January 5, 2009 More Brick, Less Mortar
􀂃 Downward revisions in growth assumptions -- Weakness in Turkish cement sector’s domestic sales
looks set to persist through 2009, defying our earlier expectations, due to flagging market conditions
driven by the global economic downturn. We now expect domestic cement consumption to contract by
6% to 39.9mn tons in 2008 and by 10% to 35.9 mn tons in 2009, versus our previous assumptions of
3% and 8% growth, respectively.
􀂃 Price weakness to continue -- Due to soaring excess cement capacity as a result of lacklustre demand
along with capacity additions, we expect average domestic cement prices to be 10% lower in 2009 in
nominal TRY terms, versus our previous assumption of flat prices.
􀂃 Margin compression -- We now expect cement companies to face more pronounced margin narrowing
compared to our earlier forecasts, in both 2008 and 2009. We were previously forecasting 5pp and 2pp
EBITDA margin contraction for the sector in 2008 and 2009 to 30% and 28%, respectively. However, in
view of the diseconomies of scale coupled with dwindling cement prices in the domestic market, we now
expect the sector’s EBITDA margin to recede by 9pp to 26% in 2008, and by 3pp to 23% in 2009.
􀂃 Exports poised to slow down -- Amid faltering global demand, cement exports are likely to fall short
of our earlier forecasts. We were previously expecting vibrant exports to Russia to absorb part of the
excess capacity. However, with Russia reeling from the global turmoil as well as plummeting oil prices,
downward revisions have been necessary in our export estimates as well. We now forecast exports
(cement + clinker) to increase by 59% to 13mn tons in 2008 and by 10% to 14mn tons in 2009, versus
our previous growth estimates of 88% and 27%, respectively.
􀂃 Cost pressure to ease with declining fuel and freight cost -- We expect the average C&F fuel cost
to decline by 23% in US$ terms in 2009, which should mitigate margin contraction.
􀂃 Potential recovery seemingly deferred to 2010 -- We were previously forecasting a recovery in the
sector to set in by 2H09. However, due to the gloomy global and domestic outlook, we now see a
possible recovery materialising no earlier than in 2010. We view the prevailing weak market conditions as
temporary, and believe that the sector’s long-term prospects remain positive, underpinned by ample
growth driven by low per capita consumption, and high GDP growth expectations.
􀂃 “BUY” Adana, Akcansa and Cimsa; “SELL” Mardin; “HOLD” Bolu -- We reckon that the weaker
short term prospects of the Turkish cement sector have already been reflected to the share prices of
major cement companies. Moreover, among stocks in our coverage, Adana, Akcansa and Cimsa have
been oversold and are highly attractive compared to domestic peers. The sector is trading at 2009E
EV/EBITDA and P/E of 5.0x and 8.5x, respectively, with a 9% dividend yield. Moreover, the sectorspecific
EV/clinker capacity ratio of US$94/ton is 71% below the average of recent transactions’
valuations. Hence, we maintain our L/T BUY rating on Adana Cimento, Akcansa and Cimsa. We
also reiterate our L/T SELL rating on Mardin, due to the removal of incentives in 2008 and
2009, and its unattractive relative valuation. On the other hand, we downgrade our L/T
rating on Bolu Cimento to HOLD, due to its unattractive upside potential relative to the
market. Based on our relative valuation approach, Aslan, Baticim, Bursa, Nuh and Mardin are
expensive. Hence, we recommend that investors switch from these stocks to Adana, Akcansa
and Cimsa.

Table of Contents
I. INVESTMENT THESIS 3
a. Positives 3
b. Negatives 4
II. DOMESTIC MARKET 5
a. Regional Demand Breakdown 5
b. Demand-Supply Trends, Cement Prices and Margins 5
c. Capacity Additions 9
d. Cost Pressure on Margins to Subside in 2009 10
e. Slowdown in Construction Permits 11
f. GDP Growth to Slow Down in 2009; Yet, to Remain a Key Driver for Long-
Term Expectations 12
g. Low Per Capita Consumption 12
h. Housing Loan Stock on an Uptrend 13
i. 2B Land Plan 14
j. Players & Consolidation 14
k. Recent Transactions 15
l. Exports -- Global Weakness Tempers Expectations 18
m. Real Cement Prices Close to Historical Lows 19
n. Can Local Elections Boost Demand in 2009? 20
o. Relative Performances and Valuations 20
II. COMPANY UPDATES 23
a. Adana Cimento 24
b. Akcansa 29
c. Bolu Cimento 34
d. Cimsa 39
e. Mardin Cimento 44

I. INVESTMENT THESIS
We expect Turkish cement sector to underperform the overall market in the
short term, due to sluggish domestic demand and a softer pricing outlook for
2009. However, from a long term perspective, we believe that the market has
priced in the gloomy outlook to a large extent. Therefore, we believe that major
cement stocks like Adana, Akcansa, and Cimsa are attractively valued and offer
remarkable upside potentials for investors with a long term vision. These stocks
do not only trade at significantly low 2009 multiples, but also offer remarkable
dividend yields ranging between 13% and 20%, well above the sector and
market averages. We reiterate our L/T SELL rating on Mardin, due to the
removal of incentives in 2008 (tax) and 2009 (electricity) and its unattractive
relative valuation. On the other hand, we downgrade our L/T rating on Bolu to
HOLD, on the back of its relatively less attractive valuation and lack of relative
upside. Furthermore, we upgrade our S/T rating on Adana to OUTPERFORM, as
the stock has underperformed the market by 16% since our downgrade on Nov
24, 2008, and the 20% dividend yield along with the strong cash position are
expected to buoy sentiment for the stock. We also upgrade our S/T rating on
Bolu, Cimsa, and Mardin to MARKETPERFORM, as we believe that the respective
high dividend yields of 22%, 16%, and 21% limit the downside risk for these
stocks. Highlights from our investment thesis are as follows:
a. Positives
Attractive valuations -- The cement stocks on which we have a L/T BUY rating, namely
Adana Cimento, Akcansa and Cimsa, are trading at attractive 2009E P/E and EV/EBITDA
multiples of 4.9x and 3.2x on average, significantly lower than the respective sector
averages of 8.5x and 5.0x and international peers’ 7.1x and 6.0x. Moreover, the sector
specific EV/clinker capacity ratio of these stocks averages at US$57/ton, which is again
significantly lower than the US$112/ton historical average, as well as the US$323/ton
average of the deals closed in recent years.
High dividend yield -- The stated stocks offer attractive dividend yields ranging between
13% and 20%, well above the sector and market averages. These cement companies have
built a solid reputation for consistent and high dividend payouts. Therefore, such high
yields, against a gloomy macroeconomic backdrop, should not be ignored, in our opinion.
Easing fuel and freight cost -- Cement sector had been suffering from soaring energy
and freight costs since 2H07. However, thanks to easing oil prices, fuel (coal and petrocoke)
prices have started to retreat, which bodes well for the sector that is already reeling
from weak demand and softer prices and hence narrowing margins. Freight costs have
dropped by a dramatic 80%-90% from their peaks. According to Bloomberg, ‘McCloskey
Newcastle 6700 kc GAD FOB Steam Coal Spot Price /Australia’ surged to its peak level of
US$193/ton by mid-2008, from its trough of US$52/ton in early 2007. Following the easing
in oil prices, coal prices have declined to current levels at around US$77.5/ton. Accordingly,
average coal prices have almost doubled to US$130/ton in 2008. Note that cement facilities
use coal and petro-coke interchangeably, depending on cost per calorie. As the supply of
petro-coke is limited, there is no listed spot price for this item. However, according to
sector authorities, the C&F price of this product has declined to current levels at US$110-
115/ton, thereby averaging at around US$150/ton in 2008. In our valuation models, we
assume that the US$-denominated average fuel price will be c.23% lower in 2009. Note
that fuel cost, given that it accounts for about a third of the CoGS, is of major significance
for cement companies.

Potential recovery seemingly deferred to 2010 -- We now see a possible recovery
materialising in 2010. We view the prevailing weak market conditions as temporary, and
believe that the sector’s long-term prospects remain positive, underpinned by ample growth
driven by low per capita consumption, and high GDP growth expectations.
“2B” Plan may fuel expectations -- In the framework of the so-called “2B” draft law,
which will enable sale of forest land deemed irrecoverable for its original use, the
government plans TOKI (the Mass Housing Administration) to develop “urban
transformation projects”. Should the bill be legislated, under some assumptions the
transformation projects could create additional cement demand of 11mn tons,
corresponding to 28% of 2008E domestic consumption. Assuming that the project would be
completed in 5 years, it would translate into a CAGR of 5% in domestic cement
consumption, per se. However, given the uncertainty, we have refrained from incorporating
this plan into our estimates.
b. Negatives
Demand and prices to remain weak in 2009 -- Turkish cement sector is likely to
continue to suffer from domestic sales erosion in 2009, defying our earlier expectations,
due to flagging market conditions driven by the global economic downturn. We now expect
domestic consumption to contract by 6% to 39.9mn tons in 2008 and by 10% to 35.9mn
tons in 2009, versus our previous assumptions of 3% and 8% growth, respectively. On the
other hand, due to rising excess cement capacity driven by weak demand and capacity
additions, we expect average domestic cement prices to decline by 10% in 2009 in nominal
TRY terms.
Exports poised to slow down -- Amid faltering global demand, cement exports are likely
to fall short of our earlier assumptions. We were previously expecting vibrant exports to
Russia to absorb part of the excess capacity. However, with Russia reeling from the global
turmoil and plummeting oil prices, downward revisions have been necessary in our export
estimates as well. We now forecast exports (cement + clinker) to increase by 59% to 13mn
tons in 2008 and by 10% to 14mn tons in 2009, versus our previous growth estimates of
88% and 27%, respectively.
High electricity prices -- Electricity is the second largest cost item for the cement sector,
with a 20-25% weight, after fuel. The government has hiked electricity prices three times
since the beginning of 2008. Accordingly, cumulative price increases have amounted to
49% in 2008. The price adjustment in electricity follows the natural gas price changes.
Despite the sharp decrease in oil prices, no downward adjustment in natural gas prices has
been made to date. This is because the adjustment in natural gas prices comes with a lag,
as the country makes its natural gas payments according to average prices for certain
periods. Hence, we expect the price cut in electricity to be implemented within 2Q09,
though this should not compensate for the hike in 2008. Therefore, we expect average
electricity price in 2009 to be c.6% higher than the average of 2008.
Margin compression -- We expect margin narrowing to be sharper than our earlier
forecasts, for both 2008 and 2009. We were previously forecasting 5pp and 2pp EBITDA
margin contraction for the sector in 2008 and 2009 to 30% and 28%, respectively.
However, in view of the diseconomies of scale coupled with dwindling cement prices in the
domestic market, we now expect the sector’s EBITDA margin to recede by 9pp to 26% in
2008, and by 3pp to 23% in 2009.