Arçelik Report

·         Domestic market trends: The latest White Goods Association data pointed to 10% y/y contraction in domestic demand in Turkey in July 2012 (-1% in Jan-Jul ’12). Arcelik states that this is the wholesale data and the data they track at the dealer level (retail data) is much better.

·         Market share gains in Europe is not just because consumers are trading down but also because Arcelik has improved distribution coverage significantly. The retailers win from extended warranties they sell for Arcelik products as the product quality is good. That has enabled them to allocate more shelf space to Arcelik products. Therefore, Arcelik has been able to put a bigger selection on display rather than a limited number as before. That is what is usually referred to as ‘improved mix’.

·         Working capital: The company expects a significant improvement in working capital requirements in 3Q and 4Q. As a reminder, working capital needs went up significantly since 2011-end at c39-40% of revenue. That has resulted in higher debt than predicted.

·         Further international expansion: Arcelik is looking to enter new markets in the SouthEast Asia (Pakistan, Indonesia, Malaysia, India, Vietnam) either through a greenfield investment or acquisition. The size of the investment would be similar to Defy according to our understanding (cUS$300mn). Some investors raised worries about the potential and the valuation of such an M&A in Asia.

·         International markets: Arcelik is currently doing almost no business in Syria. Iran is a big opportunity but not likely to happen soon. The company is in Northern Iraq. Russia is a market where Arcelik is behind targets according to our understanding. There has been a management change there and sales are rising but Arcelik only has 7% market share. The production out of its Russian plants are mostly sold there. Product range will gradually be expanded in South Africa as the company does not sell TVs and kitchen appliances there.

·         New capacity need: Arcelik is working with high capacity utilization rates in Turkey. The company however does not envisage building new plants as yet. Annual capital expenditure budget is EUR120-150mn, including investments to expand capacity as well in the existing facilities.