Fertilizer Durables None Low Medium Positive Iran Oil and oil High ... · Iran is the biggest car market in the Middle East, selling 900,000 passenger units in 2014 and with a production

1

Iran

A real opportunity or just a myth?

Iran’s re-entry into the global markets with a more

open economy could provide an economic boost

and create a strong appetite for global growth.

The nature of the Iranian market is promising with a

young educated population and increasing

consumption.

The IMF forecasts a return to pre-sanctions growth

rates as oil exports increase, boosting business

confidence and investment. With 10% of the

world's proven oil reserves and 15% of its gas

reserves, Iran is considered an "energy

superpower."

Infrastructural investments will be a major focus for

Iran as years of U.S. and UN sanctions led to a lack

of investments.

Meanwhile, structural reforms are necessary to

ensure a more competitive market.

Iran-Turkey relations

The return of Iran to the global market will be an

economic positive for Turkey as trade and business

ties will strengthen thanks to the geographical

proximity of the two countries.

Turkey is already Iran’s fourth largest trade partner.

For Turkey, Iran has the potential to offset the

recent losses resulting from the Russian sanctions.

Turkey receives approximately 20% of its natural

gas imports from Iran, making it Turkey’s second

largest natural gas supplier after Russia.

Iran offers a wide range of opportunities for the

Turkish private sector in retail trade and services.

In this report, we tried to provide a brief analysis of

various sectors and their possible implications for

Turkish BIST companies.

Iranian Economy

Iran is the world's 18th largest in terms of purchasing

power parity (PPP) and 29th in terms of

nominal gross domestic product.

Iran has the fourth-largest oil reserves in the world

and the second-largest gas reserves.

In addition to rich carbon sources, Iran also has zinc,

copper and aluminum.

The IMF forecasts that Iran's economy will expand by

4-4.5% per year through 2020 as oil output recovers

following the lifting of sanctions.

Iran suffers from large infrastructural

deficiencies. According to the International Energy

Agency (IEA), about half of Iran’s crude oil production

is from fields that are more than 70 years-old and in

urgent need of rehabilitation through new technology.

March 16, 2016

Sectors Selected BIST Companies

Automobiles & parts Dogus Otomotiv, Ford Otosan, Tofas, Brisa, Goodyear

Airline Industry Turkish Airlines, Pegasus, TAV Airports, DO & CO, Celebi

Banking Halkbank

Construction Tekfen, Enka Insaat, Akfen Construction

Durables Arcelik

Fertilizer Gubretas

Oil and oil products Tupras, Aygaz

Petrochemicals Petkim

Telecom Turkcell

Source: Garanti Securities

Sectoral Relations with Iran

High

High

Medium

Low

Medium

Medium

Medium

Medium

Low

Trade

potential

(Future)

Automobiles &

parts

Airline Industry

Banking

Construction

Durables

Fertilizer

Oil and oil

products

Petrochemicals

Telecom

Industries

Positive

Positive

Positive

None

Positive

Positive

Positive

Negative

None

Possible impact of

increasing trade with

Iran for Turkish

companies

Low

None

Low

Low

Low

None

Low

Low

None

Trade

relationship

(Current)

Source: Garanti Securities, various media sources

Est. Proj. Proj.

IRAN Macro Indicators 2013/14 2014/15 2015/16 2016/17

Nominal GDP (in mn of USD) 443 425 399 466

Real GDP at factor cost -1.9 3 0 4.3

CPI inflation (average) 34.7 15.5 15.1 11.5

Unemployment rate 10.4 10.6 11.9 12.5

Current account balance 26.5 15.9 4.5 8.5

Source: Iranian authorities and IMF estimates & projections

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

2

March 16, 2016

Iran : A real opportunity or just a myth?

RESEARCH

Iran Market Impact on Turkish Companies

Automobiles and parts

Iran is the biggest car market in the Middle East, selling 900,000 passenger units in 2014 and with a production of 1.4m in 2015

Iran’s automotive industry is the second most active industry in the country after its oil and gas industry.

Demand is buoyant and the market is expected to record strong growth in the next decade.

The auto sector will be one of the biggest beneficiaries of the lifting of sanctions in 2016 as the consumer base has shown its preference for Western brands.

Iranian automobile companies are now producing various types of reliable and reasonable automobiles in the low price range and are trying to compete with other companies.

Consumers do not have a wide range of choices, so there is high dependence on local manufacturers.

Iran’s Khodro car maker and French Peugeot signed a deal to broaden mutual cooperation in the automobile industry in Iran. The establishment of the Iran-France Joint company with an equal sharing of fifty percent will bring the latest technological development to Iran for auto manufacturing products

Strong opportunities for Turkish automotive companies.

The price range of the vehicles sold in the Iranian market is similar to the range of Turkish manufacturers.

The decision to move to the Iranian market will be made at the major brand level (FCA, Ford Motor Co, VW etc.).

If such a move materializes, we see a strong growth potential in the Iranian market for Tofas (TOASO), Ford Otosan (FROTO) and Dogus Otomotiv (DOAS).

Tofas CEO Cengiz Eroldu very recently confirmed that they have been evaluating different global markets,including Iran, for export purposes.

Regarding tires and spare parts we believe again the major brand decision will be determinant for the move to the Iranian market. Thus, see a strong potential for Brisa (BRISA) and Goodyear (GOODY).


Airlines Industry

Iran has a total of 319 airports, of which 140 have paved runways.

The country has yet to develop a significant tourism sector with airports

mainly used by business travelers. Several European airlines, including

Air France-KLM, plan to resume flights to Iran in 2016.

Airports in Iran have lacked investments for years and the fleet of

Iranian carriers is among the oldest in the world (more than 20 years

old).

After the sanctions are lifted new airport investments are highly likely.

The Iranian government has already placed orders for hundreds of

aircraft.

There are an estimated 4-5mn Iranians living abroad, mostly in North

America, Europe, Persian Gulf States, Turkey, Australia and the

broader Middle East which could further increase passenger traffic.

Opportunities for TAV Airports (TAVHL).

More business activity in the region will increase passenger traffic.

Positive for Turkish Airlines (THYAO) and Pegasus Airlines (PGSUS)

in terms of passenger flow and indirectly for Do & Co (DOCO) and

Celebi (CLEB).


Banking

Sector is underdeveloped and not competitive.

The industry has the actual and potential size for major players to

realize economies of scale.

Most of the larger banks have significant experience in international

trade.

The public sector banks have the full backing of the Iranian

government.

The removal of sanctions on Iran will benefit the banking sector,

especially as the country regains access to the SWIFT system.

Non-performing loan ratios are dangerously high; there are serious

concerns over the solvency of state-owned banks, but also of

commercial banks over the long term.

Leverage ratios are very high by international standards, threatening to

impact the banking sector’s stability.

The government has granted a number of licences to new private

banks in recent years. These private banks are growing far faster than

their state-owned counterparts.

We may see expansion, M&A and other opportunities for Turkish

banks in the future in the Iranian market.

Halkbank (HALKB, MP) has around USD2bn in demand deposits on

its balance sheet acquired from trade with Iran.

As we know, trade between Turkey and Iran and also India has been

conducted via Halkbank accounts, which provides a substantial no-

cost demand deposit for Halkbank.

While Iranian trade lowers Halkbank’s funding costs, Halkbank also

charges commission fees for these trades.

The lifting of the sanctions will be positive for Halkbank as the bank

handles these trade transactions.

According to our talks with Halkbank’s management, they also expect

to see increasing volumes in the trade balance with Iran in the

coming period, which is positive for Halkbank.

A recap on major industries on ıran and potential for Turkish companies trading on the BIST


3

March 16, 2016


RESEARCH


Construction

Urban Development

A shortage of housing provides opportunities for investment in

residential construction.

The construction industry growth forecast for Iran is for 3.2% real

growth in 2016 and an average 4% over the next five years.

Poor building inventory.

USD143bn investment needs to be made in the next 10 years for the

restoration of 14,000 meters of critically decaying buildings.

Airport Investment

There are plans to expand Iran's main airports with Iranian Airports

Holding to attract in excess of USD1bn in investments for the aviation

sector.

A significant expansion project is the Imam Khomeini Airport in Tehran,

whose capacity will be tripled to 20mn passengers per year.

Railway Investment

Railway projects will attract considerable investments.

Iran wants to splurge up to USD8bn over the next six years to revamp

and expand its railway network.

There are plans to stretch out the nationwide railroad line to 25,000km

by 2025 from under 15,000km now. The network is being expanded and

is expected to reach 400km when it is completed.

Enka Insaat (ENKAI, MP), Anel Elektrik (ANELE, N/R), Tekfen Insaat

(TKFEN, MP) could evaluate opportunities in the Iranian construction

market.

Housing and urban development projects, infrastructure projects

(highway, dam, airport, construction etc.) and energy projects could be

opportunities for Turkish companies.

However, for these large-scale projects, credit lines should be made

available and project finance and guarantee issues should be settled.

Projects like the Imam Khomeini Airport could create interest for

companies including TAV Construction, Anel Elektrik (ANELE), Tekfen

(TKFEN, MP) and to a lesser extent Enka Insaat (ENKAI).

Kardemir (KRDMD, MP) could also be positively impacted by higher

rail sales to Iran.


Durables

The Iranian WGs market (estimated to be 3-3.5mn) is around half of the

Turkish market.

The production of household appliances does not meet the demand

within the country.

A large domestic market with strong replacement demand.

Poor design and manufacturing for local production.

The market prefers value added WGs products, design and functionality

offering a higher margin.

Arcelik (ARCLK), Turkey's largest white goods manufacturer,has

been evaluating the potential in Iran for the last couple of months.

Arcelik used to realize around USD100mn in revenues from the

country before the sanctions.

The Company sees a similar market potential in Iran compared to the

Turkish WGs market.

Regulatory issues remain as a risk.


Fertilizer

In terms of agriculture, the return of economic growth will have the most

rapid and direct impact on consumption.

Fertilizers are essential for Iran's agricultural sector as a major portion

of land available for cultivation has poor soil fertility.

Rising export demand for various agricultural products is boosting

domestic crop production in the country and hence driving sales of

fertilizers in Iran.

Demand for phosphate and potash fertilizers in the country is addressed

predominantly through imports.

The fertilizer market in Iran is projected to grow at a CAGR of over 3.5%

during 2015-2020 due to the increasing need for improving the yield of

available arable land in the country.

Iran’s government aims to attain self-sufficiency in the production of

staple food crops by 2025, which is anticipated to boost fertilizer

consumption in the country over the course of next five-ten years.

The easing of sanctions imposed on Iran by the U.S. and the European

Union is expected to increasing the country's trade in fertilizers and

agricultural products in the coming years.

Gubretas owns 48.88% of Iranian Razi Petrochemical and fully

consolidates it as it has three seats out of five on Razi’s board.

Razi is the largest integrated petrochemical complex in Iran with its

TL1,045mn in revenues, TL213mn EBITDA and 20.4% EBITDA

margin as of 9M15.

The entirety of the production process (from natural gas cracking to

producing the final output) is conducted at its facilities.

Gubretas’s Iran operations constituted around 46% of consolidated

revenues and 85% of its consolidated EBITDA.

The normalization in relations between Iran and the West could

further improve profit margins as Razi could benefit from exports to

more countries with global prices and the increasing capacity

utilization rate.


4

March 16, 2016


RESEARCH


Oil and oil products

Crude Oil and Natural Gas

The oil and gas sector remains underdeveloped despite significant

improvements in recent quarters and there is considerable room to

maximize this source of revenue.

Sanctions on oil will take several months to be relaxed and years of

under investment will weigh on Iran’s export potential.

Several logistical and production difficulties will not lead to a quick

return of Iranian crude to the market.

We also factor in a steady incremental increase in Iranian exports as

Iran offloads oil in floating storage and slowly ramps-up production,

progressively adding to the oversupply in the oil market.

However, once the economy begins to pick up from 2016 onwards, we

expect import growth to be higher as consumer demand increases.

LNG

Iran intends to increase its LNG commerce

Crude Oil

The increase in Iran’s share in oil production will have a positive

impact on Tupras’ (TUPRS) raw material costs.

We believe Tupras will be one of the buyers of Iranian heavy.

The share of Iranian crude in Tupras’ total crude purchases had at

one time climbed up to the 46% levels (2012), but has now fallen back

to the 20-25% levels after sanctions.

We expect the share of Iranian crude in Tupras’ purchase to increase

going forward.

We believe Iran will be more aggressive in its new contract terms and

its previous purchase terms will be hard to repeat (70-days for

payables and payment in TL terms).

LNG

Iran’s intention to increase its LNG commerce could be positive for

Aygaz (AYGAZ).

Aygaz is currently evaluating inorganic growth opportunities both in

and outside of Turkey as well as business development alternatives in

the natural gas/LNG business.

Aygaz intends to expand its natural gas business in the medium to

long term with a focus on LNG imports and trade.


Petrochemicals

Iran's petrochemicals production capacity is around 60mn tons per

annum in 2015.

The shortage of natural gas as feedstock, ageing production units and

the problem of sanctions has led to lower capacity usage and

production.

In the 2014/2015 period the capacity utilization rate remained at 74%.

Infrastructural and regulatory problems will be difficult to solve in the

short term.

Following the necessary investments, a larger amount of basic

chemicals entering the market will put pressure on global petrochemical

product prices.

The fall in crude prices will directly impact naphtha prices. Therefore

we expect Petkim’s (PETKM) margins to improve.

However, Iran's production increase plans and increasing imports to

Turkey could limit the decrease in raw material costs.

Iran is currently active in the petrochemical market and Petkim

expects the ethylene naphtha spread to hover at USD550 per ton in

2016.

Petkim does not expect competition to intensify in the next five years

and targets a domestic market share of 22-25%.

The company currently has no intention to invest in the Iranian

petrochemical market. Iran Market Impact on Turkish Companies

Telecom

The telecom industry in Iran is marked by limited yet growing

competitiveness.

The Telecommunication Company of Iran (TCI) exclusively serves the

nation’s fixed line market. Once a state-run monopoly, TCI was publicly

offered in 2008.

MTN Irancell, 49% owned by South Africa’s MTN Group and 51% by

local investors, trails MCI by a few million clients.

Both companies have recently begun offering 3G and 4G wireless

broadband. These two wireless operators share something close to a

duopoly in the market. Two other operators, Tamim Telecom and

Taliya, serve a remaining 5mn estimated customers.

TCI had the second largest Mcap in Iran, while MCI had the fifth largest

as of June 2015. - The Iranian telecommunications sector will soon

become more completely privatized.

We do not expect any major impact and/opportunities for the Turkish

telecom companies.

Source: BMI Research, CIA Factbook, EIA, www. Projectiran.com, FT, Garanti Securities, various intermet sources


5

March 16, 2016


RESEARCH

TURKEY-IRAN

Iran, being a neighbor of Turkey, is a natural trading partner.

Iran’s vast natural resources and its proximity have always resulted in

strong commercial benefits for the two countries.

Source: EIA

The trade balance is growing in favor of Iran since 1993, increasing more

steeply since the first purchase of natural gas from Iran in 2001.

Source: EIA

Turkish exports to Iran are mainly precious or semi-presious stones

(38%), machinery, iron and steel products, boilers (27%), wood, wood

charcoal (12%), electric devices (9%) etc.

Crude oil and natural gas dominate Iranian exports to Turkey with 90% of

the total exports. Iran supplies 30% of Turkey’s oil need. The rest is

plastics (6%), copper and goods (2%), fertilizers (1%) etc.

Iraq27%

Iran26%

Turkey production

8.5%

Saudi Arabia

10%

Nigeria 8%

Kazakhstan8%

Other10%

Russia 3%

Turkey crude oil supply - 2014

Russia57%Iran

20%

Azerbaijan10%

Algeria8%

Nigeria2%

Other2%

Local1%

Turkey natural gas imports - 2013

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

14 000 000

2008 2009 2010 2011 2012 2013 2014 2015

Turkey - Iran - Import/ Export Data (000 USD)

Export to Iran Import from Iran


6

March 16, 2016


RESEARCH

Iran versus Turkey - A comparative analysis

STATISTICS TURKEY IRAN

GDP (purchasing pow er parity): USD1.576 trillion (2015 est.) USD1.382 trillion (2015 est.)

USD1.53 trillion (2014 est.) USD1.37 trillion (2014 est.)

GDP (off icial exchange rate): USD722.2 billion (2015 est.) USD396.9 billion (2015 est.)

GDP - real grow th rate: 3% (2015 est.) 0.8% (2015 est.)

2.9% (2014 est.) 4.3% (2014 est.)

GDP - per capita (PPP): USD20,500 (2015 est.) USD17,800 (2015 est.)

USD19,900 (2014 est.) USD17,600 (2014 est.)

Gross national saving: 16% of GDP (2015 est.) 31.2% of GDP (2015 est.)

14.4% of GDP (2014 est.) 34.8% of GDP (2014 est.)

GDP - composition, by end use: household consumption: 68.2% household consumption: 53.1%

government consumption: 15.4% government consumption: 10.9%

investment in f ixed capital: 19.8% investment in f ixed capital: 27.4%

investment in inventories: 0% investment in inventories: 6.6%

exports of goods and services: 28.7% exports of goods and services: 22.8%

imports of goods and services: -32.1% imports of goods and services: -20.8%

GDP - composition, by sector of origin: agriculture: 8.1% agriculture: 9.3%

industry: 27.7% industry: 38.4%

services: 64.2% (2015 est.) services: 52.3% (2013 est.)

Agriculture - products:tobacco, cotton, grain, olives, sugar beets, hazelnuts, pulses,

citrus; livestock

w heat, rice, other grains, sugar beets, sugarcane, fruits, nuts, cotton;

dairy products, w ool; caviar

Industries:

textiles, food processing, automobiles, electronics, mining (coal,

chromate, copper, boron), steel, petroleum, construction,

lumber, paper

petroleum, petrochemicals, gas, fertilizers, caustic soda, textiles,

cement and other construction materials, food processing (particularly

sugar refining and vegetable oil production), ferrous and nonferrous

metal fabrication, armaments

Industrial production grow th rate: 4.5% (2015 est.) 2.9% (2015 est.)

Labor force: 29.4 million (~ 1.2mn Turks w ork abroad (2015 est.) 29.07 million (shortage of skilled labor (2015 est.)

Labor force - by occupation: agriculture: 25.5% agriculture: 16.3%

industry: 26.2% industry: 35.1%

services: 48.4% (2010) services: 48.6% (2013 est.)

Unemployment rate: 10.4% (2015 est.) 10.5% (2015 est.)

10% (2014 est.) 10.3% (2014 est.) (ıranian Government)

Budget: revenues: USD175.4 billion revenues: USD56.11 billion

expenditures: USD187.4 billion (2015 est.) expenditures: USD70.12 billion (2015 est.)

Taxes and other revenues: 24.3% of GDP (2015 est.) 14.1% of GDP (2015 est.)

Budget surplus (+) or deficit (-): -1.7% of GDP (2015 est.) -3.5% of GDP (2015 est.)

country comparison to the w orld: 62 134

Public debt: 33.1% of GDP (2015 est.) 13.2% of GDP (2015 est.)

35% of GDP (2014 est.) 10.7% of GDP (2014 est.) (publicly guaranteed debt inc.)

Fiscal year: calendar year 21 March - 20 March

Inflation rate (consumer prices): 7.5% (2015 est.) 15.3% (2015 est.)

8.9% (2014 est.) 17.2% (2014 est.)

Current account balance: -USD32.69 billion (2015 est.) USD1.624 billion (2015 est.)

-USD46.53 billion (2014 est.) USD15.94 billion (2014 est.)

Exports: USD153.6 billion (2015 est.) USD78.99 billion (2015 est.)

USD168.9 billion (2014 est.) USD86.47 billion (2014 est.)

Exports - commodities:apparel, foodstuffs, textiles, metal manufactures, transport

equipment

petroleum 80%, chemical and petrochemical products, fruits and nuts,

carpets, cement, ore

Exports - partners:

Germany 9.6%,

Iraq 6.9%,

UK 6.3%,

Italy 4.5%,

France 4.1%,

US 4% (2014)

China 29%,

India 11.9%,

Turkey 10.4%,

Japan 6.5%,

South Korea 4.8% (2014)

Imports: USD204.3 billion (2015 est.) USD70.63 billion (2015 est.)

USD232.5 billion (2014 est.) USD52.07 billion (2014 est.)

country comparison to the w orld: 22 40

Imports - commodities:machinery, chemicals, semi-f inished goods, fuels, transport

equipment

industrial supplies, capital goods, foodstuffs and other consumer

goods, technical services

Imports - partners:

Russia 10.4%,

China 10.3%,

Germany 9.2%,

US 5.3%,

Italy 5%,

Iran 4.1% (2014)

UAE 30.6%,

China 25.5%,

Algeria 8.3%,

India 4.6%,

South Korea 4.4%,

Turkey 4.1% (2014)

Source: CIA Factbook


7

March 16, 2016


RESEARCH

Iran

A snapshot of opportunities

Investment Thesis:

The lifting of sanctions on Iran has ignited hopes for

the country’s growth. The sanctions had resulted in a

heavy burden on the Iranian economy and the lifting

could lead to a massive recovery. However, we are

aware that such a recovery will not be as fast as

perceived, aside from an increase in oil production.

The economic recovery requires a legal and regulatory

environment for sustained investment, while large-

scale investments generally require fully accessible

credit lines.

Still, the recent developments are encouraging. We expect Iran to return to the global markets in

full force in the medium term. Due to the extended period of sanctions, many sectors are ripe

with potential. Therefore, when the expected growth story materializes over the next decade,

Iran will be one of the most attractive stories in the Middle East.

Real GDP growth is now projected to decelerate from 3% in 2014/2015 to 0% in 2015/2016 because

of the drop in oil prices and delayed investments during the sanctions period. We believe 2016 will

be a transition year for Iran.

The lifting of economic sanctions is expected to initially help increase oil production and exports and

then lower trade and financial transaction costs. Access to foreign assets will also be restored.

Real GDP growth is estimated to hover at 4-4.4% in the coming years following the massive

contractions since 2012 (start of sanctions).

Still, the decline in oil prices will weaken the growth outlook in the near term.

Structural reforms are necessary to strengthen the economy, to reduce inflation and to maintain

growth.

Iranian fiscal year ends on March 20

WEO: Word Energy Outlook:IEA

Source: Iranian authorities and IMF estimates & projections

Iran Macroeconomic Indicators Est. Proj. Proj. Proj. Proj. Proj. Proj.

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21

National accounts (annual change in %)

Nom. GDP at mrkt prices (in trillion Iranian rials) 9,421 11,034 11,992 14,043 15,935 17,695 19,372 21,150

Real GDP at factor cost -1.9 3 0.0 4.3 4 4.1 4.4 4.4

Real oil and gas GDP -8.9 4.8 0.5 16.9 8.8 2.9 2.5 2.5

Real non-oil GDP -1.1 2.8 -0.1 2.8 3.4 4.3 4.6 4.6

CPI inflation (end of period) 19.7 16.2 14 9 7.5 5 5 5.0

Unemployment rate (as a % of labor force) 10.4 10.6 11.9 12.5 12.6 12.4 12.2 11.9

External sector (In USD bn)

Current account balance 26.5 15.9 4.5 8.5 11.7 13.2 12.5 12.1

In percentage of GDP at market prices 7.8 4.1 1.3 2.1 2.6 2.8 2.4 2.2

Exports of goods and services 100.1 93.9 74.3 90.5 104 111.9 117.8 124.4

Imports of goods and services -75.2 -80.1 -72.5 -85.9 -97.5 -104.6 -111.1 -118.1

External and publicly guaranteed debt 6.7 5.1 8.9 10.7 13.3 15.9 18.7 21.8

Short-term debt 0.8 0.4 4.6 6.2 7.8 9.3 10.7 12.2

Oil and gas sector

Total oil and gas exports (bn) 64.9 55.4 35.3 48.6 59.8 65.3 68.6 71.2

WEO* Oil price adj. for Iranian year (per barrel) 103.7 83.3 50.7 52.9 57.6 61.0 62.6 63.0

Average oil export price (per barrel) 101.1 79.1 49.7 52.9 57.6 61 62.6 63.0

Crude oil exports (in mn bbl/day) 1.13 1.16 1.24 1.81 2.13 2.22 2.29 2.4

Crude oil production (in mn bbl/day) 2.85 3.09 3.11 3.7 4.0 4.2 4.3 4.4

March 9, 2016

8


RESEARCH

March 16, 2016

Iran

30 years of international sanctions on Iran and future inspection timeline

Source:AFP/Alain Bommenel

1979 1995 1996 2002 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016

Seize of

hostages

for 444

days at the

US

embassy in

Tehran

Iranian

assets in

the US

banks are

frozen

Total

economic

ambargo

Sanctions

against

foreign

businesses

investing in

oil and gas

Secret

nuclear

sites in Iran

Nuclear

ballistic

program

US sanctions UN sanctions EU sanctions

Arms sales,

financial

assets

Assets for

civilian-

military use

Ban on US

banks taking

intermediary role

Sanctions for oil

Industry

Oil industry

technology

transfer

Oil embargo

Iran Central

Bank assets are

frozen

Bank to bank

transactions

Automobile

Iranian currency

Heavy weapons

Tanks, missiles,

fighter aircraft

Suspension of

sanctions on

financial assets,

gold,

petrochemicals

July

14,2015

Iran agrees

not to

acquire

nuvlear

weapons

Jan 16, 2016

end of

sanctions

2015 2016 2020 2023 2025 2030 2040

July 14

agreement

Lifting of

economic

sanctions

starts

19,000

centrifuges

were cut

5,060

centrifuges

retained

and will be

maintained

for 10 years

End of

embargo on

conventional

arms

This process is reversible at any time

End of

embargo on

ballistic

missiles

UN approval is needed

# of centrifuges no

longer limited to

5,060.

End to monitoring of

acquisition of

sensitive nuclear

materials

Limit on enriched

uranium stocks lifted

End to ban on

developing heavy

water reactors

End of

embargo on

ballistic

missiles

Supplement

ary IAEA

inspections

end.

A supervised nuclear programme


9

March 16, 2016


RESEARCH

What will be the impact of lifting of sanctions on Iran?

The sanctions on Iran were lifted on January 17

On January 17, the nuclear watchdog, the IAEA, said Iran had complied

with all of the terms under the deal reached with six world powers

(P5+1)(China, France, Russia, the United Kingdom, the United States

plus Germany) to scale down its nuclear program and as a result, the

economic sanctions were lifted. Iran reduced its low-enriched uranium

stockpile by 98% with the bulk of the uranium exported to Russia. Iran

also dismantled 12,000 centrifuges used to enrich uranium. It also

removed and disabled the core of the nuclear reactor in Arak Iran.

In brief, with the lifting of the nuclear-related sanctions:

- Some Iranian banks can once again be a part of the Society for

Worldwide Interbank Financial Telecommunication (SWIFT) system to

conduct financial transactions electronically in the global markets.

- Iran can now access its foreign reserves held in global banks.

According to the U.S. Department of the Treasury, Iran's Central

Bank has USD100bn to USD125bn in foreign exchange assets

globally, but the US Treasury estimates Iran's usable liquid assets to

be just slightly more than USD50bn.

- Non-U.S. companies can invest in Iran's oil and natural gas industry,

including the sale, supply and transfer of equipment and technology.

- Countries within the EU and elsewhere that had stopped importing

energy resources from Iran can again import Iranian oil, natural gas

and petrochemical products. Countries that are already importing

from Iran can increase their purchases.

- European protection and indemnity (P&I) clubs can provide Iranian oil

tankers with insurance and reinsurance.

The EU withdrew the restrictions on trade and investment in oil,

petrochemicals, metals, shipping, shipbuilding and other transportation

industries as well as banking, insurance and other related services,

including Iran’s ability to move money electronically overseas. Still, we

note that while Iranian banks can buy and sell USD, they are still denied

access to the American banking system, an important conduit for global

commerce.

How quickly will Iran benefit economically from these changes?

The lifting of the sanctions is expected to diminish the psychological cloud

over Iran even if it is not felt immediately. The most immediate benefit to

Iran will be access to roughly USD100bn of its money that was frozen in

foreign accounts. Analysts estimate that roughly half of this amount will go

to other obligations like payments to foreign creditors including China

(http://internationalmoneytransfers.org/iran/).

Iran will also be able to sell as much oil as it likes. However, with the

collapse of the oil market, prices have fallen by almost 70% in the last 19

months (from USD114/bbl to USD34/bbl). Iran will receive less revenues

and the return of Iranian oil supply to the market will jeopardize further

recovery in the crude oil prices.


10

March 16, 2016


RESEARCH

“Iran’s gains from the lifting of the economic restrictions are largest in per

capita terms, resulting in an increase in per capita welfare of 3.7% or

slightly more than USD17.7bn in total (in 2011 US$). The gain stems

mainly from the lifting of the EU oil embargo and the liberalization of cross

-border trade in financial and transport services, each of which contributes

1.6-1.7% to per capita welfare or about USD8bn, while the reduction in

trade costs adds less than a half of a percent to per capita welfare or $2

billion.

Net oil importers gain while net oil exporters lose as the world price of oil

declines by about 13% due to the additional amount of oil sold on the

global market.

The lifting of sanctions will have the strongest effect on oil production in

Iran, and petroleum and coal products in Israel, the EU, and the US.

Increases in export volumes will be significant, especially for cross-border

exports of financial and transport services. However, increases of

merchandise exports are also substantial: 17 percent for agricultural and

food products, 3 percent for metals and mineral products, 10 percent for

machinery, 17 percent for textiles, and 25 percent for light manufactures.”

Source: Lifting Economic sanctions on Iran, Global Effects and Strategic Responses,

Worldbank Group, February 2016)

Medium-Term Baseline Scenario

Source: World Bank Group

Welfare effects of lifting Iran's sanctions

USD mn per capita

(%) USD mn

per capita

(%) USD mn

per capita

(%) USD mn

per capita

(%)

Iran 8,174 1.72 1,968 0.41 7,571 1.60 17,713 3.73

USA 33,073 0.24 486 0 483 0.00 34,042 0.24

EU28 65,891 0.41 654 0 783 0.00 67,328 0.42

Russia -29,873 -1.61 -320 -0.02 -101 -0.01 -30,294 -1.63

Israel 1,107 0.45 14 0.01 16 0.01 1,137 0.46

Non-OPEC oil exporters -23,659 -0.67 -271 -0.01 -19 0.00 -23,949 -0.67

Rest of OECD 34,006 0.36 315 0 345 0.00 34,666 0.37

GCC OPEC -54,321 -3.88 -553 -0.04 -135 -0.01 -55,009 -3.93

Developing MENA OPEC -4,991 -2.15 -58 -0.02 -6 0.00 -5,055 -2.17

Other OPEC -19,051 -2.84 -227 -0.03 -30 0.00 -19,308 -2.88

MENA Oil Importers 1,187 0.31 17 0 36 0.01 1,240 0.32

Other Developing MENA -9,529 -2.71 -103 -0.03 -1 0.00 -9,633 -2.74

Rest of developing w orld 38,737 0.22 1,081 0.01 854 0.00 40,672 0.24

World 40,751 0.06 3,003 0.00 9,796 0.01 53,550 0.08

Total EU oil embargo Merchandise trade

costs

Liberalization in

cross-border trade

in services


11

March 16, 2016


RESEARCH

Recently, Iranian banks have started reconnecting to the SWIFT

payment system

The worldwide transaction network, SWIFT, a cooperative based in

Belgium, had cut off Iran’s banks back in March 2012 as international

sanctions were tightened against Tehran over its disputed nuclear

program.

On February 13, SWIFT reconnected a number of Iranian banks, including

the Central Bank of the Islamic Republic of Iran to its system, allowing

them to resume cross-border transactions with foreign banks.

Other Iranian banks are still in the process. Meanwhile, the reconnection

will at least lead to the resumption of the normal banking business.

The nuclear deal says non U.S. banks may resume trading with Iran. The

U.S. government still prevents U.S. nationals, banks and insurers, from

trading with Iran. It also prohibits any trades with Iran in U.S. dollars from

being processed via the U.S. financial system (http://www.reuters.com/

article/us-iran-britain-trade-idUSKCN0VD2K2).

A growth story in the Middle East

Iran, with its strong hydrocarbon supply, presents a strong and

sustainable story thanks to pent up demand in most of its consumer

sectors, its young population and high education level leading to a

skilled workforce. Looking at Iran from this angle, we can see

similarities between Turkey in the 1990s-2000s, when growth

occurred on the back of consumer demand and underpenetrated

industries. We believe Iran will be the next promising global growth

story.

The sanctions have resulted in a significant reduction in the government's

public infrastructure investment budget. Economic growth will come from

the increase in the consumption of consumer goods (automotive, white

goods, telecommunications etc.) and exports driven by oil and oil related

products.

Iran’s GDP growth trend generally follows its Middle Eastern and North

African peers, except for the sanctions period when this trend

deteriorated. Starting with the economic recovery in 2015 and onwards,

we expect Iranian GDP growth to outpace the growth in the Middle East

and North Africa.


12

March 16, 2016


RESEARCH

The rapid and visible reaction to Iranian economic growth will be through

the increase of its oil and non-oil production (petrochemical) and exports,

the decrease in financial transaction costs, capital inflows, foreign direct

investment and the release of access to foreign assets, which will play an

important role in boosting Iran’s GDP.

Real GDP growth is then projected to accelerate to 4–4.5% in 2016-2017

and to average 4% throughout the medium term. Meanwhile, we also

expect Iran’s other export products to add more value to the country’s

export revenues which have also been affected by the embargo.

Robust Foreign Interest

Currently, there is growing international interest in Iran regarding almost

every sector, but the country’s long years of isolation and

underinvestment will prevent an immediate boom.

The Iranian government has been hosting many of the world’s leaders,

especially those from Europe. Since the lifting of the sanctions:

Iran has signed an agreement with “Airbus” for the acquisition of a full

range of 118 new Airbus airliners (73 wide-body and 45 single-aisle)

on January 16, 2016. This includes pilot and maintenance training and

support services to help the aircraft enter into service and operate

efficiently.

Meanwhile, Italian prime minister Matteo Renzi will visit Tehran in April

following Iranian President Rouhani’s four-day trip to Italy and France.

Italian business leaders, including the heads of the oil firm Eni

(ENI.MI) and carmaker Fiat Chrysler Automobiles (FCHA.MI),

attended a dinner for Rouhani in Rome on January 25.

Iran held meetings with the President of Azerbaijan and signed 11

memoranda of understanding (MoUs) for cooperation in various

sectors including transportation, electricity swap, health and medical

sciences, oil, gas and petrochemical as well as customs and social

and women’s affairs on February 22, 2016.

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E2016 E2017 E

GDP Growth

Iran Middle East & North Afr ica

Source: Worldbank

February 04, 2016


13

March 16, 2016


RESEARCH

On February 23, Islamic Republic of Iran Railways (IRIR) and a

German company signed an MoU to cooperate on improving the

railway’s software system and for the implementation of railway

development projects.

Swiss Confederation President Johann Schneider-Amman visited Iran

on February 26-28 to develop Iran’s relations with Switzerland.

President Amman backs Iran joining the World Trade Organization.

Amman met with the Iranian Chamber of Commerce, Industries,

Mines and Agriculture and stressed cooperation in the medical,

environmental, food and water industries.

We believe the bilateral meetings with global leaders in Iran will continue

at full speed in the rest of 2016.

One of the largest proven reserve holders of crude oil

Iran holds an estimated 158bn barrels of proven crude oil reserves,

representing almost 10% of the world's crude oil reserves and 13% of

OPEC’s reserves.

Iran declared that it will increase its oil production by 500mn bbl per day.

However, we believe the initial post sanctions oil exports will come from

its inventory. We will be watching out for solid production increases once

the inventories have been depleted.

Almost 70% of Iran's crude oil reserves are located onshore and the

remainder are offshore, mostly in the Persian Gulf. Iran also has proven

and probable oil reserves of approximately 500mn barrels mostly

offshore in the Caspian Sea, but the exploration and development of

these reserves have been at a standstill because of territorial disputes

298

266

172

158

144

102

98

80

48

37

0 50 100 150 200 250 300 350

Venezuela

S.Arabia

Canada

Iran

Iraq

Kuwait

UAE

Russia

Libya

Nigeria

Largest proven reserve holders of crude oilbillion bbl

Source: Oil and Gas Journal, January 2015

February 04, 2016

USA3%

Canada10%

Venezuela17%

Russian Federation

6%Iran9%Iraq

9%

Kuwait6%

Saudi Arabia16%

United Arab

Emirates6%

Libya3%

Nigeria2%

Rest13%

Total Proved Reserves

Source: BP Statistical Review,2014


14

March 16, 2016


RESEARCH

with neighboring Azerbaijan and Turkmenistan. Iran also shares a number

of onshore and offshore fields with neighboring countries,

including Iraq, Qatar, Kuwait and Saudi Arabia.

The return of Iranian oil exports to the pre-2012 levels could eventually

add 1mn barrels per day to the global oil market (A total of 93mn bbl in

2014. Source: EIA) while increasing OPEC production by 2.7% and world

production by 1.1%, putting pressure on oil prices. There will also be

regional effects on Iran’s major trading partners, including the United Arab

Emirates and other countries in the Middle East and Central Asia, through

an expansion of oil and non-oil trade as sanctions-induced trading costs

come down. Finally, there will be effects on Iran’s economy as barriers to

trade are relaxed and the production mix shifts in favor of goods that fetch

high prices abroad.

Second largest natural gas reserve holder after Russia

Iran's estimated proven natural gas reserves were 1,201trn cubic feet,

second after Russia. Iran holds 17% of the world's proven natural gas

reserves and more than one-third of OPEC's reserves. Iran's largest

natural gas field, South Pars, is estimated to hold almost 40% of Iran's

gas reserves. Most of Iran's natural gas reserves are undeveloped

according to the U.S. Energy Information Administration (EIA) report.

On the natural gas front, Iran lacks the export infrastructure of its

competitors, such as Russia and Qatar holding 18% and 13% of the world

proven reserves , respectively.

Source: Oil and Gas Journal

1,688

1,201

872

339

294

265

215

197

180

164

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Russia

Iran

Qatar

USA

S. Arabia

Turkmenistan

UAE

Venezuela

Nigeria

China

Largest proven reserve holders of natural gas, end 2014trillion cubic feet

February 04, 2016

Marginal production cost by country (USD/bbl)

Marginal Production Cost 2014

Russia Arctic 120

Onshore 18

Europe Biodiesel 110

Ethanol 103

Canada Sand 90

Brazil Ethanol 66

Offshore 80

United States Deep-water 57

Shale 73

Angola Offshore 40

Ecuador Total 20

Venezuela Total 20

Kazakhstan Total 16

Nigeria Deep-water 30

Onshore 15

Oman Total 15

Qatar Total 15

Iran Total 15

Algeria Total 15

UAE Total 7

Iraq Total 6

Saudi Arabia Onshore 3

Source:http://knoema.com/vhzbeig/oil-statistics-production-costs-breakeven-price - Oil Statistics (Production Costs, Breakeven Price)


15

March 16, 2016


RESEARCH

Russia and Qatar have access to the international network in addition to

LNG export availabilities. Tehran is exploring several options to help the

country “join the international LNG club,” according to Alireza Kameli,

Managing Director of National Iranian Gas Export Co.

There is currently one semi-finished LNG project which had come on line

before the sanctions were introduced. Currently 40% of the project is

completed and the remaining could take three-four years to complete

according to Alireza Kameli.

Meanwhile, operational and political hurdles will present obstacles to

foreign investors. Specific to the construction industry, companies that are

considering taking part in long-term infrastructure projects will be

challenged by corruption, bureaucracy, the lack of transparency and

Iran's weak institutional framework.

Iran’s natural resources are mainly state owned. The state owned

National Iranian Oil Company (NIOC) is responsible for all upstream

oil and natural gas projects.

Iran will change its oil contract model to allow Iranian oil companies to

participate in all phases of upstream projects, including production, the

bringing in of know-how as well as the development of state of the art

technology to expand capacity in the oil and natural gas fields.

We expect Iran's business environment to improve significantly, but

critical risks will remain which will prevent an immediate rush to the

Iranian market.

Iran's state-owned energy companies

Company Activity

National Iranian Oil

Company (NIOC)

NIOC controls oil and natural gas upstream activities, as well as oil

downstream activities, through its subsidiaries.

National Iranian Gas

Company (NIGC)

NIGC controls natural gas downstream activities. The company's

objective is to process, deliver, and distribute gas for domestic use.

NIGC operates through several subsidiaries.

National Petrochemical

Company (NPC)

NPC operates several petrochemical complexes through its subsidi-

aries. Iran exported 13 million tons of petrochemicals in 2013.

Source: U.S. Energy Information Administration, Facts Global Energy, and Arab Oil and Gas

Directory.


16

March 16, 2016


RESEARCH

Selected industries for analysis

We believe lifting of sanctions against Iran globally, will most likely

benefit the following industries of Turkey. These are:

Automobiles and parts,

Airlines,

Banking,

Construction,

Energy

Oil and oil products

Telecom sectors

Our reasonings and possible channels through which we expect the

opportunities to rise are cited below.

Automotive:

Iran is the biggest car market in the Middle East, selling 900,000

passenger units in 2014 and with a production of 1.4m in 2015, according

to LMC Automotive. It has a substantial educated middle-class driving the

sales market on the back of pent-up demand. Despite holding the world's

fourth largest oil reserves, Iran has struggled to meet growing domestic

fuel demand owing to the burden of subsidies and inadequate refining

capacity.

Iran’s car market was dominated by French carmakers Renault and

Peugeot, which shipped “complete knockdown” (CKD) kits into the

country to be assembled by local manufacturers, such as Iran Khodro and

Saipa.

Scarce imported parts, export bans, controls on car prices, high interest

rates on loans as well as a lack of consumer purchasing power had all

taken a toll on the country’s industry. However, light vehicle production

was up 31% yoy in the first quarter. A wider lifting of sanctions is

expected to extend that run.

Recently, automotive companies have been in talks with Iranian

authorities stressing that they want to take part in the Iranian automotive

market. Iran has an enormous market potential with its aging vehicle park,

substandard parts supply and position as a strategic regional export hub.

Additionally, the country boasts a massive young and educated middle

class, which is demanding better vehicles. The automotive market could

face substantial demand increases when a regulated market is

established.

We believe a collaboration in terms of JVs and supplier-OEM partnerships

could be the most feasible choice for the Iranian market. We also expect

the global companies to team up with a local partner which could bring

competitiveness in terms of market know-how, know-how on consumer


17

March 16, 2016


RESEARCH

behavior and could be vital in establishing solid relationships with the

legal entities (competition board, ministry of transportation, tax authorities

etc.). We also expect the Iranian authorities to push localization and

domestic production since that will yield job creation and wealth

improvement. Meanwhile, local players will have limited access to capital

and are expected to favor foreign partnerships.

Almost 85% of the vehicles sold in Iran are priced below 500mn rials

(USD16,650) and 99% are priced below 2bn rials (USD66,000). It is

therefore important to ensure pricing competitiveness to make inroads

into the volume game. New vehicle segments, primarily aimed at the

young, urban, middle class population, are expected to be in the under

USD25,000 price range.

According to a report prepared by Research and Markets, Renault and

Volkswagen announced their desires to enter the local market at full

steam.

We believe Turkish automotive producers could be avidly interested in the

Iran automotive and parts market. We believe their product range,

capacity availability, price for quality and geographical proximity create a

competitive advantage compared to other competitors. However the

decision to move to the Iran market will be made on the major brand level.

Accordingly, we will be eyeing on the statements of the Ford Motor

Company for Ford Otosan (FROTO.IS) and Fiat Chrysler Automobiles

(FCA) for Tofas. For tires and other spare parts there could be

opportunities in Iran both for the OEM and replacement market.

Airline Industry

Right after the lifting of the sanctions on January 28, Airbus signed a

USD25bn deal to sell 118 airplanes to Iran. The order included 73 wide-

body and 45 narrow-body jets, including 12 A380 superjumbos.

Iranian Transportation Minister Abbas Akhoundi said that Iran will need

400 medium and long-range planes and 100 short-haul jets in the next

few years. An embargo imposed in 1995 has prevented Western

manufacturers from selling equipment and spare parts to Iranian

companies. Iranian airlines have about 140 airplanes that are on average

20 years-old, with many needing to be retired.

Iran has a total of 319 airports, of which 140 have paved runways. The

country has yet to develop a significant tourism sector with airports mainly

used by business travellers. Several European airlines, including Air

France-KLM, plan to resume flights to Iran this year. Many European

companies are lining up to strike deals with Iran following the lifting of the

sanctions. Currently, Iranians mainly use London, Amsterdam, Frankfurt,

Paris, Istanbul and Dubai for transit purposes


18

March 16, 2016


RESEARCH

There are plans to expand Iran's main airports with the Iranian Airports

Holding Company looking to attract in excess of USD1bn in investments

for the aviation sector. A significant expansion project is the Imam

Khomeini Airport in Tehran, whose capacity will be tripled to 20mn

passengers per year. Such projects could create interest for

companies including TAV Construction, Anel Elektrik (ANELE, NR)

Tekfen (TKFEN, MP) and to a lesser extent Enka Insaat (ENKAI, MP).

Banking

The banking system seems to be the most important bottleneck for the

future. In an interview with the FT on January 19, Iran’s Central Bank

Governor said that the country’s banks have become “outdated” under the

sanctions regime and added that they need to be reintegrated with foreign

banks. Furthermore, he added that the banking regulations and

compliance must be brought into line with international standards “by

measures like fully implementing the pillars [of the Basel accord on bank

safety requirements].” Iran currently uses Basel I rules for risk-

management and capital requirements for its accounting standards, while

U.S. and European lenders are shifting to Basel III standards.

Iran’s Central Bank has tried to enforce Basel III recommendations

governing bank safety requirements and has put pressure on banks to

increase capital by selling property. Still the progress was said to be slow.

Iran must implement measures to strengthen the banking sector’s

regulation, supervision and risk management.

Therefore, although Iran will again be connected to the global financial

system it is unclear how many banks will re-engage with Iranian

businesses. According to a BBC article, over the last 10 years banks have

paid USD14bn in fines or out-of-court settlements for breaking the

sanctions. U.S. financial and judicial authorities have slapped hefty

penalties on two dozen European banks for bypassing U.S. sanctions on

Iran, Sudan and Cuba. According to the article, French bank BNP

Paribas' bill alone amounted to USD9bn and many companies are waiting

for detailed guidelines by the U.S. Treasury's Financial and Asset Control

Office (OFAC) before doing business with Iran.


19

March 16, 2016


RESEARCH

Under such circumstances, all growth promising businesses and projects

could be delayed due to the ongoing sanctions on some Iranian banks.

For large-scale projects, including infrastructure, railways, refining etc.

companies will be searching for project finance availabilities through

financial institutions. When big banks are out of the league, it will be

impossible to complete or even start new projects solely with micro

credits. Foreign investment will only take place when standards,

guarantees and assurances are in place.

Iranian Growth and Inflation

Source: Iran Central Bank, Focus Economics

Iranian Central Bank presentations show that plans to decrease inflation

and to increase growth are on the government’s agenda. Therefore, such

achievements will only be successful under a regulated banking

environment. We may see expansion, M&A and other opportunities for

Turkish banks in the future in the Iranian market.

Construction

Iran has a strong potential to become one of the important construction

markets thanks to its vast oil and natural gas reserves and strong potential

to rebuild. We believe foreign investment will face limitations and

bureaucratic hurdles. A strong institutional framework, an investment

friendly environment, legal transparency, project credibility, credit

availabilities and government guarantees will be important to foster

investment. If Iran fails to implement any of these, large–scale

infrastructure projects could be delayed. Currently, Indian, French and

Turkish companies are showing a greater interest in returning to the

Iranian construction market.

We believe Turkish companies will be at an advantage especially for

urban transformation projects, the construction of new residential

complexes and the construction of infrastructure including railways, roads,

dams etc. Recall that a USD1.8bn highway project was awarded to

0

5

10

15

20

25

30

35

40

-8

-6

-4

-2

0

2

4

6

8

2010 2011 2012 2013 2014 2015E 2016E 2017E

Economic Growth (GDP, annual variation in %)

Inflation Rate (CPI, annual variation in %) - rhs


20

March 16, 2016


RESEARCH

Turkish Bergiz Insaat in January 2015.

Source: www.project-iran.com, 2015

In the international marketing and sales of “Project Iran 2015” conference

held in Tehran on June 8-11, 2015, Iran’s large-scale construction

projects were listed as follows:

Housing & Urban Development

The severe shortage in housing demand stands at around 1.5mn

housing units per year, whereas only 200,000 units are completed

annually.

4mn new residential units need to be built to create a balance between

supply and demand.

USD143bn needs to be allocated in the next 10 years for the

restoration of 14,000 meters of critically decaying buildings.

USD14bn has been earmarked for water projects over the next few

years.

USD5bn has been allocated for expanding the wastewater treatment

infrastructure.

Transportation

The government is planning to undertake several projects including

highways, arterial and rural roads, railroads, ports, and airport facilities

with significant investments to develop the national road network as well

as to improve the connections to neighboring countries.

USD23bn is needed for the completion of Gorgan-Inche Boroun

railway.

745km of freeways.

5,626km of highways.

2,970km of main roads.

USD2.5bn is needed to build two additional transit terminals at the

Imam Khomeini International airport.

Construction Sector in Numbers

Growth forecast over the next five years 4.20%

Contribution to GDP 5.70%

New housing units built per day 2,000

Average annual demand for housing units in the next five years

1.2mn

Expected construction market size by 2016 USD154.4bn

Number of construction infrastructure tenders announced in 2014

475


21

March 16, 2016


RESEARCH

Energy

Iran ranks as the 19th largest producer and 20th largest consumer of

electricity in the world. Iran’s current installed capacity stands at 73.2GW

(end-2014) almost equivalent to Turkey’s 73.1GW capacity. While natural

gas comprises 67% of its total generation, 25% is oil, 5% is hydroelectric

power, 3% is nuclear and 1% of the total generation is coal and

renewables.

A study by the Iranian Ministry of Energy indicated that between 15-

20GW of capacity should be added in Iran in the next 20

years. Generation is achieved through using natural resources, but

foreign investment is currently limited. We believe there would be fewer

opportunities for foreign investment in the generation business compared

to other industries.

Oil and Oil products

Oil and gas exports currently comprise 80% of the total exports. The

remaining 20% comes from chemical and petrochemical products, fruits

and nuts and carpet exports. Reforms are necessary to strengthen the

economy, employment and to reduce inflation. The delay in the legal

reforms and the lack of the establishment of a competitive environment

will prevent an immediate boom.

We believe there are strong opportunities in the oil and gas industries that

attract most of the attention both downstream and upstream.

Status of new upstream

crude oil projectsDeveloper

Plateau output

(000 b/d)Est. Plateau year

Yadavaran phase 1 Sinopec 85 2016

Yadavaran phase 2 Sinopec 95 2019-20

Yadavaran phase 3 Sinopec 120 post 2020

Azar phase 1 NIOC subsidiaries 30 2016

North Yaran Persian Energy 30 2016

South Yaran NIOC subsidiaries 55 2018

North Azadegan phase 1 CNPC 75 2016-17

North Azadegan phase 2 CNPC 72 2019

South Azadegan phase 1 no developer 150 NA

South Azadegan phase 2 no developer 110 NA

Forouzan NIOC subsidiaries 100 2017-18

South Pars (oil layer)

phase 1 PEDCO 35 2017-18

The Yadavaran, South Azadegan, and Forouzan fields are currently producing crude oil, but below theirplateau levels.CNPC is China National Petroleum Corporation. PEDCO is PetroIran Development Company. Sinopec isChina Petroleum &Chemical Corporation.Source: Facts Global Energy


22

March 16, 2016


RESEARCH

While Iran plans to increase its oil production by 0.5mn barrels a day, the

country is planning to increase its refining activities overseas as well. Iran

and Spain are currently discussing a plan to build a joint oil refinery in the

Strait of Gibraltar. By investing in overseas refineries, Iran will be able to

increase its crude exports and the Iranian Oil Ministry is planning to invest

in refineries in countries whose crude oil is being supplied by Iran. The

acquisition of refineries in other countries would guarantee Iran’s long-

term crude oil sales.

Telecom

The telecom industry in Iran is marked by limited yet growing

competitiveness. The Telecommunication Company of Iran (TCI)

exclusively serves the nation’s fixed line market. Once a state-run

monopoly, TCI was publicly offered in 2008.

A subsidiary of TCI, the Mobile Telecommunication Company of Iran

(MCI), leads the mobile market, although by a narrowing margin. MTN

Irancell, 49% owned by South Africa’s MTN Group and 51% by local

investors, trails MCI by a few million clients. Both companies have

recently begun offering 3G and 4G wireless broadband. These two

wireless operators share something close to a duopoly in the market. Two

other operators, Tamim Telecom and Taliya, serve a remaining 5mn

estimated customers.

TCI had the second largest Mcap in Iran, while MCI had the fifth largest

as of June 2015. The Iranian telecommunications sector will soon become

more completely privatized. Despite the lifting of sanctions, Western

telecoms must still not run afoul of the remaining U.S. sanctions.

Oil refineries in Iran

Refinery Crude distillation

capacity (000 bbl/d)

Abadan 400

Isfahan 375

Bandar Abbas 330

Tehran 250

Arak 250

Borzuyeh 120

Tabriz 110

Shiraz 60

Lavan Island 60

BooAli Sina 34

Kermanshah 22

Aras 2 10

Booshehr 10

Aras 1 5

Yazd 3

Total 2,039

Source: Facts Global energy, December 2014


23

March 16, 2016


RESEARCH

Sectoral dynamics and possible implication for Turkish BIST

companies that have direct or indirect ties to the Iran story are:

Airports in Iran have lacked investments for years and the fleet of

Iranian carriers is among the oldest in the world (more than 20 years

old). The average age of the Turkish fleet is around seven years.

Therefore, after the sanctions have been lifted new airport investments

are highly likely. The Iranian government has already placed orders for

hundreds of aircraft. In that regard, there could be opportunities for

TAV Airports (TAVHL, MP). Considering the time required for the

investment in airport infrastructure, Iran is unlikely to be an emerging

hub in the region in the short term. Given the increased business

activity in the region after the absence of sanctions, this would be

positive for Turkish Airlines (THYAO, OP) and Pegasus Airlines

(PGSUS, MP) in terms of passenger flow.

Arcelik (ARCLK,OP) has been evaluating the potential in Iran for the

last couple of months. Arcelik used to realize around USD100mn in

revenues from the country before the sanctions. The Company sees a

similar market potential in Iran compared to the Turkish WGs market.

The Iranian WGs market (estimated to be 3-3.5mn) is around half of the

Turkish market. The Iranian market prefers value-added WGs products

which offer a higher margin. Arcelik has plans in the region for 2H16

since the sanctions have been lifted. However, it is skeptical regarding

the data on the Iranian market and the regulatory issues in terms of

transactions.

We believe Turkish automotive producers could be avidly interested in

the Iran automotive and parts market. We believe their product range,

capacity availability, price for quality and geographical proximity create

a competitive advantage compared to other competitors. However the

decision to move to the Iran market will be made on the major brand

level. Tofas (TOASO, OP) CEO Cengiz Eroldu very recently confirmed

that they have been evaluating different global markets for export

purposes including Iran. However, the final decision will be made at

the Fiat Chrysler Automobiles (FCA) level.

Gubretas (GUBRF, MP) Gubretas owns 48.88% of Iranian Razi

Petrochemical and fully consolidates as it has three seats out of the five

on the board of Razi. Razi is the largest integrated petrochemical

complex in Iran with its TL1,045mn in revenues, TL213mn EBITDA and

20.4% EBITDA margin as of 9M15. It directly procures raw materials

and has access to cut-price natural gas. The entirety of the production

process (from natural gas cracking to producing the final output) is

conducted at its facilities. Gubretas’s Iran operations constituted around

46% of consolidated revenues and 85% of its consolidated EBITDA.

The normalization in relations between Iran and the West could further

improve profit margins as Razi could benefit from the wider exporting

countries with global prices and the increasing capacity utilization rate.

The increase in Iran’s share in oil production will have a positive impact

on Tupras’ (TUPRS, OP) raw material costs. We believe Tupras will

be one of the buyers of Iranian heavy. The share of Iranian crude in

Tupras’ total crude purchases had at one time climbed up to the 46%


24

March 16, 2016


RESEARCH

levels (2012), but has now fallen back to the 20-25% levels. However,

the agreement terms will be a determinant for Iranian crude purchases.

We believe Iran will be more aggressive in its new contract terms and

its previous purchase terms will be hard to repeat (70-days for payables

and payment in TL terms).

Iran’s intention to increase its LNG commerce could be interesting for

Aygaz (AYGAZ, OP). Aygaz is currently evaluating inorganic growth

opportunities both in and outside of Turkey as well as business

development alternatives in the natural gas/LNG business. Aygaz

intends to expand its natural gas business in the medium to long term

with a focus on LNG imports and trade.

While the fall in crude prices will directly impact naphtha prices, we

expect Petkim’s (PETKM, OP) margins to improve. However,

increasing petrochemical imports to Turkey might limit this positive

impact. Iran is currently active in the petrochemical market and Petkim

expects the ethylene naphtha spread to hover at USD550 per ton in

2016. Iran started investing in its petrochemical facilities, increasing

capacity, product range etc. However, Petkim does not expect the

competition to intensify in the next five years and targets a domestic

market share of 22-25%. The company currently has no intention to

invest in the Iranian petrochemical market.

Halkbank (HALKB, MP) has around USD2bn in demand deposits on

its balance sheet acquired from trade with Iran. As we know, trade

between Turkey and Iran and also India has been conducted via

Halkbank accounts, which provides a substantial no-cost demand

deposit for Halkbank. While Iranian trade lowers Halkbank’s funding

costs, Halkbank also charges commission fees for these trades. The

lifting of the sanctions will be positive for Halkbank as the bank handles

these trade transactions. According to our talks with Halkbank’s

management, they also expect to see increasing volumes in the trade

balance with Iran in the coming period, which is positive for Halkbank.

Enka Insaat (ENKAI, MP), Anel Elektrik (ANELE, N/R), Tekfen

Insaat (TKFEN, MP) could evaluate opportunities in the Iranian

construction market. Housing and urban development projects,

infrastructure projects (highway, dam, airport, constructions etc.),

energy projects could be opportunities for the Turkish companies.

However, for these large-scale projects, credit lines should be made

and project finance and guarantee issues should be settled.

Kardemir (KRDMD, MP) could also be positively impacted by higher

rail sales to Iran. Iran wants to splurge up to USD8bn over the next six

years to revamp and expand its railway network. There are plans to

stretch out the nationwide railroad line to 25,000km by 2025 from under

15,000km now. Tehran has more than 150km of metro rail which ferries

2mn commuters every day. The network is being expanded and is

expected to reach 400km when it is completed.

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.

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

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

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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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