Opel and Volkswagen. Karsan specifically provides industrial services such as stamping body parts, painting truck cabins, production of farm tractor cabins, cataphoresis coating and painting. In 2007, Karsan generated total US$23mn revenues from domestic industrial services. We believe the company should generate US$32mn revenues in 2008 and 2009; and US$4mn and US$5mn EBITDA in 2008 and 2009, respectively which are expected to comprise 11% and 4% of the total revenues and 27% and 9% of the total EBITDA in 2008 and 2009, respectively. Efficiency and flexibility in production Capacity requirements for minor capacity additions and/or the necessity to create new production lines for niche products drive the need for contract manufacturing. As such, Karsan has efficiency in the technology and know-how in developing and producing niche products such as elongated Peugeot Partner and Partner Pick-up. Moreover, Karsan has the flexibility in taking over the orders for the production of relatively smaller volumes where OEM s capacity falls short of meeting the demand. New projects should raise sales substantially in the next three years. In 2007, Karsan signed a series of new projects with different global auto producers in order to apply its multibrand manufacturing strategy and enhance the value of its business, i.e. to increase its CUR and profitability. The projects that Karsan was awarded are as follows: Karsan J9 exports to Iran: In February 2007, Karsan agreed with Iranian Sanat Khodro Karnou to export J9 minibuses to Iran. The agreement has been effective starting from H207 for 5 years for exporting 3,000 units to Iran with an additional 1,000 units per year to Middle East and CIS countries (Afghanistan, Syria, Saudi Arabia, United Arab Emirates, CIS, Qatar, and Iraq). In 2007, Karsan exported 1,632 units J9 minibuses to Iran and we expect the company to sell 2,250 units in 2008, 2,500 units in 2009 and 2,750 units in 2010 going forward. In our view, this business should generate additional revenues and EBITDA of US$38mn and US$0.1mn in 2008; and US$43mn and US$1.3mn in 2009, respectively. We believe the Iranian project should help for an additional EBITDA of 2% in 2009. Production and distribution of Hyundai light trucks: In March 2007, Karsan agreed with Hyundai for the production and distribution of Hyundai light trucks for the local market. The agreement is for 5 years and the production started in H207 to produce 2,000 units per year. Karsan sold 245 units in 2007 and we expect the company to sell 2,800 units in 2008, and 3,500 units in 2009 going forward until 2012. Moreover, the company targets to produce Hyundai based new vehicles starting from 2009; hence we also expect Karsan to sell 1,500 units Hyundai based new vehicles each year between 2009 and 2012. After 2012, we assume that Karsan will continue to sell annual 2,500 units Hyundai light trucks and 1,500 units Hyundai based vehicles in our valuation period. In our view, Hyundai project (covering both Hyundai light trucks and Hyundai based new vehicles) should generate additional revenues and EBITDA of US$49mn and US$2mn in 2008; and US$107mn and US$5mn in 2009, respectively. In total, we believe Hyundai project should help for an additional EBITDA of 13% in 2008 and 10% in 2009. Production of Renault heavy trucks: In July 2007, Karsan signed an agreement with Renault Trucks Company for the production of annual 5,000 units heavy trucks over 7.5 tons which will be sold both in local and export markets. The production will commence in Q408 and terminate at the end of 2011. Note that US$10mn capex will be financed by Renault Trucks Company. After the termination of the agreement, two parties will Karsan, 12.08.2008 11

evaluate to establish a JV producing more than 10,000 units annually. The global capacity scarcity for the production of heavy trucks creates further potential for the project. We expect Karsan to sell 150 units in 2008, 3,500 units in 2009 and 7,000 units in 2010 and 2011. Starting from 2012, we assume that Karsan will continue to sell 4,500 units Renault trucks until 2017. We believe this business should generate additional revenues and EBITDA of US$262mn and US$21mn in 2009; and US$488mn and US$44mn in 2010, respectively. All in all, we believe this project should help for an additional EBITDA of 39% in 2009 and 58% in 2010. Peugeot Partner & Citroen Berlingo Phase 2 Project - Providing guaranteed revenues In late February 2008, Karsan agreed with Peugeot Citroen (PSA) Group for the production of Peugeot Partner & Citroen Berlingo end of series models in Turkey for 5 years and the project is scheduled to start in Q408. The functional improvements such as increasing the loading capacity will be performed by Karsan and the share of local inputs will increase to 45% from 20% which will push up the margins and the profitability accordingly. The vehicles will be sold both in local and export markets (Middle East, Eastern Europe and North Africa). The management expects to sell 30,000 units in 2009 and 2010 going forward, 90% of which will be exported. Note that, PSA Group guaranteed to buy 24,000 units, an 80% of the total planned production. We assume that during the 5-year agreement period, Karsan will sell 3,000 and 25,000 units in the local and export markets, respectively each year. Moreover, we expect that, after 5 years, the two parties will extend the agreement and Karsan will sell only 3,000 and 15,000 units in the local and international markets, respectively. We believe this business should generate additional revenues and EBITDA of US$273mn and US$13.6mn in 2009; and US$254mn and US$12.7mn in 2010, respectively. All in all, we believe this project should help for an additional EBITDA of 25% in 2009 and 17% in 2010. Exhibit 15: Contribution of the new projects Revenues 2007 2008E 2009E 2010E Iran project 25 38 43 47 Hyundai project 5 49 107 110 Renault Trucks project 0 13 262 488 PSA "end of series" 0 49 273 254 Total (US$m n) 30 149 684 900 EBITDA 2007 2008E 2009E 2010E Iran project 1 0 1 1 Hyundai project 0 2 5 6 Renault Trucks project 0 1 21 44 PSA "end of series" 0 2 14 13 Total (US$mn) 1 5 41 64 Source: Company data, TEB Research Karsan, 12.08.2008 12

Karsan will raise its capacity to 70k units/year by the end of FY08 and CUR to 60% by 2009. Karsan is in the process of increasing its production capacity of 40k units/year in two shifts to 70k units by the end of this year. Moreover, with an additional EUR20mn investment, the capacity can be increased to 95k units/year in three shifts. Currently, CUR is around 25% and should increase to 60% by 2009 and 65% by 2010 which should reduce the company s idle capacity expense. In 2007, Karsan recorded US$10mn idle capacity expense which we believe should decline to US$4mn in 2009. Exhibit 16: Karsan Capacity and CUR 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 2002 2003 2004 2005 2006 2007 2008E 2009E 70% 60% 50% 40% 30% 20% 10% 0% Capacity (units/year) Utilization (RHS) Source: Company data, TEB Research Revenues, unit sales and EBITDA should increase by 4.0 folds, 4.2 folds, and 3.7 folds, respectively in 2009 compared to 2007. This means revenues, unit sales and EBITDA should grow at a 3-year CAGR of 59%, 51% and 69%, respectively between 2006 and 2009. Financial Analysis The impact of the new businesses on EBITDA and revenues: (Exhibit 15) Iranian sales: Should show its full impact this year with additional US$38mn revenues and US$0.1mn EBITDA, 14% and 0.5% of our total estimates for 2008. In 2009, Iranian project should generate US$43mn revenues and US$1.3mn EBITDA, 5% and 2% of the total expected figures. Hyundai project: Should also show its full impact this year with additional US$49mn revenues and US$2mn EBITDA, 18% and 13% of our total estimates for 2008. In 2009, we believe Hyundai project should generate US$107mn revenues and US$5mn EBITDA, a 14% and 10% of the total. Renault heavy trucks: Should show its full impact in 2009 with additional contribution of US$262mn revenues and US$21mn EBITDA, 34% and 39% of our total estimates for 2009. Peugeot Partner-Citroen Berlingo end of series: Should show its impact in 2009 with additional of US$273mn revenues and US$14mn EBITDA contribution, 35% and 25% of our total estimates for 2009, respectively. All in all, these new projects should make up 54% and 29% of total revenues and EBITDA in 2008, respectively, while we believe that they should cover 88% of total revenues and 77% of total EBITDA in 2009. Karsan, 12.08.2008 13

We expect overall revenues and sales volume to increase at a 3-year CAGR of 73% and 66%, respectively between 2007 and 2010. Domestic sales volume declined by 30% YoY in 2007 mainly due to the contraction of its Peugeot Partner sales by 59% YoY. Given that a major player (Otoyol) left the market, coupled with the new projects, Karsan s domestic sales volume should remain strong with an expected growth rate of 20% and 25% YoY in 2008 and 2009, respectively. On the other hand, while Karsan exported only 394 units of J9 in 2006, its J9 export units rose to 1,632 in 2007, thanks to the Iranian project. Going forward, we expect robust exports with a 160% YoY growth in 2008, again driven by the Iranian project which will be effective in the full-year 2008. Moreover, as a result of the Peugeot Partner-Citroen Berlingo Phase 2 project, export volume should jump to 29.5k and 31.7k units in 2009 and 2010, respectively as this project is planned to commence in Q408 and should show its full impact starting from 2009. Hence, the aforementioned volume growth should lead to a substantial revenue growth, i.e. we expect Karsan to raise its revenues from US$194mn in 2007 to US$778mn in 2009 which should be followed by a 28% YoY growth in 2010. EBITDA to grow at a 3-year CAGR of 73% - 2009 earnings to reach US$27mn in 2009 and US$41mn in 2010 Most of the auto manufacturers have significantly weaker export margins than on domestic sales. This is because the competitors are relatively large in size, requesting lower margins for guaranteed sales. Karsan s export and domestic sales margins are similar (except J9 model) and this should be unaffected despite a growing export outlook, hence going forward we expect the company s margins to recover back to its 2007 levels by 2010. We believe Karsan s EBITDA should grow at a 3-year CAGR of 74% during 2007 and 2010, and EBITDA margin should stand at 7.7% by 2010 compared to our expected FY08 EBITDA margin of 5.6%. Thanks to the recent new projects and better utilization of the plant s capacity, Karsan s CUR should reach 65% in 2010 from 25% in 2007. Moreover, on the back of increasing revenues coupled with the solid margins, Karsan should generate US$27mn and US$41mn net earnings in 2009 and 2010, respectively compared to US$1mn in 2007. Exhibit 17: Karsan - Revenues, EBITDA and Free Cash Flow (US$mn) 75 60 45 30 15 0-15 -30-45 2003 2004 2005 2006 2007 2008E 2009E 2010E EBITDA Free Cash Flow Revenues (RHS) 1,150 1,000 850 700 550 400 250 100 Source: Company data, TEB Research Margins should approach to 2004 levels by 2011, in our view. Although we expect Karsan s gross and EBITDA margin at 11.5% and 6.9% in 2009; and 12.0% and 7.7% in 2010, respectively, we believe they will continue to be lower than the local sector averages. Note that, 2009 and 2010 average expected EBITDA margins of the local peers are 11.1% and 11.2% compared to Karsan s 2009 and 2010 expected EBITDA margins of 6.9% and 7.7%. Yet, this is mainly due to the nature of the contract manufacturing business. Karsan, 12.08.2008 14

Exhibit 20: Karsan - Gross, EBITDA and Net Margins (%) Gross margin Net margin EBITDA margin (RHS) 16.0% 12.0% 8.0% 4.0% 0.0% -4.0% -8.0% -12.0% -16.0% -20.0% 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% 1.0% -1.0% Source: Company data, TEB Research We estimate annual free cash generation to reach US$33mn in 2010. The investments will be finalized by 2009 and 2010, and most significant projects will start to kick off in Q408 and should show their full impacts in 2009 and 2010. As a result, we believe Karsan s free cash should rise to US$33mn by 2010 and US$66mn by 2011 from US$24mn in 2006. In our view, the average annual free cash generation will be US$24mn between 2008 and 2012. Exhibit 21: Karsan Capex, EBITDA and Free Cash Flow (US$mn) 80 70 60 50 40 30 20 10 0-10 45 30 15 0-15 -30 2003 2004 2005 2006 2007 2008E 2009E 2010E -45 Capital Expenditure EBITDA Free Cash Flow (RHS) Source: Company data, TEB Research Karsan, 12.08.2008 15

KARSAN - FINANCIAL STATEMENTS Karsan - Income Statement IFRS US$mn (2005-2010E) 2005 2006 2007 2008E 2009E 2010E Net sales 187 192 194 277 778 994 COGS -175-169 -164-225 -674-861 Depreciation -9-9 -10-14 -14-14 Gross profit 4 14 20 39 89 119 Operating expenses -14-12 -15-37 -50-57 Operating profit -11 2 4 2 40 62 EBITDA -2 11 15 15 54 76 Financial income / (expense) (net) -5-17 -5-8 -13-12 Other income / (expense) -11-7 -8 0 0 0 Profit before tax & monetary gain & minority -27-22 -9-6 27 51 Monetary gain 0 0 0 0 0 0 Minority interest expense 0 0 0 0 0 0 Profit before tax -27-22 -9-6 27 51 Taxation -9 0 9 0 0-10 Net profit -35-22 1-6 27 41 Source: Company data, TEB Research Karsan Margins (2005-2010E) 2005 2006 2007 2008E 2009E 2010E Net sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% COGS -93.4% -88.2% -84.6% -81.0% -86.7% -86.6% Depreciation -4.7% -4.7% -5.3% -5.0% -1.8% -1.4% Gross profit 2.0% 7.1% 10.2% 14.0% 11.5% 12.0% Operating expenses -7.7% -6.0% -7.9% -13.4% -6.4% -5.8% Operating profit -5.7% 1.1% 2.2% 0.6% 5.1% 6.2% EBITDA -1.0% 5.8% 7.5% 5.6% 6.9% 7.7% Financial income / (expense) (net) -2.4% -9.1% -2.5% -2.9% -1.7% -1.2% Other income / (expense) -6.0% -3.6% -4.3% 0.1% 0.0% 0.0% Profit before tax & monetary gain & minority -14.2% -11.6% -4.5% -2.2% 3.5% 5.1% Monetary gain 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Minority interest expense 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Profit before tax -14.2% -11.6% -4.5% -2.2% 3.5% 5.1% Tax Rate -32.2% 0.0% 109.3% 0.0% 0.0% 20.0% Net profit -18.7% -11.6% 0.4% -2.2% 3.5% 4.1% Source: Company data, TEB Research Karsan Growth Rates (2005-2010E) 2005 2006 2007 2008E 2009E 2010E Net Sales -30% 2% 1% 43% 181% 28% EBITDA n.m. n.m. 30% 6% 249% 42% Net Income n.m. n.m. n.m. n.m. n.m. 50% Karsan, 12.08.2008 16

Karsan Balance Sheet IFRS US$mn (2005-2010E) 2005 2006 2007 2008E 2009E 2010E Cash and Banks 0 0 1 23 2 9 Short Term Trade Receivables 20 12 42 57 160 204 Other Short Term Receivables 0 1 1 1 2 3 Inventories 20 19 28 33 75 96 Other Current Assets 1 0 1 1 3 4 Current Assets 42 32 72 114 243 317 Net Tangible Assets 73 62 77 117 110 102 Intangible Fixed Assets 7 7 8 8 9 9 Deferred Tax Asset 0 0 11 9 8 8 Non-Current Assets 80 69 96 134 127 119 TOTAL ASSETS 121 101 168 249 370 436 Bank Debts 14 7 1 17 24 28 Short Term Trade Payables 7 9 34 49 141 180 Provisions for Expenses and Liabilities 1 2 5 5 6 6 Current Liabilities 23 19 39 72 172 214 Bank Debts 55 48 34 86 77 59 Retirement Pay Provision 1 1 1 3 4 4 Other Long Term Payables 0 0 1 1 3 3 Long Term Liabilities 55 49 36 90 83 67 Minority Interest 0 0 0 0 0 0 Paid in Capital 14 28 86 86 86 86 Capital inflation adjustment 17 16 19 19 19 19 Share Premium 16 15 18 18 18 18 Legal Reserves 9 9 11 11 11 11 Extraordinary Reserves 35 33 40 40 40 40 Net Income (Loss) -35-22 1-6 27 41 Accumulated Reserves -12-45 -82-81 -88-61 Shareholders' Equity 43 33 93 87 114 155 TOTAL LIAB. & SH. EQUITY 121 102 168 249 369 435 Net Debt / (Cash) 68 55 34 81 99 78 Source: Company data, TEB Research Karsan, 12.08.2008 17

TEB Investment Macro Estimates 2006 2007 2008E 2009E TRY/US$ (average; CB Bid rate) 1.4311 1.3003 1.3100 1.3500 TRY/US$ (end of period;cb Bid rate) 1.4131 1.1593 1.2900 1.3400 Benchmark Rate (end-%) 21.15 16.62 19.50 17.50 O/N rate (end of period;ytdav-%) 17.50 15.75 17.25 16.25 CPI (annual-%) 9.65 8.39 11.20 9.00 GDP (US$mn) 526,429 658,786 758,184 841,662 TEB Investment: Stock Rating Definitions TEB Rating Definition Investment Horizon BUY Stock return is > 20% 1 year HOLD Stock return ranges between -10% and 20% 1 year SELL Stock return is < -10% 1 year Karsan, 12.08.2008 18

TEB Investment Eski Buyukdere Cad. Park Plaza 22 Kat:4 Maslak, 34398, Istanbul / Turkey Phone : +90 (212) 345 11 11 Fax : +90 (212) 345 07 46 Trading Oguzhan Buyukbayram Head of Trading oguzhan.buyukbayram@teb.com.tr +90 (212) 345 00 68 Bulent Levi Manager bulent.levi@teb.com.tr +90 (212) 345 08 88 Yada Ozgur Assistant Manager yada.ozgur@teb.com.tr +90 (212) 345 12 50 Inci Kalkavan Assistant Manager inci.kalkavan@teb.com.tr +90 (212) 345 11 35 Institutional Sales Tunc Ural Director tunc.ural@teb.com.tr +90 (212) 345 08 80 Hasan Sevket Colakoglu Director hasansevket.colakoglu@teb.com.tr +90 (212) 345 09 99 Research Ali Kerim Akkoyunlu Head of Research, Strategy ali.akkoyunlu@teb.com.tr +90 (212) 345 09 86 Sertan Kargin Director, Chief Economist sertan.kargin@teb.com.tr +90 (212) 345 09 90 Kenan Cosguner Transportation & Airlines, Food & Beverage, Media kenan.cosguner@teb.com.tr +90 (212) 345 11 11 (x 5527) Volkan Kurt Financials volkan.kurt@teb.com.tr +90 (212) 345 11 11 (x 5530) Ebru Eroglu Energy, Oil and Basic Metals ebru.eroglu@teb.com.tr +90 (212) 345 11 11 (x 5521) Can Kaya Oztoprak Telecoms, Cement, Glass, REITs can.oztoprak@teb.com.tr +90 (212) 345 11 11 (x 5518) Didem Ozatalar Automotive, Retail, Durables, Conglomerates didem.ozatalar@teb.com.tr +90 (212) 345 11 11 (x 5529) Ozgur Geter Small Caps ozgur.geter@teb.com.tr +90 (212) 345 11 11 (x 5520) Ozkan Ozkaynak Quantitative Research ozkan.ozkaynak@teb.com.tr +90 (212) 345 11 11 (x 5512) The information and opinions in this report were prepared by TEB Investment solely for information purposes, based on information available as of the date of this report. 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