Turkish Automotive : Great expectations

In this report, we transfer coverage and revisit the investment cases of
Ford Otosan, Tofas and Dogus Otomotiv. Despite the headwinds
related to the chip supply issues, resulting in lower vehicle availability,
and the weaker TRY, which resulted in sharp increases in vehicle
prices, the Turkish automotive sector has held up strongly, by
registering 5% yoy growth in both domestic light vehicle sales and
exports in January-October 2021. We believe that the short-term
performance of the Turkish automotive companies should be shaped
by the developments related to the chip supply issues and, in the
medium term, we argue that that the details of the new vehicle projects
will be the main differentiating factors for Ford Otosan and Tofas. We
rate Ford Otosan and Tofas BUYs, with price targets (PTs) of
TRY 265.20 and TRY 78.60, respectively; and Dogus Otomotiv a HOLD,
with a PT of TRY 47.00.

Ongoing chip supply issues to continue to weigh on vehicle availability
in the short term. In our base-case scenario, we expect the supply-demand
imbalances in the semiconductor industry to persist until the end of 2022E;
however, the severity of the shortage should ease gradually, in our view,
starting from 2H22E. We anticipate the domestic light vehicle sales volumes
to remain relatively low in 1H22E, and estimate light vehicle sales to grow
by 6% yoy in 2022E. On the exports front, the current run-rate of light vehicle
sales in Europe is lower than its long-term average, indicating strong growth
potential in the medium term. We believe that growth is likely to return
gradually in 2022E and be observed mainly in 2023E. Although the
slowdown seen in domestic sales may prompt lower operating margins, we
believe that it should be different this time. In our view, the lower availability
of vehicles in the domestic market should enable the automotive companies
to keep their pricing power strong and avoid engaging in cutthroat
competition. This would be supportive for the margins, in our view.
New vehicle projects to be the game changers. We expect the new
projects that will be undertaken by Ford Otosan and Tofas to be the main
factors that will differentiate the performance of these companies in the
medium term. The new LCV projects, carried out currently by Ford Otosan,
and the expected new vehicle projects to be carried out by Tofas will be
targeted predominantly at the European markets, rather than the domestic
market. Being the main production bases for Ford Motor Co. and Stellantis,
we believe that Ford Otosan and Tofas should reap the benefits of the
demand for new vehicles, mainly in the form of electric vehicles. We project
Ford Otosan’s operating performance to reach step function type growth in
2024E, as the new vehicle will be available in 1H23E; and we envisage
Tofas to register a similar growth pattern in 2025E, as we expect the new
vehicle to be available in 2024E.

We rate Ford Otosan and Tofas BUYs. We believe that the investment
community is not fully pricing in the strong growth potential of Ford Otosan
and Tofas, as we expect these companies to operate as the main production
base for the new generation vehicles. Meanwhile, we rate Dogus Otomotiv
a HOLD, as the company’s recent strong price appreciation, which took
place after the 9M21 results, has exhausted the return potential, in our view.

Wood Company