June 2010 Saudi Factbook 2010 Gateway to the Kingdom Equity Research Eiji Aono [email protected] Farouk Miah [email protected] Ahmed Al-Qahtani [email protected] Tariq Al-Alaiwat [email protected] Faisal Al Azmeh [email protected] Economic Research Dr Jarmo T Kotilaine [email protected] Production Martin K Arokiaraj [email protected] Please refer to last page for important disclaimer EXECUTIVE SUMMARY 3 NCBC RECOMMENDATIONS 4 KSA - ECONOMY AND NATION 6 Resilience in the face of adversity 6 The Kingdom’s economy remains exposed to challenges 10 Outlook remains encouraging 14 SAUDI STOCK MARKET 15 Robust despite global uncertainty 15 Saudi market is the largest and most liquid in the region 18 Valuations look reasonable 20 Earnings growth outlook gives confidence 21 IPO market slowly returning 22 Foreign participation increasing 23 A developing debt market 24 INDUSTRIES & COMPANIES 25 Banking & Financials 27 Petrochemicals 43 Cement 62 Retail 75 Agriculture & Food 87 Energy & Utilities 104 Telecom 109 Industrial Investment 118 Multi Investment 134 Building & Construction 144 Real Estate 160 Transportation 170 Media & Publishing 177 Hotels & Tourism 183 Insurance 188 APPENDIX 222 Table of Contents JUNE 2010 THE SAUDI FACTBOOK 2 Executive Summary A Strong Economy… The Saudi Arabian economy remains one of the strongest in the region, and indeed globally, at a time when macroeconomic concerns still abound on the pace and sustainability of the recovery after the financial crisis of 2008-2009. Oil prices and production levels are still major drivers of the Saudi economy. However, years of proactive measures by the government to diversify the economy, along with government stimulus efforts, resulted in 2009 real GDP growth remaining positive at 0.6%. This at a time when most major economies globally faced declining GDP levels. Growth in 2010 looks assured, despite new areas of concern in the global economy coming to the forefront: Greece/the Euro zone budgetary sustainability, US financial reform, the health of China’s recovery, etc. While oil prices have remained volatile, we expect the average for the year to remain in the USD75-76 range, up from the USD62 average in 2009, which should result in a return to a fiscal surplus and should support growth in the economy. However, higher oil prices alone are not driving the rebound in the economy. We expect non-oil GDP to grow 3.8% in 2010e, similar to our overall expectations for the economy. … Supports A Strong Market The Tadawul All Shares Index (TASI) was the strongest in the GCC in 2009 (up 27.5%) and as of mid-year 2010, is the strongest globally at just above flat for the year. All markets in the region and globally are down so far in 2010 as the ongoing concerns on the global recovery have halted any market rallies to date. We note that apart from the Petrochemical Sector, which accounts for about 27% of the weighting in the TASI and which is very globally exposed, most other sectors are much more domestically focused. These sectors are benefitting from the continued growth in the economy, as well as the strong demographic trends such as a young, growing, and increasingly affluent population. Here we highlight the Agriculture/Food and Retail sectors, which are amongst the top performing sectors as of mid-2010, up about 10% each. Further Upside Likely by Year-end Corporate earnings have been rebounding and we believe 20% plus growth in earnings for companies in the TASI is possible for 2010e. Given still reasonable market valuation levels, we believe earnings growth should drive a rise towards the 7,000 level for the TASI by the end of the year. However, volatility is expected to remain high, especially through the summer period as volumes lighten locally and regionally. With Ramadan finishing in early September this year, the stage seems set for a return to growth in the final quarter of the year. JUNE 2010 THE SAUDI FACTBOOK 3 NCBC Recommendations Exhibit 1: Summary of our stock recommendations Company Rating Target Price Comments (SR) Almarai Neutral 193.0 Geographic expansion and Infant Milk venture key drivers for the (2280.SE) stock. With start of production at the new bakery and infant milk plants, integration of HADCO and JV projects with PepsiCo, the coming 12-18 months set to be potentially lucrative. High food costs as well as delays in new ventures key risks Savola Neutral 34.4 Fundamentals remain solid although limited upside remains. (2050.SE) Integration of Geant and provisions in non-core Real Estate are possible risks. Expansion in Sugar business acts as a potential positive catalyst Al Othaim Overweight 79.0 Number 2 food retailer in KSA, well positioned to take increasing (4001.SE) market share as market shifts to organized retailing. Entrance of foreign player and rising COGS are key risks. Store expansion is key catalyst for the stock. Jarir Overweight 170.0 Plans to almost double number of stores coupled with 50% IT market (4190.SE) share provide strong platform for the stock. Low liquidity and declining price of laptops a concern. Store openings the key catalyst for the stock Al Hokair Neutral 46.5 After rapid expansion through FY07, Al Hokair underwent (4240.SE) restructuring efforts to streamline its stores in FY08-FY09. Efficiency and profitability have improved and the company looks set to benefit from further growth. From 726 stores at the end of FY09, we estimate 1,242 stores by the end of FY16e Tasnee Overweight 36.2 NIC (Tasnee) is the only titanium pigment producer in the Middle East (2060.SE) and is monetizing its low cost feedstock advantage through its petrochemicals business. The June 2009 start of its ethylene derivatives complex, SEPC, as well as improving trends in titanium should drive 86% growth in net income in 2010e Sipchem Overweight 27.9 Acetyls Complex (Phase II expansion) will double Sipchem’s annual (2310.SE) capacity to 2.2mn mt with full-year benefits expected to materialize from 2010 onward. Volatility in the price realization and subdued demand are key risks. Earlier than expected start to Phase III expansion (currently set for 2013) is a potential catalyst Saudi Kayan Neutral 20.3 Diversified product mix and strong links with Sabic are positives (2350.SE) however doubts over on-time start of production and lack of revenues until 2011 dim the near term outlook. While 2012e will benefit from full year contribution from its plants however post 2013e net income is likely to contract as the current cycle nears its peak Sahara Neutral 27.2 Sahara has one operational plant, one coming on-stream in 2Q 2010 (2260.SE) and a further 3 set to commercialize operations in 2013. The SEPC plant is the only income generator for now. Once all of Sahara's plants are up and running, the company will have amongst the most diverse product portfolios in the sector with a range of ethylene derivatives, super absorbent polymers and acrylates. Yansab Neutral 50.7 Yansab has recently started commercial operations in March 2010. (2290.SE) The timing looks ideal as both demand and pricing are gaining traction. However with the strong performance of the stock over the past year. we believe much of this is priced in. Petrochem Underweight 15.8 Expected to commence operations in 2012e and will be entering into (2002.SE) the Ethylene and Propylene derivatives arena through a JV with Chevron Phillips. However there will be likely no revenue until 2012e and net losses in 2010e-2011e. SAFCO Neutral 127.0 The company's high margins, low capital expenditure requirement (2020.SE) and short cash conversion cycle results in high free cash flows, hence, high dividends payments. We believe the expected increase in ammonia and urea prices that will help the company to grow bottom line is already priced in by the market Ma'aden Underweight 15.3 Concerns regarding long term reserves exist despite the higher gold (1211.SE) price. Phosphate unit is the main value driver for Maaden and is expected to start commercially in June 2011. High Zakat expense and growing debt levels are a drag on the company's value in the short and medium term. The aluminum project may not be value accretive. We do not include the aluminum project in our valuation until we have further clarity JUNE 2010 THE SAUDI FACTBOOK 4 NCBC RECOMMENDATIONS Exhibit 1: Summary of our stock recommendations Company Rating Target Price Comments (SR) Saudi Steel Pipes Overweight 40.5 Increasing demand in medium size pipes, and the start of a large (1320.SE) diameter pipe production facility (which SSP owns 33%) in 2012 will drive robust revenue and earnings growth. With the significant growth potential, high dividends yield and clean balance sheet; we think the market is not pricing in the expected performance of SSP over the next 12 months Saudi Electricity Overweight 18.5 The new tariff structure which will affect industrial, commercial and (5110.SE) government customers will lead to SR3.2bn increase in revenue that we expect to flow directly to income. This will have a significant impact on profitability which the market has not yet fully realized. Key risks remain the rising cost of purchased energy and rising capital expenditure requirements Yamama Cement Overweight 58.0 Strong demand in Riyadh coupled with highest capacity in the central (3020.SE) region a positive. Competition and deterioration in operational performance a risk. Ability to get a higher share in new projects coupled with rationalization of cost structure to boost top and bottom- line Saudi Cement Neutral 41.2 Based in the Eastern region, away from most of the key demand (3030.SE) centers.