2010 Saudi Arabia Yearbook

SAuDI ARABIA
YEARBOOK
YEARBOOK
2010
Content
EXECUTIVE SUMMARY STRATEGY ECONOMICS BANKING Saudi Banking Sector Al Rajhi Bank Bank Albilad Bank Aljazira Saudi British Bank (SABB) Banque Saudi Fransi (BSF) Arab National Bank (ANB) Saudi Hollandi Bank (SHB) Samba Financial Group Riyad Bank The Saudi Investment Bank (SAIB) TELECOM Saudi Telecom Sector Saudi Telecom Company (STC) Etihad Etisalat (Mobily) Zain KSA Telecom Telecom Telecom P70 P74 P76 P78 Banking Banking Banking Banking Banking Banking Banking Banking Banking Banking P42 P48 P50 P52 P54 P56 P58 P60 P62 P64 P66 P04 P08 P28
REAL ESTATE Saudi Real Estate Sector Saudi Real Estate Company (AKARIA) Dar Al-Arkan PETROCHEMICAL AND FERTILISER Saudi Petrochemical and Fertiliser Sector Saudi Basic Industries Corporation (SABIC) Saudi Arabian Fertiliser Company (SAFCO) Yanbu National Petrochemical Company (YANSAB) OTHER Savola Group Jarir Marketing Company National Shipping Company of Saudi Arabia (NSCA) Saudi Electricity Company (SEC) CONTACTS Consumer Staples Consumer Staples Shipping Utilities P104 P106 P108 P110 P112 Petrochemical Fertiliser Petrochemical P92 P96 P98 P100 Real Estate Real Estate P82 P86 P88
EXECUTIVE SUMMARY
economy
The negative impact of the global crisis on the Saudi Arabian economy has been mitigated by significant government countercyclical spending. Saudi Arabia remains one of our top macroeconomic picks for the region. The government has stepped in to support the non-oil economy, including increasing expenditure, providing funding for investment projects and paying contractors ahead of time. The government has also substantially increased its direct investment in the economy. We have nevertheless seen a slowdown in real non-oil activity, owing to the limited availability of credit. The headline numbers have deteriorated substantially, following the sharp fall in average oil prices from 2008 and the fact that Saudi Arabia slashed its oil production levels to support the oil price. Consequently, we see nominal GDP growth contracting sharply, real GDP stalling and the government balance falling into deficit in 2009e. The recent budget announcement confirms this view. We expect to see a notable improvement in the economy in 2010e and 2011e. We forecast that the fiscal (and current) account will see a surplus in 2010e and beyond, of around 2.5% of GDP in 2010e and 3.6% in 2011e, on the back of higher oil earnings. Moreover, we expect to see solid, broad based real GDP growth of 4.1% in 2010e. Along with net exports making a positive contribution, we also expect to see a pick-up of domestic drivers, especially investment as government projects announced in 2009 start to be implemented. Central to the acceleration of domestic demand growth will be the return of bank lending, especially for projects linked to the governments investment programme. We forecast that real non-oil growth will accelerate to 4.4% in 2010e, from 3.0% in the previous year. We also expect the government to continue to support the growth outlook through an expansionary fiscal position and accommodative monetary policy, with real interest rates remaining negative. We believe that the greatest risk to our forecasts is on the external side, with a possible correction in the oil price. However, with net foreign assets representing over 100% of GDP and a vital need to upgrade infrastructure, we expect to see solid non-oil activity going forwards.
strategy
We believe the Saudi market offers a compelling investment opportunity for 2010e and we regard it as one of our two preferred markets in the MENA region, alongside Egypt. We believe the market is well positioned for a strong performance over 1H2010e, driven by i) a resumption in bank lending activity (the sector is a key driver for the market overall); ii) the market re-gaining its traditional valuation premium to MENA markets; iii) positive earnings revisions; iv) a shift in liquidity back into the overlooked large cap names; v) a regional shift into less risky markets in the wake of the debt restructuring in Dubai; and vi) the most negative level of real interest rates in the region. Overall, we believe the market offers 30-40% upside potential over the course of 2010e.
stock picks
Our stock picks for the year are based on four key investment themes that we believe will drive the market over 2010e. This year, we also include a number of companies from outside our coverage universe, in order to take advantage of the breadth and depth of listings offered by Saudi Arabia. The themes we favour are Commodity Cycle - Moving from the Bottom; Improving Credit Growth; Consumer Resilience; and Infrastructure Spend & Capex. From within our coverage universe, the stocks we highlight are: SABIC, Yansab, Samba Financial Group, Saudi British Bank, Savola Group and Mobily. The stocks we favour, but do not cover, are: Aldrees Petroleum & Transport Services, Amiantit, Arabian Cement, Red Sea Housing, and Saudi Ceramics. We take a negative stance on Bank Albilad, National Shipping Company of Saudi Arabia (NSCSA), and Saudi Electricity Company (SEC), which we expect to underperform the Tadawul Index.
risks
We see a rising risk of global economic disappointment in 2H2010e, although Saudi Arabia should remain largely protected due to the governments investment programme. We believe the primary risk to Saudi Arabia is contained within the petrochemical sector, since any setback to the expected global recovery would inevitably cause a sharp correction in oil prices - both due to concerns over end-user demand and to the commodity being increasingly traded as a separate asset class. A tightening of the global monetary environment would negatively affect global risk appetite. However, this might not feed through to the Kingdom immediately: SAMA has kept its benchmark rates at a premium to US Fed funds rates and therefore has some room to keep rates in Saudi Arabia on hold in the face of rising US rates.
FAHD IQBAL / MONICA MALIK
SAUDI ARABIA
Research Yearbook
EXECUTIVE SUMMARY
2 0 1 0
investment thesis
valuation
The Saudi market traditionally trades at a premium to the region (on average 25%). However, on current forward multiples (11.7x 2010e and 9.8x 2011e P/E), the premium is a relatively benign 13%. In absolute terms, this offers a rare entry opportunity into this long-term growth market. In relative terms, we see room for the premium to grow further. Indeed, this premium disappears if we exclude the currently depressed UAE multiples.
global risk appetite

We believe the highly accommodative global monetary environment will remain in place over 1H2010e, which should be supportive for risk appetite over this period. We expect Saudi Arabia to remain relatively resilient to changes in this environment due to i) foreign investors accounting for a negligible level of total trading activity, and ii) the Tadawul Index having one of the lowest levels of correlation to a wide range of local and international indicators.
financial gearing and credit growth

The Kingdom enjoys a relatively low level of credit penetration, and credit raising (through capital markets) is below what would normally be expected of an economy the size of Saudi Arabias. This should provide a positive backdrop for the banking sector, where we expect to see a resumption in lending activity driven by substantially de-risked portfolios, strong capital adequacy, good loan-to-deposit ratios, and low rates on sovereign bonds. Indeed, we expect Saudi Arabia to record the second highest level of credit growth in MENA after Qatar.
capital raising
While IPO activity has died down across MENA, new listings continue unabated in Saudi Arabia where they are still seen as a source of quick returns - although the size of listings has obviously dropped dramatically. We see little change to this environment in 2010e, but expect to see a more diversified set of listings as the insurance sector (responsible for the bulk of listings over the past 2 years) is now looking more saturated. Bonds and sukuks are attracting more attention, and we believe that investors will favour countries with greater resources or liquid wealth (Qatar, Abu Dhabi and Saudi Arabia). The new trading platform for bonds should be supportive for the credit market over the medium to long term, but for the time being it remains at an embryonic stage.
earnings expectations cycle

Revisions to analysts earnings forecasts, in aggregate, tend to lag reported quarterly numbers at turning points in the earnings cycle. We believe that we are now at the beginning of the positive phase of this revisions cycle and, in our opinion, aggregate earnings in the Kingdom could be upgraded by 8-12% over the year. However, the petrochemical sector constitutes a substantial swing factor: moving our oil price assumptions from our petrochemical analysts conservative USD70 p/b to the consensus average of USD80 p/b would raise total forecast earnings for 2010e by a further 6-7%.
small and mid caps

Uniquely in the region, companies comprising the bottom 20% of total listed market cap account for 70-90% of total value traded. Over recent rallies, small and mid cap companies have underperformed the broader market on the way up but have outperformed during sell-offs. We believe we are towards the end of the small and mid cap cycle since i) we do not believe the asset class can account for any more of the value traded than it currently does (c90%); and ii) the ten largest stocks in Saudi Arabia are now trading at a meaningful discount to the market, highlighting the fact that blue chip names are currently overlooked.
foreign investor restrictions

In the short to medium term we expect the market to be supported by the gradual increase in products that allow foreign investors access to the Saudi market. Over a longer period of time, we believe foreign ownership rules will be meaningfully loosened and could lead to the Kingdom easily rivalling Egypt as the primary target for funds seeking exposure to the Middle East. We believe dedicated institutional money is likely to accumulate slowly, but allowing direct foreign equity ownership would open the floodgates, in our opinion.
EXECUTIVE SUMMARY
YEARBOOK
2010
Strategy
strategy
STRATEGY
2009 - in review
a. stock market performance summary
The sharp decline in the Saudi market, which began in 2H2008 triggered by the global financial crisis, persisted into 2009 spurred by investors anticipation of poor FY2008 results and weak risk appetite. The Tadawul Index bottomed out on 9 March 2009, after falling 14% from the beginning of the year. The market subsequently enjoyed a rally of 47% until the end of May (outperforming the MSCI Arabian Markets Index), when news emerged that two wealthy, high profile, family-owned businesses - the Saad and Algosaibi Groups - had defaulted on debt of USD1.0 billion. Uncertainty over the extent of local banks exposure to the two troubled conglomerates, together with fears that other similar enterprises might follow suit, severely damaged investor sentiment. The event acted as a broad overhang on the market, although the large cap banking sector was most severely affected. By September, reports began to circulate that progress was being made in resolving the outstanding debts of the two troubled groups. The stock market reacted strongly, with a 16% rally over September and October. This resulted in an overall year-todate (YTD) performance for the Saudi market of 27%, outperforming the 16% YTD rise of the MSCI Arabian Markets Index. Fig 1: Performance of Saudi Arabia Tadawul Index vs GCC
Legend is in decreasing order of performance
150 140 130 120 110 100 90 80 70 60
Mar-09 May-09 Oct-09 Aug-09 Nov-09 Dec-08 Sep-09 Jul-09 Jun-09 Jan-09 Apr-09 Feb-09
Fig 2: Saudi Arabia Performance and Value Traded

In SAR million (RHS), Index (LHS)
11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000
Mar-08 Mar-09 Nov-08 Nov-09 May-08 May-09 Jul-08 Jul-09 Jan-08 Jan-09 Sep-08 Sep-09
Saudi Qatar
Kuwait Dubai
Oman Bahrain
Abu Dhabi
MSCI Arabia
Turnover (20d MA) (RHS) Saudi Arabi Tadawul Index (LHS)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Source: Bloomberg, Reuters
Note: 20d MA = 20-day moving average Source: Reuters
Liquidity fell in 2009 however, with the market turning over an average daily value of SAR5.2 billion (USD1.4 billion) YTD, 35% lower than in the same period a year earlier. Trading activity in Saudi Arabia is significantly higher than in the rest of the region. Nevertheless, it has been consistently declining since 2006, when liquidity peaked at SAR19.8 billion (USD5.3 billion) on an average daily basis.
sector performance
In 2009, all sectors returned to positive figures after posting negative performances in 2008. The insurance sector has been the best performing sector YTD, up 82%. The petrochemical sector has risen sharply, adding 65% YTD, thus increasing its weight from 20% of the index to 26%. This was of course driven primarily by SABIC, which has risen 55.3% YTD. The banking sector rose only 16%, thereby reducing its weight from 38% of the index to 34%. The telecom sector (representing 8% of the index) rose a relatively modest 9%. The total value traded declined across all sectors, with the exception of the insurance sector which saw trading activity improve 36.4% Y-o-Y (calculation based on average daily turnover), underpinned by the listing of four new insurance companies during the year. The petrochemical sector (accounting for 23% of total value traded) saw the steepest decline, with turnover falling 47.1% and contributing half of the decline in liquidity across the market.
Prices as at 08 December 2009
SAUDI ARABIA
Research Yearbook
2009 - resilience in a turbulent year 2010 - recapturing the premium rating
Figure 3: Summary of Tadawul Performance over 2009

Legend is in decreasing order of performance
200 180 160 140 120 100 80 60 Sep-09 Mar-09 Oct-09 May-09 Aug-09 Nov-09 Dec-09 Feb-09 Jul-09 Jun-09 Apr-09 Jan-09 Oil price recovery boosts petrochems Positive news on Saad & Algosaibi Banks lead the rally before 1Q earnings Bear market rally ends, trading dominated by defensive stocks Banks keep the market flat despite petrochems strength Market stabilises, investors shift to speculative sectors Insurance Petrochemicals Cement Agriculture Tadawul Banking Telecom
Source: Reuters, EFG-Hermes
stock performance
The majority of listed companies have yielded positive returns YTD, with the newly listed insurance companies among the best performers. This was to be expected given the strong appetite in Saudi for IPOs. Negative performance was limited to only a few stocks, mainly consisting of small and mid cap companies. Fig 4: Best and Worst Performing Stocks YTD
600% 500% 400% 300% 200% 100% 0%
Sagr Ins. Al Ahlia SAICO Natl Agr. Market. SABB Takaful Sadafco Saudi ACIG Alahli Takaful Tourism Ent. Sanad Taibah SRMG SARCO Red Sea Malath Ins. Babtain Al Bilad Bank SPM Pipes Mohd El Moagel
Fig 5: Best Performing Stocks on a Trough-to-Peak Basis

600% 500% 400% 300% 200% 100%
Ashargiyah Ag. Dev. Nat'l Agr. Market. Saudi Livestock Arabian Shield Alahli Takaful SABB Takaful Tourism Ent. Trade Union Saudi ACIG Gulf Union Sagr Ins. Al Ahlia SAICO Sanad NCCI
0%
-100%
Source: Reuters
Source: Reuters
b. revenue and earnings growth

Revenues have witnessed a contracting trend since 4Q2008. With oil and commodity prices markedly below 2008s elevated levels, the petrochemical sector (47% of total revenue) has contributed the bulk of revenue contraction. The financial sector (11% of total revenue) has seen modest growth as net special commission income improved from loan re-pricing and a lower cost of funding. Telecoms (16% of total revenue) also continued reporting positive revenues, driven by an ongoing expansion of services. Earnings continued to show Y-o-Y contraction in 2009, although the scale of contraction has eased steadily. The petrochemical sector, generating 40% of total earnings, accounted for the vast bulk of the total markets earnings decline. The financial sector (25% of total earnings) recorded muted Y-o-Y growth in 2009, with the improvements in spreads offset by high levels of provisioning. The telecom sector (15% of total earnings) generated negative earnings growth due to FX losses and margin contraction at STC.
STRATEGY
10
STRATEGY
Fig 6: Breakdown of Revenue Growth Y-o-Y by Sector

60% 40% 20% 0% -20% -40% -60%
1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009
Fig 7: Breakdown of Earnings Growth Y-o-Y by Sector

60% 40% 20% 0% -20% -40% -60%
1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009
-29% -22% 16% -30% -19% -8% 20% -3% 0% N/A N/A
Financials & Ins. Telecoms
Energy & Materials Others
Real Estate Saudi Arabia
Energy & Materials Telecoms
Financials & Ins. Others
Real Estate Saudi Arabia
-80%
-80%
Source: Zawya, company data, and EFG-Hermes calculations
Source: Zawya, company data, and EFG-Hermes calculations
c. initial public offerings

IPO activity declined sharply in 2009, along with overall value traded, given the poor market conditions in the wake of the global financial crisis. The overall size of funds raised was 80% lower than the amounts raised in 2007 and 2008. That said, however, Saudi IPO activity was the highest in the region, with 11 IPOs out of a total of 28 for the region. Of the 11 IPOs during the year, nine have listed so far. The petrochemical sector attracted the largest share of funds raised, courtesy of National Petrochemicals; while the insurance sector once again saw the highest number of IPOs, although all were smaller in size. Oversubscription levels on average remained high. In line with the trend seen over the past few years, all new listings rose sharply on their first trading day. Subsequently, however, most of the new listings substantially underperformed the broader market. Fig 8: Value of Funds Raised Through IPOs by Sector
In SAR million (LHS), number (RHS)
Insurance Others Real Estate Telecoms Materials Industrials Financials Num. of IPOs (RHS)
Company Sector Listing Date 21-Mar-09 13-Jul-09 20-Jun-09 29-Jul-09 27-Jul-09 4-Aug-09 8-Aug-09 2-Sep-09 8-Dec-09 N/A N/A 1st Day Relative Perf. 53% 670% 281% 663% 267% 35% 30% 19% 287% N/A N/A Relative Perf. after 1st day close, to date
Fig 9: Relative Performance of IPOs over 2009
40,000
30 25
Etihad Atheeb Telecommunication Telecoms Al Rajhi Co. for Cooperative Ins. ACE Arabia Cooperative Ins. AXA Cooperative Ins. Saudi Steel Pipe National Petrochemical Al Mouwasat Medical Services Al Alamiya for Cooperative Ins. Buruj Cooperative Insurance Gulf General Cooperative Ins. Insurance Insurance Insurance Materials Materials Healthcare Insurance Insurance Insurance Weqaya for Takaful Ins. and Re-ins. Insurance
30,000 20 20,000 15 10 10,000 5 0 0
2007
2008
2009
Source: Zawya, EFG-Hermes calculations
Source: Zawya, EFG-Hermes calculations
SAUDI ARABIA
Research Yearbook
2010 - top down outlook

a. valuation
The Tadawul Index has traditionally traded at a premium on earnings multiples, both in absolute terms and relative to MENA (after Morocco). It is difficult to adequately explain why this is, but we believe it is related to the extremely high levels of value traded relative to the size of the stock market. In our view, a better way of looking at the Kingdom is to assess the actual level of its premium, which has averaged c25% over the past four years (excluding the bubble in 2006). On current forward multiples, the Saudi market trades at a relatively benign 13% premium. The premium is reduced to negligible levels if we exclude the depressed UAE market valuations. Figure 10: Saudi Arabia 12-month Trailing P/E vs GCC and MSCI Emerging Markets
45 35 25 15 5 (5)
3Q2005 4Q2005 1Q2006 2Q2006 3Q2006 4Q2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009
Fig 11: Saudi Arabia Forecast P/E Multiples by Sector

120% 100% 80% 60% 40% 20% 0% -20% -40% 5 0 20 15 10 30 25 Utilities Banking Consumer Telecoms Petrochemicals Real Estate Shipping Saudi Arabia
Saudi Arabia (LHS) GCC (LHS)
MSCI Emerging Market (LHS) Saudi Arabia Premium to GCC (RHS)
2009e
2010e
2011e
Source: Bloomberg, Zawya, company data, and EFG-Hermes calculations
Source: EFG-Hermes estimates
On absolute terms, the market trades at an attractive 11.7x 2010e and 9.8x 2011e P/E. In our view, this presents a rare and attractive entry opportunity for investors.
b. outlook for 2010 market well positioned for 1h2010

Saudi Arabia constitutes one of our most preferred markets in the MENA region, alongside Egypt. We believe the market is well positioned for a strong performance over the short term, driven by the following factors: i) a recovery in bank lending activity, supported by the governments investment programme; ii) attractive valuations in both absolute and relative terms, coupled with an expected return to the Kingdoms traditional premium valuation relative to the region; iii) continued positive earnings revisions; iv) liquidity moving back into large cap names, which have been relatively overlooked in the past few months; v) a shift to less risky markets in the wake of Dubais debt restructuring issues; and vi) the highest level of negative real interest rates in the region. In our view, this positive momentum is likely to last throughout 1H2010e, and should help the Saudi market to generate one of the strongest returns in the MENA region during this period.
STRATEGY
2012e
(15)
12
STRATEGY
risks moving into 2h2010

As we move into the second half of 2010e, we see an increasing risk of disappointing economic growth at a global level. From a macroeconomic perspective, we believe the risks to Saudi Arabia are limited, as much of its growth is driven by the investment programme where we expect government support to remain firm. We estimate that oil prices would need to fall to roughly USD40 per barrel (p/b) on a prolonged basis to trigger a protracted slowdown in the investment programme. We consider such an event unlikely and do not include it as part of our core scenario. Our concerns, however, centre on two sectors where a negative impact is possible within the context of the equities market: petrochemicals and banks, which together account for 60% of the index.
petrochemicals
A disappointment in global economic growth would result in a sharp correction in oil prices, due to concerns regarding falling end-user demand, as well as the commodity itself increasingly being used as a separately traded asset class by capital market investors. To some extent though, this risk is factored into our petrochemical analysts forecasts, as he uses a conservative average oil price for 2010e of USD70 p/b, which is at the bottom end of consensus forecasts and also below our economists forecast of USD80 p/b. This is to account for the risk of fundamentals lagging the more buoyant oil price. We would also expect the impact of any oil price weakness to be somewhat offset by the increased volumes expected to come on stream over 2010e.
banks
Here we believe the overall impact is likely to be more limited. Overall credit availability to the domestic economy could be hampered by a retrenchment by foreign banks in the wake of global economic weakness. However, we have already witnessed a similar instance of this in early 2009. At that time the government undertook an active role in funding the private sector directly, primarily through substantially increased advances to contractors and suppliers. Also, the Saudi Arabia Monetary Authority (SAMA) has kept its benchmark reverse repo rate at a premium to the Fed funds rate, thus leaving room for SAMA to keep its rates on hold in the face of increased US rates. This would keep the accommodative monetary policy in Saudi Arabia in place and support credit growth. In our view, a slowdown in economic growth in 2H2010 would again be met with government support; however, we would expect a greater contribution from the domestic banking sector this time around. Since 2H2009 (when banks were still reeling from problems related to the troubled Saad and Algosaibi Groups), banks have successfully managed their risks down, are better capitalised, and enjoy greater liquidity. Therefore we would not expect any global economic weakness to have a substantially negative effect on the sector. Over 2H2010e, we are therefore not overly concerned about the potential impact of disappointing global economic growth on Saudi Arabia. Outside of the petrochemical sector, we believe growth will remain robust, driven by strong domestic factors. In addition, Saudi Arabia is one of the least correlated markets in MENA, both intra-regionally and to international indicators. We therefore expect the market to remain one of our top picks in 2H2010e, even under difficult global conditions.
c. upside potential
Over the course of 2010e, we believe the Saudi market could trade at levels as high as 15x P/E (not that different from historic valuations), suggesting an upside potential of 30% from current valuation levels. Continued earnings upgrades will add further support by bringing down our forward P/E multiples, and we believe there is scope for upgrades of between 8-12% over the next 12 months (see Key Investment Themes, Part D). We therefore think the Saudi market has a total upside potential of between 30-40%.
SAUDI ARABIA
Research Yearbook
key investments themes

a. global risk appetite
At present, the highly accommodative monetary environment, coupled with an earnings recovery, has created a sweet spot for global equities that has so far strongly favoured high beta names. The long-term relationship between the S&P500 Implied Volatility Index (a measure of risk appetite that registers a decrease as risk appetite increases) and the slope of the US yield curve suggests that global risk appetite will remain robust in the short term. Indeed, the chart below indicates that risk appetite will increase over 1H2010. Worryingly though, risk appetite is forecast to reach levels that have previously marked the peak of an asset bubble. Fig 12: Outlook for Global Risk Appetite, Implied Volatility
Spread in percentage points (LHS), % implied volatility (RHS)
(6) (5) (4) (3) (2) (1) 0 1 2 3 4 5
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Fig 13: MENA Region Real Interest Rates Forecasts in 2010e

80 70 60 50 40 30 20 10 0 5% 4% 3% 2% 1% 0% -1% -2%
Kuwait Qatar Jordan Algeria
US 10Y Treasury Yield - Fed Funds Target Rate (inverted, lagged 22 months) VIX S&P Volatility Index (RHS)
-3%
Source: Bloomberg, EFG-Hermes calculations
Regional and global markets, however, have been jarred by two debt-related events: the troubles with the Saad and Algosaibi Groups and, more recently, Dubai World. These have acted as stark reminders to the low interest rate fuelled stock markets (both regionally and globally) that sharp disruptions are still likely due to the fragile global economic backdrop. We believe that the sweet spot referred to earlier will favour emerging market equities over 2010. However, the debt-related troubles that have emerged out of the MENA region - especially that of Dubai World - will, rightly or wrongly, weigh heavily on the appetite of Western institutional investors for exposure to MENA equities. We believe Saudi Arabia will be largely shielded from this, given its low level of foreign investor penetration (see Section F), and we expect the market to continue to be driven by local retail investors. Institutional penetration is likely to rise over the year, in light of an increasing number of funds interested in having - and now able to have - access to the market. However, we nevertheless believe that institutional investors will remain small players relative to highly liquid Saudi retail investors. In light of this, we believe a more important driver for Saudi Arabia in 2010e will be real interest rates. We expect these to be the most negative in the region.
correlation analysis
The Kingdom's resilience to external events is supported by a weekly correlation analysis. This shows that Saudi Arabia has been a more domestically driven market than most (if not all) of its regional peers over the course of this past year. While 2008 was marked by a high and rising correlation to selected MENA (notably Dubai) and international indices, 2009 has seen a steady reversion to lower historic average levels. A similar trend has been observed with regards to oil prices, although historically the Tadawul has shown very low levels of correlation to oil. This stands in sharp contrast to popular preconceptions about the Saudi market. While oil prices are important for business and private consumer confidence, the Saudi stock market has rarely shown any significant level of correlation to oil prices. Figure 16 shows a longer-term analysis - monthly correlation over the past four years - with the coloured cells highlighting which countries offer the lowest levels of correlation across the region. Saudi Arabia consistently scores well here compared to its regional peers. We believe this adds to the Kingdoms overall defensive properties and allows greater diversification opportunity for regional investors.
STRATEGY
Saudi Arabia
Bahrain
UAE
Morocco
Egypt
14
STRATEGY
Fig 14: Correlation of the Saudi Arabian Tadawul Index to Selected MENA Indices
0.8 0.6 0.4 0.2 0.0 (0.2) (0.4)
Oct-08 Oct-09 Aug-08 Aug-09 Dec-08 Jun-08 Jun-09 Apr-08 Apr-09 Feb-09 Dec-07 Feb-08
Fig 15: Correlation of the Saudi Arabian Tadawul Index to Selected International Indices
Qatar 0.8 0.6 0.4 0.2 0.0 (0.2) (0.4)
Oct-08 Oct-09 Aug-08 Aug-09 Dec-08 Jun-08 Jun-09 Apr-08 Apr-09 Dec-07 Feb-08 Feb-09
Egypt
Abu Dhabi
Oman
Dubai
Oil
MSCI World
MSCI EM
S&P 500
Note: Correlation has been calculated on a weekly basis covering a rolling six-month period Source: Bloomberg, EFG-Hermes calculations
Note: Correlation has been calculated on a weekly basis covering a rolling six-month period Source: Bloomberg, EFG-Hermes calculations
Figure 16: Long-Term Monthly Correlation Analysis

Saudi Arabia Saudi Arabia Dubai Abu Dhabi Qatar Kuwait Oman Bahrain Egypt MSCI Arabian Mkts MSCI AM ex KSA MSCI Emerging Mkts MSCI World Brent Crude Oil 1 0.538 0.495 0.439 0.460 0.505 0.453 0.492 0.875 0.502 0.476 0.445 0.310 Dubai 0.538 1 0.890 0.607 0.573 0.719 0.726 0.583 0.751 0.806 0.545 0.507 0.493 Abu Dhabi 0.495 0.890 1 0.567 0.542 0.660 0.597 0.433 0.700 0.738 0.404 0.377 0.378 Qatar 0.439 0.607 0.567 1 0.574 0.583 0.526 0.662 0.675 0.783 0.693 0.688 0.427 Kuwait 0.460 0.573 0.542 0.574 1 0.711 0.755 0.598 0.728 0.841 0.540 0.567 0.480 Oman 0.505 0.719 0.660 0.583 0.711 1 0.634 0.642 0.718 0.793 0.603 0.601 0.470 Bahrain 0.453 0.726 0.597 0.526 0.755 0.634 1 0.613 0.700 0.774 0.508 0.453 0.469 Egypt 0.492 0.583 0.433 0.662 0.598 0.642 0.613 1 0.705 0.802 0.783 0.747 0.421 MSCI AM 0.875 0.751 0.700 0.675 0.728 0.718 0.700 0.705 1 0.830 0.673 0.651 0.464 MSCI AM ex KSA 0.502 0.806 0.738 0.783 0.841 0.793 0.774 0.802 0.830 1 0.700 0.708 0.516 MSCI EM 0.476 0.545 0.404 0.693 0.540 0.603 0.508 0.783 0.673 0.700 1 0.936 0.599 MSCI World 0.445 0.507 0.377 0.688 0.567 0.601 0.453 0.747 0.651 0.708 0.936 1 0.503
Note: Correlation calculations are based on monthly changes over a four-year period Source: Bloomberg
global macro risks

Any tightening of the monetary environment would cause an unwinding of the USD carry trade and trigger an exit from risky assets. For the moment, however, the US Federal Reserves comments in the last Federal Open Market Committee meeting for 2009 suggest that the low interest rate environment will remain in place for the foreseeable future, although references were made to a pick-up in economic activity. As we move into 2H2010e, we believe there will be an increasing risk of disappointing economic growth at a global level. In our view, much of the economic improvement seen thus far has been a statistical recovery' and the economic outlook - albeit improving - still remains fragile. Any negative development regarding the global recovery would also result in a sharp correction in oil prices. We believe macroeconomic risks to Saudi Arabia are limited, given the role of the investment programme and the firm level of government support for it. We believe that oil prices would need to be sustained at USD40 p/b levels in order to trigger a protracted slowdown in the investment programme. We consider this to be an unlikely event and therefore do not include it in our core scenario. Finally, we believe Saudi Arabia will be able to keep its accommodative monetary policy in place in the face of increased US Fed funds rates, since SAMA has kept the benchmark reverse repo rate at a premium to US rates.
SAUDI ARABIA
Research Yearbook
b. financial gearing and credit growth

The average net debt to equity ratio for Saudi Arabia (excluding the heavily geared Saudi Electricity Company) is low at 32%, which is generally in line with gearing levels across our MENA coverage universe. However, this is not reflective of the broader level of indebtedness across the Saudi market (i.e. debt held by non-listed entities). Fig 17: Saudi Arabia Forecast Debt / Equity Ratios
60% 50% 40% 30% 20% 10% 0% 2009e 2010e 2011e 2012e Saudi Arabia Saudi Arabia Exc Saudi Electricity Company
Fig 18: Credit to the Private Sector as % of Nominal GDP

120% 100% 80% 60% 40% 20% 0%
UAE Kuwait KSA Qatar Oman Bahrain 2007 2008 2009f*
*Latest credit data as a % of GDP forecast Note: the sharp rise in credit as a % of GDP in 2009 was driven by the drop in nominal GDP as oil prices fell sharply Source: EFG-Hermes estimates Source: Regional central banks, EFG-Hermes estimates
To gauge this broader level of indebtedness, we look at private sector credit as a proportion of GDP. While this data includes consumer debts as well as corporate, we nevertheless believe it provides a good proxy. Credit penetration in Saudi Arabia is below the regional average (although this is also reflective of high credit penetration in Kuwait and the UAE), giving scope for further credit growth in the economy, which we believe will be required for the governments investment programme. The above should provide a positive backdrop to a banking sector that, we believe, is well positioned to increase its lending activity. This is due to: i) a substantially de-risked asset portfolio; ii) strong capital adequacy and good levels of liquidity; and iii) low rates on sovereign bonds. (These issues are discussed in more detail in 2010 Bottom Up Outlook, Part A.) As a result, we forecast that Saudi Arabia will have the second strongest level of credit growth in the MENA region after Qatar. Fig 19: MENA Private Sector Credit Growth Forecasts
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Morocco Kuwait Qatar Saudi Arabia Jordan Oman Bahrain Algeria UAE Lebanon Egypt 2009e 2010e
Fig 20: Correlation of Saudi Arabias Tadawul Index to its Sub-Indices

0.95 0.90 0.85 0.80 0.75 0.70 0.65 Real Estate Agriculture Multi-Ind. Industrials Transport Petrochem. Telecoms Retail Insurance Cement Building Energy Hotels Banks Media
Source: Bloomberg
This forecast credit growth is important since banks comprise the largest sector in the Kingdom, accounting for 34% of total market cap (the petrochemical sector is the next biggest sector at 26% of total market cap). As a result, the banking sector is a key driver for the stock market. Indeed, in the rally of 10 March-10 May 2009, the sector accounted for 43% of all returns generated by the index (versus 30% for the petrochemical sector). As a result of this, the banking sector index shows the closest level of correlation to the overall index.
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c. capital raising
We expect investor appetite for IPOs to remain strong in the Kingdom, as this is still viewed as a quick and easy way to generate potentially substantial gains. Indeed, oversubscription levels and the number of listings in 2009 compares favourably to the previous years levels, despite the funds raised being of a relatively smaller size. We see little likelihood of this scenario changing in future. Over the past couple of years, the insurance sector has accounted for the bulk of the new listings following a regulatory change that opened up the sector. With the insurance sector now beginning to look more saturated in terms of listings, we would expect to see a more diversified spread of companies undertaking a listing. Indeed, the list of companies that have expressed an interest in seeking an IPO in 2010e supports this view. Some of these were originally supposed to list in 2009, but were postponed (at least partially due to there being a natural limit to the number of listings that can occur in any one year). Figure 21: Upcoming IPOs - Announced
Sector Subscription Size of Equity Offering Offered Period (USD mn) 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 4Q2009 2H2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 160 24 67 59 27 320 50% 30% 30% 30% 25% 50% 40% 30% 30% 30% 50% 30% Al-Mutakamilah Alargan Homes AlKhorayef Group Alkifah Construction Equipment Alsorayai Trading Industrial Group Arab Resort Areas Arab Satellite Comm. Organization Arabian Industrial Fibers Aujan Group Cable Factories Union Central Mining Investments City Cement Coast Cement Dallah Healthcare Holding Elaj Medical Services Jubail Refining and Petrochemical Saudi Arabian Airlines Catering* H G Ibrahim Shaker Knowledge Economic City Developers Meed Trading Najran National Air Services Optical Communication Real Estate Finance The Arabian Ceramics Manufacturing Sector Subscription Period 2010 2010 2010 2010 2010 2010 2010 2010 2010 1H2010 2010 1H2010 1H2010 2010 2010 2010 4Q2010 2H2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 Equity Size of Offering Offered (USD mn) 16.52 73 271.97 600.2 25% 30% 30% 30% 30% 40% 30% 30% 50% 50% 50% 30% 50% 25% 30% 30% 50% 30% 25% 50% -
Gulf Stevedoring Contracting Hail Cement Hamad Bin Mohamed Bin Saedan Group Herfy Food Services HUTA Group Jazan Economic City Makkah Petrochemical Industries Mouawad National Jewellery & Watches National Commercial Bank* National Technology Group Obeikan Investment Group Saudi Integrated Telecom Saudi Pan Kingdom Saudi Railways Organization* Saudi Stock Market * Shuaibah Water and Electricity Zamil Group Holding Solidarity Saudi Takaful Mohammed Abdulaziz Al Rajhi & Sons Abdul Mohsen Al Hokair Group Ajlan Bin Abdulaziz Al Ajlan & Brothers Al Baha Cement Holding Al Ittefaq Steel Products Al Jouf Cement Al Kusaibi for Aluminium Al Rabie Saudi Foods Al Sawani Food and Industrial Supply Al Tayyar Travel Group
Transport Construction Conglomerates Food and Beverages Construction Financial Services Industrials Consumer Goods Financial Services Information Technology Industrials Telecommunications Construction Transport Financial Services Power and Utilities Industrials Financial Services Industrials Conglomerates Consumer Goods Construction Mining and Metals Industrials Industrials Food and Beverages Retail Leisure and Tourism
Telecommunications Real Estate Industrials Industrials Industrials Leisure and Tourism Media Oil and Gas Food and Beverages Industrials Mining and Metals Industrials Construction Health Care Health Care Oil and Gas Transport Consumer Goods Real Estate Retail Construction Transport Telecommunications Financial Services Media Industrials
El Khayyat for Trading and Engineering Construction
Saudi Electronic Information Exchange
*Privatisation Source: Zawya
bonds and sukuk

Difficult trading conditions in equity markets, coupled with increased difficulties in accessing bank borrowings, have led a number of large corporate borrowers to turn to the debt capital markets, where investors have shown a sizeable appetite for yield. This has not been a traditional source of funding for the Kingdom, and overall bond issuance falls far below the levels that would normally be expected from an economy the size of Saudi Arabia.
SAUDI ARABIA
Research Yearbook

Fig 22: Sovereign Bonds & Sukuks Raised in Saudi Arabia vs MENA
In USD million, unless otherwise stated
120,000 100,000 80,000 60,000 40,000 20,000 0
1997 1999 2001 2002 2004 2005 2007 2008 1998 2000 2003 2006 2009
2
Fig 23: Corporate Bonds & Sukuks Raised in Saudi Arabia vs MENA
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0
1997 1998 1999 2000 2001 2002 2003 2004 2005
Sovereign: Rest of MENA
Sovereign: Saudi Arabia
Corporate: Rest of MENA
Corporate: Saudi Arabia
2006
2007
2008
Source: Company data, Bloomberg, and EFG-Hermes calculations
Source: Company data, Bloomberg, and EFG-Hermes calculations
In terms of credit raising, the Kingdom is one of the most under-penetrated markets in the region, highlighting the substantial scope for growth in this area. We also expect Saudi borrowers to benefit from a more attractive credit profile versus their riskier peers in the region - the ongoing debt restructuring in Dubai is likely to favour countries with greater resources or liquid wealth (Qatar, Abu Dhabi, and Saudi Arabia). However, we expect lenders to demand greater transparency, documentation, and explicit sovereign guarantees (where applicable). This is due not just to recent events in Dubai, but also to concerns that have arisen in the aftermath of the Saad and Algosaibi Group troubles. Unlike some of its peers in the GCC (namely Qatar and the UAE), no sovereign debt issuances have been made in recent years. While other countries have issued such debt as part of a move to establish a domestic yield curve, we have not yet seen any similar indications in the Kingdom. Over a medium to long-term horizon, the establishment of the trading platform for bonds and sukuks, and the regulatory framework that accompanies such a platform, is likely to attract significant investor interest and liquidity to this asset class. For the moment though, the bonds and sukuk exchange remains at a very nascent stage with only five listings (three SABIC and two SEC bonds) and very intermittent trading (the last trade occurred at the beginning of November).
d. earnings expectations cycle

Changes to earnings forecasts have tended to lag the quarterly earnings numbers reported by companies at turning points in the economic cycle. We believe the current cycle is no different. Judging by the rate of earnings revisions (see Figure 24), we believe that analysts forecasts are now bottoming out and are on the cusp of moving into a positive earnings revisions cycle. This will probably reduce aggregate forward-looking valuations and be supportive for stock prices overall. Across our coverage universe, earnings expectations bottomed out in May to June 2009. Since then, 2010e forecasts have been raised by an average of 21.4% (although 2009e and 2011e earnings have seen more modest upgrades of 5.2% and 7.8% respectively). However, the bulk of this was accounted for by the petrochemical sector, due to both the size of the companies involved (mainly SABIC) and the volatility of oil prices. Excluding this, earnings have been revised down 7.5% for 2009e, down 5.7% for 2010e, and down 5.1% for 2011e.
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2009
18
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Figure 24: Re-Based Earnings Forecasts for the Saudi Arabia Coverage Universe
Earnings Indices are re-based such that 2008e forecasts in Jan 2008 = 100
140 130 120 110 100 90 80 70 60 50 40 May-08 May-09 Nov-08 Nov-09 Jul-08 Jul-09 Mar-08 Mar-09 Jun-08 Jun-09 Jan-08 Oct-08 Jan-09 Oct-09 Aug-08 Aug-09 Apr-08 Apr-09 Sep-08 Sep-09 Dec-08 Dec-09 MSCI Saudi Arabia Domestic (LHS) MSCI KSA Small / Large (RHS) MSCI KSA Mid / Large (RHS) Feb-08 Feb-09 2009e 2010e 2011e
We see scope for 2010e earnings to be revised upwards by around 8-12% over the course of the next 12 months as we move into the positive phase of the earnings revisions cycle. However, the impact of oil prices on the petrochemical sector creates a substantial swing factor. For instance, if we were to increase our average oil price forecast for the petrochemical sector from USD70 p/b to the consensus average, and our economists forecast, of USD80 p/b, our 2010e earnings forecasts would rise by 20-25% for SABIC alone. This in turn would raise the aggregate earnings expectations for our Saudi coverage universe by 6-7%.
e. small and mid caps

Like much of the MENA region, the Saudi market is dominated by a handful of large cap stocks that account for close to half of all listed market capitalisation. However, the Kingdom is unique in the region (and perhaps globally) in that the large role played by retail investors - and a general preference for speculative investment in penny stocks - has resulted in small and mid cap stocks dominating trading activity. Over the past two years, between 70% and 90% of all trading activity has been accounted for by companies representing the bottom 20% of market capitalisation. Fig 25: Small & Mid Cap Trading Activity as a % of Total Trading Activity
100% 95% 90% 85% 80% 75% 70% 65%
Mar-08 Mar-09 May-08 May-09 Nov-08 Nov-09 Jul-08 Jul-09 Jan-08 Jan-09 Sep-08 Sep-09
Fig 26: Saudi Small & Mid Cap Performance Relative to Large Cap
MSCI Index (LHS), Relative Performance (RHS)
800 700 600 500 400 300 200
Mar-08 Mar-09 Jul-08 Jul-09 Nov-08 Nov-09 May-08 May-09 Jan-08 Jan-09 Sep-08 Sep-09
% of Trading Activity Accounted for by the Bottom 20% of Market Cap (20d MA) (LHS) Saudi Arabia Tadawul Index (RHS)
13,000 12,000 11,000 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000
1.05 1.00 0.95 0.90 0.85 0.80
Note: 20d MA = 20-day moving average Source: Reuters, stock exchange, and EFG-Hermes calculations
Source: Bloomberg, EFG-Hermes calculations
SAUDI ARABIA
Research Yearbook
Looking at previous rallies in Saudi Arabia, it seems that small and mid cap stocks account for a higher share of overall trading activity towards the end of a prolonged rally, and peak during subsequent periods of market weakness. This results in small and mid cap names generally outperforming the market during sell-offs (and underperforming during rallies). During sell-offs, the level of value traded generally contracts (partially due to falling prices) but large caps are disproportionately impacted, resulting in small and mid cap stocks accounting for a larger share of a smaller pie. In our view, we are currently at the end of this stage of the cycle, since we do not believe small and mid cap stocks can account for a greater proportion of overall value traded than they already do. We would view this as a positive signal, since it suggests that large cap stocks have become largely overlooked and present an attractive buying opportunity. This is further evidenced by trailing 12-month valuation multiples. These show that the largest ten listed stocks in Saudi Arabia are trading at 16.2x earnings versus the market as a whole at 20.8x, or a 22% discount. This suggests near-term upside potential for the index as a whole, which is obviously more influenced by movements in its largest constituents.
f. foreign investor restrictions

Many institutional investors are restricted in their exposure to quasi-equity products. We consequently believe the level of trading activity in swap products does not fully reflect the total amount of interest there is from Western institutions towards Saudi Arabia. Over the short to medium term, therefore, we expect the market to benefit from a slow increase in the number of broking firms that are given official approval to offer products that allow foreign investors to indirectly own Saudi equity through alternative means (such as equity listings in other international exchanges). Over a longer-term horizon, we believe these rules will be sufficiently loosened to allow Saudi Arabia to become a member of the MSCI Emerging Markets Index. While such an event remains years away, in our view, it would represent a turning point for the market. Once this occurs, we believe that Saudi Arabia will easily rival Egypt (and by then perhaps the UAE too) as the primary target of exposure for Middle East funds. Dedicated institutional money is likely to be slow to accumulate while foreign investor restrictions remain, and will probably remain minute in proportion to overall activity in the Kingdom (itself almost double the rest of the GCC combined). Allowing foreign investors direct ownership rights, however, would open the floodgates to institutional money, although we suspect that it will take time (at least one year) for institutional money to account for over one third of overall trading activity. Fig 27: Foreign Investor Trading Activity in Saudi Arabia
In SAR million (LHS), unless otherwise stated
2,500 2,000 1,500 1,000 500 0
Mar-08 Mar-09 May-08 May-09 Nov-08 Nov-09 Jul-08 Jul-09 Sep-08 Sep-09 Jan-08 Jan-09
Fig 28: Net Foreign Investor Trading Activity Across MENA

2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1,000 800 600 400 200 0 (200) (400)
Mar-09 May-09 Oct-09 Aug-09 Nov-09 Jul-09 Jun-09 Jan-09 Sep-09 Apr-09 Feb-09
Total Foreign Buying Activity (LHS) Total Foreign Selling Activity (LHS) Foreign Buying as a % of Total Buying (RHS) Foreign Selling as a % of Total Selling (RHS)
Egypt
Other GCC
Saudi
Source: Stock exchange, EFG-Hermes calculations
Source: Stock exchanges, EFG-Hermes calculations
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2010 - bottom up outlook

a. sector outlook
Our earnings growth forecasts have increased since the 2009 Yearbook (published 26 May 2009), particularly for 2010e which has seen earnings forecasts (on a like-for-like basis) raised by an average of 15%. However, the bulk of this increase came from SABIC, which has seen substantial earnings upgrades on the back of stronger-than-expected oil prices. Excluding SABIC, overall earnings have actually been downgraded by a modest 2% since May. This is principally due to higher provisioning numbers from the banks, while the telecom sector has seen modest upgrades due to better-than-expected results. We now forecast a sharp earnings contraction of -18.7% in 2009e, followed by robust growth of 33.5% in 2010e and 25.4% in 2011e. Excluding the petrochemical sector, our growth forecasts are a more modest, but still impressive, 8.9% in 2009e, 12.9% in 2010e, and 14.7% in 2011e. We address the growth prospects and dynamics for each sector below. Fig 29: Saudi Arabias Earnings Growth Outlook Fig 30: Change in Total Earnings Expectations
In SAR million, unless otherwise stated
150% 100% 50% 0% -50% -100% 08-09e 09-10e 10-11e 11-12e 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Industrials
Current Earnings Forecasts
Previous Earnings Forecasts
Consumer Staples
Petrochemicals
Saudi Arabia
Telecoms
Utilities
Banks
2009e
2010e
2011e
2012e
2009e
2010e
2011e
Total Earnings Forecasts
Total Earnings Forecasts Excluding Petrochemicals
Note: Previous earnings estimates refer to forecasts as per the 2009 Yearbook Total earnings are based on a comparable universe Source: EFG-Hermes estimates
banks
Bank lending activity has slowed from a peak of close to 35% Y-o-Y in mid-2008 to less than 5% Y-o-Y by the end of 2009. However, we expect 2010e to be marked by a resumption in lending activity - indeed we expect Saudi Arabia to generate the second strongest level of credit growth in the MENA region after Qatar. The primary driver will be the governments countercyclical fiscal expenditure, carried out as part of the investment programme. In addition to this, we believe banks will have more incentive to lend in 2010e compared to last year. Banks spent 2H2009 derisking their asset portfolios as problems emerged over the troubled Saad and Algosaibi Groups. As a result, the sector now enjoys stronger capital adequacy and better liquidity. In addition to this, rates on sovereign bonds remain very low, encouraging banks to direct funds towards higher yielding loans. This is likely to be compounded by the Central Banks reduced issuance of treasury bills, forcing banks to maintain deposits with SAMA - which earn a mere 25 bps. The combination of the above factors will be strongly supportive for corporate lending, which we believe will be focused towards high quality clients for the time being. Consumer lending is expected to be more muted, although the prospect of a mortgage law holds substantial long-term upside potential for this segment.
2012e
SAUDI ARABIA
Research Yearbook
petrochemicals
We expect strong earnings growth over 2010e, supported by high oil prices and new production volumes coming on stream. Our analysts forecasts assume 2010e oil prices of USD70 p/b (at the bottom end of the consensus range and below our economists forecast of USD80 p/b) to account for the risk of fundamentals lagging relatively buoyant oil prices. We believe the petrochemical sub-segment will enjoy higher growth than the fertiliser sub-segment, due to the direct exposure of the former to oil prices. A high oil price environment benefits the Kingdoms low-cost producers. To put the scale of this advantage into context, we believe oil prices would need to fall to USD20-25 p/b for a global naphtha-based producer to match a Saudi companys cost structure. We also expect a strong recovery in demand for nitrogen fertilisers next year. However, we believe the increase in nitrogen prices will be relatively weaker than that in petrochemicals, as current prices are well above our expectations for the 2010e cash costs of marginal producers. We do not expect Chinese export tariffs to affect global prices as demand and supply forces will be relatively balanced. Instead, we believe pricing will be set by the marginal producers in Europe. The 20% discount on gas supplies given to Ukrainian producers (who account for c10% of global urea exports) expires at the end of 2009, which will lead to higher floor prices for urea (USD260/tonne) versus 2009 (USD220/tonne). Higher oil prices should also lead to higher applicable gas contract prices for other European producers, but given the six-month contractual pricing used, nitrogen fertiliser prices will ultimately lag oil prices.
telecoms
The Saudi market is well on its way to being the most competitive telecoms market in the region with three mobile operators and two fixed-line players at present (and two more fixed operators due to enter). The high competition has led us to forecast a mobile penetration rate of 154% by the end of 2009e, and we therefore expect 2010e to be marked by a lower level of subscriber additions than in previous years. In addition, the performance of the fixed-line segment is likely to be held back by ongoing fixed-to-mobile substitution. We believe the main area of growth over short to medium term will be the data and broadband segment, which is significantly under-penetrated, both on the residential and business side. We expect penetration to rise sharply, from 4.4% in 2008 to 9.4% in 2009e and then 16.3% in 2010e.
consumer
The Kingdoms large population, comprised primarily of nationals (in contrast to other GCC markets which have expatriatedominated populations), its high population growth of 2.5% per annum, and its demographic which is skewed significantly towards the under-30s (comprising some two-thirds of the population of Saudi nationals) gives rise to substantial growth opportunities within the consumer sector. This sector has a substantial depth and breadth of listing, distinguishing Saudi sharply from other markets in the region. As Figures 31 and 32 make clear, consumer companies (Staples and Discretionary) have a highly volatile earnings growth track record. This is mostly due to the presence of investment gains and losses. However, on a top line basis the consumer staples sector has a highly impressive track record, with consistent positive growth delivery every quarter going back some five years. Fig 31: Consumer Staples Sector
Revenue and Earnings Growth Y-o-Y
50% 40% 30% 20% 10% 0% -10% -20% -30%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
Fig 32: Consumer Discretionary Sector

Revenue and Earnings Growth Y-o-Y
400% 300% 200% 100% 0% -100% -200% -300% -400% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
Revenue Growth Y-o-Y (LHS) Earnings Growth Y-o-Y (RHS)
360%
Revenue Growth Y-o-Y (LHS) Earnings Growth Y-o-Y (RHS)
400% 300% 200% 100% 0% -100% -200% -300% -400%
-40% -50%
-50%
Source: Zawya, Company data, and EFG-Hermes calculations
Note: Revenue growth in 4Q2006 was 360% Y-o-Y Source: Zawya, Company data, and EFG-Hermes calculations
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We expect to see support to consumer expenditure coming from positive private sentiment and government expenditure. Sentiment is generally supported by a high oil price environment, but also by growth in the non-oil sector, itself a function of government expenditure. We would also highlight that the government has announced a large budget within the education segment, which should be supportive over the medium term for spending in areas such as books, stationery and media. We expect to see inflationary pressures pick up again in 2010e, with inflation averaging 4.4%. Food and beverage inflation, currently touching negative inflation rates at present, should also increase, but remain below overall inflation levels. We therefore believe that the benefits consumer companies gained from the low inflationary environment in 2009 (by not fully passing on the decreases in raw material costs to end consumers) is likely to diminish in 2010e.
shipping
The fundamentals for the sector globally remain difficult due to the significant levels of overcapacity: at a global level, the order book is worth some 40% of the existing fleet. However, we expect overcapacity concerns to be somewhat mitigated by cancellations, as shipowners struggle to raise financing and older ships are demolished. Regarding the latter, we believe demolitions may accelerate as it is no longer financially viable to operate older ships. We believe these factors will contribute to a recovery from mid-2010e onwards. Some positive signs have already begun to emerge, with increased demand from China and increased activity in crude oil markets. However, visibility remains weak and it is still not possible to confirm whether these trends represent a sustained improvement or a temporary spike.
utilities
The water and power sector is a critical segment of the governments investment programme and underpins the strong growth outlook for this sector. We expect substantial capex over the short term to meet growing demand. This demand will be driven by i) the high level of population growth, ii) falling household size, iii) increased capacity across the industrial sector, and iv) lack of natural water aquifers (which forces the country to use desalinated water). Over the medium term, there is further scope for growth as the Kingdom is in the process of developing four new cities, which are expected to add USD150 billion to annual GDP. While the impact of this is still some time away, it underscores the positive long-term growth outlook for the sector overall.
b. stock picks
Our stock picks for the year are based on four key investment themes, which we believe will drive the market. This year, we also include some companies from outside of our coverage universe, to take advantage of the breadth of listings that the Kingdom offers. - Commodity Cycle - Moving from the Bottom: SABIC, Yansab. - Improving Credit Growth - Samba Financial Group, Saudi British Bank. - Consumer Resilience - Savola Group, Mobily, Aldrees Petroleum & Transport Services. - Infrastructure Spend & Capex - Amiantit, Arabian Cement, Red Sea Housing, Saudi Ceramics. Within the petrochemical sector we favour SABIC and Yansab, as strong beneficiaries of a higher oil price environment. SABIC (Buy, SAR80.0, FV105.0) derives its global cost advantage from its low fixed price feedstock, and we expect a further boost to earnings from new capacities coming on-stream (Yansab and Sharq). While the SIP business remains troubled, recent 3Q2009 results suggest an improvement in earnings following the restructuring programme. The shares trade at 12.7x 2010e and 9.6x 2011e P/E. We also highlight Yansab (Buy, SAR30.2, FV SAR42.0), which has higher cost advantage than SABIC and offers a pure play on the petrochemical sector. The shares trade at 15.1x 2010e and 8.3x 2011e P/E. Our main concern is that the company is highly leveraged, with a Net Debt/EBITDA ratio of 5.0x. However, our concerns are partially mitigated by the strong support Yansab receives from parent company SABIC. Nevertheless, earnings remain vulnerable to changes in polymer prices.
SAUDI ARABIA
Research Yearbook
Our top pick within the banking sector is Samba Financial Group (Buy, SAR50.3 FV SAR72.1). The bank was previously seen as a high risk stock due to its potential Saad and Algosaibi exposure. However, its risk profile has improved considerably, and we do not believe this has been priced in. As a result, the shares should be a prime beneficiary of any positive developments regarding the troubled groups. We also believe its exposure to Dubai World and other Dubai government-related entities (GREs) is likely to be small. With a loan-to-deposit ratio (LDR) of 60%, versus a sector average of 86%, and a capital adequacy ratio (CAR) of 15.2%, the bank is well positioned to benefit from an upturn in lending activity in the economy. The shares trade below the sector average, at 8.7x 2010e and 7.5x 2011e P/E (1.8x 2010e P/B). Saudi British Bank (Buy, SAR45.2, FV SAR55.0) has one of the highest quality banking franchises in the Kingdom and enjoys strong corporate relationships. The banks improving share in trade finance and the swap fee business has provided substantial resilience to its fee income. We expect the bank to record high provisioning in the face of its exposure to the Saad and Algosaibi Groups, but we believe it has minimal exposure to Dubai GREs. Moreover, we expect provisioning to peak by 1Q2010e and recede thereafter. Shares trade at 10.9x 2010e and 9.1x 2011e P/E (2.3x 2010e P/B). Among the consumer staples we favour Savola (Buy, SAR29.9, FV SAR39.4), given its strong regional presence, aggressive expansionary strategy through acquisitions and greenfield projects, and synergies from existing supply and distribution channels. Savolas quality of earnings has also improved, with core operational earnings now driving growth (versus investment gains and losses last year). We expect strong earnings growth in 2010e to be driven by its ongoing expansion in edible oils (Saudi Arabia), new operations (second sugar refinery in Egypt), full-year consolidation of Savola Behshahr, retail store additions and margin expansion in start-up operations. Lastly, the Capital Market Authority has given approval for Herfy (a fast food franchise 70% owned by Savola) to IPO. We believe this will also give some short-term support to shares. The shares trade at 14.8x 2010e and 12.7x 2011e P/E. Lastly, we like telecom operator Etihad Etisalat, known commercially as Mobily, (Buy, SAR42.2, FV SAR65.4), which offers pure play exposure to the domestic market. The company has strongly beaten consensus expectations for the past two quarters and also benefits from a strong, commercially-minded management team. The company has aggressively moved into the data market (via two internet and data service provider acquisitions over the past two years) and holds a c75% market share in the HSPA wireless broadband market. We expect overall data revenue to exceed 15% of total revenues in the long term, from 10% currently. The shares trade at an attractive 9.7x 2010e and 9.2x 2011e P/E.
stocks not currently covered

One of the key advantages offered by the Saudi Arabian stock market is the depth and breadth of investment opportunity. As a result of this, we have decided to step outside of our coverage universe and highlight some small and mid cap names that we believe offer significant alpha generating opportunities. Aldrees Petroleum & Transport Services operates the largest network of fuel stations in Saudi Arabia, comprising 350 pumping stations. This division is driven by the strong demand for cars (supported by favourable demographics) and the young generation that is expected to join the workforce soon. Aldrees also owns a fleet of 955 powered vehicles and over 1,000 trailers catering to the petrochemical sector (primarily SABIC), refining clients, cement plants and agricultural traders, among others. The main driver to this business is the increasing capacity coming from SABIC and cement producers. However, the Saudi governments new policy to stop unprofitable agricultural activities by shifting towards imports also opens up new possibilities for the company. The shares trade at a 12-month trailing P/E of 15.7x. Despite the cement sector facing overcapacity in the next few years, we believe Arabian Cement will benefit from its location in the Western region of the Kingdom. The dynamics in this part of the Kingdom remain favourable given: i) limited competition, ii) overall limited levels of capacity increase, and iii) strong development activity resulting in robust demand. Earnings are expected to improve over 2H2009e as new volumes come on stream. Valuations are attractive at 11.2x 12-month trailing earnings. Red Sea Housing sells and leases a wide range of high-quality modular manufactured buildings for commercial and residential application on a turnkey basis. Its main clients are the oil and gas, construction, and mining sectors, as well as government and multilateral organisations. The company tends to operate in territories marked by high political risk. It has three manufacturing facilities in Saudi Arabia, the UAE and Ghana. The companys 9M2009 results showed a 42% decline in earnings, driven by a 26% drop in revenue. However, 3Q2009 contract additions were the highest since 1Q2008. The six-month lag between orders and their P&L impact suggests that this will not be reflected in the financials until 1Q2010e. The company is a lagged play on a recovery in global capex spend, with shares currently trading at a 12-month trailing P/E of 13.3x.
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24
STRATEGY
Saudi Ceramics is a quasi-monopoly producer of ceramic tiles and sanitary ware in Saudi Arabia. It is an import substitution business, with an estimated 22% market share and virtually no local competition. Saudi Ceramics owns four factories that produce 33 million sqm of tiles, 2 million pieces of sanitary ware and 600,000 water heaters. We believe 2010e and 2011e are expected to be pivotal years, with a new tile plant coming on stream in 2H2010e. This plant is expected to increase the companys tiles and sanitary ware capacity by 50% and double its water heater production. The shares trade at a 12-month trailing P/E of 15.5x. Lastly, we highlight Amiantit whose core business includes the manufacturing and sale of pipes used for water transport and sewage, provision of water management, and the sale of pipe technologies. The company is a beneficiary of the rise in infrastructure expenditure. There are currently a large number of projects expected in power, water and sewage, and many plants are already under construction. The shares trade at a 12-month trailing P/E of 14.7x.
underweight ideas
We take a negative stance on National Shipping Company of Saudi Arabia (Sell, SAR17.5, FV SAR15.0) given that the company is highly exposed to the volatile VLCC market, with 11 of its 17 vessels trading on the spot market. Our analysts forecasts already factor in a recovery in VLCC rates, which leaves the company vulnerable to downgrades should VLCC rates not recover further from current levels. The shares trade at 11.2x 2010e and 8.6x 2011e P/E. Given our expectations of a strong rally across the Saudi market, we also keep Saudi Electricity Company (Buy, SAR10.9, FV SAR12.7) underweight, despite its positive recommendation. Shares are low beta and, with negative earnings generated outside of the summer period, we see no significant trigger for the stock to outperform. Despite benefiting from government support via interest-free loans, the 10-year extension to its dividend waiver and its cheap feedstock from Saudi Aramco, the company still has extensive capital expenditure requirements in 2010e to meet its planned capacity expansion. In addition, it charges low fixed tariffs, a position we do not expect to change. The shares are expensive, trading at 25.2x 2010e and 22.3x 2011e P/E but offer an attractive dividend yield of 6.5%. Lastly, we highlight Bank Albilad (Sell, SAR20.2, FV SAR15.5), which has the highest cost-income ratio of the sector at 78.4% due to its extensive spending on expanding its infrastructure. The bank also generates the lowest ROE of 4.3% in 2010e versus a sector ROE of 17.7%. The shares are expensive at 41.5x 2010e and 29.4x 2011e P/E (although its valuation is in line with the sector on a P/B basis at 1.8x 2010e).
FAHD IQBAL / HANZADA NESSIM
Figure 33: Saudi Arabia Coverage Universe

P/E 2009e 2010e 2011e 09-10e 10-11e 2009e 2010e 2009e 2010e 2009e 2010e EPS Growth P/BV ROE Div. Yield
RIC Code
Company Name
Rating
Price (SAR) 08-Dec-09 FV (SAR) Upside MKT Cap (USD mn)
Avg. Daily Value Traded (USD mn)
Banks 1120.SE 1080.SE 1140.SE 1020.SE 1050.SE 1010.SE 1090.SE 1060.SE 1040.SE 1030.SE 74.7 55.8 15.5 21.0 53.3 34.0 72.1 55.0 39.0 21.5 2.3% 29.8% -23.3% 6.9% 28.1% 34.9% 43.5% 21.7% 25.8% 15.9% 29,200 7,453 1,616 1,572 8,023 10,080 12,060 9,040 2,734 2,226 27.7 1.6 3.1 3.4 1.2 3.5 6.9 1.3 0.6 1.0
Al Rajhi Bank Neutral Arab National Bank Buy Bank Albilad Sell Bank Aljazira Neutral Banque Saudi Fransi Buy Riyad Bank Buy Samba Financial Group Buy Saudi British Bank Buy Saudi Hollandi Bank Buy The Saudi Investment Bank Buy
73.0 43.0 20.2 19.8 41.6 25.2 50.3 45.2 31.0 18.6
13.4 17.0 11.2 113.8 14.9 11.7 13.0 9.5 14.3 15.4 10.4
11.5 15.6 10.0 41.5 11.3 10.3 9.8 8.7 10.9 10.0 8.8
9.6 13.5 8.6 29.4 9.1 8.6 7.7 7.5 9.1 8.0 7.5
17.2% 9.0% 11.3% 174.2% 32.4% 13.5% 31.6% 9.6% 30.4% 53.9% 17.6%
19.1% 15.8% 16.1% 41.1% 22.6% 20.2% 27.2% 15.9% 20.3% 24.5% 18.3%
2.3 4.1 2.0 1.9 1.2 2.0 1.5 2.0 2.6 1.7 1.1
2.0 3.5 1.7 1.8 1.1 1.8 1.4 1.8 2.3 1.5 1.0
17.0% 24.1% 18.0% 1.6% 8.0% 17.2% 11.4% 21.2% 18.0% 10.9% 11.0%
17.7% 22.8% 17.1% 4.3% 9.8% 17.3% 14.1% 20.3% 20.7% 14.6% 11.7%
3.6% 3.8% 2.7% 0.0% 2.5% 3.0% 5.6% 4.2% 2.9% 1.3% 1.9%
3.7% 3.2% 3.0% 0.0% 2.5% 3.4% 6.0% 4.6% 3.7% 1.9% 2.3%
Consumer Staples 2050.SE Savola Group 4190.SE Jarir Marketing 39.4 162.5 31.8% 24.0% 3,987 1,397 5.0 1.8
Buy Buy
29.9 131.0
16.2 17.0 14.3
14.2 14.8 12.7
12.2 12.7 10.9
14.4% 16.3% 14.9% 16.4% 13.3% 16.1%
2.7 2.2 7.3
2.5 2.1 6.5
16.6% 17.8% 13.0% 14.1% 51.1% 51.4%
3.8% 3.3% 5.2%
4.7% 4.0% 6.5%
Petrochemical & Fertiliser 2010.SE SABIC 2020.SE SAFCO 2290.SE YANSAB 105.0 123.0 42.0 31.3% 2.7% 39.1% 64,000 7,983 4,530 133.3 11.3 9.3
Buy Neutral Buy
80.0 119.8 30.2
29.3 31.2 16.5 N/A
12.8 12.7 12.6 15.1
9.7 9.6 11.6 8.3
129.1% 146.1% 30.4% 305.8%
32.0% 31.9% 8.6% 82.6%
2.2 2.0 4.9 2.8
2.0 1.8 4.7 2.3
7.5% 6.5% 30.1% 4.6%
15.6% 15.2% 36.9% 17.0%
1.7% 1.3% 6.7% 0.0%
3.8% 3.8% 6.7% 0.0%
Industrials 4030.SE 15.0 -14.0% 1,466 11.8
NSCSA
Sell
17.5
14.4 14.4
11.2 11.2
8.6 8.6
28.7% 30.4% 28.7% 30.4%
1.1 1.1
1.1 1.1
7.6% 7.6%
9.8% 9.8%
8.6% 8.6%
8.6% 8.6%
SAUDI ARABIA
Real Estate 4020.SE 4300.SE 33.5 19.2 20.1% 25.2% 893 4,406 3.4 19.7
Akaria Dar Al-Arkan
Buy Buy
27.9 15.3
8.4 28.6 7.4
8.0 22.6 7.1
6.8 20.9 6.0
5.1% 17.9% 26.8% 7.9% 4.0% 18.5%
1.2 1.1 1.2
1.0 1.1 1.0
13.8% 12.7% 3.8% 4.8% 16.0% 14.3%
0.6% 3.6% 0.0%
0.6% 3.6% 0.0%
STRATEGY
65.4 73.5 12.4 55.0% 61.5% 21.0% 7,877 24,267 3,827 9.0 8.6 31.4 12.8 10.1 8.9 N/M 12.0 9.7 8.8 N/M 12.7 17.1% 12,055 5.0 27.5 27.5 25.2 25.2
Telecoms 7020.SE 7010.SE 7030.SE
Etihad Etisalat (Mobily) Saudi Telecom Company Zain KSA
Buy Buy Neutral
42.2 45.5 10.3
10.9 9.2 8.4 N/M
6.4% 3.6% 1.9% N/M
10.1% 6.4% 4.9% N/M
2.1 2.5 2.2 1.6
2.1 2.3 2.0 2.1
16.7% 25.2% 24.1% -28.2%
17.2% 23.9% 22.8% -31.8%
5.2% 3.6% 6.6% 0.0%
6.7% 6.7% 7.7% 0.0%
2 0
Utilities 5110.SE
Saudi Electricity
Buy
10.9
22.3 22.3
9.2% 9.2%
13.0% 13.0%
0.9 0.9
0.9 0.9
3.3% 3.3%
3.5% 3.5%
6.5% 6.5%
6.5% 6.5%
Source: Reuters, company data, and EFG-Hermes estimates
Research Yearbook
1 0
YEARBOOK
2010
my
Economy
econom
28
ECONOMICS
Saudi Arabia remains one of the top country picks for the region. After years of strong oil prices and successful management of the oil boom, we believe Saudi Arabia is in a strong position to continue with its counter-cyclical policy and smooth out the downturn. The sharp fall in both oil production and prices has led to nominal GDP contracting and real GDP remaining flat in 2009e. However, we estimate that the governments measures have resulted in a more moderate deceleration in real non-oil GDP, which is a better barometer of economic activity on the ground. Nevertheless, non-oil private sector economic activity has been stifled by the limited availability of new credit, both domestic and international. This is despite the fact that there has been no structural correction in Saudi Arabia and that there is still a strong need for investment in a number of areas, including housing and utilities. Positively, we see a notable improvement in the economic outlook in 2010e. We believe both the fiscal and current accounts will realise a surplus in 2010e, due to increased oil revenue, while government spending will remain expansionary. Importantly, we believe that government spending (the main way for oil revenue to enter the real economy) will remain expansionary even if the oil price falls to around or below USD50 per barrel (p/b), although the higher oil price forecast will have a notable impact on private sector confidence as well as guaranteeing the governments investment programme. We forecast that real non-oil activity will strengthen in 2010e, as government projects initiated in 2009 are implemented and as domestic credit returns. With a strengthening in global demand, albeit tentative, and a higher forecast oil price, we expect to see headline figures strengthen in FY2010e - including nominal GDP returning to positive growth, real GDP accelerating, a widening in the current account surplus and a small fiscal surplus.
growth and output - forging ahead with the investment programme

Fig 1: Oil Price and Production Levels for Saudi Arabian Crude
USD/barrel (LHS), Million barrels/day (RHS)
140 120 100 80 60 40 20 0
Oct-09 Oct-07 Oct-08 Jul-07 Jul-08 Jul-09 Jan-07 Jan-08 Jan-09 Apr-07 Apr-08 Apr-09
Fig 2: Breakdown of Nominal GDP

In USD billion, unless otherwise stated
Private Consumption Government Consumption Net Exports Gross Fixed Capital Formation Change in Inventories Nominal GDP Growth
Average Daily Production (RHS) KSA Average Spot Price (LHS)
10.0 9.5 9.0 8.5 8.0 7.5 7.0
600 500 400 300 200 100 0

2001
2002
2003
2004
2005
2006
2007
2008
2009f
2010f
Source: EIA
Source: SAMA, EFG-Hermes estimates
fy2009e economy contracts nominally, but flat in real terms

While OPEC aggressively cut its production quotas at the end of 2008 and early 2009, Saudi Arabias cuts were particularly severe. Production data shows that Saudi Arabia was producing below OPEC quota levels from December 2008 to April 2009. However, with the strengthening in the oil price from April onwards OPEC countries, including Saudi Arabia, have increased production levels from the lows seen at the beginning of 2009. The government indicated in its 2010 budget, announced at the end of December 2009, that it estimated that real GDP grew a marginal 0.15% in 2009. We had forecast a contraction, of 1.0%, in FY2009es overall real GDP, driven by Saudi Arabias sharp contraction in oil production. Oil production fell by 11.8% in the first 10 months of 2009, according to EIA data. We believe that the difference between our forecasts and the governments estimate, given that both of our estimates for real non-oil GDP growth were 3.0% exactly, is due to either i) a revision in the historic data, the details of which are not included in the budget; or ii) a lower fall in oil production levels than we had expected. We estimate that to see growth of 0.15%, the drop in 2009s oil production levels would need to be around 7.5%, as opposed to our expectations of a more significant drop of 11.5%. Specific details of oil production levels were not included in the budget. The real contraction in net exports was partly moderated by increased petrochemical exports in 2009e, driven by increased production capacity and strong demand from Asia, and partly by the drop in the volume of imports. However, in nominal terms, petrochemical export earnings were sharply down as a result of weaker global demand and a substantial fall in prices. Petrochemical exports dominate non-oil exports. Nevertheless, even with the recent slight increase in production, we believe Saudi Arabia has probably seen the sharpest fall in oil production globally in 2009e and, coupled with the fall in average oil price, nominal GDP is estimated to have contracted by around 21%.
2011f
SAUDI ARABIA
Research Yearbook
2009 - the government filling the gap 2010 - return of credit to support outlook
domestic demand also impacted in 2009

Global and local developments negatively affected private consumption and investment levels in 2009. In particular, concerns about the substantially weaker oil price in 1Q2009, a key driver of sentiment, coupled with concerns about the debts faced by two large family conglomerates (Saad and Algosaibi) dented business confidence and reduced the availability of lending from the domestic banking sector. Availability of loans to the private sector, especially for those projects without government involvement, has been difficult to obtain (see Credit Section). This has been compounded by the loss of external financing. On the back of weaker private consumption and investment growth, real non-oil GDP is estimated to have decelerated to 3.0% in 2009e, from 4.3% in 2008. Fig 3: Proxies of Private Consumption Y-o-Y change, unless otherwise stated
20% 15% 10% 5% 0% -5% -10% -15% -20% -25%
Mar-09 May-09 Oct-09 Aug-09 Sep-09 Jul-09 Jun-09 Jan-09 Apr-09 Feb-09
Fig 4: Volume of Cement Sold to the Domestic Market Y-o-Y change, unless otherwise stated
30% 25% 20% 15% 10% 5% 0% -5% -10%
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09
Volume of Imports of Consumer Goods Volume of Point of Sales of Transactions
-30%
Source: SAMA, Saudi Ports Authority
Source: Yamama Cement
Although interim data is not available for GDP by demand, proxy data points to a year-on-year deceleration in both investment and private consumption growth. Within investments, however, we believe that construction activity continued to see moderate growth. Private consumption growth has been weakened by a combination of lower expatriate inflows (especially into the construction sector) and weaker wage increases, along with the fall in oil prices. However, the drop in inflation levels has provided a degree of support to consumption, reducing the level of deceleration in real wage growth. The volume of consumer and investment imports fell in 1H2009, as domestic demand slowed. However, the sharp drop in both investment and consumer import volumes (rather than a deceleration) is linked to the build-up of stocks in 2H2008, which are now being drawn down. Indeed, a slowdown in retail spending (opposed to a contraction) is evidenced by points of sale data, which is a good proxy of consumer spending. Moreover, cement sales (which we believe is a better proxy as limited inventory build-up occurs) for domestic use have accelerated during the year, reflecting ongoing construction activity. This is in line with our belief that there was a relatively weaker fall in consumer and business sentiment compared to some of the other counties in the region, given the more limited speculative activity, less leverage and limited development of speculative bubbles.
government action provides support

All the indicators point to a tentative pick-up in economic activity in 3Q2009, despite the slowdown in activity occasioned by the Holy Month of Ramadan. The strengthening of the oil price, pick-up of global and domestic stock markets and, crucially, the direct role played by the government in the investment programme, have all been central to this improvement in economic activity. Nevertheless, reflecting the weaker domestic and external demand, the majority of sectors in 2009 saw a deceleration in real growth, albeit still positive. The industrial sector grew by 2.2%; the electricity, gas, and water sector by 3.4%; and the transport and communication sector by 6.0%. Retail sector growth saw a notable deceleration to 2.0%, reflecting a slowdown in private consumption growth. The finance, insurance and real estate sector grew by an anaemic 1.8%, as banks slowed their lending growth and increased provisioning. However, in a positive development, the construction sector witnessed a marginal acceleration in growth, to 3.9%, reflecting the ongoing construction activity. We believe that the governments actions were pivotal in supporting domestic demand throughout the year. We estimate that spending increased during 2009, and was substantially above the budgeted increase, in order to compensate for the loss of bank credit availability, although this is not fully reflected in the governments expenditure figure for 2009 (see Fiscal Section).
ECONOMICS
30
ECONOMICS
Consequently, we estimate that government consumption was the main positive contributor to real GDP growth. Highlighting the importance of the government in supporting growth in 2009, preliminary government data estimates that the government sector grew by 4.0%, while the private sector expanded by a weaker 2.5%. Government credit institutions, such as the Public Investment Fund (PIF) and the Saudi Arabian Development Fund, increased funding for infrastructure and industrial projects throughout the year. In addition, the government has been paying contractors in advance, to offset the impact of the lack of bank finance. Furthermore, the government and related entities (such as Aramco) have increased their direct investment. The government has increased its contract awards by over USD120 billion in 11M2009, equivalent to over 25% of forecast FY2010e GDP, although of course not all these projects will be implemented in 2010e. Those projects put on hold in 2009 are believed to be, for the most part, private ones, and we believe the economic impact of these projects being put on hold will be relatively little as they have yet to be started. Fig 5: Progress in Saudi Arabias 5-Year Investment Programme
700 600 500 400 300 200 100 0 Total Planned Projects* Awarded Delayed or Cancelled Infrastructure Real Estate Industry Oil and Gas Petrochemical 12 10 8 6 4 2 0
1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11
Fig 6: Awarded Projects Schedule by Sector

Oil & Gas Petrochemical Real Estate Infrastructure Others
*Excluding awarded, delayed and cancelled Source: MEED Projects
Source: MEED Projects
domestic demand to accelerate in 2010e

We see domestic demand strengthening in 2010e, driven by the governments investment programme. We believe that most of the benefit accruing from the increased number of projects announced by the government (and issued contracts linked to them) will be felt in 2010e and 2011e as the majority of projects are likely to be implemented in these years. We forecast that real non-oil activity will accelerate to 4.4% in 2010e, up from 3.0% in 2009. We expect relatively healthy activity in those sectors linked to the investment drive, such as construction and transportation. The manufacturing sector should also benefit in real terms from an increase in petrochemical production, as a number of new petrochemical projects expected to start production in 2009 have been delayed until 2010. The outlook for the financial sector is also likely to improve in 2010e, with provisioning levels falling and bank lending increasing. Importantly for domestic demand, particularly investment, we expect to see increased bank lending for private sector activity, especially to companies associated with government contracts. We also expect to see private consumption strengthening as a result of accelerating investment activity (leading to increased wages and a greater influx of expatriates), higher government spending and oil prices. We believe the governments investment programme will focus on domestic projects, in particular on social and physical infrastructure. Over 80% of planned government projects are in non-oil sectors. Areas of strong activity include water, power, transportation, and the building of universities and the economic cities. On the oil side, Saudi Arabia has reached its goal of increasing output capacity to 12.5 million barrels per day (bpd) by the end of 2009, with ample spare capacity currently of around 4.3 million bpd. While Saudi Arabia still plans to develop its oil field to ensure that future demand is met, and that there always remains spare capacity of around 2.0 million bpd, the speed of development will depend upon the global recovery. Saudi Aramco, for example, has delayed its Manifa heavy-oil field development because of lower global demand. Instead, the focus has shifted to increasing gas and refined fuel production. Current gas production is not sufficient to meet domestic needs. This will also help to meet medium to long-term petrochemical expansion plans.
SAUDI ARABIA
Research Yearbook
Fig 7: Drivers of Non-oil GDP

6% 5% 4% 3% 2% 1% 0%
2004 2005 2006 2007 2008 2009f 2010f 2010f
Fig 8: Broad Based Growth Forecast

Construction Financial & Real Estate Other 10% 8% 6% 4% 2% 0% -2% -4% -6%
2009f 2010f 2011f 2001 2002 2003 2004 2005 2006 2007 2008
Manufacturing Transport & Communication Government Services Real Non-Oil GDP Growth
Government Consumption Private Consumption Net Exports
Gross Fixed Capital Formation Change in Inventories Real GDP Growth
-8%
headline figures to improve with higher oil earnings

We also expect to see net exports making a positive contribution to real and nominal GDP growth in 2010e as oil prices and production levels rise, and consequently we expect both nominal and real GDP growth. We are forecasting real GDP growth of 4.1% in 2010e. While oil production increases for OPEC countries will be limited by the fragile global recovery and the buildup of oil inventories in 2009, Saudi Arabia is likely to see a greater Y-o-Y increase in oil production in 1H2010e, given 1H2009s below OPEC quota production levels. We continue to maintain that the greatest risk to our forecast is on the external side and, notably, our oil price scenario. This is especially the case if there is a fall in global sentiment and the development of a double dip recession, which would also impact petrochemical exports. Nevertheless, given the strong net foreign asset (NFA) position, we expect to continue to see a strongly expansionary fiscal position, even if there is a lower oil price than our forecast level of USD80 p/b for Brent crude in 2010e. Going into 2011e, we continue to expect broad based growth, with real GDP growth accelerating to 4.5%. An improvement on the external front will result in increased oil production, although we also expect to see stronger import growth. We also see non-oil GDP growth accelerating, as the investment programme gains momentum and private consumption picks up.
fiscal developments and outlook

Counter-cyclical government spending has been the backbone of 2009s non-oil activity. Government expenditure directly accounts for around 30% of nominal GDP, but it is also the key driver of confidence in the domestic economy and the investment programme. Saudi Arabia has one of the strongest government fiscal stimuli in the region - with government spending accounting for 67% of non-oil nominal GDP in 2009e, which is forecast to increase to above 70% in 2010e. Fig 9: Fiscal Balance
In SAR billion (LHS), % of GDP (RHS)
1,200 1,000 800 600 400 200 0
2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f 2011f
Fig 10: Budget Breakeven Oil Price

In USD/barrel, unless otherwise stated
Expenditure (LHS) 35% 30% 25% 20% 15% 10% 5% 0% -5% 70 60 50 40 30 20 10 0 2004-2006 2007 2008e 2009f 2010f 2011f
Revenue (LHS) Fiscal Balance (RHS)
Source: Regional central banks, EFG-Hermes estimates
ECONOMICS
32
ECONOMICS
expansionary fiscal policy - focus on capital expenditure

Preliminary government estimates suggest that Saudi Arabia realised a fiscal deficit of SAR45 billion (USD12 billion) in 2009, equivalent to 3.3% of preliminary GDP. This was the first deficit realised by Saudi Arabia since 2002 and a sharp reversal from the peak fiscal surplus seen in 2008 of USD154.6 billion, equivalent to 33.0% of GDP. Overall revenue fell by 54% in 2009e, as oil revenues fell sharply. Oil revenue accounts for around 85% of government revenue, depending on the oil price. With an increase in government spending and sharply lower oil production levels, we forecast a budget breakeven oil price of around USD64 p/b in 2009e. Even though we expect government spending to accelerate in 2010e, our expectations for higher production levels and increases in non-oil revenue mean that we forecast 2010es budget breakeven oil price will fall below USD60 p/b. However, budget data indicates that actual spending in 2009 only increased by 5.8% Y-o-Y. This increase is substantially below 2008s actual spending increase of 11.5% and the 16.3% average annual rise in expenditure between 2005 and 2008. We believe that this relatively muted government spending level (especially in light of the various government actions taken in 2009 to support growth) is a result of two main factors. Firstly, not all of the stimulus policy is reflected in the expenditure component of the budget, with high investment by Aramco, for example, resulting in lower oil revenues being transferred to the government. The fiscal deficit could thus point to spending by government related bodies. Indeed, taking into account just the average oil price and production levels, government revenues should have fallen by a lower 43%. Secondly, the sharp fall in commodity prices and other imported prices will have helped limit spending increases on goods and subsidies, freeing up resources for capital expenditure. If we take both these factors into account, we believe that the real impact of government spending was over 15%. Importantly for the economic outlook, we believe that the budget continues to point to an expansionary stance in 2010e. We believe this is highly positive, given the importance of government spending as a driver of domestic demand. Although total expenditure in the 2010 budget is slated to contract by 1.8% from actual spending in 2009, we forecast that spending will remain expansionary. The Saudi budget has historically underestimated government expenditure, with forecast expenditure in the budget lower than the estimated actual expenditure of the current year. The 2010 budget has expenditure increasing by 13.7% from the 2009 budget, which we believe is a better indicator of government spending plans. We forecast that actual government spending will increase by 12% in 2010e. The 2010 budget continues to prioritise capital spending. Spending on investment projects is set to increase by 16% over 2009 budgeted spending levels. Key areas of capital expenditure include social development (notably education and healthcare) and infrastructure. Although inflation is set to increase from its level at the end of 2009, we believe that overall annual average inflation will be marginally down in 2010e compared to 2009e. Consequently, current spending will be less of a priority, albeit still expanding. Expenditure on goods and services will also increase. The education and manpower sector is due to receive the largest spending allocation within the capital expenditure component, with an increase of around 13%. Expenditure on water and infrastructure projects will increase by around 30%. Given that the budget is tailored to the challenges of the economy, we feel its focus is correct. We believe there is a vital need for Saudi Arabia to move forward with its social development investment plans (especially education, given the increasing need for its young population to find employment) and infrastructure upgrades (including in areas such as power, water and housing), after 20 years of underinvestment in these sectors combined with strong population growth. Fig 11: GCC Fiscal Stimulus
% of GDP*, unless otherwise stated
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Qatar KSA Kuwait Oman UAE Bahrain 0 50 100 150 2009e 2010e
Fig 12: Breakdown of Government Spending

200 Current Expenditure Capital Expenditure
2003
2004
2005
2006
2007
2008
2009f
2010f 2011f
*Government spending as a percent of non-oil GDP Source: SAMA, EFG-Hermes estimates
Source: Regional central banks, EFG-Hermes estimates
SAUDI ARABIA
Research Yearbook
With the increase in oil revenue, we forecast that Saudi Arabia will realise a small fiscal surplus of around 2.5% in 2010e. However, the government is currently predicting a second year of fiscal deficit in 2010. This is due to substantially lower forecast revenue of SAR470 billion (USD125.3 billion) in 2010e, which is below both 2009s actual revenue and our 2010e estimate of SAR656.5 billion. Although the budget does not provide an oil assumption, the revenue estimate implies an oil price of around USD50 p/b, with average production levels remaining constant at around 8.2 million barrels per day. Saudi Arabia changed its oil pricing policy, effective from 1 January 2010, away from using WTI as a benchmark to the Argus of Sour Crude Index. We expect this to have a negligible impact on oil revenues going forward. The new pricing will, however, remove volatility and ensure that pricing reflects global developments.
nfa position to remain strong despite falling in 2009

Although the structure of the budget has not changed, the underlying fiscal position has improved substantially. After six years of fiscal surpluses and relatively restrained government spending (especially in light of the rising oil price), Saudi Arabia is in an extremely strong position to continue with its expansionary government policy, even if there is another drop in the oil price. The bulk of government savings have been channelled to SAMA to manage and have been mostly invested in overseas securities, as reflected in the build-up of foreign assets. The conservative management of reserves has meant that savings were not eroded by the collapse of global markets and asset prices at the end of 2008, and they are in a relatively liquid form. We do not expect to see a change in Saudi Arabian investment policy, especially considering its likely strong performance in the recent global turbulence. In line with 2009es fiscal deficit and the government tapping into reserves to fund spending, Central Bank data shows that the NFA position at the Central Bank has continued to fall in 9M2009 from a peak in November 2008, even with the increase in oil revenue in 2H2009. The governments wider (i.e. non-fiscal) measures to support the economic outlook have also resulted in a fall in NFAs. These measures include reducing government debt to the banking sector. In addition, and in line with Saudi Arabias greater commitments to the IMF, in 3Q2009 the Kingdom increased its deposits with the IMF through the allocation of IMF special drawing rights (SDRs). These SDRs are classified as official reserves, rather than NFAs. The governments strong support for growth was, we believe, the correct policy, given Saudi Arabias ample asset position. The fiscal deficit is equivalent to just 2.8% of the estimated NFA position at the end of 2009e. There was an increase in the October NFA figure, and we expect this trend to continue for the remainder of the year and into 2010e as the fiscal balance returns to a surplus. Despite the fact that we expect the NFA position to fall by just under 6.0% in absolute terms in 2009e, on the back of the substantially greater fall in nominal GDP, NFAs as a percentage of GDP are estimated to increase to 114% of GDP in 2009e, from 95.8% in 2008. This compares to an average of around 28% of GDP between 1996 and 2003 and highlights Saudi Arabias substantially stronger fiscal position. We forecast that NFAs will remain at around 115% over the outlook period, albeit continuing to increase in absolute terms. Fig 13: NFA Position
In USD billion (LHS), % of GDP (RHS)
600 500 400 300 200 100 0
2010f 2011f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Fig 14: Government Debt Position

In SAR billion (LHS), % of GDP (RHS)
130% 110% 90% 70% 50% 30% 10% -10% 700 600 500 400 300 200 100 0 2010f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gov Debt to Banking Sector (LHS) Other Government Debt (LHS) Total Debt to GDP (RHS) 120% 100% 80% 60% 40% 20% 0%
Net Foreign Assets (LHS) Net Foreign Assets (RHS), as a % of GDP
ECONOMICS
34
ECONOMICS
debt developments will depend on liquidity

The fiscal surpluses have also been used to reduce Saudi Arabia's debt position, thus freeing up more resources for countercyclical spending at times of lower oil prices. The debt level fell to SAR225 billion (USD60 billion) in 2009, down from SAR620 billion (115% of GDP) in 1999. However, given the contraction in nominal GDP, debt as a percentage of GDP rose to 16% at the end of 2009, up from 13.3% in 2008. The risk profile is further reduced because government debt is all domestically held. We believe debt developments will now depend on liquidity issues, given this lower debt level. As liquidity in the banking system and inflation surged late-2007 and in 1H2008, SAMA increased its borrowing from commercial banks by issuing paper. However, as the focus shifted to ensuring ample liquidity in late-2008 and throughout 2009, SAMA reduced its borrowing from the banking sector (see Monetary Section). In the first ten months of 2009, bank claims on the government fell by around 30.0% compared to their late-2008 levels. Given the build-up in reserves, Saudi Arabia no longer needs to fund a deficit through issuing debt (as it has done in the past). We forecast that, with the focus remaining on growth and encouraging greater lending from the banking system, bank claims on the government will continue to fall, albeit not to the same degree as seen in 2009. With a fiscal surplus forecast for 2010e we also expect to see a fall in non-bank debt. We are therefore forecasting a reduction in government debt to 12.8% of GDP by 2010e.
monetary developments and outlook

As the economic challenge from October 2008 onwards became one of supporting growth, the government adopted a looser monetary policy and ensured the availability of sufficient liquidity in the banking sector. We believe this policy will continue. Although we expect to see inflation picking up in 2010e, we believe this will be mostly externally driven. With only a tentative recovery in credit growth, we expect limited (if any) increase in interest rates in 2010e. Fig 15: Fall in Interbank Rates
6% 5% 4% 3% 2% 1% 0%
Oct-07 Oct-08 Oct-09 Mar-07 Mar-08 Mar-09 May-07 May-08 May-09 Jul-07 Jul-08 Jul-09 Jan-07 Jan-08 Jan-09 Dec-07 Dec-08
Fig 16: Benchmark Interest Rates

3-month SIBOR 6% 5% 4% 3% 2% 1% 0%
May-07 May-08 May-09 Jan-07 Jan-08 Jan-09 Sep-07 Sep-08 Sep-09
3-month US LIBOR
3-month EIBOR
Repo Rate (Lending Rate) US Fed Fund Rate
Reverse Rate (Deposit Rate)
Source: Reuters
Source: SAMA, IMF
loosening monetary policy and boosting liquidity

Policy makers stepped in quickly to add liquidity to the banking sector and support the growth outlook in 2H2008, as the abundant liquidity position reversed and interbank rates increased. This reversal of the liquidity position was largely due to i) the removal of speculative funds focusing on currency reform, and ii) the limited availability (and increasing cost) of international wholesale and capital market funding as a result of the global crisis. Moreover, with the global crisis leading to a sharply deteriorating economic outlook, plummeting oil prices and falls in inflationary pressures, SAMA moved to loosen monetary policy. Liquidity levels have now improved, reflected in three-month SAIBOR remaining below 1.0% since mid-April 2009, after rising above 4.6% in October 2008. Interbank rates are now below the levels they reached during the time of currency speculation and foreign inflows. Policies adopted by the government to improve liquidity include: - Cutting Interest Rates: SAMA aggressively reduced the lending rate by 350 bps from October 2008 to January 2009, to 2.0%. The deposit rate was also reduced by 175 bps between November 2008 and June 2009, to 0.25%, after being on hold since April 2008. The cuts in the benchmark deposit rate reduce the attractiveness of holding funds at the Central Bank. Reducing the benchmark deposit rate has also helped to reduce the treasury rate; this reduces the attractiveness of holding government paper, and is aimed at promoting lending. SAMA has indicated that the existing interest rate cuts are sufficient to support the economic outlook. However, as SAMA has historically kept the official lending rate at a premium of about 25 bps over the Fed Fund Target Rate (FFTR), there is some further room for interest rate cuts if required. We believe that interest
SAUDI ARABIA
Research Yearbook
rates will be kept on hold into 2010e, although there is a possibility of a 25 bps increase in both benchmark lending and deposit rates in 4Q2010e should inflationary pressures pick up. We forecast that real interest rates will remain negative in 2010e, given the inflation level, but substantially less so than in 2008. Given the fact that banks will remain cautious about lending, we believe that this is the correct policy. - Reducing the Reserve Requirement of Commercial Banks: From October 2008, SAMA began reversing its cash reserve requirement policy, reducing it twice to reach 7% in 4Q2008. The government also announced that it would guarantee bank deposits and interbank loans to encourage deposits and bank lending. - Increasing Government Deposits in the Banking System: SAMA substantially increased its SAR and USD deposits at the end of 2008. We believe these official deposits in the commercial banking system were a main factor behind the improving liquidity. Although government deposits had been increasing since 2007, as public spending increased, the pace picked up from mid-2008. In addition, the government has substantially reduced its issuances of government bonds and treasury bills to encourage bank lending to the private sector. With the improved liquidity and buoyant public spending in 2009, government deposits (and the net government deposit position) in the banking sector have fallen from their November 2008 peak, when liquidity concerns were at their highest. Nevertheless, government deposits are still ample and, as such, Saudi banks are generally not looking for new deposits. We forecast net government deposits in the banking system will continue to drop, albeit moderately, in 2010e as a result of the ongoing expansionary fiscal position. SAMA will undoubtedly monitor the liquidity position closely and change its stance if required. Fig 17: Net Government Deposits in the Banking Sector
In SAR billion, unless otherwise stated
1,100 900 700 500 300 100 (100) Bank Claims on the Government Government Deposits at Commercial Banks Net Deposits at the Banking Sector 5% 4% 3% 2% 1% 0% -1%
2000 2001 2002 2003 2004 2005 2006 2007 2008 Oct-09 Oct-07 Oct-08 Oct-09 Jul-07 Jul-08 Jul-09 Jan-07 Jan-08 Jan-09 Apr-07 Apr-08 Apr-09
Fig 18: M-o-M Private Sector Credit Growth
-2%
monetary supply growth to slow sharply

The deceleration in credit growth originally stemmed from the tight liquidity. However, the risk aversion of the banking sector increased markedly in 2Q2009 following the emergence of debt difficulties and corporate defaults by two important and prominent Saudi families - the Saad and Algosaibi Groups. The banking sector limited new lending to the private sector as concerns increased that similar difficulties might be faced by other family businesses. M-o-M credit growth, which reflects new credit entering the economy, rose by an average of just 0.17% in 10M2009. However, from June 2009, private sector credit growth has been positive. The removal of credit in 2009 has severely dampened non-oil sector growth, as government spending has not been multiplied to the fullest extent and it has provided more limited benefits to the private sector than may otherwise have been expected. Lending has been slow across the board, not just in the corporate loan segment. The latest Central Bank data shows that private sector credit growth decelerated to a mere 1.3% Y-o-Y in October 2009. However, in a positive development, consumer credit is showing some signs of recovery, with consumer loans growing 3.0% Q-o-Q in 3Q2009. A recovery in consumer loans could however occur earlier than in other areas, given the typically high level of collateralisation in this segment. With one of the strongest macroeconomic positions in the region, we expect confidence to return relatively quickly in Saudi Arabia and we believe there is likely be some pick-up in loan activity from 2Q2010e, albeit tentative. We expect the debt difficulties faced by Dubai at the end of 2009 to have a relatively limited impact on credit growth, although external lenders will look for greater transparency and explicit sovereign guarantees for government-linked projects. Saudi banks are likely to want to see exposure to Dubai debt before lending; however, once comfortable with this, we believe they will be looking to extend credit after the limited activity in 2009. We are forecasting that private sector credit growth will accelerate to 16% in 2010e.
ECONOMICS
36
ECONOMICS
In line with the acceleration in credit growth and a build-up in the NFA position, money supply growth is also likely to pick-up in 2010e to around 18.6%. This is after broad money (M2) growth decelerated to 10.8% Y-o-Y in October (from a peak of 28.5% Y-o-Y in January 2008). However, with weaker credit growth and an increase in the fiscal surplus, money supply growth will nevertheless be weaker than in 2007 and 2008. Fig 19: Drivers of Credit Growth
Q-o-Q change, unless otherwise stated
50% 40% 30% 20% 10% 0% -10%
1Q2005 3Q2005 1Q2006 3Q2006 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009
Fig 20: Money Supply (M2) Growth

Y-o-Y change, unless otherwise stated
30% 25% 20% 15% 10% 5% 0%
Oct-07 Oct-08 Oct-09 Oct-09 Jul-07 Jul-08 Jul-09 Jul-09 Jan-07 Jan-08 Jan-09 Apr-09 Apr-08 Apr-07 Apr-09
Commerce Corporate Loans Real Estate Finance Public Services Total Credit
-20%
Source: SAMA
Source: SAMA
inflation
Inflation surged from mid-2007 onwards, driven by rents and food prices, and was a key area of concern for policy makers in 2007 and 2008. After surging to 9.9% in 2008, Saudi Arabia has seen a sharp deceleration in price increases in 2009, from 7.9% Y-o-Y in January to 3.5% in October. This sharp fall in the rate of inflation has enabled SAMA to loosen its monetary policy. We forecast that annual average inflation will fall to 5.0% in 2009e, with the sharp decline in food prices the main contributing factor. The inflation rate is also slowing on the back of lower imported inflation, as the USD appreciates and as prices fall globally. Domestically, Saudi Arabia has also seen rental price deflation, pointing to a slowdown in the influx of expatriates as economic activity slowed. Nevertheless, rental price increases have remained above 10% Y-o-Y, partly owing to a substantial amount of the Kingdoms rental demand stemming from the domestic population (unlike in other GCC countries). We believe that the inflation rate is close to bottoming out, and we expect inflationary pressures will start increasing. We expect inflation to be predominantly driven by imported inflation increases, with a weaker USD and food price inflation. Domestic demand is also expected to increase, led by a pick-up in investment and non-oil activity. This, in particular, could lead to a pick-up in housing costs, the key area of supply shortage in the domestic economy. We are forecasting an annual average inflation rate of 4.4% for 2010e. Given the forecast USD weakness and the stronger economic activity resulting from the investment programme, we forecast a structurally stronger inflation rate in the medium term compared to historic levels. Fig 21: Annual Average Inflation Fig 22: Drivers of Inflation
Y-o-Y change, unless otherwise stated
12% 10% 8% 6% 4% 2% 0% 0% 15% 10% 5% 20% Food & Beverages Rent & Related Items Clothing & Footwear Overall CPI
Oct-08
Apr-08
Jul-08
Jan-08
-5%
Source: SAMA
Jan-09
2010f
2011f
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
-2%
SAUDI ARABIA
Research Yearbook
external developments
As with the fiscal position, Saudi Arabia's external economic performance is highly dependent on oil exports, which account for 85-90% of total exports depending on the price of oil. Not surprisingly, the external position has improved since the beginning of the decade with the increases in oil earnings. Positively, non-hydrocarbon exports have also performed robustly over the last few years, more than doubling to USD27.9 billion in 2007 from USD10.9 billion in 2003. Most of this increase has been in petrochemical and plastic products.
sharp drop in trade and current account surpluses

The current account continued to realise a surplus in 2009, unlike the fiscal balance. However, the sharp fall in both global demand and commodity prices resulted in a substantial fall in 2009es trade surplus and, subsequently, its current account surplus, with the latter realising a modest surplus of 5.6% of 2009s GDP according to preliminary government estimates. This follows a current account surplus of 28.6% of GDP in 2008. The sharp decline is a result of substantially lower oil earnings (falling by around 44%), due to both a weaker average oil price and lower production levels. In addition, non-oil export earnings have also witnessed a marked fall (down 16% in 2009), driven by weaker petrochemical prices. However, in a positive development, the volume of petrochemical exports increased by 10.3% in 10M2009, driven by demand from Asia and an increase in production capacity. The deterioration in the trade balance has been limited by the around 20% drop in the value of imports, reflecting weaker commodity prices and weaker domestic demand. The deterioration in the current account balance is also a result of the ongoing, albeit slower, growth in the invisible components of the current account. These include areas such as the service balance and net transfers, which include remittance outflows. With lower global interest rates (including treasury rates), we also expect to see a fall in investment income over FY2009e. We expect the current account surplus to widen to 12.6% in 2010e, as a result of increased oil export earnings. Although we forecast export income and the current account will both increase in 2011e, strong import growth of goods and services and remittance outflows will result in the current account surplus increasing by a weaker amount than nominal GDP. As a result, we forecast that the surplus, as a percent of GDP, will narrow marginally to 12.4% of GDP.
limited balance of payments surplus

Despite the substantial current account surpluses over the last few years, capital and financial account outflows have continued to increase as the majority of oil earnings have been invested overseas. Consequently, the overall balance of payments surplus has tended to be below 5% of GDP. Although capital inflows have been totally overshadowed by outflows, they too have been increasing. FDI inflows into Saudi Arabia have risen recently, especially with the government's investment plans. In addition, to meet local requirements regional banks and corporates have increasingly turned to external funding. However, Saudi Arabias reliance on overseas funding has been much less than elsewhere in the region, in particular the UAE. We continue to believe that the overall balance of payments will realise a small surplus in 2009e. However, in a reversal of the last few years, there will be small overall net financial and capital inflows (surplus) in 2009e, as the government taps into its savings (directed towards overseas assets) to fund its spending plans. This is partly reflected in the fall in the NFA position. In addition, with the lower oil earnings and fiscal deficit, there will be no surplus to invest overseas in 2009e. The global credit crisis has also restricted the access of banks to FDI inflows, which are also likely to have fallen in 2009e. We expect to see a return of capital outflows in 2010e as the fiscal surplus increases. Fig 23: Balance of Payment Position
250 150 50 (50) (150)
2009f 2010f 2011f 2001 2002 2003 2004 2005 2006 2007 2008
Fig 24: SAR Forward Pricing Suggests a Revaluation

In bps, unless otherwise stated
Trade Balance Services Balance Overall Balance 400 200 0 (200) (400) (600) (800) (1000)
Sep-08 May-09 Sep-09 May-08 Jan-08 Jan-09
Income Balance Financial & Capital Account Transfers Balance
SAR 1YR FW
SAR 2YR FW
(1200) (250)
Source: SAMA, EFG-Hermes
Source: Reuters
ECONOMICS
38
ECONOMICS
no change in currency regime

We believe the SAR's peg to the USD will remain intact over our outlook period. The fall in the inflation rate and the fact that the Saudi Arabian economy is now in line with that of the US has reduced the short-term incentive to move away from the peg. Indeed, both the US and Saudi Arabia will be looking to keep monetary policy accommodative and interest rates low. Saudi Arabia has indicated that the new common currency would initially be pegged to the USD. After speculation regarding GCC currency reform abated in 2Q2008, there have been some increased flows into GCC currencies from mid-2009 onwards, probably as a result of the market considering that greater progress is being made towards a monetary union, which is seen a step towards currency reform. This is reflected in the fact that SAR 1-year and 2-year forwards are trading at a discount. However, we believe the 2010 deadline will not be met and, given the degree of monetary and fiscal harmonisation required between the countries in the monetary union, we believe that any expectation of currency reform is thus premature. However, inflows have been very limited, and we do not see a return to the 'hot money' levels of 2007 and 2008. Nevertheless, we believe that the currency reform debate is likely to re-emerge given that the USD is structurally weak and there is a desire for greater monetary policy flexibility across the GCC. In the medium or longer term, the GCC countries are likely to re-evaluate the benefits of a peg to a structurally weak currency, which faces a number of challenges with its widening fiscal deficit. We believe that any currency reform, although unlikely in the near term, would probably be in the form of an undisclosed trade and investment-weighted currency basket, as in the case of Kuwait.
medium-term outlook
Actual 2005 Real Sector Average Brent Crude Spot Price (USD/barrel) GDP at Current Market Prices (SAR bn) GDP at Current Market Prices (USD bn) Real GDP Growth Rate, % Population (mn) GDP / Capita (USD) CPI Inflation (Y-o-Y % Change) External Sector Trade Balance (USD bn) Current Account Balance (USD bn) Current Account, % of GDP Net Foreign Assets (USD bn) Fiscal Sector Budget Balance (USD bn) Budget Balance / GDP Net Banking Sector Claims on the Government (USD bn) Financial Sector SAR / USD Exchange Rate, Annual Average Annual Growth Rate in Broad Money, % Growth in Credit to the Private Sector, % 3M Deposit Rate, end-of-period, % 3.75 11.4 38.9 3.7 3.75 19.3 9.2 5.0 3.75 23.7 21.4 4.7 3.75 19.0 27.1 3.8 3.75 12.4 5.2 1.8 3.75 18.6 16.0 2.4 3.75 21.4 19.5 3.6 58.1 18.4 (30.1) 74.7 21.0 (57.0) 47.1 12.3 (99.3) 154.6 33.0 (225.6) (12.0) (3.3) (205.0) 10.8 2.5 (220.5) 17.2 3.6 (230.0) 126.0 90.5 28.7 157.3 147.2 98.9 27.8 239.9 151.6 93.3 24.3 312.2 212.7 134.0 28.6 449.0 104.1 20.5 5.6 423.0 148.8 54.8 12.6 495.0 162.5 59.5 12.4 550.0 54.0 1,183 315.3 5.5 23.1 13,651 0.7 64.8 1,336 356.2 3.1 23.7 15,028 2.2 72.1 1,440 383.9 3.3 24.3 15,797 4.1 98.7 1,758 468.8 4.4 24.9 18,827 9.9 62.0 1,384 3692 0.2 25.5 14,416 5.0 80.0 1,632 4352 4.1 26.2 16,645 4.4 85.0 1,797 4792 4.5 26.8 17,914 5.0 2006 2007 2008e 2009e MT Projections 2010f 2011f
Source: SAMA, IMF, and EFG-Hermes estimates
MONICA MALIK
SAUDI ARABIA
Research Yearbook
growth outlook
The better management of the oil boom since the beginning of the decade has meant that Saudi Arabia's economic reforms and investment programme have resulted in a deceleration rather than a derailment. Positively, we expect acceleration in real non-oil activity to be above 4.0% in 2010e and 2011e, as Saudi Arabia progresses with its investment programme. The government remains committed to upgrading its infrastructure and increasing its output capacity, and has initiated a number of projects in 2009. We believe that the majority of the benefit from these will be felt in 2010e and 2011e, as the projects are implemented. The domestic outlook will also be supported by the increased availability of bank credit from the banking system. Even if there is a drop in the oil price we believe the investment programme will remain on track, given the substantial buildup in reserves. If necessary, the government can easily afford a deficit of about 4-5% of GDP for a few years. Saudi Arabias medium-term outlook and headline figures remain tied to oil price developments, and we forecast an average Brent crude price of USD80 p/b in 2010e. We expect to see both real and nominal GDP growth rebounding in 2010e, as oil production and prices rise. We are forecasting the economy will expand by 4.1% in real terms in 2010e, accelerating to 4.5% in 2011e.
fiscal outlook
Despite the strengthening of the oil price from 2Q2009 onwards, Saudi Arabia nevertheless realised a fiscal deficit of equivalent to 3.3% of GDP. We believe that actual fiscal spending in 2009 was far greater than the government expenditure figure suggests. The focus of government spending has been on capital expenditure, supported by the sharp drop in inflation, and this will continue into 2010e. With increased oil revenue, we forecast that the fiscal deficit will move to a small surplus of 2.5% in 2010e and will reach 3.6% in 2011e. With the fiscal account realising a surplus in 2010e, we expect the NFA position will start to increase.
monetary and external outlook

The focus will continue to be on keeping monetary policy loose to support the growth outlook for 2010e. Importantly, we expect to see a pick-up in bank lending to the private sector, which is crucial to reignite private sector activity. Lending is likely to be particularly linked to projects associated with the government-sponsored investment programme. Although we expect to see money supply and inflation levels tick up from late-2009 levels, we expect benchmark rates to remain on hold for the majority of 2010e. We believe that there is some likelihood of a 25 bps rate increase in 4Q2010e. In our view, inflation in 2010e will be driven largely by external factors (accelerating food prices and linked to USD weaknesses). On the domestic side, rental inflation is the main area of concern. As such, interest rate increases will have a limited impact on suppressing inflation. Moreover, we forecast that the inflation rate will not see the same levels of upward pressure as seen in 2008, given the economic slack in the global economy. Although inflation will mostly be driven by external factors, we do not expect to see a change in the currency regime in 2010e or 2011e, especially as four of the GCC countries are moving towards a currency union. However, we forecast that with the structural weakness in the USD the issue of currency reform will re-emerge. The current account surplus is forecast to increase in 2010e and 2011e with the widening trade balance. With the strengthening current and trade account surpluses, we expect to see a return to the usual trend of capital outflows as the current account surplus is invested overseas.
ECONOMICS
YEARBOOK
2010
Banking
SAudi BAnKing SECtOR Al RAjhi BAnK BAnK AlBilAd BAnK AljAziRA SAudi BRitiSh BAnK (SABB) BAnquE SAudi FRAnSi (BSF) ARAB nAtiOnAl BAnK (AnB) SAudi hOllAndi BAnK (ShB) SAmBA FinAnCiAl gROup RiYAd BAnK thE SAudi invEStmEnt BAnK (SAiB)
42
BANKING SECTOR
2009 - focusing on risk management

asset quality concerns take centre stage
While the slowdown in the global and domestic economy towards the end of 2008 made banks wary of a possible deterioration in asset quality, the first major sign of deterioration came in May 2009 following the emergence of liquidity problems at the Saad and Algosaibi Groups. Although there has been limited data disclosure by banks since then, the release of Basel II Compliance Statements by banks in June 2009 showed some deterioration in asset quality. The trend, however, has been inconsistent, as banks have taken different approaches to the issue. Some banks have reported an increase in nonperforming loans (NPLs), while at other banks NPL levels have remained unchanged. On an aggregate basis, NPLs for the listed banks were 56% higher in June 2009 compared to December 2008. Fig 1: Aggregate* NPLs and Coverage
3.0% 2.5% 2.0% 1.5% 1.0% 0.5%
2004 2005 2006 2007 2008 1H2009
Fig 2: NPLs of Banks

250% 200% 150% 2% 100% 50% 0% 1% 4% 2008 1H2009
NPLs
Coverage
3%
Al Rajhi
Aljazira
Samba
Albilad
SABB
SAIB
BSF
NCB
BSF
*Aggregate data for 11 banks, including NCB Source: Company accounts
Source: Company accounts
Equally, although credit provisions have jumped across the board, some banks have been more aggressive in making provisions, while others have absorbed the impact of incremental NPLs through excess provisions built up during 2004-2006. This has meant that average sector provisioning costs have been much lower than they would have been had banks made fresh provisions for the deterioration in asset quality during 2009. Absorbing the incremental flow of NPLs against existing loan loss reserves has reduced the sectors NPL coverage to 119% in 1H2009, versus 152% at the end of 2008. Fig 3: Annualised Sector Provisioning Costs
120 100 80 60 100 40 20 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
Fig 4: Annualised Provisioning Costs of Banks

250 200 150 2008 2009 (annualised)
50 0
Aljazira Al Rajhi Albilad Samba SABB SAIB NCB Riyad ANB SHB
Source: Company accounts, EFG-Hermes estimates
Riyad
ANB
SHB
0.0%
0%
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2009 - loan growth slows on risk aversion 2010 - high government spending supporting improved risk appetite 2 0 1 0
loan growth slows

The start of the financial crisis at the end of 2008 heightened the risk management focus of the banks in Saudi Arabia. The banks reacted by significantly slowing down incremental loan growth, and divesting exposures which were considered to be risky. Incremental credit growth during January-September 2009 slowed down to only 1.6%, compared to 27.1% Y-o-Y growth in 2008, indicating a sharp decline in the risk appetite of banks. Fig 5: Loans to Private Sector
Y-o-Y Growth, unless otherwise stated
40% 35% 30% 25% 20% 15% 10% 5% 0%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09
Fig 6: YTD Loan Growth of Banks

30% 20% 10% 0% -10% -20%
Aljazira
Al Rajhi
Albilad
Source: Saudi Arabia Monetary Authority (SAMA)
The sharpest loan book contraction has been witnessed at Samba and ANB, which have recorded a decline of 12.7% and 7.9%, respectively, in net loans since the end of 2008. On the other hand, Riyad and Albilad have capitalised on their high capital adequacy to grow their loan books, albeit at a slower pace compared to 2008s growth.
earnings impact cushioned by improving spreads

Although credit provisions have jumped in 9M2009, and are expected to remain high in the near term, the impact on earnings has remained relatively muted. Aggregate earnings of listed banks for 9M2009 were only 2.64% lower Y-o-Y, as credit provisions largely replaced the investment impairments made by the banks during 2008. Most of the banks reported either stable, or a relatively small decline in earnings on a Y-o-Y basis. Saudi British Bank and Saudi Hollandi Bank, which have been more aggressive compared to their peers in terms of provisioning, have seen some of the sharpest declines in earnings in 9M2009. Fig 7: Aggregate Earnings Growth (9M2009)
Y-o-Y, unless otherwise stated
10% 5% 0% -5% -10%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Fig 8: Earnings Growth (9M2009)

Y-o-Y, unless otherwise stated
10% 0% -10% -20% -30% -40% -50% -60% -70%
Al Rajhi Aljazira Samba 3Q09 Albilad SAIB BSF SABB ANB Riyad SHB
-80% -15%
BANKING SECTOR
Samba
SAIB
NCB
BSF
SABB
SHB
Riyad
ANB
44
BANKING SECTOR
managing the dubai risk

Based on the data available from the Basel II Compliance Statements, the exposure of Saudi banks to the GCC (ex-Saudi) is restricted to 3.2% of their total risk weighted assets (RWA). More than half of this (1.9% of RWAs) represents sovereign and interbank lending, while the remaining 1.4% of RWAs constitutes corporate credit exposure (includes both corporate loans and corporate bonds). Total GCC exposure as a proportion of total corporate risk weighted assets is only 3.0%. While the data disclosure does not provide country-specific details, we believe that a large portion of this exposure is likely to be to the UAE and, within this, a significant part of it is likely to be exposure related to Dubai entities. At 3.0% of total corporate exposure, we do not believe that the GCC corporate exposure of the banks is significant enough to have a material impact on the balance sheet strength of the banks. However, depending on the individual banks exposure to Dubai World (which is not yet known), there could be an impact on the earnings of particular banks. We are of the view that while earnings might be impacted, with the magnitude depending on the eventual outcome of the restructuring process, in most cases the exposure of the banks can be absorbed. In our opinion, in a worst case scenario the earnings of a bank might be dented, but will not result in a loss. Fig 9: Saudi Bank's GCC Corporate Credit Risk Exposure
In SAR million, unless otherwise stated
6,000 5,000 4,000 3,000 2,000 1,000 0
SHB BSF Samba* Al Rajhi Aljazira Albilad SABB Riyad SAIB NCB ANB
Fig 10: Corporate GCC RWA to Total Equity

6% 5% 4% 3% 2% 1% 0% 18% 16% 14% 12% 10% 8% 6% 4% 2%
Al Rajhi Aljazira Samba Albilad SABB Riyad SAIB NCB BSF ANB SHB
GCC Corporate RWAs (LHS) As a % of Total Corporate RWAs (RHS)
0%
*Samba figures adjusted for Nakheel Bond repayment in Oct-09 Source: Basel II compliance statements of banks
Source: Basel II compliance statements of banks
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2010 - looking ahead to a recovery

While we expect some spill over impact on the earnings of banks in 2010e as a result of 2009s deterioration in asset quality, we believe that banks are gradually beginning to resume their lending activities. Banks have spent most of 2009 reviewing the credit profile of their domestic customers, and have lowered their exposure to clients/businesses which were considered to be risky. With increased liquidity and relatively strong capital adequacy, we believe that banks will now be comfortable in resuming their lending activities.
governments counter-cyclical stance

With government sticking to its commitment to play a counter-cyclical role, we expect loan growth to recover in 2010e. Government spending is likely to remain the key driving factor stimulating credit demand in the near to medium term. While the risk aversion of banks has resulted in relatively stagnant loan growth in recent months, we expect banks to resume their lending activities in 2010e at a stronger pace than that seen in 2009. Figure 11: Changes in Saudi Arabian Monetary Authority (SAMA) Reserves
30 20 10 0 (10) May-09 Nov-08 May-08 Apr-09 Mar-09 Jun-09 Dec-08 Oct-08 Sep-08 (20) Sep-09 Feb-09 Mar-08 Aug-08 Aug-09 Apr-08 Jul-08 Jul-09 Jun-08 Jan-08 Jan-09 Feb-08
Source: SAMA
improving confidence to drive credit growth

With the economy showing signs of stability and crude oil prices recovering from their early 2009 lows, the confidence of the domestic private sector is gradually picking up. Also, over the last six months, the banks have successfully managed down the risks in their existing domestic corporate loan book, which is translating into increased confidence. We believe that credit growth is likely to remain muted during the remainder of 2009, as banks continue to monitor the private sector for any signs of stress. In the future, however, we expect credit demand to recover, largely supported by continued government spending. We believe that this is likely lead to a recovery in corporate credit demand. While consumer loans are also likely to show some signs of recovery, we expect growth to remain muted in the near term. Mortgages represent a key growth area in the overall consumer segment, but banks are likely to continue focusing on top quality clients for the time being. Any wide-scale launch of mortgage products hinges on the approval of the mortgage law, which will provide more clarity on the foreclosure law.
BANKING SECTOR
46
BANKING SECTOR
Figure 12: Saudi Banking Sector Loan Growth Profile

In SAR billion (LHS), unless otherwise stated
1,400 1,200 1,000 800 15% 600 400 200 0 2006a 2007a 2008a 2009e 2010e 2011e 2012e 10% 5% 0% Corporate & Commercial (LHS) Growth in Total Loans (RHS) Gradual recovery after a sharp slowdown Corporate expansion drives loan growth Consumer (LHS) Sharp slowdown on asset quality concerns 30% 25% 20%
pressure building up on banks to lend

We are of the view that pressure on banks to resume their lending activity is beginning to pick-up. During 2009, banks felt prudent in reducing their credit exposure. Re-pricing the loan book, coupled with the decline in funding costs enabled banks to maintain their profitability levels. However, with rates on sovereign securities remaining extremely low, banks are being compelled to look at redeploying their assets into relatively higher yielding loans. Additionally, the Central Bank has also lowered the weekly issuance of treasury bills, which is forcing banks to maintain deposits with the Saudi Arabian Monetary Authority (SAMA), earning 25 bps, to meet their liquidity reserve requirement. Fig 13: SAIBOR and Reverse Repo Rates
5% 4% 3% 2% 1% 0.5% 0%
Oct-08 Oct-09 Jul-08 Jul-09 Jan-08 Jan-09 Apr-08 Apr-09
Fig 14: Saudi Banks - Net Interest Spreads

3.0% 2.5% 2.0% 1.5% 1.0% Funding Costs Net Interest Spread 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
3M SAIBOR
Rev Rep
0.0%
0.0%
Source: SAMA
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
consumer credit - refocusing attention

With strong corporate sector driven demand during 2007-2008, we believe the consumer segment has been largely ignored by commercial banks over the last few years. The stock market crash of 2006, followed by strong growth in the corporate sector, meant that banks have not focused on the consumer segment. However, the slowdown in 2009 has allowed banks to refocus their efforts on growing their consumer loans. We believe that those banks with relatively smaller market shares of the consumer segment are likely to be most aggressive in improving their retail lending franchise. While overall growth in consumer loans has remained sluggish in 1H2009, we expect a moderate recovery in 2010e. Mortgages represent a key growth opportunity for the banking sector over the longer term. In the near term, banks will continue to focus on offering mortgage products to their top quality clients. Mass-market mortgages are likely to remain limited until the mortgage law is passed and a precedent is set for foreclosure. Once this has happened, we believe that banks will become more aggressive in this segment. Fig 15: Consumer Loan Split of the Banking Sector
29.6% 18.2% 10.1%
Fig 16: Consumer Loan Market Share (2008)

35% 60% 30% 25% 20% 15% 10%
200
Real Estate Credit Cards
Cars & Equip. Y-o-Y Growth (RHS)
Personal
150
40%
8.8%
8.2%
7.6% 2.8%
100
20%
0.9% AlJazira
50
0%
0%
Al Rajhi Samba
1.0%
0 2004 2005 2006 2007 2008 1H2009
-20%
Source: SAMA, Company accounts
BANKING SECTOR
Albilad
SABB
Riyad
SAIB
NCB
ANB
BSF
SHB
0.9%
5%
1.9%
48
AL RAJHI BANK
Current Price : SAR 73.0 Fair Value (FV) : SAR 74.7
Rating : Neutral
Share Price Performance and Price Relative to TASI

85 80 75 70 65 60 55 50 45 40
08-Mar-09 08-Jan-09 08-Dec-08 08-Feb-09
Company and Stock Data

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 73.00 on 08 December 2009 RJHI AB / 1120.SE SAR109,500 / 1,500 SAR2,862 45.70% Accessible via swaps only
Price (SAR)
TASI (Rebased)
08-May-09
08-Nov-09
08-Jul-09
08-Jun-09
08-Oct-09
08-Dec-09
08-Apr-09
08-Sep-09
08-Aug-09
Major Shareholders: Mr. Suleiman Abdulaziz Saleh Al Rajhi 24.60% Mr. Saleh Abdulaziz Saleh Al Rajhi 13.60% Management: CEO: Mr. Abdullah Sulemain Abdulaziz Al Rajhi
Valuation Statistics (SAR)

EPS (Attrib.) DPS BVPS P/E (x) Div Yield P/BV (x) Mkt Cap / Deposits ROAE ROAA
2008a 3.93 3.00 15.90 18.6 4.1% 4.59 93.9% 25.5% 4.1%
2009e 4.30 2.80 17.80 17.0 3.8% 4.10 87.2% 25.5% 3.8%
2010e 4.69 2.30 20.59 15.6 3.2% 3.55 77.6% 24.4% 3.9%
2011e 5.43 2.70 23.82 13.5 3.7% 3.07 68.1% 24.4% 4.0%
Key Forecast Drivers

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 11,302 2,892 144,004 2,868 3,864 164,930 116,611 7,902 1,875 14,693 141,081 23,849 9,421 (927) 8,494 76 2,004 2,081 10,575 (1,128) (1,649) (2,776) 7,799 (1,274) 6,525 (633) 5,892 2009e 12,932 4,645 145,334 3,418 4,198 170,527 125,632 5,025 13,169 143,826 26,701 9,971 (736) 9,235 82 1,992 2,074 11,309 (1,120) (1,715) (2,835) 8,474 (1,431) 7,043 (596) 6,447
2008a 37.3% 30.0% 123.5% 10.0% 30.1% 6.4% 6.5% 26.3% 1.2% 191.2% 99.7
2009e 0.9% 7.7% 115.7% 8.7% -0.3% 6.0% 6.0% 25.1% 2.2% 150.8% 96.2 2010e 15,193 3,458 163,410 3,485 4,618 190,164 141,090 4,938 13,252 159,280 30,884 10,389 (533) 9,855 77 2,175 2,252 12,107 (1,364) (1,869) (3,233) 8,874 (1,176) 7,698 (668) 7,030
2010e 12.4% 12.3% 115.8% 6.7% 8.6% 5.9% 6.0% 26.7% 2.6% 137.2% 73.6
2011e 29.2% 28.0% 116.8% 19.7% 18.6% 5.8% 6.0% 26.3% 2.8% 130.0% 57.7 2011e 15,986 1,969 187,824 3,558 5,080 214,417 160,843 3,217 14,632 178,691 35,726 11,660 (604) 11,056 85 2,376 2,461 13,517 (1,498) (2,056) (3,554) 9,964 (1,052) 8,912 (772) 8,140
Financial Statements - December Year End (SAR mn)

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Investment Income Cost of Funds Net Investment Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income S,G&A, Rent and Depreciation Expenses Salaries & Other Related Expenses Total Operating Expenses Income before Provisions Provisions Income before Minority Interest Zakat & Taxes Net Income
Source: Al Rajhi Bank, EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
Al Rajhi Bank is the largest listed bank in Saudi Arabia in terms of market capitalisation. Total assets stood at SAR123.2 billion as at 30 September 2009, which makes it one of the largest Islamic banks in Saudi Arabia. Al Rajhi has the widest geographical reach within Saudi Arabia of all the banks, with a network of 439 branches as at October 2009. Al Rajhi also owns a bank in Malaysia, and has received approval to open a branch in Kuwait. A pure Shariah-compliant bank, Al Rajhi enjoys a significant funding cost advantage over its peers in Saudi Arabia in the form of the lowest deposit cost, averaging less than 1%. This advantage comes from the banks strong branding as an Islamic bank, which has allowed it to maintain a favourable deposit mix - demand deposits accounted for over 90% of total deposits as at September 2009.
2009 - stronger revenues offsetting higher provisioning costs

Despite a challenging environment, Al Rajhi has continued to deliver a strong performance throughout 2009. Earnings grew by 3.9% Y-o-Y in 9M2009, even though credit provision costs doubled on a Y-o-Y basis to 92 bps. Revenues continued to improve, rising by 11% Y-o-Y owing to a widening of spreads and a higher market share of stock exchange trading volumes. With pressure on funding receding as loan growth slowed in 2009, Al Rajhi re-focused its attention on improving its deposit mix. Demand deposits as a proportion of total deposits had declined to 85% in December 2008, versus 97% in December 2007. While the bank does not provide a deposit split in its interim accounts, we believe that demand deposits currently account for more than 92% of total deposits. This has led to a sharp fall in funding costs, which we estimate to have declined to less than 50 bps in 9M2009, versus 82 bps in 2008. Al Rajhis 3Q2009 decline in funding costs was much steeper, as the bank retired a SAR1,875 million bond during the quarter. The widening of net special commission spreads, coupled with an almost 6% increase in net investments, supported a 12% Y-o-Y growth in net special commission income. At the same time, Al Rajhi strengthened its position in the broking business. Its market share of traded value at the Tadawul stock exchange rose to over 14% in 9M2009, versus 12% in 2008, providing a relatively stable fee income base. Asset quality deterioration became visible with the release of Al Rajhis Basel II Compliance Statement, which indicated an increase in the NPL ratio to 2.2% in June 2009, compared to 1.2% in December 2008. The bulk of incremental NPL formation in 1H2009 came from the bank's exposure to the commerce and building & construction sectors. These incremental NPLs were absorbed by the banks excess loan loss reserves. According to our estimates, this has lowered the bank's NPL coverage to 111% at the end of June 2009.
2010 - maintaining dominance, but some challenges

With the slowdown in corporate loan demand, Al Rajhi is focusing on improving its share of the consumer finance segment. During 2007-2008, most of the incremental growth in loans came from the corporate book, while consumer loans remained stagnant. This had a detrimental impact on the banks overall asset yield, which was pushed lower as a result of the rising contribution of corporate loans to a predominantly retail loan book (retail loans accounted for 37% of total loans in 2008, versus 51% in 2007). However, although yields on corporate loans have declined, due to re-pricing to a lower benchmark, Al Rajhi has nevertheless continued to report a stable asset yield. We believe that this is due to a change in the mix of its loan book in favour of consumer loans. In the short term, we believe this trend is likely to continue. Al Rajhis strong, 400-plus branch network ideally positions it to capitalise on a recovery in consumer credit demand. Strongly entrenched in the retail segment, we believe Al Rajhi is also best positioned to capitalise on an upsurge in mortgage demand, if the mortgage law is passed in 2010. The only challenge to Al Rajhi that we see in the near term is likely to come from Bank Al Inma. While the other Shariahcompliant banks (Albilad and Aljazira) are too small to provide any meaningful competition, Al Inma with its strong government backing and increasing branch network could potentially prove to be a serious competitor. However, we do not consider it to be an immediate threat to Al Rajhi, as Al Inma is still in the early stages of its development and its branch network expansion is likely to take some time to materialise.
valuation and recommendation

An unmatched deposit franchise and a business model which is difficult to replicate makes Al Rajhi a highly profitable bank. The bank continues to generate ROAEs in excess of 24%, even in the current tough economic conditions. However, with the stock trading at a 2010e P/E of 15.6x and a P/B of 3.6x, we believe the premium is already reflected in valuations. We recommend a Neutral stance on Al Rajhi and have an FV of SAR74.70.
BANKING SECTOR
50
BANK ALBILAD
Rating : Sell

35 33 31 29 27 25 23 21 19 17 15
08-Mar-09 08-Jan-09 08-Dec-08 08-Feb-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 20.20 on 08 December 2009 ALBI AB / 1140.SE SAR6,060 / 300 SAR254.8 57.20% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Mr. Mohammed Ibrahim Mohammed Al Subeaei 11.90% Mr. Abdullah Ibrahim Mohammed Al Subeai 11.10%
08-May-09 08-Nov-09 08-Jul-09 08-Jun-09 08-Oct-09 08-Apr-09 08-Dec-09 08-Sep-09 08-Aug-09
Management: CEO: Mr. Khalid Bin Suleiman Jaseer CFO: Mr. Gohar Iqbal Sheikh

2008a 0.41 N/A 10.71 49.4 0.0% 1.89 55.2% 3.9% 0.8%
2009e 0.18 N/A 10.78 113.8 0.0% 1.87 49.6% 1.7% 0.3%
2010e 0.49 N/A 11.27 41.5 0.0% 1.79 42.1% 4.4% 0.8%
2011e 0.69 0.10 11.84 29.4 0.5% 1.71 36.1% 5.9% 1.0%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 1,125 3,894 1,883 8,275 537 338 16,052 10,971 639 825 404 12,839 3,213 669 (91) 578 216 80 296 875 (665) 210 (85) 125 (2) 123 2009e 1,081 2,719 1,511 10,642 561 371 16,885 12,228 611 367 444 13,651 3,235 592 (29) 563 269 79 348 911 (721) 190 (133) 57 (4) 53
2008a 28.6% 11.5% 75.4% 8.2% 21.4% 4.1% 4.2% 76.0% 1.2% 90.6% 27.1
2009e 19.5% 17.8% 87.0% -2.6% 17.4% 3.9% 3.9% 79.1% 2.2% 100.0% 137.9 2010e 1,257 2,774 1,561 12,713 567 408 19,280 14,403 648 360 489 15,900 3,381 667 (52) 616 306 84 390 1,005 (796) 209 (59) 150 (5) 146
2010e 16.2% 16.7% 88.3% 9.3% 12.1% 3.8% 3.9% 79.2% 2.3% 100.0% 49.2
2011e 14.1% 14.0% 87.9% 13.6% 10.5% 3.8% 3.8% 77.0% 2.3% 100.0% 33.8 2011e 1,552 2,749 1,767 14,778 525 449 21,821 16,807 672 252 537 18,269 3,552 774 (75) 699 343 88 431 1,130 (870) 260 (48) 212 (6) 206

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Reported Net Income Zakat & Taxes Net Income
Source: Bank Albilad, EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
With total assets of SAR17.0 billion as at 3Q2009, Bank Albilad is currently the smallest bank in Saudi Arabia in terms of balance sheet size. The bank began commercial operations in 2005 and is one of the most recent entrants to the Saudi banking sector. Established as a pure Shariah-compliant bank, Albilad has quickly grown in size. Total assets doubled over the last two years, while deposits tripled during the same period. The bank operates 63 branches, which is almost double that of similar assetsized banks. Realising its size disadvantage, Albilad has built its growth strategy around focusing on mid-tier corporate and consumer clients. Its existing low equity base constrains the single-party lending exposure of the bank, limiting its ability to meet the high borrowing requirements of large corporates. However, like its peer Al Rajhi, Albilad enjoys a strong funding cost advantage. Although the ratio of demand deposits deteriorated in 2008, the slower credit growth environment of 2009 has enabled the bank to improve its deposit mix.
2009 - balance sheet expansion continues

The slowing economic environment and rising sector-wide asset quality concerns did not do much to dent Albilad's aspirations of continuing to grow its balance sheet size. Although the pace of growth slowed compared to 2008, Albilad's YTD loan growth in 9M2009 stood at 27.9%, significantly above the sector average loan growth of 1.6% over the same period. Deposits recovered sharply in 1Q2009, rising by 17.1% Q-o-Q, after recording a consistent decline throughout 2008. However, following 1Q2009s strong growth, the bank concentrated more on improving its deposit mix, by shedding remunerative deposits and replacing them with non-remunerative deposits. As a result, deposit costs in 9M2009 declined to 40 bps versus 72 bps in 2008, with funding costs in 3Q2009 falling as low as 8 bps. From a management point of view, the biggest development in the year was the appointment of Mr. Khalid Bin Sulaiman Al Jasser as the CEO of the bank in April 2009. Mr. Al Jasser, who has over 20 years of experience, was working with Riyad Bank before taking up the CEO position at Bank Albilad. While the bank does not provide asset quality data on an interim basis, an increase in provisioning costs in 3Q2009, which offset the entire earnings of the bank for the quarter, suggests that there has been some deterioration in asset quality. We expect more visibility on asset quality with the release of 2009s annual accounts, and we expect the NPL ratio to increase to almost 2.2%, versus 1.2% in December 2008.
2010 - focusing on revenue improvement

Bank Albilads ability to maintain its net investment spreads in 2009 has surprised us positively. We believe that the bank is likely to capitalise on its 63 branch network to continue tapping into low-cost funding. However, with the deposit market expected to become more competitive in 2010e, as other banks start to build up their deposit base to fund loan growth, we believe that maintaining spreads at current levels is likely to be challenging. We expect loan growth to remain strong, and expect Albilad's net loans to grow by 19% Y-o-Y in 2010e, with the stronger loan growth also a reflection of a relatively small base. The challenge for Bank Albilad, however, remains improving its revenue generation. The bank has invested heavily in building up its infrastructure over the last three years. This has led to a high-cost base, with a cost-to-income ratio of 78.4% in 9M2009, almost twice as high as the sector average. With its existing branch network, we do not believe that there is significant room for cost reduction. However, we believe that opportunities for improvement in revenue generation exist, by offering new banking products and improving its cross-selling of products, particularly in its consumer business.

We continue to find Bank Albilads valuations to be extremely rich - at current prices, the stock trades at a 2010e P/E of 41.5x and a P/B of 1.8x. ROAEs remain extremely weak, although they are expected to improve in 2010e to around 4.4%. The stock, however, retains strong domestic investor interest owing to its Shariah-compliant status and expectations of continued strong balance sheet growth. We nevertheless believe that the valuation premium is unjustified, and we have a Sell rating on Bank Albilad and an FV of SAR15.50.
BANKING SECTOR
52
BANK ALJAZIRA
Rating : Neutral

30 25 20 15 10
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jan-09 08-Jun-09 08-Oct-09 08-Dec-08 08-Apr-09 08-Dec-09 08-Sep-09 08-Feb-09 08-Aug-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 19.75 on 08 December 2009 BJAZ AB / 1020.SE SAR5,925 / 300 SAR301.7 60.50% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Mr. Rashid Abdul Rahman Al Rashid & Company 22.20% Union Brothers for Development Company 6.50% Management: CEO: Mr. Khaled Oudghire CFO: Mr. Abdullah Kishek

2008a 0.69 0.50 15.79 28.6 2.5% 1.25 28.3% 4.4% 0.8%
2009e 1.33 0.50 16.63 14.9 2.5% 1.19 25.8% 8.2% 1.4%
2010e 1.75 0.50 17.89 11.3 2.5% 1.10 22.0% 10.2% 1.6%
2011e 2.17 0.50 19.55 9.1 2.5% 1.01 18.9% 11.5% 1.8%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 2,258 3,904 4,909 15,133 4,909 494 31,607 20,900 1,367 515 22,782 4,738 1,114 (483) 631 538 (57) 25 505 1,137 (791) 345 (123) 222 (15) 207 (1) 206 2009e 2,185 5,129 5,262 15,673 513 1,112 29,874 22,947 1,449 489 24,885 4,990 963 (285) 677 399 213 21 632 1,309 (697) 612 (198) 414 (17) 397 (2) 396
2008a 53.2% 33.6% 72.4% 6.1% -40.7% 4.0% 3.7% -69.6% 1.5% 163.9% 47.6
2009e 3.6% 9.8% 68.3% 7.3% 25.1% 3.0% 3.0% -53.3% 2.7% 134.5% 124.6 2010e 2,298 4,319 6,787 19,064 543 1,210 34,221 26,939 1,377 538 28,853 5,368 1,109 (304) 805 478 86 23 587 1,392 (740) 652 (102) 549 (22) 527 (1) 526
2010e 21.6% 17.4% 70.8% 18.8% -7.1% 2.9% 3.0% -53.2% 2.7% 127.9% 56.9
2011e 20.7% 16.3% 73.4% 18.8% 5.8% 3.0% 3.0% -51.0% 2.7% 123.6% 44.6 2011e 2,543 3,905 7,810 23,005 560 1,319 39,141 31,337 1,347 592 33,275 5,866 1,317 (361) 956 519 76 26 621 1,577 (804) 773 (97) 676 (27) 649 1 650

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fees & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Reported Net Income Zakat & Taxes Net Income before Minority Interest Minority Interest Net Income
Source: Bank Aljazira, EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
With 36 branches at the end of September 2009, Bank Aljazira is the smallest bank in Saudi Arabia in terms of branch network. Being a smaller bank, Aljazira has created a niche for itself by investing heavily in developing its stock market trading platform. The bank boasts the highest market share, estimated at 17%, in terms of volumes executed on the Saudi stock market. The banks revenue mix is also heavily tilted towards income generated from its broking business. Aljaziras profitability soared as stock market trading volumes rose exceptionally during 2004-2006. However, high revenue leverage to stock market related income has also made Aljaziras earnings vulnerable to the volatility of the stock market. Even though the bank has focused on building up its commercial banking franchise, in which it has made appreciable progress, the decline in trading volumes over the last three years has eroded the banks profitability. However, Aljazira continues to invest in improving its commercial banking presence, aiming to build up a stronger deposit franchise to support its lending operations.
2009 - negotiating the decline in stock market volumes

With credit growth remaining slow in 2009, we were expecting Aljazira to make progress on strengthening its commercial banking operations. The bank had made significant progress in 2008, with net loans growing by 53% Y-o-Y and customer deposits by 33.6% Y-o-Y. However, loan growth momentum slowed down considerably in 2009 (YTD loan growth of 3.6%), while deposit growth was slightly stronger at 9.8% in 9M2009. The bank increased its branch network to 36 in 2009, from 24 branches at the end of 2008, which was reflected in its relatively strong deposit growth and an almost halving of funding costs. Weak brokerage commissions continued to be a major drag on Aljazira's earnings in 2009. Trading volumes at the Tadawul stock exchange declined for the third year in a row, with total value traded at the stock exchange in 9M2009 declining by 37% Y-o-Y. Being the major player in the broking business, Aljazira's revenues also suffered. Aljaziras fee and commission income, the bulk of which is comprised of broking commissions, declined by 32% Y-o-Y in 9M2009. Total revenues, however, were 6% higher Y-o-Y owing to SAR98 million of capital gains realised by the bank on its domestic equity portfolio in 3Q2009. Excluding capital gains, total revenue declined by 7% Y-o-Y in 9M2009. With revenue continuing to come under pressure, Aljazira has focused on exercising strong cost control. Total operating costs declined by 8.8% Y-o-Y, improving its cost-to-income ratio to 54% in 9M2009, versus 69.6% in 2008. Although the bank has not reported any material deterioration in asset quality YTD, credit provisions jumped by almost four times Y-o-Y in 9M2009, resulting in earnings declining by 7% Y-o-Y.
2010 - strengthening the commercial banking franchise

Bank Aljazira is likely to maintain its focus on strengthening its commercial banking operations and lowering its revenue vulnerability to volatile stock market broking commissions. Central to the banks strategy is expanding its branch network, enabling it to access low-cost deposits and improving its net special commission spreads. We expect the bank to add another 8-10 branches in 2010e, with the focus being on the major commercial hubs in the country. While the contribution of net special commission income to revenues has improved, the revenue mix currently remains heavily tilted towards broking commission. We expect a gradual improvement in the revenue mix, and expect net special commission incomes contribution to revenues to increase to almost 58% in 2010e. With high capital adequacy (17.9% at the end of 3Q2009) and high balance sheet liquidity (loan-to-deposit ratio of 70.3% at the end of 3Q2009), Bank Aljazira has sufficient capacity to grow its loan book. We expect net loans to grow by 21.6% Y-o-Y in 2010e, with incremental growth coming through a mix of corporate and consumer loans. Aljazira's focus on building up its consumer loan book, which started in 2008, is likely to continue as the bank aims to reverse its relatively lower presence in the retail segment. We believe that increases in the bank's customer base, resulting from the expansion of its branch network, will allow the bank to improve the cross-selling of its product. We also forecast some improvement in its broking commission in 2010e. After three years of declining volumes, we expect activity in the stock market to pick-up, and expect Aljazira's brokerage income to rise by 10% Y-o-Y in 2010e.

We have an FV of SAR21.0 and a Neutral rating on Bank Aljazira. The stock currently trades at a 2010e P/E of 11.3x and a P/B of 1.1x, with 2010e ROAE expected to improve to 10.2% in 2010e from 8.2% in 2009. We await progress on strengthening its commercial banking franchise before turning more positive on the stock.
BANKING SECTOR
54
SAUDI BRITISH BANK (SABB)

Rating : Buy

65 60 55 50 45 40 35
08-May-09 08-Jan-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jun-09 08-Oct-09 08-Dec-08 08-Apr-09 08-Dec-09 08-Sep-09 08-Feb-09 08-Aug-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 45.20 on 08 December 2009 SABB AB / 1060.SE SAR33,900 / 750 SAR105.5 33.50% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: HSBC Holdings 40.00% Olayan Saudi Investment Company 17.00% Management: CEO: Mr. Richard W. L. Groves CFO: Mr. Rehan Khan

2008a 3.51 0.88 15.51 12.9 1.9% 2.91 36.6% 24.9% 2.3%
2009e 3.17 1.30 17.55 14.3 2.9% 2.58 37.5% 19.2% 1.8%
2010e 4.13 1.69 19.99 10.9 3.7% 2.26 32.6% 22.0% 2.4%
2011e 4.97 2.04 22.93 9.1 4.5% 1.97 28.5% 23.2% 2.6%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 11,328 6,200 29,604 80,237 561 3,729 131,661 92,678 16,069 5,844 5,436 120,027 11,634 5,865 (2,658) 3,207 1,257 306 141 1,704 4,912 (1,642) 108 3,378 (458) 2,920 (284) 2,636 2009e 7,985 8,626 24,728 79,899 568 3,895 125,701 90,353 10,391 5,930 5,865 112,538 13,163 4,579 (1,124) 3,455 1,258 399 176 1,832 5,287 (1,620) 55 3,723 (1,132) 2,590 (215) 2,375
2008a 29.4% 29.0% 86.6% 4.9% 29.6% 3.3% 3.3% 33.4% 0.2% 325.0% 51.8
2009e -0.4% -2.5% 88.4% 7.7% 7.5% 2.9% 3.0% 30.6% 2.3% 95.9% 139.3 2010e 9,628 6,268 26,325 90,451 575 4,270 137,517 103,906 6,234 5,930 6,454 122,524 14,993 4,994 (1,277) 3,717 1,365 329 190 1,884 5,601 (1,734) 63 3,930 (551) 3,379 (280) 3,098
2010e 13.2% 15.0% 87.1% 7.6% 2.8% 3.0% 3.1% 31.0% 2.5% 99.7% 63.2
2011e 13.7% 14.6% 86.4% 15.6% 7.1% 3.2% 3.2% 30.0% 2.6% 99.8% 43.1 2011e 9,574 8,450 26,757 102,880 583 4,683 152,926 119,079 5,954 3,675 7,023 135,732 17,194 5,586 (1,288) 4,297 1,484 334 199 2,017 6,314 (1,894) 73 4,493 (427) 4,066 (337) 3,728

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income S,G&A, Rent and Depreciation Expenses Share of Income of Associates Income before Provisions Provisions Reported Net Income Zakat & Taxes Net Income
Source: Saudi British Bank (SABB), EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
Saudi British Bank (SABB) is a 40% owned subsidiary of HSBC and, in our opinion, one of the best managed banks in the country. With total assets of SAR123.9 billion as at 3Q2009, SABB is the largest joint venture bank operating in the country and has a market share of 10% on most balance sheet measures. SABB also has an 8% market share of consumer loans. With strong support from HSBC, SABB is among the top three players in all segments of the banking business. Under the umbrella of HSBC Amanah (the Islamic banking arm of HSBC), SABB is also among the leading players in Saudi Arabias Islamic banking industry. SABB has a 40% stake in HSBC Saudi Arabia, which is the banks Saudi Arabian investment banking arm. SABB also has a 32.5% stake in SABB Takaful, a non-life insurance company based in Saudi Arabia. While SABB Takaful is yet to report profits, HSBC Saudi Arabia contributes around 2% to SABBs pre-provision pre-tax earnings.
2009 - biting the bullet

When the financial turmoil began in September 2008, SABB acted quickly to reduce its lending exposure and beef up its balance sheet liquidity. Net loans declined by 4% Q-o-Q in 4Q2008. The conservative stance of the bank carried on into 2009 as well, with net loans declining by a further 1.7% in 9M2009. The bank complemented the decline in loans by shedding deposits, which declined by 3.7% in 9M2009. The bank continued to benefit from HSBC's global presence, which translated into strong trade-related revenues. Despite a significant slowdown in loan growth, SABB managed to restrict the decline in fee income to only 4.5% in 9M2009. With negligible loan growth in 2009, the focus of the bank has been to improve balance sheet efficiency. SABB shed its high-cost term deposits and replaced them with demand deposits to lower its funding costs. Although asset yields remained under pressure due to the overall low interest rate environment, SABB was able to improve net special commission spreads by about 50 bps in 9M2009 by lowering its funding costs. However, aggressive provisioning more than offset the positive impact of spread improvement on earnings, with reported net profit for 9M2009 declining by 11% Y-o-Y. Signs of asset quality deterioration became visible when the bank released its Basel II Compliance Statement, which showed an increase in its NPL ratio to 2.2% in June 2009, versus just 0.3% in December 2008. Although SABB had a healthy NPL coverage of 325% at the end of 2008, the sharp spike in NPLs lowered the banks NPL coverage to less than 50% in 1H2009. Aggressive provisioning during the year has raised the bank's NPL coverage to an estimated 70% by 3Q2009, and the bank is likely to maintain elevated levels of provisioning in 4Q2009e to raise its NPL coverage to close to 100%.
2010 - starting afresh, looking to grow

With SABB aiming to achieve close to full NPL coverage by the end of 2009, we expect credit provisions to start normalising in early 2010e. In the absence of any further deterioration in asset quality, we expect earnings to bounce back to normalised levels and ROE to move up to 22% in 2010e, versus 19% in 2009e. Net special commission spreads could come under pressure if loan growth recovery is stronger than expected. SABB has a relatively lower liquidity cushion on its balance sheet, with loans to deposits at slightly above 80% in 3Q2009. Funding costs, which fell significantly in 2009e, could start climbing up again if the proportion of non-interest bearing deposits in the total deposit mix declines. We are also concerned about SABBs relatively lower capital adequacy (11.7% in 3Q2009) compared to its peers, which is also at the bottom end of the range for Saudi banks. We however highlight that SABB has historically maintained a relatively efficient capital structure, and the bank managed to deliver strong growth in 2008 despite its CAR remaining around the 12% mark. With government spending on infrastructure holding up, the bank is looking ahead to a gradual recovery in credit demand. We expect net loans to grow by 13.2% Y-o-Y in 2010e, with the bank largely focusing on growing its corporate loan book. The bank has also been selectively giving out mortgage loans to its existing client base, and approval of the mortgage law could provide further potential for growth.

The aggressive provisioning undertaken by the bank in 9M2009 has created some uncertainties regarding the potential asset quality problems faced by the bank in the absence of any public disclosure. However, we are of the view that provisions are likely to peak in 4Q2009e and will start to recede thereafter. This, in our view, is likely to act as a key catalyst for stock price performance. We recommend a Buy on SABB and have an FV of SAR55.0.
BANKING SECTOR
56
BANQUE SAUDI FRANSI (BSF)

Rating : Buy

55 50 45 40 35 30

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 41.60 on 08 December 2009 BSFR AB / 1050.SE SAR30,086 / 723.2 SAR106.4 41.00% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Groupe Credit Agricole 31.10% General Organization for Social Insurance 12.80% Management: CEO: Mr. Jean Marion CFO: Mr. Phillipe Touchard

2008a 3.40 1.07 18.38 12.2 2.6% 2.26 32.4% 20.3% 2.2%
2009e 3.55 1.20 20.69 11.7 2.9% 2.01 32.6% 18.2% 2.0%
2010e 4.03 1.40 23.31 10.3 3.4% 1.78 28.1% 18.3% 2.2%
2011e 4.85 1.70 26.46 8.6 4.1% 1.57 24.1% 19.5% 2.3%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 5,773 4,246 27,887 80,866 591 6,502 125,865 92,791 8,402 4,927 6,452 112,572 13,292 5,298 (2,478) 2,821 834 446 291 1,571 4,391 (1,096) 3,295 (504) 2,791 (345) 2,446 12 2,458 2009e 7,291 6,729 22,605 81,781 742 7,152 126,300 92,261 7,381 4,781 6,915 111,338 14,962 4,440 (1,392) 3,048 882 219 186 1,287 4,335 (1,171) 3,164 (356) 2,807 (249) 2,558 11 2,569
2008a 35.1% 25.4% 87.1% 22.8% 11.8% 2.9% 2.9% -25.0% 0.9% 111.0% 13.2
2009e 1.1% -0.6% 88.6% 8.1% -18.1% 2.7% 2.7% 27.0% 1.4% 107.5% 43.3 2010e 8,564 2,508 27,769 93,852 774 7,867 141,334 107,229 7,506 2,344 7,397 124,476 16,858 4,603 (1,343) 3,260 973 266 204 1,443 4,702 (1,253) 3,449 (262) 3,188 (283) 2,905 12 2,917
2010e 14.8% 16.2% 87.5% 6.9% 12.1% 2.8% 2.8% 26.6% 1.5% 106.1% 29.4
2011e 17.0% 16.4% 88.0% 14.7% 11.8% 2.8% 2.8% 25.0% 1.4% 105.4% 17.3 2011e 8,325 2,895 30,578 109,825 809 8,654 161,085 124,814 7,489 1,658 7,986 141,947 19,138 5,136 (1,397) 3,739 1,097 293 223 1,613 5,352 (1,340) 4,012 (178) 3,833 (340) 3,493 13 3,506

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Reported Net Income Zakat & Taxes Income before Minority Interest Minority Interest Net Income
Source: Banque Saudi Fransi (BSF), EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
With total assets of SAR121.7 billion as at 3Q2009, Banque Saudi Fransi (BSF) is the second largest joint venture bank in Saudi Arabia and the sixth largest bank in the Saudi banking sector. BSF has an 11% market share of loans and a 10% market share of deposits. It was a late starter in capitalising on the consumer loan growth boom in the early part of the decade, and is consequently a marginal player in the consumer finance segment with a 3% market share. Known primarily as a corporate bank, BSF has capitalised on the expertise of its parent shareholder, Calyon (which holds a 31.1% stake in BSF), to develop into a strong corporate franchise. However, the bank is now focusing on building up its retail presence, both on the liability and the asset side. BSF also has a 50% stake in Sofinco Saudi Fransi (a white goods consumer finance company), a 60% stake in CAAM Saudi Fransi (an asset management joint venture with Credit Agricole Asset Management), a 32.50% stake in Saudi Fransi Cooperative Insurance and a 27% stake in Banque Demo Saudi Fransi (a commercial bank in Syria). However, the contribution from these subsidiaries is currently negligible.
2009 - managing risks and profitability

Like most of its peers, BSF spent most of 2009 managing its credit risks and maintaining an efficient balance sheet structure. While net loans remained broadly stagnant, BSF has made a concerted effort to diversify its loan book by building up its SME portfolio. The corporate focused balance sheet, both on the liability and asset side, ensured that spreads remained relatively stable. The bank was able to offset the pressure on asset yields, arising as a result of declining interest rates, by building up its non-interest bearing deposit base. Customer deposits declined by only 2.8% in 9M2009, as the strong growth in demand deposits was used to replace BSFs relatively high-cost term deposits. The slowing loan growth environment also enabled the bank to significantly reduce its reliance on interbank borrowings, which declined by almost 63% Y-o-Y. However, the positive impact accruing from all these savings on funding costs was offset by a relatively low interest rate environment and the maturity of government bonds. BSF's investment portfolio declined by almost 37% in 9M2009, with the majority of the proceeds channelled towards reverse repos with SAMA to comply with the Central Banks liquidity reserve requirements. Asset quality trends remained relatively healthy as reported in the Basel II Compliance Statement for June 2009. Credit provisioning costs increased in 9M2009 to 27.9 bps, versus 13.2 bps in 2008, suggesting only a slight deterioration in asset quality. Nonetheless, we believe that credit costs could remain high in the near term, as the bank builds up on its relatively thin NPL coverage (111% in December 2008).
2010 - maintaining strength in corporate, growing retail business

With risk appetite improving and government spending remaining on track, we expect credit growth to recover in 2010e. Initially, the recovery is likely to be driven by the corporate sector, where BSF has a relatively strong presence. We forecast BSF's net loans will grow by 15% Y-o-Y in 2010e, with growth in the corporate loan book being the major driver. However, the bank is increasingly focusing on building up its retail presence. BSF has a market share of 3% in the consumer finance segment, and the bank believes that with a more focused approach it can increase its market share by improving the crossselling of its retail products to its existing client base. If successfully executed, we believe that this could enable the bank to improve its spreads in 2010e, which are currently among the lowest in the sector. On the liabilities side, the bank aims to increase its geographic reach and expand its branch network. BSF only added two branches to its network in 9M2009, and we believe that its branch network expansion is likely to be more aggressive in 2010e. BSF is also working on improving its cost efficiency by automating most of its routine transactions and transforming its branches into sales centres for its retail products. Management has indicated that support from Calyon, its sponsor shareholder, has increased over the last few years due to the increasing importance of BSF in Credit Agricole's regional expansion plan. This support also includes regular training for employees, aimed at improving BSFs consumer banking business.

The uncertainty surrounding its asset quality and any potential impact on provisioning costs due to its exposure to the Saad and Algosaibi Groups has kept BSFs share price performance subdued. With limited visibility, we expect the overhang on BSF's stock price to continue. However, the bank is looking to start 2010e with a clean sheet, and provisioning levels are likely to recede in 2010e. We have a Buy rating on BSF and an FV of SAR53.30.
BANKING SECTOR
58
ARAB NATIONAL BANK (ANB)

Rating : Buy

55 50 45 40 35 30 25 20
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jan-09 08-Jun-09 08-Oct-09 08-Dec-09 08-Apr-09 08-Sep-09 08-Feb-09 08-Aug-09 08-Dec-08

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 43.00 on 08 December 2009 ARNB AB / 1080.SE SAR27,950 / 650 SAR159.1 33.70% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Arab Bank 40% General Organization for Social Insurance 10.80% Management: CEO: Dr. Robert Maroun Eid CFO: Mr. Abdullah Al Khalifa

2008a 3.33 1.00 18.49 12.90 2.3% 2.33 30.1% 19.2% 2.0%
2009e 3.85 1.16 21.40 11.17 2.7% 2.01 32.0% 19.3% 2.1%
2010e 4.29 1.29 24.94 10.02 3.0% 1.72 28.1% 18.5% 2.2%
2011e 4.98 1.50 29.10 8.63 3.5% 1.48 24.4% 18.4% 2.3%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 12,051 2,747 28,228 74,662 935 2,685 121,307 92,743 10,509 1,875 4,158 109,286 12,021 5,639 (2,285) 3,354 839 (471) 414 782 4,135 (1,582) 2,553 (60) 2,493 (319) 2,174 (7) 2,167 2009e 7,347 5,180 28,624 73,860 923 2,910 118,844 87,353 11,356 1,688 4,536 104,933 13,912 4,719 (1,049) 3,669 722 69 379 1,170 4,840 (1,621) 3,219 (349) 2,870 (364) 2,506 2,506
2008a 22.2% 25.9% 80.5% 4.1% -25.7% 3.6% 3.6% 38.3% 0.4% 349.0% 8.7
2009e -1.1% -2.0% 84.6% 9.4% 47.4% 3.5% 3.5% 33.6% 0.7% 261.5% 46.2 2010e 8,585 6,056 29,067 84,325 947 3,089 132,069 99,328 9,933 1,688 4,908 115,856 16,212 4,885 (986) 3,899 775 157 347 1,279 5,178 (1,741) 3,438 (243) 3,195 (406) 2,789 2,789
2010e 14.2% 13.7% 84.9% 6.2% 8.1% 3.5% 3.6% 33.8% 0.9% 217.6% 35.4
2011e 15.9% 15.3% 85.4% 13.7% 9.5% 3.5% 3.6% 32.5% 1.0% 188.2% 27.5 2011e 10,027 6,922 31,842 97,759 974 3,281 150,805 114,520 10,307 1,688 5,378 131,892 18,913 5,487 (1,049) 4,438 856 168 388 1,412 5,850 (1,881) 3,969 (258) 3,711 (471) 3,240 3,240

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Reported Net Income Taxes & Zakat Net Income before Minority Interest Minority Interest Net Income
Source: Arab National Bank (ANB), EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
A 40% owned subsidiary of Arab Bank of Jordan, Arab National Bank (ANB) is the third largest joint venture (JV) bank and the seventh largest bank in the sector in terms of total assets. ANB has a 9% market share of both sector loans and deposits, which is line with its asset size. However, its consumer loan market share of 10% at the end of September 2009 is the third highest among Saudi banks. ANB derives its strength from its retail banking franchise of 140 branches, which is the biggest branch network among the JV banks and has allowed ANB to maintain one of the most competitive deposit costs among the conventional banks in Saudi Arabia. During 2007 and 2008, the bank formed joint ventures with local and international partners in the equipment leasing, mortgage financing and insurance businesses. The bank partnered with Dar Al-Arkan (the largest residential property developer in Saudi Arabia) to form the Saudi Home Loans Company, in which ANB has a 40% stake. It also partnered with the Consolidated Contractor Company to set up a heavy construction equipment leasing company in Saudi Arabia, in which it has a 62% stake. In addition, it entered into a joint venture with AIG to set up an insurance company in Saudi Arabia.
2009 - going conservative

After recording strong balance sheet growth in 2008, ANB focused most of its efforts in 2009 on managing balance sheet risks and maintaining profitability levels. Among the Saudi banks, ANB adopted a more conservative approach, which resulted in a sharp contraction in the size of its loan book. Net loans declined by almost 8% in 9M2009, as ANB cut down on its credit risk exposure as a slowing economy gave rise to asset quality concerns. Earnings, however, remained broadly stable in 9M2009, as the bank was able to offset the volume impact by improving its net special commission spreads. With a conservative approach towards credit risk, the bank aggressively reduced its balance sheet liquidity by shedding high-cost customer deposits, which declined by almost 13% in 9M2009. With the progressive contraction in both loan and deposits in 2009, the bank's loan-todeposit ratio rose to 85% in 3Q2009, versus 80% in 4Q2008. During the year, ANB also received regulatory approval to set up its heavy construction equipment leasing business, which was established in partnership with the Consolidated Contractor Company. The bank also completed the integration of its new core banking system, which is expected to improve customer service as well as result in greater transaction and investment efficiencies. Based on the disclosures made by the bank so far, there has not been any deterioration in asset quality. However, we expect more visibility on asset quality with the publication of 2009s annual report and accompanying disclosures. At 0.4%, ANB has one of the lowest NPL ratios among Saudi banks, while its NPL coverage stood at 349% at the end of December 2008.
2010 - looking to bounce back

After going through a consolidation phase in 2009, which involved a rigorous risk assessment of the loan book, we believe that ANB will focus on rebuilding its loan portfolio in 2010e. While the bank has been able to maintain profitability levels in 2009 despite a contraction in its loan book, we believe that a continuation of its conservative stance and loan book run off is likely to start putting pressure on its profitability. The improvement in the economic environment is likely to lead to an improved risk appetite at ANB. We expect a gradual pick-up in the growth momentum, and expect ANBs loan book to grow by 14.2% in 2010e. We nevertheless expect net special commission spreads to come under slight pressure in 2010e, as the bank will need to grow its deposit book in line with its loan growth. We therefore believe that spreads on incremental loans are likely to be lower. A deterioration in asset quality will become apparent with the release of 2009s annual accounts. However, we highlight that the bank has a relatively high NPL coverage (excess loan loss reserves accounted for almost 1.3% of the bank's net loans at the end of 3Q2009), which could be used to absorb some deterioration in asset quality. Overall the asset quality of the bank, aside from its exposure to the Saad and Algosaibi Groups, has held up relatively well, and we expect its NPLs to peak in 1H2010e. ANBs credit provision costs, which we forecast to rise to 46 bps in 2009, versus 9 bps in 2008, are expected to decline to 30 bps in 2010e.

We believe that ANB is likely to maintain its competitive funding costs by capitalising on its strong retail franchise. While some risk to 4Q2009e earnings remains in the form of increased credit provisions, we believe that ANB has the capacity to absorb any shock, in the form of excess loan loss reserves, without a significant impact on earnings. We have a Buy rating on ANB and an FV of SAR55.80.
BANKING SECTOR
60
SAUDI HOLLANDI BANK (SHB)

Rating : Buy

55 50 45 40 35 30

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 31.00 on 08 December 2009 AAAL AB / 1040.SE SAR10,253 / 330.8 SAR42.6 29.70% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: ABN AMRO Bank 39.90% Olayan Saudi Investment Group 20.80% Management: CEO: Dr. Bernd Van Linder CFO: Mr. Ananth Venkat

2008a 3.33 0.71 16.57 9.3 2.3% 1.87 23.8% 22.0% 2.0%
2009e 2.01 0.40 18.40 15.4 1.3% 1.68 19.3% 11.5% 1.0%
2010e 3.10 0.60 21.22 10.0 1.9% 1.46 18.2% 15.6% 1.4%
2011e 3.86 1.00 24.53 8.0 3.2% 1.26 15.9% 16.9% 1.6%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 2,791 365 18,368 38,017 466 1,429 61,436 43,012 9,286 1,475 2,181 55,954 5,482 2,977 (1,532) 1,445 456 121 89 666 2,111 (810) 1,301 (78) 1,224 (122) 1,102 2009e 4,564 5,580 18,383 40,007 511 1,572 70,619 53,001 8,480 775 2,276 64,532 6,087 2,559 (985) 1,574 370 124 76 570 2,144 (793) 1,350 (612) 739 (72) 666
2008a 38.0% 24.3% 88.4% 20.4% 15.6% 2.6% 2.8% -38.4% 2.7% 107.8% 7.5
2009e 5.2% 23.2% 75.5% 8.9% -14.5% 2.5% 2.6% 37.0% 3.0% 134.5% 151.3 2010e 6,134 5,511 17,910 43,434 540 1,729 75,257 56,436 8,465 775 2,562 68,238 7,019 2,920 (1,160) 1,761 395 91 84 570 2,330 (847) 1,484 (347) 1,137 (111) 1,025
2010e 8.6% 6.5% 77.0% 11.9% 0.0% 2.6% 2.6% 36.3% 3.2% 139.5% 79.6
2011e 16.2% 14.0% 78.4% 10.5% 8.5% 2.6% 2.7% 35.7% 3.2% 134.0% 47.3 2011e 6,240 7,082 18,887 50,463 571 1,902 85,146 64,337 9,007 775 2,911 77,031 8,115 3,155 (1,210) 1,945 430 96 92 618 2,564 (916) 1,647 (232) 1,415 (139) 1,276

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Income before Minority Interest Zakat & taxes Net Income
Source: Saudi Hollandi Bank (SHB), EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
Saudi Hollandi Bank (SHB) is Saudi Arabias smallest joint venture bank, and the fourth smallest bank in the sector, with total assets of SAR63.2 billion and total deposits of SAR47.3 billion as at 30 September 2009. One of the oldest banks operating in Saudi Arabia, Saudi Hollandi is 40% owned by ABN AMRO (stake now held by a Royal Bank of Scotland-led consortium) and is predominantly a corporate bank, enjoying strong relationships with mid and top-tier corporate clients. The bank underwent a restructuring exercise in 2007, resulting in a new senior management team and aggressive provisioning against doubtful loans. SHB has relatively small operations despite its long history in the country. SHBs network of 43 branches is also much smaller than its peers. Despite its small balance sheet size, however, the bank has historically been an active participant in the investment advisory business, with technical expertise provided by ABN AMRO Bank.
2009 - aggressive provisioning dents earnings

After bouncing back in 2008, SHBs earnings were once again hit by aggressive provisioning in 2009. While the loan quality clean up in 2007 was primarily driven by the restructuring exercise, provisioning in 2009 has been led by growing asset quality concerns in a slowing economic environment. In 9M2009, SHB's credit provision costs have jumped by almost 10x Y-o-Y to 107 bps, leading to a 43% Y-o-Y decline in earnings. This is one of the most aggressive provisioning exercises that we have seen among Saudi banks in 2009. With lower NPL coverage (108% in December 2008), SHB had less capacity to absorb an increase in NPLs and therefore had to be more cautious in pre-empting any asset quality deterioration. We expect credit provisions to remain high in the near term, with the bank aiming to improve its NPL coverage. Balance sheet growth momentum also decelerated sharply in 2009. Net loans grew by 2.5% in 9M2009 which, although high when compared to an overall sector growth of 1.6% YTD, is considerably lower than SHBs 38.0% Y-o-Y growth in 2008. However, the bank has used the slowing loan growth environment to bolster its capital adequacy, which had fallen sharply after the aggressive loan growth in 2008. The initial support to CAR came through a Tier II sukuk issuance in December 2008. Since then, the bank has been retaining its earnings and lowering its risk weighted assets, which has enabled it to raise its CAR to 14.5% in September 2009, versus 12.7% in December 2008.
2010 - looking for a gradual recovery

Provisioning costs, which have been a major drag on SHB's earnings in 2009, are likely to start receding in early 2010e, in our view. We believe that this should lead to a rebound in earnings in 2010e, and expect earnings to jump by 54% Y-o-Y as provisioning costs normalise. We expect credit growth to recover in 2010e, growing by 8.6% Y-o-Y, although the recovery is likely to be relatively restrained due to SHBs desire to maintain a comfortable capital adequacy ratio. SHB is aware of the fact that, in the absence of any clarity on the RBS-led consortiums plan regarding its stake, any improvement in CAR will be primarily driven by retention of earnings or through raising Tier II capital. This is likely to constrain SHBs growth ambitions. The slowdown in the economy, and hence credit growth, has allowed SHB to focus on areas that need improvement. SHB's presence in the consumer finance segment (less than 2% of sector consumer assets) is clearly below its overall 5% market share of banking sector assets. The bank has already introduced a new product offering on credit cards, and is likely to look at opportunities to increase cross-selling to its existing client base. We believe that if the consumer finance segment strategy is successful, the bank will improve its net special commission spreads, which are currently among the lowest in the sector.

We recommend a Buy rating on SHB, with an FV of SAR39.0. Its aggressive provisioning levels are likely to keep investor sentiment subdued in the near term, as the domestic retail investor base remains sensitive to quarterly earnings announcements. Results for 1Q2010e are likely to be the key catalyst for stock price performance, in our opinion, and we believe receding provisioning levels will lead to strong earnings growth.
BANKING SECTOR
62
SAMBA FINANCIAL GROUP

Rating : Buy

65 60 55 50 45 40 35

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 50.25 on 08 December 2009 SAMBA AB / 1090.SE SAR45,225 / 900 SAR560.6 42.80% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Public Investment Fund 22.90% Public Pension Agency 15.00% Management: CEO: Mr. Issa M. Al Issa CFO: Mr. Abdulhalim Sheikh

2008a 4.77 1.65 21.48 10.5 3.3% 2.34 33.7% 23.5% 2.6%
2009e 5.27 2.10 24.81 9.5 4.2% 2.03 32.9% 22.7% 2.6%
2010e 5.77 2.30 28.47 8.7 4.6% 1.77 30.8% 21.7% 2.8%
2011e 6.69 2.70 32.71 7.5 5.4% 1.54 27.0% 21.9% 2.9%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 13,800 878 54,213 98,147 870 10,983 178,891 134,228 12,090 1,873 11,370 159,561 19,330 8,426 (3,365) 5,061 1,624 (122) 449 1,951 7,012 (2,111) 4,901 (458) 4,443 (150) 4,293 11 4,304 2009e 17,554 3,066 58,250 88,321 878 12,624 180,692 137,410 9,619 1,873 9,458 158,359 22,333 6,979 (1,624) 5,355 1,363 469 393 2,225 7,580 (2,102) 5,477 (579) 4,898 (159) 4,739 4,739
2008a 21.8% 15.9% 73.1% 2.4% -13.4% 3.6% 3.6% 30.1% 1.8% 167.0% 28.9
2009e -10.0% 2.4% 64.3% 5.8% 14.0% 3.7% 3.7% 27.7% 2.6% 151.0% 59.9 2010e 10,896 5,171 60,325 102,760 892 14,517 194,561 146,734 10,271 1,873 10,060 168,938 25,623 7,180 (1,519) 5,661 1,447 458 461 2,366 8,028 (2,210) 5,817 (450) 5,368 (174) 5,193 5,193
2010e 16.3% 6.8% 70.0% 5.7% 6.4% 3.6% 3.6% 27.5% 2.7% 143.0% 45.3
2011e 16.9% 14.0% 71.8% 12.7% 6.2% 3.6% 3.6% 26.5% 2.6% 138.7% 27.4 2011e 11,420 5,838 64,213 120,116 907 16,695 219,188 167,277 11,709 10,766 189,752 29,436 7,928 (1,546) 6,383 1,561 446 507 2,514 8,897 (2,359) 6,538 (317) 6,221 (202) 6,019 6,019

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Reported Net Income Zakat & Taxes Income before Minority Interest Minority Interest Net Income
Source: Samba Financial Group, EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
Samba Financial Group (Samba) is the second largest bank in Saudi Arabia in terms of asset base. Total assets stood at SAR184 billion as at 3Q2009, accounting for 14% of the banking sectors total assets. The bank also has a 16% market share of total sector deposits, an 11% share of total sector loans, and a 7% share of total sector consumer loans. Previously a joint venture bank run by Citibank, and now majority owned by government institutions, Samba has historically been one of the more aggressive banks in our opinion. Despite its smaller branch network, Samba has been able to grow its deposit base both strongly and efficiently; it has one of the best deposit/branch ratios, at SAR2.1 billion per branch. Samba operates a network of 65 branches throughout Saudi Arabia and one branch in London. The bank acquired a 68.4% shareholding in Crescent Commercial Bank in Pakistan in 2007 and commenced commercial operations in the UAE in 2008.
2009 - cutting down on risks

Within the banking sector, Samba reported one of the biggest reductions in loans in 2009, with net loans declining by almost 12.7% in 9M2009. Central to the contracting loan book was the banks strategy of lowering its credit exposure and maintaining a liquid balance sheet in the tough economic environment. The bank also significantly reduced its trading investments, which declined to SAR1.61 billion in September 2009 from SAR2.75 billion in December 2008. Samba also reduced its hedge fund investments in 2009 (part of its FVIS portfolio), which had been a source of earnings volatility in 2008. Deposit mobilisation, however, was relatively strong, with customer deposits increasing to SAR141.7 billion. The majority of the growth came through non-interest bearing deposits. This had a favourable impact on net special commission spreads, which are estimated to have rebounded by almost 45 bps since 4Q2008. When the Saad and Algosaibi Groups disclosed their liquidity problems, Samba was perceived to be one of the most exposed to the two groups given its relationship with both business groups - Saad Group was among the largest shareholders in the bank, while a member of the Algosaibi family was chairman of Sambas board of directors. However, the fact that Algosaibi was represented on the board of directors meant that Sambas entire exposure to the Algosaibi Group had to be 100% collateralized as per the banking regulations. Moreover, reports that Saad has settled its bilateral debts to Saudi banks also lowered the banks potential asset quality deterioration. Nonetheless, the bank reported an increase of SAR1.3 billion in NPLs in June 2009, which was largely absorbed by the loan loss reserves created by the bank in previous years. This resulted in a minimal impact on earnings, which grew by 9% Y-o-Y in 9M2009.
2010 - strongly positioned for an upturn

Samba appears to be best positioned among Saudi banks to capitalise on an upturn in the economy, in our opinion. At the end of 3Q2009, Samba possessed one of the strongest balance sheet liquidity positions among the Saudi banks. The loan-todeposit ratio stood at 60%, versus a sector average of 81%; capital adequacy improved to 16.5% in September 2009, versus 14.1% in December 2008; while liquid assets on the balance sheet accounted for almost 45.7% of deposits. However, management remains cautious and is likely to be relatively conservative in deploying its liquidity. We expect the majority of loan growth to come through the corporate loan book, while the consumer loan book remains relatively stable. Samba is also well-positioned to benefit from a rising interest rate environment. With almost 45% of deposits maintained in liquid assets, any increase in interest rates is likely to have a positive impact on the bank's net special commission spreads, as liquid assets get re-priced quickly. On the other hand, its funding costs are unlikely to rise, as an estimated 35% of its deposits are non-interest bearing. While we forecast 2010e provisioning costs, in absolute terms, will remain at more or less the same level as in 2009, we believe that this represents a potential source of positive surprise to our earnings estimates. We believe that NPLs are likely to peak in early 2010e, while provisioning costs are likely to start trending downwards in 2H2010e.

Samba is our top pick in the Saudi banking sector, and we have a Buy rating on Samba with an FV of SAR72.10. We believe that the bank's relatively strong balance sheet liquidity and ability to absorb incremental NPLs has been under-estimated, which is reflected in its discounted valuation to the rest of the sector. In the short term we believe quarterly results remain the key catalyst for stock price performance, while any progress on debt restructuring by the Saad and Algosaibi Groups is likely to lead to a sector-wide improvement in sentiment.
BANKING SECTOR
64
RIYAD BANK
Rating : Buy

30 Price (SAR) TASI (Rebased)

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 25.20 on 08 December 2009 RIBL AB / 1010.SE SAR37,800 / 1,500 SAR331.40 30.40% Accessible via swaps only
25
20
15
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jan-09 08-Jun-09 08-Oct-09 08-Dec-08 08-Dec-09 08-Apr-09 08-Sep-09 08-Feb-09 08-Aug-09
Major Shareholders: Public Investment Fund 21.70% General Organization for Social Insurance 21.60% Management: CEO: Mr. Talal I. Al-Qudaibi EVP Finance: Mr. Saad Q. Al-Qassim

2008a 1.84 1.65 18.89 13.7 6.5% 1.33 36.0% 13.9% 1.8%
2009e 1.95 1.40 17.03 13.0 5.6% 1.48 29.2% 11.7% 1.7%
2010e 2.56 1.50 18.12 9.84 6.0% 1.39 25.0% 14.6% 2.0%
2011e 3.26 2.00 19.49 7.74 7.9% 1.29 21.9% 17.3% 2.3%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 11,078 6,257 40,329 96,430 1,630 3,928 159,653 105,056 21,213 1,874 6,950 135,093 24,559 6,737 (2,790) 3,947 1,187 (230) 344 1,302 5,248 (2,086) 3,162 (523) 2,639 (81) 2,558 2009e 16,579 9,680 38,721 110,612 1,704 3,426 180,723 129,558 17,490 1,875 6,259 155,182 25,541 6,810 (2,244) 4,565 1,240 42 232 1,514 6,079 (2,219) 3,860 (835) 3,025 (106) 2,919
2008a 43.2% 24.6% 91.8% 20.8% -32.0% 3.2% 3.3% -39.8% 1.3% 131.9% 42.6
2009e 14.7% 23.3% 85.4% 15.7% 16.3% 2.9% 3.1% 36.5% 1.7% 121.1% 62.8 2010e 17,477 12,950 40,701 128,519 1,786 3,727 205,161 151,249 18,150 1,875 6,704 177,978 27,183 7,442 (2,282) 5,160 1,356 95 268 1,719 6,879 (2,389) 4,490 (510) 3,980 (139) 3,840
2010e 16.2% 16.7% 85.0% 13.0% 13.6% 3.0% 3.1% 34.7% 1.9% 116.7% 42.7
2011e 15.7% 14.0% 86.3% 17.5% 14.3% 3.1% 3.2% 32.2% 1.9% 114.4% 27.5 2011e 15,367 10,409 45,799 148,751 1,876 4,057 226,258 172,424 17,242 7,350 197,016 29,242 8,345 (2,283) 6,062 1,507 148 309 1,965 8,026 (2,585) 5,442 (381) 5,060 (177) 4,883

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Income before Provisions Provisions Income before Minority Interest Zakat & Taxes Net Income
Source: Riyad Bank, EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
Majority-owned by government and government institutions, Riyad is the third largest bank in Saudi Arabia in terms of assets. Riyad also has the third largest branch network in the country, with 209 branches. Established by one of the prominent business families of Saudi Arabia, Riyads shareholding was taken up by the government after the bank ran into asset quality problems in the 1960s. The bank has a 13% market share of banking sectors loans and deposits and a 9% share of sector consumer loans. Over the last four years, Riyad has made up for its relative lack of technological sophistication by aggressively spending on improving its IT infrastructure. Riyads ATM network has almost quadrupled over the last four years, which has both generated fee income and enabled the bank to improve its cost efficiency. Riyads capital adequacy improved significantly in 2008, with the bank almost doubling its equity base via a substantial rights issue. The bank capitalised on the increased lending room made available to it as a result of the rights issue and grew its loan book by almost 43% in 2008.
2009 - bucking the trend

The strong growth momentum seen in 2008 has carried over into 2009, with Riyad recording the strongest loan growth among the Saudi banks in 9M2009 as it capitalised on the balance sheet room made available to it as a result of the 2008 rights issue. Net loans increased by 17.7% Y-o-Y and 10.0% in 9M2009. This was in contrast to overall sector loan growth of 2.5% Y-o-Y and 1.6% YTD. The start of 2009 also marked an aggressive deposit mobilisation effort by the bank in order to bring its loan-to-deposit ratio, which stood at 92% in December 2008, in line with the prescribed Central Bank limits. Total deposits grew by 13% Q-o-Q in 1Q2009, bringing Riyads loan-to-deposit ratio to 84%. However, the deposit growth momentum slowed significantly after 1Q2009, and the bank shed some of its high-cost deposits in 3Q2009 to support its net special commission spreads. While funding costs continued to decline in line with the fall in benchmark interest rates, spreads were hit in 3Q2009 by the partial maturity of the banks high yielding government bond portfolio. The bank has not reported any material deterioration in asset quality, with the NPL ratio remaining relatively stable at 1.3% in June 2009. We however believe that there will be more visibility in 2009s annual results, as the bank undertakes a rigorous end of year asset quality review, which could potentially lead to higher NPLs. Credit provisioning costs at 44 bps for 9M2009, almost 2x higher on a Y-o-Y basis, wiped out the gains accruing from stronger balance sheet growth, with 9M2009 earnings remaining flat on a Y-o-Y basis. Earnings were also impacted by the SAR285 million impairment provision taken on the investment book in 1Q2009, which was partially reversed during 2Q2009 and 3Q2009.
2010 - focusing on efficiency improvement

With Riyad's capital position remaining strong, we expect the bank to continue to grow its balance sheet. We expect net loans to grow by 16% in 2010e, with most of the growth coming from corporate loans. We also expect the bank to try and maintain its share of the consumer loan market through its relatively strong retail presence, supported by its 209 branches. However, after registering stronger-than-expected sector loan growth for two consecutive years, we expect the bank to focus on consolidating the gains made over the last two years and work on improving its balance sheet efficiency. Net special commission spreads, which continue to remain depressed compared to 2008, is an obvious area of improvement. While asset yields are unlikely to improve significantly with the prevailing interest rate environment, the bank is likely to focus on improving its funding mix and utilising its branch network to raise more non-interest bearing deposits. We expect the bank to continue to enjoy gains from its IT infrastructure spend, which is likely to lead to further cost efficiencies. We also expect a slowdown in ATM installation after an almost quadrupling of the banks ATM network since 2004. At the end of September 2009, Riyad had 2,400 ATMs throughout the country compared to less than 700 at the end of 2005. The investment book is unlikely to be a source of concern in the near to medium term, with global markets appearing relatively stable. Reversals in investment provisions, which have been a feature in 2Q2009 and 3Q2009, are likely to continue into 4Q2009e. We expect overall credit provisioning costs to remain at elevated levels in the near term, but forecast a gradual decline that will become more visible in 2H2010e.

We have an FV of SAR34.0 and a Buy recommendation rating on Riyad. The stock trades at a 2010e P/E of 11.6x. Although its 2010e P/B of 1.4x is towards the lower end of the range when compared to peers, Riyads 2010e ROAE of 14.6% is also below the sector average, and has been depressed by the rights issue in 2008.
BANKING SECTOR
66
THE SAUDI INVESTMENT BANK (SAIB)

Rating : Buy

24 23 22 21 20 19 18 17 16 15 14
08-Mar-09 08-Jan-09 08-Dec-08 08-Feb-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 18.55 on 08 December 2009 SIBC AB / 1030.SE SAR8,348 / 450 SAR92.3 38.00% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: General Organization for Social Insurance 21.50% Public Pension Agency 17.30%
08-May-09 08-Nov-09 08-Jul-09 08-Jun-09 08-Oct-09 08-Apr-09 08-Dec-09 08-Sep-09 08-Aug-09
Management: CEO: Mr. Saudi Saleh Al Saleh CFO: Mr. David Johnson

2008a 1.09 0.00 14.69 17.0 0.0% 1.26 20.5% 7.3% 1.0%
2009e 1.79 0.36 16.20 10.4 1.9% 1.14 21.8% 11.6% 1.5%
2010e 2.10 0.42 17.98 8.8 2.3% 1.03 19.5% 12.3% 1.7%
2011e 2.49 0.50 20.09 7.5 2.7% 0.92 17.1% 13.1% 1.8%

Growth in Loans Growth in Deposits Loans / Deposits Growth in Commission Inc. Growth in Non-commission Inc. Net Commission Spread Net Commission Margin Cost / Income NPLs / Gross Loans Loan Provisions / NPLs Provisions Made / Avg. Gross Loans 2008a 1,427 7,453 13,451 29,556 548 1,163 53,596 40,702 5,209 1,076 46,988 6,609 2,541 (1,514) 1,026 481 277 153 912 1,938 (411) 1,528 (998) 530 (22) 508 (17) 491 2009e 1,667 5,909 11,552 31,517 612 1,279 52,537 38,278 5,359 500 1,109 45,246 7,291 2,217 (1,170) 1,047 278 57 48 383 1,430 (447) 120 1,103 (241) 861 (39) 822 (18) 804
2008a 27.8% 24.2% 72.6% -2.8% 162.6% 1.9% 2.2% -21.2% 1.0% 251.9% 11.1
2009e 6.6% -6.0% 82.3% 2.0% -58.0% 1.9% 2.1% 31.3% 1.7% 183.0% 76.9 2010e 1,983 4,875 14,262 34,592 686 1,407 57,806 42,891 5,147 500 1,175 49,714 8,093 2,192 (1,095) 1,097 292 106 52 450 1,547 (489) 132 1,191 (179) 1,012 (46) 966 (20) 946
2010e 9.8% 12.1% 80.7% 4.8% 17.5% 2.0% 2.2% 31.6% 2.0% 162.2% 52.4
2011e 15.3% 14.0% 81.6% 10.3% 8.5% 2.0% 2.2% 31.8% 2.0% 154.1% 28.1 2011e 2,279 4,237 15,850 39,888 772 1,548 64,573 48,896 4,890 500 1,246 55,532 9,042 2,372 (1,161) 1,210 312 118 58 488 1,698 (541) 145 1,303 (108) 1,195 (54) 1,141 (22) 1,119

Balance Sheet Cash & Balances with SAMA Due from Banks Net Investments Net Loans Net Fixed Assets Other Assets Total Assets Customer Deposits Due to Banks Term Loan (Debt) Other Liabilities Total Liabilities Equity Income Statement Special Commission Income Special Commission Expense Net Special Commission Income Fee & Commission Income Income from Investments Other Operating Income Total Non-special Commission Income Total Banking Income Operating Expenses Share of Associates Income before Provisions Provisions Income before Taxes Zakat & Taxes Income before Minority Interest Minority Interest Net Income
Source: The Saudi Investment Bank (SAIB), EFG-Hermes estimates
MURAD ANSARI
SAUDI ARABIA
Research Yearbook
BANKING SECTOR
2 0 1 0
background
The Saudi Investment Bank (SAIB) is the third smallest bank in Saudi Arabia in terms of assets (SAR50.6 billion at the end of September 2009). The bank has a 4% market share on most balance sheet measures and, with 39 branches at the end of September 2009, it is the second smallest bank in terms of geographical reach. While SAIB has a 4% market share of total commercial and corporate loans, it has less than a 1% market share of consumer loans. SAIB has historically maintained high balance sheet liquidity, with net loans accounting for only 60% of its total assets in 3Q2009. The bank has traditionally relied on its proprietary book to generate high investment income. SAIBs profitability over the past few years has been buoyed by rising investment gains and an increasing contribution of broking income to its total revenues.
2009 - earnings recovery, but spreads remain under pressure

SAIBs earnings, which were hit by investment impairments in 4Q2008, started showing some stability in 2009. However, although the slower credit growth environment eased the pressure on the bank to raise funding, net special commission spreads failed to rebound in line with improvements seen in the rest of the sector. SAIB had to rely on relatively expensive interbank borrowings towards the end of 2008, after the maturity of its USD380 million bond. In 2Q2009, SAIB raised SAR500 million through a domestic currency bond offering, which was used to lower the bank's reliance on interbank borrowings. This led to an improvement in net special commission spreads in 2Q2009 to 2.26%. However, this recovery was short-lived, and spreads declined to around 2.0% in 3Q2009. Primarily a corporate franchise, SAIB has the lowest spreads among banks in Saudi Arabia. In June 2009, SAIB and Al Baraka Bank called off their 2007 plan for a proposed share swap deal, indicating that the sharp fall in asset prices due to the turmoil in the financial markets had made it impossible for the banks to move forward with the deal. In June 2009, both Fitch and S&P downgraded their respective credit rating on SAIB, citing high borrower concentration potentially leading to a deterioration in asset quality. While the banks June 2009 Basel II Compliance Statement does not suggest any deterioration in asset quality, credit provisioning costs have risen almost five times Y-o-Y, to 53 bps in 9M2009. We expect more visibility on asset quality to come through with the year-end results, but believe that SAIBs relatively higher lending exposure to the construction segment could be a cause for concern.
2010 - managing funding costs

SAIB has historically maintained a liquid balance sheet. However, with the pressure building up on net special commission spreads in 3Q2009, the bank shed its high-cost customer deposits, pushing up its loan-to-deposit ratio to almost 80% at the end of 3Q2009. While the bank can potentially raise deposits to fund loan growth, we believe that this will be at the cost of spreads. We therefore do not expect any material recovery in SAIB's net special commission spreads in 2010e, which we expect to remain around the 2.0% mark. The bank is likely to concentrate on expanding its branch network in order to access low-cost deposits. While this could help the bank to potentially improve its spreads, we do not incorporate this into our estimates as recent branch expansion has not yet delivered any improvements in spreads. We expect the bank to maintain a relatively conservative approach to credit growth, and forecast loan growth of 9.8% in 2010e, slightly below our sector loan growth forecasts. Although earnings are likely to recover strongly in 2009e, in the absence of investment impairments, we expect incremental growth in pre-provision earnings to be relatively moderate. We expect these trends to persist in 2010e and expect improvement in pre-provision profits to be moderate. We believe the biggest risks to earnings remain the bank's relatively high borrower concentration and its relatively high exposure to the building and construction segment.

We have an FV of SAR21.50 and a Buy recommendation on SAIB. With the stock trading at a 2010e P/E of 8.8x and a P/B of 1.0x valuations are attractive, and the discount to the rest of the sector will remain a major driver for the stock price.
BANKING SECTOR
YEARBOOK
2010
telecom
SAudi tElECOm COmpAnY (StC) EtihAd EtiSAlAt (mOBilY) zAin KSA
70
TELECOM SECTOR
highlights of 2009 - new players, more competition

Table 1: Saudi Arabia Telecom Market Indicators
In million, unless otherwise stated
2008a Population Mobile Market Indicators Addressable Market New Additions Total Subscribers Penetration to Addressable Penetration Rate STC STC Subscribers STC Market Share Mobily Mobily Subscribers Mobily Market Share Zain KSA Zain KSA Subscribers Zain KSA Market Share Fixed-Line Market Indicators Addressable Market New Additions Total Subscribers Penetration to Addressable Penetration Rate STC STC Subscribers STC Market Share Other Operators Others Subs Others Market Share 24.8 32.5 6.7 33.7 104% 136% 19.1 57% 12.6 37% 2.0 6% 5.0 0.02 4.1 83% 17% 4.1 100% 0% 2009e 25.5 36.7 5.4 39.1 107% 154% 20.6 53% 14.2 36% 4.2 11% 5.2 0.10 4.2 81% 17% 4.2 99% 0.0 1% 2010e 26.1 38.3 2.9 42.0 110% 161% 21.4 51% 15.2 36% 5.3 13% 5.4 0.15 4.4 81% 17% 4.3 98% 0.1 2% 2011e 26.8 40.1 1.5 43.4 108% 162% 21.9 50% 15.7 36% 5.8 13% 5.8 0.23 4.6 79% 17% 4.4 96% 0.2 4% 2012e 27.5 41.7 1.0 44.4 106% 161% 22.2 50% 16.1 36% 6.1 14% 6.0 0.29 4.9 82% 18% 4.5 91% 0.4 9% 2013e 28.3 43.6 0.9 45.3 104% 160% 22.5 50% 16.3 36% 6.4 14% 6.2 0.38 5.3 85% 19% 4.6 87% 0.7 13% 2014e 29.1 45.4 1.0 46.2 102% 159% 22.8 49% 16.7 36% 6.8 15% 6.4 0.38 5.6 88% 19% 4.7 82% 1.0 18% 2015e 29.9 47.3 1.0 47.3 100% 158% 23.2 49% 17.0 36% 7.1 15% 6.6 0.38 6.0 91% 20% 4.7 79% 1.3 21%
Source: Companies, EFG-Hermes estimates
mobile market
subscriber additions - strong competition leads to healthy additions
The Saudi Arabian mobile market has done rather well in 9M2009 in terms of subscriber additions. The market has added 5.2 million subscribers in 9M2009, which compares favourably with the 4.2 million added during 9M2008. This growth was expected in light of the aggressive competition, via numerous offers and promotions, in the market that followed the entry of third operator, Zain KSA. The total active subscriber base in Saudi Arabia reached 38.9 million at September 2009, implying a penetration rate of 154%. However, we do not expect additions for the fourth quarter of the year, which coincides with the Hajj (Muslim pilgrimage), to reach the levels seen in 4Q2008. The entry of new operator Zain KSA to the Saudi market in August 2008 resulted in subscriber additions of 2.5 million in 4Q2008 (of which 42% were attributed to Zain KSA and the rest shared almost equally between STC and Mobily), representing a significant 37% of FY2008 subscriber additions. Fig 2: STC, Mobily & Zain KSA Quarterly Subscriber Additions
In thousand, unless otherwise stated
1,200 1,000 800 600 400 200 0 55% 45% 29% 71% STC 51% 38% Mobily 42% 46% 29% 25% 11% 25% 25% 41% 30% 30% Zain KSA 50%
Fig 3: STC, Mobily & Zain KSA Quarterly Subscribers and Market Share
In million, unless otherwise stated
25 20 15 10 5 3% 0 37% 63% 62% STC Mobily 57% 37% 55% 37% Zain KSA 54% 36% 53% 36%
59% 38%
29% 28%
38%
6%
8%
10%
11%
1Q09a
2Q09a
3Q09a
1Q09a
2Q09a
1Q08a
2Q08a
3Q08a
4Q08a
1Q08a
2Q08a
3Q08a
4Q08a
3Q09a
SAUDI ARABIA
Research Yearbook
TELECOM SECTOR
2009 - a more crowded playground 2010 - seeking new growth areas 2 0 1 0
During the first nine months of the year, Zain KSA has managed to capture the largest share of net active subscriber additions, with 46%, followed by Mobily with 28% and STC with the remaining 26%. The latter nevertheless remains the market leader, with a 52.6% market share at the end of September 2009. Mobily comes in second, with a 36.0% market share. Zain KSA ended September 2009 with a market share of 11.3% after almost five quarters of operations. It has consistently secured the majority of quarterly subscriber additions since its entry, relegating Mobily into second place, which is normal for the time being given its status as the newcomer to the market.
tariffs - more focus on roaming and international

The three mobile operators maintained strong marketing efforts during the first nine months of 2009, albeit slightly less aggressively than in FY2008 which saw new market entrant Zain KSA end the Saudi markets duopoly. These marketing efforts have inevitably led to pricing pressures, as all three operators have sought to gain market share. The focus in 2009 has been predominantly on roaming and international tariffs. In early February, STC decreased tariffs for incoming calls while roaming by around 63% for all packages. It later expanded its unified roaming service to include more countries, and introduced new fixed roaming tariffs that were 50% lower than its original tariffs. A particularly aggressive month-long promotion from Mobily in 2Q2009 allowed subscribers to make international calls for a reduced tariff of SAR0.55 after the first minute (from 8:00 pm until 8:00 am). Mobile operators have also continued to concentrate their efforts on value-added services designed to sustain usage levels, along with the focus on the international and roaming segment. 2009s Hajj season coincided with an aggressive one-month offer from STC, which gave its non-business post-paid subscribers unlimited free on-net calls to both fixed-line and mobile numbers.
fixed-line market
In January, Saudi Arabias second fixed-line and broadband operator, Etihad Atheeb (15% owned by Bahrains Batelco), floated a 30% stake on the Saudi stock exchange (Tadawul) through an initial public offering (IPO) at a par value of SAR10 per share. Following the IPO, which was 3.5x oversubscribed, the company listed its shares on Tadawul on 21 March 2009. The company started its commercial operations on 6 June 2009 by offering high-speed internet services in Riyadh and Jeddah. Medina became the third city where it provides WiMAX services in mid-August. The company plans to increase coverage to Mecca and Al Shargiyah by the end of the year. The two other consortiums, holders of the third and fourth fixed-line licenses in the Kingdom, have not yet launched commercial operations.
voice - anaemic growth

During 9M2009, we estimate incumbent STC added a modest 25,000 lines to reach a total subscriber base of 4.2 million, implying a penetration rate of 16.5%. Fixed-line growth has been stagnant over the past few years, which we believe is largely due to increasing fixed-to-mobile substitution. This is a normal phenomenon, and one that we have seen in almost all other markets under coverage, especially given the very strong competition in the Kingdoms mobile segment.
broadband and data - the gold rush

Saudi operators increased their focus on the broadband and data segment during 2009. We have previously highlighted this as the next growth area in the Saudi telecom market. We believe that this segment provides substantial growth potential for operators in a market that is fast approaching saturation levels in terms of voice, on both the mobile and fixed-line fronts. Incumbent STC slashed its DSL subscription rates by 70% in early March, in an aggressive move to maintain its position in the internet market prior to the entry of second operator Etihad Atheeb. Mobily announced that its broadband subscriber base doubled in the first six months of the year to 600,000, with a minimum monthly consumption of 1GB. Mobily also ventured into the business segment during the year, offering broadband business solutions through its data subsidiary Bayanat al-Oula. We believe the business segment, which has been historically under-served as operators raced to sign-up mobile subscribers, will gain increasing importance as competition forces operators to find support for their usage levels.
TELECOM SECTOR
72
TELECOM SECTOR
highlights of 2010 - tapping into new areas of growth

mobile market
subscribers - market approaching mature levels
We estimate that the Saudi mobile market will end 2009e with a total of 39.1 million subscribers and a penetration rate of 154%, slightly higher than our estimate for the addressable market. This is a normal phenomenon that we have seen in other markets following the entry of a new operator. The subsequent wave of offers and promotions that follow this event leads to a larger subscriber base than the markets actual capacity. We believe this phenomenon has been intensified in the Saudi market by the fact that a number of subscribers have bought new SIMs and sent them to relatives in neighbouring countries, so they can benefit from cheaper calls owing to the significant reduction in operators roaming and international tariffs. This implies that a number of SIM cards are actually outside of the Saudi market, and hence not included in our calculation of the addressable market. We expect 2010e to show visibly lower levels of subscriber additions than previous years. In FY2010e, we are forecasting that total active mobile subscriber additions will plunge a substantial 47% Y-o-Y to 2.86 million. We expect additions to be distributed more equally between the three operators, with Zain KSA maintaining a slight lead at 38%, followed by Mobily with 34% and STC with 28%. In 2011e we expect market additions will fall another 48% Y-o-Y, to 1.48 million. This will result in a total subscriber base of 43.4 million at the end of 2011e, at which point we calculate penetration will be at its peak of 162%. As the voice market matures, we believe operators will increasingly seek other engines of growth, such as data and broadband, which they have already begun tapping into. Fig 4: Historical & Forecast Mobile Subscribers and Penetration Rate in Saudi Arabia
In million (LHS), unless otherwise stated
Subscribers (LHS) 50 45 40 35 30 25 20 Penetration Rate (RHS) 165% 160% 155% 150% 145% 140% 135% 130% 125% 2008a 2009e 2010e 2011e 2012e 2013e 2014e 2015e 120% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008a 2009e 2010e 2011e 2012e 2013e 2014e 2015e 57% 53% 51% 50% 50% 50% 49% 49% 6% 11% 36% STC 13% 36% Mobily 13% 36% 14% 36% Zain KSA 14% 36% 15% 36% 15% 36%
Fig 5: Historical & Forecast Mobile Market Shares by Operator in Saudi Arabia
37%
Source: CITC, companies, and EFG-Hermes estimates
Source: CITC, companies, and EFG-Hermes estimates
market shares - stc to maintain the lead, zain ksas share to remain below 20%
We forecast operators will end 2010e with market shares of 51% for STC, 36% for Mobily and 13% for Zain. These are approximately the levels we forecast for the three players in the longer term, especially as shares of net subscriber additions begin to even out between the operators from 2011e onwards.
arpus - usage to stabilise at moderate levels

The Saudi mobile market witnessed aggressive competition in 2H2008 and, to a lesser degree, in 9M2009, with numerous offers and promotions particularly from incumbents. However, we do not expect this to continue in the longer term. We believe that eventually tariff stability will return to the market, so that operators can preserve relatively moderate ARPU levels. While we expect to see some pressure on the blended monthly ARPU levels for STCs Saudi operation in FY2009e, we do not anticipate ARPU levels will drop below SAR100 (USD27) in the medium term. We forecast it will fall at a five-year compound rate of 4% (2008a -2013e), to reach SAR104 (USD27.8) by 2013e. On the other hand, we forecast Mobily will be able to maintain its blended monthly ARPU at relatively stable levels over the next couple of years. We then expect to see a slight improvement, to SAR83 (USD22), as its investments in 3G and data networks start to pay off in terms of higher revenue streams. We estimate Zain KSA will maintain lower ARPU levels than both STC and Mobily, and forecast its ARPU will fall by a five-year compound rate of 6%, to reach SAR67 (USD17.8) in 2013e.
NADINE GHOBRIAL / OMAR MAHER
SAUDI ARABIA
Research Yearbook
TELECOM SECTOR
2009 - a more crowded playground 2010 - seeking new growth areas 2 0 1 0
Figure 6: ARPU Forecasts for Mobile Operators in Saudi Arabia

In SAR, unless otherwise stated
35 30 25 20 15 10 5 0 2008a 2009e 2010e 2011e 2012e 2013e 2014e 2015e STC Mobily Zain KSA
fixed-line market
voice - not much action
We forecast that the Saudi fixed-line market will grow to 4.37 million subscribers in 2010e, implying a penetration rate of 16.7%, up from 4.22 million and 16.6% in FY2009e. We expect STC will relinquish only 2% of its market share monopoly in 2010e to newcomer Etihad Atheeb. Over the longer term, we forecast that STCs market share will fall to 79% by 2015e, as other operators enter the market and capture a higher share of net additions. On a preliminary basis, we believe that Etihad Atheeb will be STCs main competitor in the fixed-line market. While we currently do not have enough information to assess the future performance of the other two new fixed-line consortiums, we have a slight preference for Etihad Atheeb judging by the news flow. The consortium has already signed two contracts with both STC and Mobily, each worth SAR200 million, for STC and Mobily to provide Etihad Atheeb with carrier and interconnection services. To date, neither the Verizon consortium nor the PCCW consortium have floated their shares on the Tadawul stock exchange, a pre-requisite for launching commercial operations. We expect the listings to occur early/mid-2010. According to media reports, the two consortiums papers are currently with the Saudi Capital Market Authority. Fig 7: Historical and Forecast Fixed-Line Subscribers & Penetration Rate in Saudi Arabia
In million (LHS), unless otherwise stated
Subscribers (LHS) 7 6 5 4 3 2 Penetration Rate (RHS) 25% 20% 15% 10% 5% 0% 100% 90% 80% 70% 60% 50% 0% 1% STC 2% 4% Others 9% 13%
Fig 8: Historical and Forecast Fixed-Line Market Shares by Operator in Saudi Arabia
18%
21%
2008a
2009e
2010e
2011e
2012e
2013e
2014e
2015e
2008a
2009e
2010e
2011e
2012e
2013e
2014e
2015e
Source: CITC, STC, and EFG-Hermes estimates
Source: CITC, STC, and EFG-Hermes estimates
broadband and data - increasingly strategic

As competition heats up in the increasingly strategic broadband and data segments, we expect STC to double its DSL subscribers to 2.04 million in 2009e and to reach 3.44 million in 2010e, with penetration racing up to 9.4% in 2009e and 16.3% in 2010e, from 4.4% in 2008. We are positive on DSL growth, and we expect penetration to reach the mid-thirties over the next four to five years. On the other hand, we expect Mobily to remain focused on mobile broadband through its HSPA offerings. We estimate that Mobily will end FY2009e with more than 1 million HSPA subscribers, and will double that figure by the end of 2010e.
74
SAUDI TELECOM COMPANY (STC)

Rating : Buy

70 60 50 40 30

Price (SAR) Bloomberg / Reuters Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit Major Shareholders: Saudi Arabia Government 70.0% General Organisation for Social Insurance 7.0% Management: CEO: Mr. Saud Al Daweesh CFO: Mr. Amin Al Shiddi; IR: Mr. Khalid Al Ghurair 45.5 on 08 December 2009 STC AB / 7010.SE SAR875.8 16.4% Accessible via swaps only
Price (SAR)
TASI (Rebased)
MKT Cap (mn) / Shares (mn) SAR91,000 / 2,000

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / Sub* EV / EBITDA* (x)
2008a 5.52 3.75 18.82 8.2 8.2% 2.4 -16.0% 3,020 5.4
2009e 5.09 3.00 21.10 8.9 6.6% 2.2 12.5% 2,563 5.6
2010e 5.19 3.50 22.79 8.8 7.7% 2.0 10.9% 2,329 5.4
2011e 5.44 4.00 24.23 8.4 8.8% 1.9 13.3% 2,158 5.3

Total Subscribers (000's) Revenue Growth EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROAIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA 2008a 8,062 8,120 2,765 44,382 36,434 99,762 3,905 6,649 12,345 28,081 6,220 57,200 4,924 37,638 47,469 21,742 (6,408) 15,334 69 (3,362) 12,042 (173) 11,868 (832) 11,037 20,235 19,595 (34,215) (14,620) 15,063 442 2009e 9,520 8,737 2,917 48,191 32,340 101,705 4,711 6,965 12,454 26,254 6,285 56,669 2,841 42,196 50,757 21,113 (7,709) 13,404 (1,128) (809) 11,468 (398) 11,069 (890) 10,179 19,265 18,921 (6,407) 12,514 (10,647) 1,866
2008a 89,892 37.8% 45.8% 32.3% 7.0% 29.3% 26.8% 68.0% 63.6% 1.10
2009e 107,693 6.9% 41.6% 26.4% 8.0% 24.1% 18.8% 58.9% 50.8% 1.02 2010e 7,362 9,188 3,129 50,491 32,723 102,893 4,811 7,439 12,469 23,373 6,353 54,445 2,875 45,573 52,851 21,927 (7,985) 13,942 (1,003) (794) 12,144 (783) 11,362 (984) 10,377 20,442 20,268 (9,336) 10,932 (12,873) (1,941)
2010e 123,314 4.1% 41.5% 26.4% 8.7% 22.8% 19.1% 67.5% 45.7% 0.95
2011e 134,734 1.5% 41.4% 26.1% 8.8% 22.5% 18.7% 73.5% 37.0% 0.81 2011e 6,804 9,257 3,301 51,153 32,211 102,726 4,757 7,658 12,420 19,994 6,426 51,255 3,009 48,462 53,631 22,214 (8,201) 14,012 (932) (244) 12,836 (898) 11,939 (1,049) 10,890 21,165 21,093 (8,029) 13,064 (13,440) (376)

Balance Sheet Cash & Cash Equivalents Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables Other Current Liabilities LT Debt Other LT Liabilities Total Liabilities Minority Interest Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Earnings before Minority Interest Minority Interest Earnings before Zakat Zakat Net Profit Cash Flow Statement Cash Operating Profit after Zakat Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
*Proportionate Source: Saudi Telecom Company (STC), EFG-Hermes estimates
SAUDI ARABIA
Research Yearbook
TELECOM SECTOR
2 0 1 0
background
Saudi Telecom Company (STC) provides mobile, fixed-line, internet and data services. It is Saudi Arabias incumbent operator and the Middle Easts largest operator by revenue (2008: USD12.7 billion) and market capitalisation (USD24 billion). STC lost its mobile services monopoly in May 2005, when Etihad Etisalat (Mobily) started operations. A third mobile operator, Zain KSA, launched operations in August 2008. STC also lost its fixed-line services monopoly in June 2009 when Etihad Atheeb, the first of the three newly licensed fixed-line consortiums, started commercial operations in Riyadh and Jeddah. STCs acquisition of a 25% stake in Malaysias Maxis and a 62% effective stake in its Indonesian subsidiary, NTS, in a USD3.05 billion deal in June 2007 marked a major strategic shift for the company. STC went from being a local operator to one with significant regional and international ambitions. In November 2007, STC paid USD908 million for a 26% stake in Kuwaits third mobile license. In early 2008, STC acquired a 35% stake in Dubai-based Oger Telecom, for USD2.6 billion, that gave it access to operations in key emerging markets. Oger Telecom owns 55% of Turkeys fixed-line operator Turk Telekom, which in turn owns 81% of Avea, Turkeys third mobile operator. Oger also owns 75% of Cell C, a mobile operator in South Africa, and 95% of Cyberia, an internet service provider that operates in Jordan, Saudi Arabia and Lebanon. STC also won Bahrains third mobile license for USD230 million in early 2009. In November 2009, 30% of Maxis Malaysias shares were listed on Bursa Malaysia, decreasing STCs stake in the Malaysian operation to 17.5% from 25%.
2009 - tough competition in major markets

In late 2008 and 2009, the Saudi telecom landscape underwent significant changes with new players joining the market and competition reaching new heights. Throughout this period, STC tried to assert its leadership in the market through a number of aggressive offers and promotions. STCs Saudi operation added 1.4 million new subscribers during 9M2009 to reach a subscriber base of 20.5 million, implying a 52.6% market share according to our estimates. On the fixed-line front, growth was anaemic during the year, with the subscriber base standing stagnant at, we believe, 4.2 million as of the end of September 2009. On a consolidated basis, we have seen a steady Q-o-Q progression in the companys revenue. Revenue for 9M2009 came in at SAR37.8 billion, with the Saudi operation contributing the bulk of this (slightly above 70%). In terms of margins, however, STC has seen a significant deterioration from 2Q2009 onwards owing, we believe, to increased competition in its main markets. EBITDA margin for the third quarter disappointed at 39.4%, the lowest reported margin since 2005, excluding 4Q2008s margin, at the height of the financial crisis. The past several quarters have seen STCs consolidated margins swinging sharply, and they now appear to be settling at disappointingly low levels. An FX loss of SAR695 million in 1Q2009 has been balanced by substantial FX gains in both 2Q2009 and 3Q2009 (totalling SAR1.2 billion), as both the TRY and ZAR regained their strength against the USD. In 9M2009, STC has distributed three interim dividends totalling SAR4.5 billion, or SAR2.25 per share. We expect the company to meet our full-year dividend estimate of SAR3.00 per share. This implies a dividend yield of 6.6%.
2010 - margins under pressure

We forecast STC and its subsidiaries will reach a total subscriber base of 108 million by the end of December 2009e (representing a proportionate subscriber base of 45.9 million), which will increase to 123 million by the end of 2010e (proportionate subscribers 50.5 million). We expect the main contributor to the subscriber base to be the Indian operation (Aircel), with an estimated 35 million subscribers by the end of FY2010e, followed by the Saudi operation with an estimated 25.7 million mobile and fixed-line subscribers by the end of FY2010e. We forecast STCs consolidated revenue to grow to SAR50.8 billion in FY2009e and SAR52.9 billion in FY2010e. We estimate that STC's Saudi operation will contribute 69% to consolidated revenue in FY2009e and 68% in FY2010e. We do not anticipate the contribution of the Saudi operation will drop below these levels in the medium term. We anticipate that STC's consolidated EBITDA margin will continue to face pressure as competition gets tougher and markets become more saturated. We expect FY2009e EBITDA to fall 3% Y-o-Y, to SAR21.1 billion (an EBITDA margin of 41.6%), and forecast a FY2010e EBITDA of SAR21.9 billion (margin 41.5%). We forecast earnings of SAR10.2 billion in FY2009e, not taking into account proceeds from the listing of a 30% stake in Maxis Malaysia. We believe there will be a slight 1.9% Y-o-Y improvement in the bottom line in FY2010e to SAR10.4 billion.

We have a Buy recommendation on the stock despite weak third quarter results. We believe the current cheap valuation - a 2010e P/E of 8.8x and an EV/EBITDA of 5.4x, along with a dividend yield of 7.7% and a FCF yield of 10.9% - will eventually trigger a rally in the stock. Our sum of the parts DCF-based model yields an FV of SAR73.5 per share. We believe STC has a well-diversified portfolio of telecom assets in Saudi Arabia and in emerging markets.
TELECOM SECTOR
76
ETIHAD ETISALAT (MOBILY)

Rating : Buy

50 45 40 35 30 25 20

Price (SAR) Bloomberg / Reuters Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit Major Shareholders: Etisalat Group 27.4% General Organization for Social Insurance 11.2% Management: CEO: Mr. Khalid Al Kaf CFO: Mr. Thamer Al Hosani; IR: Mr. Nader Al Nuwayhid 42.2 on 08 December 2009 EEC AB / 7020.SE SAR1,009 40% Accessible via swaps only
Price (SAR)
TASI (Rebased)
MKT Cap (mn) / Shares (mn) SAR29,540 / 700

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / Sub EV / EBITDA (x)
2008a 3.25 0.75 13.93 13.0 1.8% 3.0 -1.7% 3,026 10.0
2009e 4.18 1.50 16.62 10.1 3.6% 2.5 4.4% 2,622 7.8
2010e 4.33 2.82 18.13 9.7 6.7% 2.3 6.5% 2,453 7.3
2011e 4.61 3.46 19.28 9.2 8.2% 2.2 7.5% 2,374 6.7

Total Subscribers (000's) Revenue Growth EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROAIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA 2008a 2,313 3,098 1,209 8,118 12,453 27,191 3,148 4,365 3,236 6,642 46 17,437 9,754 10,794 3,794 (1,298) 2,496 (438) 41 2,099 2,099 (7) 2,092 3,787 4,472 (4,549) (77) 1,924 1,847 2009e 2,701 4,343 1,438 9,630 11,933 30,043 2,450 4,895 4,075 6,942 51 18,412 11,631 13,209 4,773 (1,626) 3,147 (205) 42 2,984 2,984 (57) 2,927 4,717 4,087 (2,577) 1,511 (1,123) 388
2008a 12,580 27.9% 35.1% 23.1% 0.3% 21.4% 15.4% 25.1% 87.4% 2.25
2009e 14,249 22.4% 36.1% 23.8% 1.9% 25.2% 16.4% 35.9% 67.8% 1.65 2010e 2,499 4,425 1,571 11,400 11,413 31,307 3,900 5,065 4,707 4,886 56 18,615 12,692 14,043 5,132 (1,841) 3,291 (240) 44 3,094 3,094 (62) 3,032 5,070 5,198 (3,048) 2,150 (2,352) (202)
2010e 15,230 6.3% 36.5% 23.4% 2.0% 23.9% 16.3% 65.0% 58.8% 1.45
2011e 15,739 5.8% 37.6% 24.2% 2.0% 23.9% 17.2% 75.0% 54.9% 1.33 2011e 2,132 4,476 1,711 13,034 10,893 32,247 3,986 5,298 5,003 4,400 62 18,748 13,499 14,853 5,587 (1,991) 3,595 (348) 43 3,291 3,291 (66) 3,225 5,521 5,633 (3,063) 2,570 (2,937) (366)

Balance Sheet Cash & Cash Equivalents Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Earnings before Minority Interest Minority Interest Earnings before Zakat Zakat Net Profit Cash Flow Statement Cash Operating Profit after Zakat Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: Etihad Etisalat (Mobily), EFG-Hermes estimates
SAUDI ARABIA
Research Yearbook
TELECOM SECTOR
2 0 1 0
background
Etihad Etisalat acquired the Kingdom's second mobile license for USD3.25 billion and a 3G license for USD201 million in August 2004 - ending STCs monopoly over the Saudi mobile market. It launched operations in May 2005, under the commercial name Mobily, and succeeded in capturing an estimated 16% market share within eight months and a 31% market share in less than two years of operations. Mobily is 27% owned by Etisalat, the UAEs incumbent operator, 33% by Saudi entities and 40% is free float on Saudi Arabias Tadawul stock exchange. Mobily launched 3G/3.5G services in June 2006, two weeks after STC launched its own 3G services. Saudi Arabias regulator, the Communications and Information Technology Commission, tendered a third mobile license in March 2007, which Kuwaits Zain Group won for USD6.1 billion. Zain KSA launched operations in Saudi Arabia in August 2008. In April 2008, Mobily bought 100% of Bayanat al-Oula (Bayanat), a Riyadh-based data services provider, for SAR1.5 billion. Bayanat and Mobily are involved with Saudi Arabias Integrated Telecom Company in building a fibre optic network spanning 12,600 kilometres. Bayanat also has a strategic arrangement with Samsung to build the region's biggest mobile WiMAX network. In July 2008, Mobily acquired 96% of Zajil International Telecom, an ISP offering services in Saudi Arabia, for SAR80 million. Zajil has had a wide portfolio of corporate clients since the early 1990s.
2009 - impressive performance

We estimate Mobily added 1.4 million net subscribers during the first nine months of 2009, to reach an active subscriber base of 14 million. This implies a market share of 36%, slightly down from the 37.3% recorded at the end of 2008, owing to newcomer Zain KSA capturing the highest share of net additions in 9M2009. Mobilys operational performance during the first three quarters of FY2009 surprised on the upside, coming in above our estimates; 9M2009 revenue came in at SAR9.5 billion, a 24% Y-o-Y increase. According to our estimate for subscribers, 3Q2009s blended monthly ARPU improved to SAR84.9 (USD22.6), from SAR80.1 in 2Q2009. We believe this is the result of the companys efforts to increase usage through both Value Added Services (VAS) and data services. The companys forays into the wholesale segment are also likely to have helped revenue growth. Mobilys EBITDA margin has improved gradually throughout the year, reaching 36.4% in the third quarter. Mobilys strongest margin is usually reported in the fourth quarter of the year. The company recorded significantly lower levels of finance expense compared to FY2008, as both the SAIBOR and LIBOR, to which Mobilys finance expenses are linked, fell to low levels. Mobilys net debt position also contracted, to SAR7.5 billion as at the end of September 2009. In early October 2009, Mobily rescheduled its short-term SAR1.5 billion Islamic facility into a four-year medium-term loan. The loan had been used to finance Mobily's acquisition of Bayanat al-Oula in 2008. The company only distributes dividends after its full-year results. We are forecasting a total dividend of SAR1 billion, or SAR1.50 per share. This implies a dividend payout ratio of 36%, based on our FY2009e estimates, and a dividend yield of 3.6%.
2010 - expect another good year

We forecast Mobily will end FY2009e with a market share of 36.4%, down from 37.3% in FY2008, and an active subscriber base of 14.3 million, up from 12.6 million the year before. In FY2010e, we forecast Mobily will add slightly less than 1 million new subscribers, to reach 15.2 million subscribers and a stable market share of 36.3%. We forecast Mobily will end 2009e with SAR13.2 billion in total revenue, a 22.4% Y-o-Y increase. We expect this to grow by a further 6.3% Y-o-Y, to SAR14.0 billion in FY2010e. We believe that Mobily will continue to focus on the data and broadband segments of the market, as a means of providing ARPU support in an increasingly penetrated market. As a result, we believe the company will continue to increase its 3G coverage across the Kingdom. We forecast EBITDA will grow to SAR4.8 billion in FY2009e, a 25.8% Y-o-Y increase, and SAR5.1 billion in FY2010e. Margins should continue to improve, ending FY2009e with 36.1% and FY2010e with 36.5%. We forecast earnings of SAR2.9 billion in FY2009e, which will grow by 4% to SAR3.0 billion in FY2010e.

Our DCF-based model yields an FV of SAR65.4 per share and we have a Buy rating on the stock. On a P/E basis, the stock currently trades in line with the regional telecom average, with a 2010e P/E of 9.7x, while it is trading at the high end of the regional EV/EBITDA average at 7.3x. However, we believe the relatively rich multiples are justified by the companys strong growth. We are positive on the companys fundamentals, particularly given its strong performance in 9M2009 despite increasing competition in the Saudi telecom market.
TELECOM SECTOR
78
ZAIN KSA
Rating : Neutral

15 14 13 12 11 10 9 8

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 10.25 on 08 December 2009 ZAINKSA AB / 7030.SE SAR14,350 / 1,400 SAR1,182 45% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Zain Group 25% Faden Trading and Contracting Establishment 6.8% Saudi Plastics Factory 6.8% Management: CEO: Mr. Saad Al Barrak CFO: Mr. Nabil Younan; IR: Mr. Waleed Hakeem

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / Sub EV / EBITDA (x)
2008a (1.63) N/A 8.37 N/M 0.0% 1.22 -164.7% 12,732 N/M
2009e (1.84) N/A 6.53 N/M 0.0% 1.57 -17.4% 6,040 N/M
2010e (1.57) N/A 4.96 N/M 0.0% 2.07 -18.9% 4,817 N/M
2011e (1.27) N/A 3.69 N/M 0.0% 2.78 -12.0% 4,390 N/M

Total Subscribers (000's) Revenue Growth EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROAIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA 2008a 583 318 280 2,409 23,075 26,665 11,326 414 1,350 1,849 4 14,944 11,722 505 (1,265) (435) (1,700) (160) (418) (2,278) (2,278) (2,278) (1,265) 1,748 (25,226) (23,478) 24,754 1,276 2009e 925 298 297 4,020 22,137 27,678 315 480 1,384 16,349 5 18,534 9,144 2,723 (875) (1,274) (2,149) (428) (2,577) (2,577) (2,577) (875) (119) (1,947) (2,066) 2,408 342
2008a 2,010 N/A N/M N/M 0% -19% N/A N/A 91.7% (8.5)
2009e 4,237 439.2% -32.1% -78.9% 0.0% -28.2% -9.6% N/A 144.8% (15.1) 2010e 899 324 321 5,025 21,199 27,768 520 1,454 18,849 6 20,828 6,940 3,945 (291) (1,329) (1,620) (585) (2,205) (2,205) (2,205) (291) (732) (1,396) (2,128) 2,101 (27)
2010e 5,312 44.8% -7.4% -41.1% 0.0% -31.8% -7.2% N/A 229.8% (54.8)
2011e 5,829 19.2% 7.1% -22.3% 0.0% -34.4% -4.6% N/A 342.3% 53.2 2011e 673 322 332 5,829 20,261 27,418 523 1,526 20,199 6 22,255 5,163 4,701 332 (1,381) (1,048) (728) (1,777) (1,777) (1,777) 332 250 (1,247) (997) 772 (225)

Balance Sheet Cash & Cash Equivalents Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income / Expense Other Income (Expense) Earnings before Minority Interest Minority Interest Earnings before Zakat Zakat Net Profit Cash Flow Statement Cash Operating Profit after Zakat Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: Zain KSA, EFG-Hermes estimates
SAUDI ARABIA
Research Yearbook
TELECOM SECTOR
2 0 1 0
background
Zain Saudi Arabia (Zain KSA) was established after a consortium led by Kuwait-based Zain Group, and including a number of Saudi companies, won Saudi Arabias third mobile license in March 2007 with a bid of SAR22.9 billion (USD6.1 billion). Samawat Consortium, which included Telecom Italia and Saudi investors, put in the second highest bid, which was 25% less than Zains. The 25-year license allows the company to install, own and operate a mobile network to provide mobile cellular services using 2G and 3G technology. The company floated a 50% stake on the Saudi stock exchange in an IPO in February 2008, at SAR10.0 per share. The IPO was 283% oversubscribed and the stock began trading on 22 March 2008. Following the IPO, Zain KSAs shareholder structure became: Kuwaits Zain Group 25%, Saudi investors 25%, the Public Pension Fund 5%, and the remaining 45% as free float on the Saudi stock exchange. Zain KSA launched commercial operations in August 2008 and has since attracted 4.4 million subscribers, implying an 11% market share at the end of September 2009.
2009 - highest share of additions in the market

According to our estimates, Zain KSA remained the top operator in Saudi Arabia in terms of net subscriber additions during 9M2009. While we expected this to happen, given the companys status as a new entrant to the market, we do not expect its lead in terms of share of net additions to continue beyond 2011e. Zain KSA managed to capture 46% of total market additions in 9M2009, extending its subscriber base to 4.4 million and already beating our total FY2009e estimate of 4.24 million subscribers. This implies a market share of 11.3% in just over a year of operations. In 9M2009, Zain KSA recorded total revenue of SAR2.1 billion. Revenue growth has generally exceeded our estimates during the year on the back of higher subscriber additions. According to our calculations, blended monthly ARPU came in at SAR63 (USD17) in 3Q2009, down from SAR67 (USD18) in 2Q2009. The companys 9M2009 gross profit grew to SAR522 million. The gross profit margin improved in 3Q2009 to 29.4%, after briefly slipping to 18.9% in 2Q2009 from 25.1% in 1Q2009. The company is still EBITDA negative at SAR1.0 billion. Net loss amounted to SAR2.4 billion during 9M2009, which is already c95% of our forecasted FY2009e net loss, implying that Zain KSA will probably incur more losses than we had expected. On the balance sheet side, the company ended September with a net debt position of SAR11.9 billion and a minimal cash balance of SAR101 million. The company refinanced its SAR9.4 billion Murabaha facility into a two-year facility in August, at a relatively high spread (LIBOR+425 bps). We have concerns about this high debt position, which is larger than we are comfortable with.
2010 - test of sustainability

While we forecast Zain KSA will maintain its lead in terms of total net subscriber additions in FY2010e, we forecast its share of new subscribers will decline to 38% from 41% in FY2009e. From FY2012e onwards, we anticipate that the share of net additions will be more or less equally split between the three operators. We forecast a total subscriber base for the company of 5.3 million in FY2010e, implying a market share of 12.7%. Throughout our forecast horizon, we do not see the companys market share exceeding 18%. In terms of usage, we calculate a blended monthly ARPU of SAR64 (USD17.0) for FY2010e, and we expect the company to maintain this level going forwards. We forecast total revenue of SAR3.9 billion in FY2010e, up 45% Y-o-Y, and a gross profit of SAR1.7 billion, implying a gross profit margin of 43%. We also forecast negative FY2010e EBITDA of SAR291 million and a net loss of SAR2.2 billion. We estimate that the company will not be able to breakeven on the earnings level until 2018e. We are sceptical of Zain KSAs ability to operate without having to raise further funds of approximately SAR20 billion between now and 2012e. However, we believe Zain will find raising debt difficult, due to both the companys current leverage position and the overall debt environment. We therefore believe that the company will have to resort to raising a substantial amount of equity, possibly through a rights issue, at some point before the end of 2010e.

We use a DCF-based model to value Zain KSA, and we reach an equity value of SAR17.4 billion, which implies an FV of SAR12.4 per share. We have a Neutral rating on the stock, reflecting the exceptional start-up risk and overstretched balance sheet. We believe the companys operation is under a lot of pressure, given that it is a new entrant in an aggressively competitive market dominated by two strong incumbents. The additional debt refinancing and potential equity raising also increases the companys risk profile.
TELECOM SECTOR
YEARBOOK
2010
Real Estate
dAR Al-ARKAn SAudi REAl EStAtE COmpAnY (AKARiA)
82
REAL ESTATE SECTOR
2009 - market changing but robust despite economic downturn

Real estate companies listed on Tadawul mainly underperformed the market during 2009, hit by the negative sentiment towards the real estate sector that prevailed in the region. Companies with unclear financing strategies, such as Jabal Omar and Emaar the Economic City (Emaar), suffered most. We believe concerns surrounding Dar Al-Arkans debt obligations pulled the stock down in 2H2009. Akaria was one of the best performers among Saudi real estate stocks, which we attribute to its stable rental revenue stream, zero leverage, modest dividend yield and heavy government ownership. The stock rose 8.9% in the first Tadawul trading session following late Novembers announcement of Dubai Worlds debt restructuring, emphasising the attractiveness of the stock. Figure 1: Performance of Selected Real Estate Stocks Against TASI (All rebased to 100)
150 140 130 120 110 100 90 80 70 60 27-May-09 14-Jul-09 30-Jul-09 08-Mar-09 24-Mar-09 12-Jun-09 28-Jun-09 03-Jan-09 19-Jan-09 02-Oct-09 11-May-09 18-Oct-09 03-Nov-09 19-Nov-09 15-Aug-09 09-Apr-09 25-Apr-09 31-Aug-09 05-Dec-09 16-Sep-09 04-Feb-09 20-Feb-09 Jabal Omar Dar Al-Arkan Akaria Arriyadh Development Emaar the EC TASI
Source: EFG-Hermes
regulatory changes increase need for upfront financing

The Council of Ministers forbade off-plan real estate sales by developers without ministry approval through a resolution passed in March 2009. The rule covers all types of real estate sales. In future, developers will have to register their properties with a special property committee that will be run by the Ministry of Commerce and Industry, the Saudi Arabia Monetary Authority (SAMA), and other ministries and municipalities. An escrow account is required, into which the developer must deposit all instalments and other project financing for each property. The new regulations make off-plan sales increasingly difficult and will force local developers to seek upfront financing to construct the units before they can sell them in the market. This limits possibilities for price speculation on unfinished or not yet launched projects, but also limits the developers ability to scale operations according to actual demand. Additionally, it increases the risk of developers being left with unsold inventory. Buyers, although more protected against sellers not meeting their obligations on time, are deprived of price discounts which projects being sold off-plan could otherwise offer. We believe that the new regulations will increase the debt levels on the balance sheets of local developers, especially those focusing on developing large-scale residential projects. Egypt-based Talaat Moustafa Group is so far one of the few big companies to be granted an off-plan sales license. Meanwhile, the new regulations should temporarily shield incumbent developers from foreign competitors with stretched balance sheets.
SAUDI ARABIA
Research Yearbook
REAL ESTATE SECTOR

2009 - market underpinned by strong fundamentals 2010 - no surprises expected 2 0 1 0
real estate prices and office rents stable, commercial space nearing excess supply
Although little information on real estate pricing trends in the Kingdom is available, anecdotal evidence suggests that prices of residential units remained stable during 2009, despite sharp downward corrections in other GCC countries. We believe that prices were supported by the lack of an active secondary market and an insignificant presence of speculative demand, especially in the middle-income bracket. Such information that is available is restricted to Riyadh and Dammam, is delayed, and does not differentiate between different types of real estate transactions. The data shows significant volatility, due to this blending of different types of contracts. Nevertheless, the data demonstrates a continued high level of activity and confirms that in Riyadh prices did not drop below 2008 levels and have been relatively stable during 2H2009. Figure 2: Average Weekly Blended Price per sqm of Contracts Registered in Riyadh and Dammam (6-week moving average)
In SAR per sqm, unless otherwise stated
1,000 900 800 700 600 500 400 300 200 100 0 14-Nov-07 14-Jul-08 14-Nov-08 14-Jul-09 14-May-08 14-May-09 14-Mar-08 14-Mar-09 14-Oct-08 14-Aug-08 14-Dec-07 14-Dec-08 14-Aug-09 14-Jun-08 14-Jun-09 14-Jan-08 14-Jan-09 14-Apr-08 14-Apr-09 14-Sep-08 14-Feb-08 14-Feb-09 Riyadh Dammam
Source: Ministry of Justice of KSA
Rents also remained stable, as suggested by steady rental revenues reported by listed companies year-to-date. We believe that the extent of pent up demand for quality office space gives scope for many developers to operate their properties profitably. However, as new prime quality office space gradually enters the market (such as the opening of Akaria Plaza in Riyadh), some pressure on pricing and occupancies of B class properties will become visible. Meanwhile, we believe that available retail space is nearing excess supply in Saudi Arabia. Due to poor transparency in the market, together with uncertainty surrounding many already announced projects, it is hard to accurately estimate how much new Gross Leasable Area (GLA) will be supplied in the short term. Anecdotal evidence suggests a range of between 0.5 million to 1 million square metres (sqm) of new space becoming operational by 2011e, most of which is destined for Riyadh. We estimate global retail space occupancies in the Kingdom at 70%, much lower than those of residential and office segments. We believe that decreasing occupancy in older and already depreciated retail outlets may trigger their exit from the market, either through demolition or adaptation to other purposes, such as office rental. Meanwhile, we expect the growth of commercial space in the Kingdom to decelerate as declining yields become less appealing to potential investors and financing for commercial developments dries up as more funds are directed towards the residential segment.
construction costs moderated

Downward corrections in the cost of building materials were evident at the beginning of 2009, which we believe will have encouraged some developers to speed up their construction process, depending on the strength of their balance sheet. By mid-2009, average prices had increased but were still lower than the highs of 2008. Owing to this decline in construction material prices, some real estate companies have been able to renegotiate contracts with construction companies. For example, Emaar was able to cancel a SAR1.4 billion contract with Saudi Bin Ladin Group, citing the decrease in building material costs. Meanwhile, we believe that the cost of labour in the construction industry increased in 2009, albeit not as sharply as in the preceding year.
REAL ESTATE SECTOR
84
REAL ESTATE SECTOR
2010 - lending to build or lending to buy?

We believe that catalysts for Saudi real estate stocks are still limited, and we do not anticipate any drastic changes to stock valuations during the year. Most of the catalysts that could positively affect the real estate market in Saudi Arabia, and thus the listed real estate companies, are largely related to the availability of financing, both on the developer and the buyer side. We believe that implementation of the new mortgage law, although not yet confirmed but widely anticipated by the market, could act as a strong catalyst for all real estate stocks, especially those with high exposure to the middle-income bracket, such as Dar Al-Arkan and Akaria. Availability of financing on the buyers side would alleviate concerns of some developers regarding the demand for their products, and thus give them an incentive to launch more projects. On the other hand, banking sector support for local real estate developers would provide them with more liquidity and flexibility in product offerings. For stocks such as Emaar, Jabel Omar and Dar Al-Arkan, any positive news about new sources of financing could be of a significant benefit.
demand remains strong, underpinned by healthy fundamentals

We estimate that the total property demand in Saudi Arabia over an economic cycle is approximately 160,000 new residential units per year. As illustrated in the table below, this is driven by i) new family formation (mainly marriages), ii) changes in household size (moving out of traditional houses), and iii) replacement demand. We expect demand will continue to increase at a gradual pace due to i) the young population, ii) a move to smaller household sizes, iii) the replacement of older housing at a slightly faster rate than currently, and iv) growing home ownership. Figure 3: Housing Demand Build Up
Units New Marriages Changes in Household Size Replacement Demand Total Demand 95,000 25,000 40,000 160,000 Assumptions 75% of new marriages Assumes gradual shift 1% of households
Additionally, if the mortgage law is passed, we expect demand will increase further (mostly at the lower end of the market as most transactions at the upper end are financed by cash). However, any increase in demand will occur gradually, rather than drastically, given the substantial amounts of liquidity that would be required in the mortgage market to stimulate extensive demand. Currently, real estate financing represents a small portion of total consumer credit, as indicated by the chart below. Figure 4: Real Estate Financing a Small Part of Total Consumer Credit
18 16 14 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 1Q2007 2Q2007 3Q2007 4Q2007 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009 3Q2009 Real Estate Financing (LHS) % of Total Consumer Credit % of Nominal GDP 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
JAN PAWEL HASMAN / AHMED GAD
SAUDI ARABIA
Research Yearbook
REAL ESTATE SECTOR

2009 - market underpinned by strong fundamentals 2010 - no surprises expected 2 0 1 0
real estate prices to grow moderately, expecting pressure on commercial yields

We believe that any pricing shock in Saudi Arabia is unlikely during 2010e, and expect moderate price increases corresponding to the overall inflation rate. This is mainly due to the fragmented nature of the Saudi residential market, with supply largely provided by smaller developers and individuals, rather than dominated by large-scale developers able to control prices. We expect competition in the residential segment to increase over the coming years, as already established developers shift their focus from oversupplied commercial developments to residential ones, thus increasing the number of large players in the market. We remain bearish on commercial property valuations and rents, given the significant supply of new GLA entering the market. Although we do not anticipate severe drops in occupancy rates of retail rental properties, we believe that rental yields on B class outlets might temporarily fall below our current estimate of c9-10% owing to this new supply. Similarly, we believe that landlords of B class office space might also experience difficulties in sustaining their current yields, as the supply of formerly scarce A class office space increases. This is despite the positive consensus outlook on Saudis longterm economic growth, which should provide incentives for new business creation and thus increased demand for new office space. As competition in the retail and office segments increases, we believe some landlords will be required to refurbish their properties in order to sustain their current rental prices.
construction material costs to remain at current levels

We expect that building material costs will remain at current levels, albeit with some fluctuations, into 2010e. In the long term, prices should be supported by local construction demand but we expect no drastic increases given Saudi Arabias extensive capacity expansion plans for both cement and steel production. This new capacity should result in easier local access to these basic materials. Local authorities responded to the escalation in building material costs in mid-2008 by temporarily banning exports. We believe that similar regulatory intervention can be expected whenever cost increases are significant and could hurt local Saudi buyers. Labour costs have not historically been a major issue for construction companies, but they are likely to become a bigger part of costs in the future. Increasing inflation, increasing living costs (mostly rent), exchange rate fluctuations and considerable improvements in the Asian economies make it more difficult to attract qualified workers to execute ambitious development plans. This effectively increases the contribution of the cost of labour to overall construction costs. The development of six new economic cities, requiring substantial amounts of manpower, may put further upwards pressure on wages.
need for financing could stimulate ipo activity

Over the past year two economic cities, Prince Abdulaziz bin Mousaed Economic City in Hail and Knowledge Economic City in Medina, have announced their intention to issue equity to the public. Both will offer 30% of their shares via IPOs. They will follow Jabal Omar and Emaar in selling shares to the public to finance undeveloped projects. While the original announcements indicated that IPOs were imminent, these plans have been delayed and we no longer know when to expect them. The sukuk market, which has previously been a source of capital for many Saudi companies, has been very quiet for the past year. While Dar Al-Arkan was able to raise SAR750 million in a five-year term sukuk in mid-May, it is only one of three Saudi Arabian companies to issue sukuks in 9M2009. We expect Saudi businesses will have a difficult time raising money from foreign sources for some time, especially in the aftermath of the Dubai debt crisis. This could force some local real estate companies, especially those with a limited track record or projects still in the concept stage, to turn to the equity markets to secure financing for project execution.
REAL ESTATE SECTOR
86
SAUDI REAL ESTATE CO. (AKARIA)

Rating : Buy

29 27 25 23 21 19 17 15

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 27.90 on 08 December 2009 SRECO AB / 4020.SE SAR3,348 / 120 SAR160 31% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Public Investment Fund 64% Retirement Pension Agency 5% Management: CEO: Mr. Fahed Bin Abdulaziz Al Saeed CFO: Mr. Mohammed Al Ali

EPS (Attrib.) DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / EBITDA (x) EV / IC (x)
2008a 0.98 1.00 25.62 28.6 3.6% 1.09 -0.3% 20.7 1.14
2009e 0.97 1.00 25.64 28.6 3.6% 1.09 2.9% 20.6 1.13
2010e 1.23 1.00 25.88 22.6 3.6% 1.08 1.3% 16.7 1.07
2011e 1.33 1.00 26.21 20.9 3.6% 1.06 1.6% 15.7 0.99

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA EBITDA / Net Interest Expense 2008a 711 11.8 79 1,920 453 3,174 49 51 100 3,074 225 130 (20) 110 25 2 137 137 (20) 117 140 117 (127) (10) (426) (122) (558) 2009e 698 11.8 32 1,990 456 3,188 57 53 111 3,077 216 131 (19) 112 7 14 133 133 (16) 117 133 132 (35) 97 409 (122) 384
2008a -7.3% -56.5% 57.9% 49.1% 14.7% 3.8% 5.0% 102.5% -23.1% -545.8% N/R
2009e -4.1% -16.2% 60.6% 51.9% 12.3% 3.8% 4.9% 102.7% -22.7% -533.5% N/R 2010e 589 15.0 36 2,133 466 3,239 72 62 134 3,105 289 161 (20) 141 13 6 161 161 (13) 148 150 147 (103) 44 (34) (120) (109)
2010e 34.0% -35.5% 55.8% 48.9% 8.1% 4.8% 5.9% 81.0% -19.0% -364.9% N/R
2011e 8.3% -34.4% 54.9% 48.2% 5.2% 5.1% 5.9% 75.0% -13.7% -250.6% N/R 2011e 430 16.3 38 2,340 466 3,290 79 66 145 3,145 313 172 (21) 151 11 7 169 169 (9) 160 165 162 (108) 55 (93) (120) (158)

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Attributable Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Other Investing Cash Flows Net Financing Change in Cash
Source: Saudi Real Estate (Akaria), EFG-Hermes estimates
JAN PAWEL HASMAN
SAUDI ARABIA
Research Yearbook
REAL ESTATE SECTOR

2 0 1 0
background
Saudi Real Estate Company (Akaria) is a Riyadh-based company, founded in 1976, which develops and manages residential and commercial real estate properties. It has a land bank of 13.8 million sqm spread throughout the Kingdom, of which c280,000 sqm is occupied by its rental portfolio consisting of over 2,700 residential and commercial units. Historically, a small portion of its revenue has been generated by raw land sales. The company will gain exposure to the residential sales market through its Binban project, located in Riyadh and covering 2 million sqm. The project is currently in the design phase and is expected to generate its first revenues by 2012e. Akaria owns minority stakes in a number of companies operating in real estate related industries, such as mortgage or glass manufacturing. It is 70% owned by the Saudi government.
2009 - rents stable, new property added to the portfolio

Despite the turmoil in the global economic environment during 2009, Akaria had a calm year with no negative surprises. We estimate that, in 9M2009, Akarias rental revenues increased 4% Y-o-Y. Total revenue in the same period declined 30% Y-o-Y as the company did not sell any of its raw land, which contributed 25% to the top line in 9M2008. Akaria demonstrated good cost control, with SG&A expenditure declining 15% Y-o-Y in 9M2009. Earnings dropped 31% Y-o-Y to SAR72 million in the same period. In 3Q2009, the company launched Akaria Plaza, a new property in Riyadhs Central Business District composed of three integrated buildings with 305 offices and 19 retails outlets. We forecast that Akaria will achieve total revenue of SAR216 million in FY2009e, a slight decline due to weaker land sales. However, we expect rental revenue increases of 14% Y-o-Y, owing to Akaria Plaza becoming fully operational by the end of the year. We expect net income to come in at SAR117 million. Our forecast assumes that the company will sell SAR25 million worth of land; however, since Akaria has not reported any land sales in 9M2009, there is some downside risk to this forecast. The companys balance sheet remains unleveraged, with cSAR45 million in cash, cSAR613 million in liquid instruments and zero debt reported at the end of 3Q2009. The stock has closely followed the market index throughout the year, which we believe is due to its significant government ownership and the lack of any significant catalysts.
2010 - financing may be needed to continue expansion

We forecast that Akaria will report revenues of cSAR289 million in 2010e, of which SAR50 million could be generated from sales of raw land, and earnings of cSAR148 million. We expect rental revenue to increase 26% Y-o-Y, driven by the contribution of the newly opened Akaria Plaza as well as some moderate increases in the rents charged to tenants of older properties. We believe that Akarias occupancy rates will remain strong, in the high 80% and 90%, despite new commercial properties gradually entering the market. We do not anticipate any changes to the companys dividend policy, and forecast a dividend of SAR1 per share will be paid out from 2009 earnings. Finalising the design stages of new projects and securing new financing will confirm the companys commitment to further expansion and could act as a catalyst for the stock. Akaria has an ambitious expansion plan, which includes construction of the SAR2 billion Akaria Tower in Jeddah, a mixed-use property with 300,000 sqm of leasable residential built-up area. It also plans to add new residential units, worth cSAR420 million, in Riyadhs Diplomatic Quarter where it already rents properties built on leased land. The Binban project, located in the outskirts of Riyadh and expected to start contributing to revenue by 2012e, would consume another SAR1.5 billion. In order to proceed with all these plans, the company may need to secure debt - possibly in 2010e, although this is not yet included in our forecasts. While the company has not resorted to debt financing for its previous, less expensive expansions, we believe it is now more likely to seek debt rather than new equity given its clean balance sheet, a number of properties that could act as debt collateral, and a firm dividend policy. Implementation of the proposed mortgage law, anticipated in 2010e, could provide a further catalyst for the stock, especially given the companys exposure to the mortgage market through its 10% owned subsidiary Dar Al Tamleek.

We have a Buy recommendation and an FV of SAR33.5 per share. We like Akarias steady rental revenue stream, attractive land bank, its prospective exposure to the under-served middle-income residential market, and its stable dividend with a yield of c4%. With no stock-specific catalysts expected, we believe that Akarias performance will closely follow the market in the short to medium term. The stock currently looks expensive, with a 2009e P/E of 29x, but this should be adjusted for the value of cash and liquid investments. The adjustment brings the P/E down to 23x which, although still pricey, can be justified by Akarias stable revenue stream.
REAL ESTATE SECTOR
88
DAR AL-ARKAN
Rating : Buy

22 20 18 16 14 12 10

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 15.30 on 08 December 2009 ALARKAN AB / 4300.SE SAR16,524 / 1,080 SAR1,243 11% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Mr. Khaled Bin Abdullah Shelash Al Shelash 9.1% Al Arkan for Construction Company 8.4% Management: Managing Director: Mr. Abdullatif Bin Abdullah Shelash Al Shelash CFO: Mr. Benoit Bellerose; IR: Mr. Sayed Al Jawhary

2008a 2.18 2.25 10.87 7.0 15.0% 1.4 -6.3% 8.8 1.28
2009e 2.07 N/A 12.94 7.4 0.0% 1.2 18.2% 9.6 1.16
2010e 2.15 N/A 15.09 7.1 0.0% 1.0 9.6% 9.3 1.14
2011e 2.55 N/A 17.64 6.0 0.0% 0.9 7.8% 7.9 1.05

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA EBITDA / Interest Expense 2008a 716 949 1,794 15,458 1,247 20,164 1,635 171 613 6,000 8 8,427 11,736 5,611 2,694 (50) 2,644 (245) 17 2,417 2,417 (60) 2,356 2,470 2,766 (3,802) (1,036) (1,169) (426) (2,630) 2009e 1,714 543 957 18,751 1,274 23,239 2,650 300 615 5,689 10 9,265 13,974 5,694 2,482 (40) 2,442 (157) 6 2,290 2,290 (53) 2,237 2,333 4,099 (1,087) 3,013 (2,693) 677.614 998
2008a 14% -68% 48% 47% -2.5% 20% 13% 103% 58.9% 256.8% 11.0
2009e 1% -19% 44% 43% -2.3% 16% 11% 0% 47.4% 266.9% 15.8 2010e 171 775 957 18,752 1,260 21,917 900 301 615 3,789 11 5,617 16,300 5,636 2,573 (47) 2,526 (149) 9 2,386 2,386 (60) 2,326 2,436 2,339 (747) 1,592 516 (3,650) (1,543)
2010e -1% -13% 46% 45% -2.5% 14% 11% 0% 27.7% 175.6% 17.3
2011e 20% -7% 45% 43% -2.5% 14% 12% 0% 18.5% 116.6% 25.2 2011e 271 1,881 957 19,450 1,248 23,807 3,750 335 615 39 11 4,751 19,056 6,774 3,018 (82) 2,936 (120) 10 2,827 2,827 (71) 2,756 2,911 1,777 (485) 1,292 (293) (900) 99

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Attributable Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Other Investing Cash Flows Net Financing Change in Cash
Source: Dar Al-Arkan, EFG-Hermes estimates
JAN PAWEL HASMAN
SAUDI ARABIA
Research Yearbook
REAL ESTATE SECTOR

2 0 1 0
background
Dar Al-Arkan, established in 1994, is the largest listed residential real estate developer in Saudi Arabia. It develops large scale integrated communities, as well as selling raw land to third-party developers and individuals. Additionally, it develops commercial and residential properties for leasing. It has historically addressed the upper-middle income market through villa sales, but now it also offers apartments targeted at middle and lower-middle income buyers. It operates in Riyadh, Jeddah, Mecca and Medina. Dar Al-Arkan does not disclose the size or location of its land bank, which we estimate at 35-50 million sqm. The company has four projects under construction: Al Qasr and Shams Arriyadh in Riyadh, Al Tilal in Medina and Khozam Palace in Jeddah, with a total 8,200 residential units already planned. The company recently announced a SAR7.5 billion project in Jeddah to be completed over the next five years. Land sales are the main driver of the companys earnings and cash flows, with proceeds partially spent on upfront financing of construction as Dar Al-Arkan does not sell off-plan. It is the most leveraged listed real estate company, with a debt-to-equity ratio of 0.62x and a gross debt of SAR8.3 billion (USD2.2 billion).
2009 - land sales support the top line

In 2009, the company completed the sale of its villas in its Ishbiliya project and approached completion of two other projects Al Qasr and Al Tilal. Deceleration in residential unit sales was offset by increased land sales, which in 9M2009 contributed 91% to the top line. In 1Q2009, the margins on land sales declined to 43%, from 52% in 2008. We believe this stemmed from accelerated land turnover to secure cash for construction and repayment of short-term debt obligations. Land margins had recovered to 49% by 3Q2009. Margins on residential units dropped to c25%, from the high 40% of previous years, following the increases in construction costs in 2008 as well as recognition of lower-margin apartment revenues. In 3Q2009, Dar Al-Arkan reported a cash position of SAR1.06 billion (USD281 million) compared to SAR460 million (USD122 million) in the previous quarter. This could increase in 4Q2009e as it continues to conserve cash for repayment of its SAR2.25 billion sukuk, due in March 2010. The company should be able to generate a strong positive operating cash flow after sales of new tranches of villas and apartments are launched in Al Qasr and Al Tilal. In May, Dar Al-Arkan issued SAR750 million in a fiveyear term sukuk at SIBOR +4%. It was one of only three Saudi companies to issue a sukuk in 9M2009.
2010 - a hunt for cash

We believe a struggle to conserve cash or secure financing for ongoing and upcoming projects will dominate the companys operations in 1Q2010e. Dar Al-Arkan will need to repay its USD600 million (SAR2.25 billion) sukuk in March 2010. The company might therefore accelerate the turnover of its land bank, which could put some downward pressure on its margins, or hasten the sale of units in Al Qasr (the sukuk is backed up by revenues generated from this project). If new financing was needed to replace the maturing sukuk, we believe it might take the form of a syndicated bank loan rather than tradable debt instruments. We forecast that Dar Al-Arkan will end FY2010e with total revenue of SAR5.6 billion, down 1% Y-o-Y. We believe that the company might sell as much as SAR5 billion worth of land in FY2010e, contributing 89% to the top line. We anticipate a minor decline in Dar Al-Arkans SG&A expenses in 2010e, as no new projects are due to be launched. We expect net income will reach SAR2.3 billion, up 4% Y-o-Y. Given the tightening liquidity of the companys balance sheet, we do not expect Dar Al-Arkan to pay any dividends out of its 2009 earnings. The volatility of both gross margins on land sales and sales of new units, coupled with the capitalisation of interest expense, all cause some modeling risk. We believe there are a few positive catalysts for the stock that may emerge in 2010e, such as the implementation of the mortgage law which, if passed, will be highly beneficial for Dar Al-Arkan. However, we believe that refinancing concerns will overshadow any positive triggers in the short term. We therefore expect some overhang on Dar Al-Arkans shares in 1Q2010e, before the company repays its outstanding debt obligations.

We have a Buy recommendation on Dar Al-Arkan, and an FV of SAR19.15 per share. Our valuation is mainly driven by the value of its raw land bank. We believe that Dar Al-Arkan is well-positioned to take advantage of pent up demand in the residential segment, and is one of the few companies with the capacity to develop large scale integrated communities. Although the stock trades on a very cheap 2010e P/E of 7.1x, we remain cautious given its high leverage and the current uncertainties surrounding its financing plans, which may result in share price volatility in 2010. Our valuation does not include newly announced projects for which financing has not yet been secured.
REAL ESTATE SECTOR
YEARBOOK
petrochemicals & Fertilisers
SAudi BASiC induStRiES CORpORAtiOn (SABiC) SAudi ARABiAn FERtiliSER COmpAnY (SAFCO) YAnBu nAtiOnAl pEtROChEmiCAl COmpAnY (YAnSAB)
2010
92
PETROCHEMICAL AND FERTILISER SECTOR
2009 - surviving the trough year

The profitability of the Saudi petrochemical industry in 2009 was severely hit by one of the most dramatic global economic downturns in history, led by the US financial crisis, which overwhelmed global commodity markets in 2H2008. At the beginning of the year, the global industry suffered a freefall in commodity prices, a significant retreat in global demand, aggressive de-stocking activities following a swift and substantial decline in product and feedstock prices, and a severe tightness in credit lines for traders and producers. This led to significant margin contractions for Saudi producers, exacerbated by their high operating leverage stemming from their access to fixed natural gas costs (at varying degrees). Their cost advantage nevertheless remained significantly greater than that of any of their peers. Fig 1: Oil and Feedstock Price Trends
USD/tonne (LHS), and USD/barrel (RHS)
1,400 1,200 1,000 800 600 400 200 0
Nov-2000 Nov-2001 Nov-2002 Nov-2003 Nov-2004 Nov-2005 Nov-2006 Nov-2007 Nov-2008 Nov-2009
Fig 2: Prices of Ethylene and its Main Derivatives

USD/tonne, unless otherwise stated
Oil (RHS) Ethylene LDPE Propylene LLDPE HDPE PS PP
Naphtha
Propane
Butane
140 120 100 80 60 40 20 0
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Nov-2000
Nov-2001
Nov-2002
Nov-2003
Nov-2004
Nov-2005
Nov-2006
Nov-2007
Nov-2008
Source: Chemicals Market Associates, Inc. (CMAI)
Source: Chemicals Market Associates, Inc. (CMAI)
Prices, however, recovered strongly starting in 2Q2009, driven by i) a positive demand surprise from China owing to the governments economic stimulus plan, which continued to support global ethylene utilisation rates, and ii) a strong rebound in oil prices that led to cost pressures for marginal producers. While YTD demand in North America and in Europe has declined Yo-Y by c3.4% and 6%, respectively, demand in North East Asia has surged 15% Y-o-Y. Within this, Chinas imports of polyethylene and polypropylene as at 9M2009 have surged 58% and 61% Y-o-Y, respectively. In addition, the gradual rebound in naphtha prices increased production costs of Western European and Asian producers, pushing the global cost curve upwards and improving the cost advantage of Saudi fixed-cost producers. We estimate utilisation rates of Saudi Arabian producers at 95% as at 9M2009. Fig 3: Ethylene Cash Costs, Saudi vs World Regions
1,400 1,200 1,000 800 600 400 200 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 EU (Naphtha) SABIC (Mixed) US (Ethane) SABIC (Ethane) Asia (Napththa) IQ (Ethane)
Fig 4: Ethylene Cash Margins, Saudi vs World Regions

1,700 1,300 900 500 100 (300) EU (Naphtha) SABIC (Mixed) US (Ethane) SABIC (Ethane) Asia (Napththa) IQ (Ethane)
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: CMAI, EFG-Hermes estimates
Nov-2009
SAUDI ARABIA
Research Yearbook

2009 - prices bottomed out, china was a key driver 2010 - profitability outlook improves on higher energy prices 2 0 1 0
The margins of Saudi Arabias low-cost crackers benefited from oil price increases in the second and third quarters, following poor operating performances in 1Q2009. We expect Saudi producers will maintain their high utilisation rates in 4Q2009e, and expect 4Q2009e margins to be constant or slightly better as prices of olefins, polymers and derivatives have remained relatively stable Q-o-Q. Fig 5: Oil and Main Product Prices
USD/tonne (LHS), USD/barrel (RHS)
2,000 PE PP Ethylene Urea Naphtha Oil (RHS) 150 120 90 1,000 60 500 30 0 100 50 0
Fig 6: Oil Prices vs Rebased EBITDA*

USD/barrel for oil, unless otherwise stated
250 200 150 SABIC SAFCO Oil Price
1,500
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
3Q08
4Q08
1Q09
2Q09
3Q09
Source: CMAI
*Rebased Oil Prices Source: Company disclosures
Nitrogen fertiliser prices, however, remained relatively soft during 9M2009. The global market remained supply driven, with lacklustre demand in 9M2009 and limited production cuts, as prices remained slightly above the production costs of marginal producers. In Europe, oil-linked gas contracts averaged USD6.8/mmBtu in 1Q2009 (implying a urea cash cost of USD225/tonne), while spot gas prices continued to slump below USD4/mmBtu reflecting weak supply/demand fundamentals. In mid-August, the Ukrainian government approved a c17% discount on the gas price supplied to local nitrogen producers. We estimate this reduced the effective gas price for Ukrainian exporters (c10% of global trade) to cUSD6.5/mmBtu, from USD7.6/mmBtu, implying a cash cost of USD215/tonne of urea (from USD237/tonne previously). Fig 7: Urea and Ammonia Prices
800 700 600 500 400 300 200 100 0
340 140 (60)
Fig 8: Urea Cash Margins, SAFCO vs World Regions

Ammonia
940 740 540 SAFCO Avg. Middle East W. Europe US
Urea
3Q08
4Q08
1Q09
2Q09
3Q09
3Q08
4Q08
1Q09
2Q09
3Q09
Source: Fertecon, EFG-Hermes estimates
However, nitrogen prices have picked up recently due to i) a seasonal increase in demand in major markets ahead of the spring application season in the US and Western Europe, and the Rabi season in India and Pakistan (November 2009-February 2010); ii) limited exports from China; and iii) a slight increase in oil-linked gas prices in Europe, reflecting higher Brent prices in the second and third quarters. The increased demand, coupled with low inventory levels in major markets (India, US, Pakistan and Brazil), could lead to strong restocking that will benefit the pricing power of exporters in the Middle East and the Former Soviet Union countries (FSU). We expect this positive trend to continue into 1Q2010e.
94
2010 - strong recovery expected on higher oil prices

We believe the Kingdoms petrochemical sector is well positioned to achieve strong earnings growth in 2010e on the back of both higher prices driven by a stronger energy price environment, and new volumes stemming from aggressive capacity expansion plans. Despite depressed fundamentals globally, oil prices benefited in 2009 from the ultra-easy global monetary policy environment, a weak US exchange, and increased investor appetite for equities and commodities. Strategically, we prefer producers with high exposure to oil-based commodities, such as SABIC and Yansab, both of which we believe will benefit from a higher price environment in 2010e. On the other hand, we believe nitrogen fertiliser prices will continue to lag changes in oil prices and we are therefore less bullish on SAFCO. Any upward/downward movements in oil prices, however, provide significant upside/downside risks to our views and recommendations. Fig 9: 2010e Avg. Ethylene Cash Costs vs Price
1,000 800 600 400 200 0 Ethylene Price
Fig 10: 2010e Avg. Urea Cash Costs vs Price

320 270 220 170 120 70 Avg. Urea Price (Middle East)
EU (naphtha)
Asia (naphtha)
20
US (ethane) IQ (ethane) SABIC (ethane) SABIC (mixed) Ukraine Europe US
(30)
Typically, higher oil prices shift the global cost curve upwards, leading to higher commodity prices, with the difference feeding directly through to the margins of producers with low, and relatively fixed, costs. We estimate that the oil price would have to fall to around USD20-25 p/b for a global naphtha-based producer to match the cost advantage of a Saudi producer. To put things into perspective, we estimate the cash costs of an ethane-based cracker in Saudi Arabia at USD76/tonne, which implies a cUSD870/tonne cost advantage over producers in Asia in 2010e (vs USD1,200/tonne in 2008). Figure 11: Global Ethylene Cost Curve
900 800 700 600 500 CIS South East Asia North America Central Europe South America North East Asia Western Europe
400 SABIC (other feeds) Africa 300 200 100 0 0 Yansab IQ Middle East
SABIC (Ethane) 20 40 60 80 100 120 140 160
Over the longer term, we remain concerned about the substantial growth in the global supply of ethylene, with c22 million tonnes of new ethylene capacity expected during 2009-2012e. Of the total new supply, c53% is expected in the low-cost Middle East region, and c34% in China.
AHMED SHAMS EL DIN
Middle East
Russia
China (coal)
SAUDI ARABIA
Research Yearbook

2009 - prices bottomed out, china was a key driver 2010 - profitability outlook improves on higher energy prices 2 0 1 0
Assuming demand will grow at a CAGR of 3.5% during 2009-2012e (vs a CAGR of 3.8% during 2003-2008), we believe global utilisation rates could fall to 83% during 2009-2012e and expect c8-10 million tonnes of supply will be permanently shutdown (mostly from Western Europe). The main upside risk to this bearish scenario is significant delays in the Middle Easts planned new capacity. Figure 12: Forecasts of Ethylene Supply / Demand Balance
In mtpa (LHS), unless otherwise stated
180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009e 2010e 2011e 2012e Supply (LHS) Demand (LHS) Utilisation Rates 96% 94% 92% 90% 88% 86% 84% 82% 80% 78% 76%
Source: CMAI
Theoretically, lower utilisation rates should place downward pressure on petrochemical prices and squeeze the spread of ethylene to naphtha prices. However, we believe that global pricing mechanisms will continue to be set by marginal producers, whose production costs could be further inflated if oil prices continue their surge. For nitrogen fertilisers, we believe the recent rally in grain prices has helped to reduce uncertainty over farmers profits in 2010e. Future corn prices increased to cUSD4/bushel, which provides support for 2010es urea prices. The global grains stockto-use ratio stands at c20.6%, which is at the lower end of the historic comfort zone (20-25%). The International Fertilisers Association (IFA) estimates that demand for urea will grow at a CAGR of 3.7% during 20092011e. On the supply side, however, global capacity is expected to grow at a CAGR of 5.3% during the same period, with 57% of the worlds new capacity coming from China and 22% from the MENA region. Outside China, urea capacity is expected to grow by 3.8% during 2009-2011e, of which c72% is planned in the Middle Easts low gas cost region. Assuming the IFA's estimated demand growth materialises during 2009-2011e, we believe the market outside China could be tighter in 2010e, but not sufficiently tight for China's export tariffs to impact global prices. Upside risks to our assumptions are significant delays in Chinese new capacity and/or a shutdown of old capacities after new supply comes on stream. Fig 13: Global Urea Supply / Demand (mtpa)
Capacity (LHS) 250 200 150 100 50 0 Demand (LHS) Utilisation Rates 88% 87% 86% 85% 84% 83% 82% 81% 80% 79% 2007 2008 2009e 2010e 2011e 2012e 78%
Fig 14: Urea Supply / Demand Ex-China (mtpa)

140 120 100 80 60 40 20 0 2007 2008 2009e 2010e 2011e 2012e Capacity (LHS) Demand (LHS) Utilisation Rates 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80%
We nevertheless expect a higher urea floor price in 2010e due to i) the 20% discount on gas prices for Ukrainian producers coming to an end in December 2009, and ii) higher oil prices, which should lead to higher gas contract prices in Western Europe. We expect gas prices in the Ukraine will increase to USD8.5/mmBtu in 2010e, from USD6.5/mmBtu in 2009e. This implies cash costs of USD250/tonne in 2010e, up from USD225/tonne in 2009e.
96
SAUDI BASIC INDUSTRIES CORPORATION (SABIC)

Rating : Buy

90 80 70 60 50 40 30

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit Major Shareholders: Government 70% Management: CEO: Mr. Mohammad Hammad Al Mady VP Corporate Finance: Mr. Mutlaq H. Al Murished 80.00 on 08 December 2009 SABIC AB / 2010.SE SAR240,000 / 3,000 SAR8,551 30% Accessible via swaps only
Price (SAR)
TASI (Rebased)

2008a 7.34 3.00 34.31 10.9 3.8% 2.3 6.7% 9.3 2.0
2009e 2.56 1.00 39.64 31.2 1.3% 2.0 1.4% 15.7 1.9
2010e 6.30 3.00 43.26 12.7 3.8% 1.8 2.0% 9.9 1.8
2011e 8.32 5.00 46.99 9.6 6.3% 1.7 5.8% 8.4 1.9

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA EBITDA / Net Interest Expense 2008a 51,028 16,104 28,323 141,440 34,865 271,760 4,289 8,261 14,030 88,367 10,228 43,653 168,828 102,932 150,810 46,643 (10,052) 36,591 (3,801) 4,545 37,335 (13,905) 23,430 (1,400) 22,030 45,243 49,258 (28,394) 20,864 4,205 (20,096) 4,973 2009e 62,431 20,703 29,888 154,205 33,638 300,865 6,313 11,489 14,398 94,187 10,535 45,028 181,949 118,915 100,752 27,680 (9,856) 17,823 (1,384) (1,181) 15,258 (6,878) 8,380 (694) 7,685 26,986 24,418 (22,047) 2,371 (530) 9,561 11,403
2008a 19.5% 18.8% 30.9% 24.3% 3.7% 22.7% 27.1% 40.9% 0.40 0.89 12.3
2009e -33.2% 22.5% 27.5% 17.7% 4.0% 6.9% 11.8% 39.0% 0.32 1.38 20.0 2010e 59,539 22,295 33,646 162,657 34,396 312,533 17,598 15,646 10,387 76,589 10,851 51,689 182,760 129,773 135,626 43,743 (11,549) 32,195 (1,439) 703 31,459 (11,289) 20,170 (1,258) 18,912 42,485 37,281 (20,000) 17,281 (55) (20,119) (2,892)
2010e 34.6% 14.7% 32.3% 23.7% 4.0% 15.2% 20.0% 47.6% 0.27 0.79 30.4
2011e 13.3% 9.8% 33.8% 26.1% 4.0% 18.4% 25.1% 60.1% 0.10 0.27 58.2 2011e 59,896 21,045 29,871 165,879 35,547 312,237 15,012 17,326 9,034 58,923 11,176 59,794 171,265 140,972 153,628 51,877 (11,777) 40,100 (892) 1,094 40,302 (13,738) 26,564 (1,612) 24,952 50,265 55,617 (15,000) 40,617 (56) (40,204) 357

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex Free Cash Flow Other Investments Net Financing Change in Cash
Source: SABIC, EFG-Hermes estimates
AHMED SHAMS EL DIN
SAUDI ARABIA
Research Yearbook

2 0 1 0
background
Headquartered in Riyadh, SABIC is one of the worlds largest producers of petrochemicals and nitrogen fertilisers and the largest manufacturer of steel in the Middle East. SABIC enjoys a strong global presence, with numerous large-scale production facilities, sales and distribution assets, and research and development centres across the world. SABIC is highly exposed to the cyclicality of the global petrochemical industry, with petrochemical commodities comprising c86% of FY2009e revenue and c84% of EBITDA. However, it enjoys a strong competitive position globally, which allows it to outperform global peers, operate at above average utilisation rates and generate robust cash flow during cyclical downturns. SABICs main competitive advantages arise from: i) its significant cost advantage in Saudi Arabia, primarily its access to considerably cheaper feedstock (ethane, propane and butane) than its global peers, ii) its new large-scale crackers, iii) its high level of upstream/downstream integration among subsidiaries, and iv) its proximity to the high-growth emerging markets of Asia. Furthermore, SABIC plans to aggressively expand, adding c17 million tonnes per annum of new petrochemical capacity by 2012e.
2009 - hurt, but surviving on global cost advantage

SABICs 1H2009 performance was weighed down by a freefall in the prices of petrochemicals, fertilisers and steel products and the impairment of SAR1.2 billion of goodwill related to its acquisition of SIP in 2007. With c55% of SABICs petrochemical capacity based on fixed feedstock costs, the swift and substantial decline in prices led to a significant retreat in operating margins. SABICs 1H2009 revenues declined by 48% Y-o-Y, while its EBITDA and net income plummeted 62% Y-o-Y and 94% Y-o-Y, respectively. However, from late 2Q2009 onwards petrochemical prices began to gain positive momentum, driven by strong demand from China and a rise in global feedstock costs led by higher oil prices. This has benefited SABICs low-cost base model. SABICs 3Q2009 revenue grew 18% Q-o-Q (-39% Y-o-Y), its EBITDA rose 32% Q-o-Q (-42% Y-o-Y) and its net income surged 102% Q-o-Q (-50% Y-o-Y). On a year-to-date basis, SABICs 9M2009 revenue fell 44% Y-o-Y, while its EBITDA and net income plummeted 55% and 79%, respectively. We estimate that SABIC will maintain its high utilisation rates (c95% in Saudi and c85% in Europe) in 4Q2009e. In FY2009e, we forecast SABICs revenue will be SAR101 billion (-33% Y-o-Y), its EBITDA SAR28 billion (-41% Y-o-Y), and its net profits SAR7.7 billion (-65% Y-o-Y).
2010 - strong growth ahead

We believe SABIC is well positioned to generate strong earnings and cash flow growth next year. The main growth drivers are i) a higher oil price environment, ii) new petrochemical volumes, and iii) a relative improvement in SIPs performance following its ongoing restructuring programme. We estimate SABICs ethylene cost advantage over an Asian naphtha-based producer will improve to USD535/tonne in 2010e (from cUSD400/tonne in 2009e). Furthermore, Yansab and Sharq together will add c8 mtpa of low-cost petrochemical capacity in 2010e, which we believe will contribute positively to SABICs margins and cash flow generation. SABICs expected growth in 2010e, however, is not risk free. We are concerned about oversupply along the global ethylene value chain, to which SABIC is highly leveraged. Our model suggests the global ethylene supply/demand gap could widen as supply increases by c22 million tonnes during 2010-2012e, while demand grows at a slower pace. Our forecasts reflect this, by incorporating a lower-than-historical average spread of ethylene prices to naphtha. We nevertheless believe that SABIC will maintain high utilisation rates, while among its competitors c5-8 million tonnes of global ethylene capacity is permanently shut down (mostly in Europe). In 2010e, we forecast SAR136 billion in revenue (+35% Y-o-Y), SAR44 billion in EBITDA (+58% Y-o-Y) and SAR19 billion in net profits (+146% Y-o-Y).

SABICs share price performance closely mirrors movements in oil prices, which defines the global cost curve for its main commodities. We believe the core investment thesis for SABIC is a higher oil price environment next year on the back of the ongoing ultra-easy global monetary policy, a relatively weak US dollar and, to a lesser degree, demand recovery in the developed world. We value SABIC at SAR105.0 per share and have a Buy recommendation on the stock. Our forecasts, valuation and recommendation are highly biased to our oil price assumptions of a long-term price of USD80p/b, on which we base our normalised free cash flow model. Any increase/decrease in oil prices will therefore lead to significant upside/downside risks to our forecasts and fair value estimate. SABIC trades at a 2009e P/E of 31.2x, which falls to 12.7x in 2010e driven by higher petrochemical margins and volumes. Similarly, SABIC trades at a 2009e EV/EBITDA of 15.7x, which falls to 9.9x in 2010e. We believe SABIC trades at a normalised P/E of 10.8x (based on 2012e discounted EPS) and a normalised EV/EBITDA of 6.5x.
98
SAUDI ARABIAN FERTILISER CO. (SAFCO)

Rating : Neutral

130 120 110 100 90 80 70

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 119.8 on 08 December 2009 SAFCO AB / 2020.SE SAR29,950 / 250 SAR680 42% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: SABIC 42.9% General Organisation for Social Insurance 15.1% Management: CEO: Mr. Fahed Bin Rashed Al Otaibi CFO: Mr. Abdulrahman Rashed Al Zuraiq

2008a 17.12 13.00 25.14 7.0 10.9% 4.8 14.3% 6.2 5.4
2009e 7.28 8.00 24.24 16.5 6.7% 4.9 6.0% 14.9 6.0
2010e 9.50 8.00 25.74 12.6 6.7% 4.7 6.6% 10.9 6.3
2011e 10.32 8.00 28.06 11.6 6.7% 4.3 7.8% 10.1 6.1

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Cash / BV Net Cash / EBITDA EBITDA / Net Interest Expense 2008a 3,918 893 350 3,458 1,232 9,850 237 321 181 590 488 1,816 8,034 5,236 4,505 (255) 4,250 76 64 4,389 4,389 (109) 4,280 4,521 4,269 125 4,393 (2,048) 2,345 2009e 2,379 338 349 3,363 1,221 7,651 254 298 133 418 488 1,591 6,059 2,686 1,870 (256) 1,614 61 190 1,865 1,865 (44) 1,821 1,826 2,079 (161) 1,918 (3,663) (1,539)
2008a 48.9% 1.0% 86.0% 81.2% 2.5% 68.1% 22.0% 75.9% 21.4% 29.8% 59.5
2009e -48.7% 6.0% 69.6% 60.1% 2.4% 30.1% 34.7% 109.8% 28.2% 91.3% 30.5 2010e 2,350 448 410 3,278 1,352 7,839 167 345 154 251 488 1,405 6,434 3,563 2,556 (263) 2,293 13 129 2,436 2,436 (61) 2,375 2,496 2,393 (178) 2,215 (2,241) (29)
2010e 32.7% 5.0% 71.7% 64.4% 2.5% 36.9% 51.8% 84.2% 30.0% 75.6% 193.6
2011e 7.3% 5.0% 72.2% 65.1% 2.5% 36.8% 54.8% 77.5% 34.6% 87.8% 146.5 2011e 2,677 481 432 3,198 1,490 8,277 171 363 162 81 488 1,263 7,014 3,824 2,762 (271) 2,491 19 136 2,646 2,646 (66) 2,580 2,697 2,667 (191) 2,476 (2,148) 327

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: SAFCO, EFG-Hermes estimates
AHMED SHAMS EL DIN / RITA GUINDY
SAUDI ARABIA
Research Yearbook

2 0 1 0
background
Established in 1965, SAFCO is the oldest petrochemical producer in Saudi Arabia. Since its establishment, SAFCO has grown organically through several capacity expansions to become one of the worlds largest, and most profitable, producers of nitrogen fertilisers. SAFCOs current capacity stands at 2.1 mtpa of ammonia, 2.3 mtpa of urea and 100 ktpa of sulphuric acid, although the heart of its business model remains urea. SAFCO is 42.9% owned by SABIC, 15.1% owned by the Saudi General Organization for Social Insurance, and the remaining 42% is free float. The company has one of the highest operating margins and free cash flow generation in the industry owing to i) its access to cheap, fixed gas prices (USD0.75/mmBtu) in Saudi Arabia, making its production costs a fraction of those of its global and regional peers; ii) its highly integrated production model with ammonia, the main feedstock in the production of urea, manufactured internally; and iii) its low tax environment.
2009 - cost advantage weathering weak fundamentals

SAFCOs 9M2009 profitability was hit by the significant Y-o-Y decline in urea prices on the back of i) the sizable correction in feedstock prices, which led to aggressive global de-stocking activities at the beginning of 2009; ii) the tightness in credit supply, which weakened the ability of producers and traders to take long positions; and iii) the substantial Y-o-Y correction in grain prices, which squeezed farmers profits. In 9M2009, the Middle Easts urea price averaged USD270 per tonne, almost 52% below its level in 9M2008, and ammonia prices averaged USD218 per tonne (from USD760/tonne in 9M2008). SAFCOs revenue dropped 53% in 9M2009, to SAR 2.14 billion, its EBITDA plunged 62%, implying an EBITDA margin of c70% (from 9M2008s high levels of 87%), and its net income fell 63% to SAR1.47 billion. For the rest of 2009e we expect higher urea prices, mainly on the back of i) a seasonal increase in demand ahead of the spring application season in the US and Europe, and the Rabi season in India and Pakistan; ii) limited exports from China; and iii) higher gas contract prices in Europe, which should start reflecting 3Q2009s higher Brent prices. However, we believe that this stronger price environment will be more than offset by a significant drop in 4Q2009es volumes. According to market consultant ICIS, SAFCO IV plant, which represents c50% of SAFCOs capacity (SAFCO IV: 1.1 mtpa of urea, 1.1 mtpa of ammonia), has been out of service due to technical issues. We assume the duration of the plant outage was from the beginning of October until mid-November, and expect this to weigh significantly on SAFCOs 4Q2009e performance. In FY2009e, we therefore forecast SAR2.69 billion in revenue (-49% Y-o-Y), SAR1.87 billion in EBITDA (-58% Y-o-Y) and SAR1.82 billion in net income (-57% Y-o-Y)
2010 - outlook improves as urea floor price set higher

We believe SAFCOs earnings and cash flow generation will improve considerably in 2010e. This is largely due to the impact of higher urea and ammonia prices, combined with higher volumes as the company returns to full capacity utilisation. We believe next years global urea price will be a function of i) production costs in Europe (price floor), particularly in the Ukraine which accounts for approximately 10% of global urea exports; and ii) the outlook for export tariffs in China (price ceiling), which could influence global prices if, and only if, the demand for imports outside China exceeds supplies from the Middle East and the Former Soviet Union (FSU). The IFA forecasts that demand for urea will grow by 3.7% in 2010e. This suggests the global market will be tighter in 2010e, but not sufficiently tight for Chinese export tariffs to influence global pricing mechanisms. We therefore expect global prices will continue to be set close to the production costs of marginal producers. We estimate higher floor prices for urea in 2010e due to the fact that the 20% discount on gas supplies given to Ukrainian producers will end on 31 December 2009. In addition, higher oil prices should also lead to higher applicable gas contract prices for other European producers. We forecast a urea price of USD300 per tonne in 2010e (from USD272/tonne in 2009e). For ammonia, we estimate a 2010e price of USD325 per tonne (from USD236/tonne). In 2010e, we forecast SAFCOs revenues will reach SAR3.56 billion (+33% Y-o-Y), its EBITDA SAR2.56 billion and its net income SAR2.38 billion (+30% Y-o-Y).

We value SAFCO at SAR123.0 per share and have a Neutral recommendation on the stock. Our equity fair value estimate is derived from a discounted cash flow (DCF) methodology, based on three-year detailed forecasts followed by a normalised free cash flow on which we base SAFCOs perpetual value. Our model suggests normalised prices of USD350 per tonne for urea and USD400 per tonne for ammonia. Theoretically, this implies an average long-term oil price of USD80 p/b. SAFCO trades at a 2010e P/E of 12.6x and an EV/EBITDA of 10.9x, which is a 23% premium to its global fertiliser peers, but is nevertheless lower than the average trading multiples of regional producers with a relatively similar cost structure.
100
YANBU NATIONAL PETROCHEMICAL CO. (YANSAB)

Rating : Buy

35 30 25 20 15 10
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jan-09 08-Jun-09 08-Oct-09 08-Dec-08 08-Dec-09 08-Apr-09 08-Sep-09 08-Feb-09 08-Aug-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 30.20 on 08 December 2009 YANSAB AB / 2290.SE SAR16,988 / 562.5 SAR867.6 39.8% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: SABIC 51.0% General Organisation for Social Insurance 9.2% Management: CEO: Mr. Mutlaq H. Al Murished CFO: Mr. Fayez M.Al Rokh

2008a (0.05) N/A 10.13 N/A 0.0% 3.0 -4.03% N/A 1.79
2009e 0.49 N/A 10.67 N/A 0.0% 2.8 -4.91% N/A 1.36
2010e 2.00 N/A 12.87 15.1 0.0% 2.3 4.04% 11.38 1.40
2011e 3.65 1.50 15.39 8.3 5.0% 2.0 2.34% 8.45 1.42

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA EBITDA / Net Interest Expense 2008a 1,033 184 17,105 355 18,677 669 63 1,039 11,128 81 12,980 5,697 (26) (26) (26) (26) (26) (26) (199) (4,118) (4,317) 3,663 (653) 2009e 227 109 69 21,397 355 22,157 1,089 102 116 14,767 81 16,155 6,002 (71) (71) 358 286 286 (9) 277 277 (601) (4,291) (4,892) 4,087 (806)
2008a N/A N/A N/A N/A N/A N/A N/A N/A 1.9 N/A N/A
2009e N/A N/A N/A N/A N/A N/A N/A 0.0% 2.6 N/A N/A 2010e 1,026 939 633 20,806 309 23,714 1,911 967 660 12,856 81 16,475 7,239 5,714 2,584 (922) 1,662 (503) 1,160 1,160 (35) 1,125 2,549 2,563 (286) 2,278 (1,479) 799
2010e N/A 5.0% 45.2% 29.1% 3.0% 17.0% 7.6% 0.0% 1.9 5.3 5.1
2011e 37.6% 5.0% 44.3% 32.3% 3.0% 25.8% 11.9% 41.1% 1.4 3.5 8.2 2011e 785 1,293 884 20,308 263 23,534 2,175 1,017 925 10,681 81 14,879 8,654 7,863 3,480 (938) 2,542 (425) 2,117 2,117 (64) 2,054 3,416 3,128 (393) 2,734 (2,975) (241)

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Interest Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: Yansab, EFG-Hermes estimates
AHMED SHAMS EL DIN / MALAK YOUSSEF
SAUDI ARABIA
Research Yearbook

2 0 1 0
background
Yansab, an affiliate of SABIC, was established in 2006 to build an integrated petrochemical complex in Yanbu Industrial City. The complex started experimental operations in 3Q2009 and has a total capacity of c4 mtpa, including a mix of olefins (ethylene and propylene), polyolefins (polyethylene and polypropylene), fibre intermediates (ethylene glycol) and aromatics (benzene, toluene and xylene). The projects investment cost was originally estimated at SAR18.8 billion, of which 70% was financed by debt (SAR13.1 billion) and 30% by equity (SAR5.6 billion). In 2Q2009, Yansab stated that its investment costs had increased by SAR2.4 billion, to SAR21.18 billion. We believe Yansab enjoys a highly competitive global profile due to its significantly lower cost structure than its global peers. In Saudi Arabia, Yansab enjoys a long-term feedstock supply contract with Saudi Aramco, through SABIC, which allows it to receive ethane at a fixed price of USD0.75/mmBtu and propane at a 25-30% discount to the Saudi export price of naphtha. This, we believe, allows the company to sell polymers at a significant discount to the minimum price that local producers can afford in its key target export destinations (Asia and Western Europe). Yansab also enjoys a highly integrated business model (it is self-sufficient in monomers), and receives strong technical and marketing support from its major shareholder SABIC, which exclusively markets its products at international prices.
2009 - gearing up for a delayed start

Yansab started experimental production of linear low density polyethylene (LLDPE - 0.4 mtpa), polypropylene (PP - 0.4 mtpa), and monoethylene glycol (MEG - 0.7mtpa) late in 3Q2009. Management expects commercial production to commence in 1Q2010e. This is well behind the original production schedule (1H2009). Yansabs balance sheet is highly leveraged, with a net debt position of SAR12.4 billion as at 9M2009. In 9M2009, the company reported pre-operating losses of SAR23 million, of mostly general and administrative expenses. We estimate an average utilisation rate of c35% in 4Q2009e and expect a nonoperational income of SAR277 million in 2009e.
2010 - the scene is set for a strong take-off

Like all commodity producers, Yansab is a price taker with its business model totally dominated by basic petrochemical products, whose prices are largely correlated to global energy prices. We believe the current high oil price environment will support Yansabs margins and cash flow generation in 2010e, its first operational year. This is mainly due to Yansabs highly integrated and low-cost base production model. We estimate that c38% of Yansabs ethylene capacity is based on fixed-cost ethane, at USD0.75/mmBtu, and c62% is based on propane, which it receives at a discount to Saudis naphtha export price. This, we believe, will allow for an EBITDA margin of 45% next year. We estimate Yansabs ethylene production costs at USD180/tonne in 2010e, which implies a cost advantage of USD770/tonne over an Asian naphtha-based producer. We also estimate 2010e production costs of USD337/tonne for HDPE, USD364/tonne for LLDPE, and USD270/tonne for MEG. We therefore believe Yansab can sell polymers in Asia at a significant discount to the minimum price afforded by a local producer. One of our main concerns is that Yansab appears to be over-leveraged, especially with our net debt/EBITDA estimate of 5.3x, which makes its bottom-line vulnerable to changes in polymer prices. Yansabs total capitalised interest expense during construction amounted to SAR974.1 million as of 9M2009. We estimate Yansabs FY2010e total financing costs at SAR517 million. In 2010e, we forecast SAR5.7 billion in revenue, SAR2.6 billion in EBITDA and SAR1.1 billion in net profits.

We value Yansab at SAR42 per share. Our equity value estimate is derived from a discounted cash flow (DCF) methodology, based on three-year detailed forecasts followed by a normalised free cash flow on which we base Yansabs perpetual value. We believe that higher oil prices next year will have a disproportionately positive impact on Yansabs profitability and margins due to its favourable feedstock structure. Our forecasts, valuation and recommendation are highly biased to our oil price assumptions of a long-term price of USD80p/b, on which we base our normalised free cash flow model. Any increase/decrease in oil prices will therefore lead to significant upside/downside risks to our forecasts and fair value estimate. We have a Buy recommendation for Yansab. Based on estimates, Yansab trades at a 2010e P/E of 15.1x (vs a peer average of 16.1x) and an EV/EBITDA of 11.4x (vs a peer average of 9.7x). On a normalised basis, we estimate that Yansab trades at a normalised P/E of 11.2x (based on 2012e discounted EPS).
YEARBOOK
2010
Other
SAvOlA gROup jARiR mARKEting COmpAnY nAtiOnAl Shipping COmpAnY OF SAudi ARABiA (nSCSA) SAudi ElECtRiCitY COmpAnY (SEC)
104
SAVOLA GROUP
Rating : Buy

35 30 25 20 15

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Est. Float Foreign Ownshp Limit 29.9 on 08 December 2009 SAV AB / 2050.SE SAR14,950 / 500 SAR465 71% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Sheikh Mohammed Ibrahim Mohammed Al Issa 11.9% Sheikh Abdullah Mohammed Abduallah Al Rubiea 8.7% Management: CEO: Dr. Sami Baroum CFO: Mr. Majid Karim; IR: Mr. Sultan Al-Hunaiti

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / EBITDA* (x) EV / IC (x)
2008a 0.40 1.00 12.78 73.9 3.3% 2.34 -13.4% 15.3 1.81
2009e 1.76 1.00 13.53 17.0 3.3% 2.21 2.1% 10.8 1.69
2010e 2.02 1.20 14.35 14.8 4.0% 2.08 0.6% 9.5 1.54
2011e 2.35 1.40 15.30 12.7 4.7% 1.95 4.0% 8.5 1.46
2008a
2009e 27.6% 4.7% 8.4% 5.8% 6.3% 13.3% 11.5% 57.0% 52.4% 2.2 7.8 2010e 675 1,466 4,071 5,289 5,972 17,473 2,744 1,899 1,548 2,403 314 1,390 10,298 7,175 21,264 212 1,746 (508) 1,237 (246) 383 1,375 (98) 1,277 (268) 1,008 1,648 1,162 (809) 353 (703) (350)
2010e 20.6% 4.4% 8.2% 5.8% 7.1% 14.5% 12.1% 59.5% 54.0% 2.2 8.7
2011e 13.7% 2.9% 8.0% 5.7% 7.3% 15.8% 12.7% 59.6% 49.0% 1.9 9.7 2011e 780 1,805 4,446 5,463 6,240 18,735 3,093 2,173 1,718 2,086 330 1,685 11,086 7,649 24,173 229 1,929 (545) 1,383 (245) 446 1,584 (115) 1,469 (295) 1,174 1,814 1,535 (542) 992 (888) 105
Revenue Growth 32.8% Capex / Sales 11.7% EBITDA Margin 7.1% EBIT Margin 4.5% Effective Tax Rate (Zakat) 23.9% ROAE 3.0% ROAIC 8.7% Dividend Payout Ratio 247.1% Net Debt (Cash) / Equity 57.5% Net Debt (Cash) / EBITDA* 3.1 EBITDA* / Net Commission Expense 8.6 2008a 605 857 3,267 4,251 5,566 14,546 3,433 1,216 1,358 1,117 285 748 8,157 6,389 13,821 111 988 (367) 621 (154) 335 (579) 223 (53) 170 32 202 911 29 (1,560) (1,532) 1,802 270 2009e 1,025 1,545 3,360 4,834 5,743 16,508 2,309 1,754 1,537 2,721 299 1,122 9,741 6,767 17,632 186 1,486 (461) 1,025 (240) 386 27 1,198 (76) 1,122 (245) 878 1,410 1,340 (699) 641 (221) 420

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Investments,Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue Other Operating Income EBITDA Depreciation and Amortisation EBIT Net Commission Income (Expense) Share of Profit from Associates Other Income (Expense)** Net Profit before Zakat Taxes and Zakat Net Profit before Minority Interest Minority Interest Net Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
*Adjusted to include share of profits from associates **For 2008, it includes one-off provision for investments, inventory write-down and gain on sale of investments Source: Savola Group, EFG-Hermes estimates
WAFAA BADDOUR, CFA / NADA AMIN
SAUDI ARABIA
Research Yearbook
CONSUMER STAPLES
2 0 1 0
background
Savola Group is a leading consumer staples producer and retailer, with factories in MENA and Asia. Savolas business is split into food, retail and packaging. The food segment includes: i) edible oil, with plants in Saudi Arabia (60% market share), Egypt (42%), Iran (45%), Morocco (15%), Kazakhstan (20%), Sudan (10%), Turkey (20%), and, recently, Algeria, with a combined total capacity of 1.94 million tonnes (or effective capacity of 1.5 million tonnes); ii) sugar, with refineries in Saudi Arabia (85% market share) and, recently, Egypt, with a combined total capacity of 1.95 million tonnes (or effective capacity of 1.1 million tonnes); and iii) a 28% stake in Almarai Company (listed). The retail segment includes Panda, KSAs largest grocery retail chain which operates over 118 stores; Herfy (30% IPO scheduled for January 2010), a local fast food chain with 158 stores by the end of 2009e; and a franchising unit. Savola also holds some investments in real estate and private equity funds. Savolas food and retail expansion strategy is through greenfield projects and acquisitions in high-growth MENA and Asian markets. The company plans to expand its sugar presence and introduce other consumer staples (such as pasta and possibly rice) in countries where it operates edible oil facilities, whenever economically justified, in order to benefit from supply and distribution synergies. In 4Q2009, Savola launched a new SAR120 million pasta factory in Egypt, with an annual capacity of 50,000 tonnes, which will begin operations by 2010 and is expected to generate annual revenue of up to SAR500 million within five years. In the edible oil segment itself, Savola plans to increase its capacity in Saudi Arabia by over 30%, to 400,000 tonnes, and nearly triple its capacity in Sudan, to 83,000 tonnes in 2009/2010. Additionally, negotiations are underway to acquire Pakistans third-largest edible oil producer, Agro-Processors. In the sugar segment, Savola is setting up a second sugar refinery in Egypt, with an annual capacity of 180,000 tonnes, which will produce sugar from beet cultivated on Savola-owned farms. The refinery is scheduled to start production in 1Q2011e, and should yield higher margins than current refineries that use imported raw sugar. In the retail segment, Savola acquired the assets of 11 Gant stores in 3Q2009, increasing its market share in Saudi Arabia to 8% from 7%. The company plans to increase its market share to 10% within five years, and increase its number of stores to 160.
2009 - operationally safe and sound

Savolas 9M2009 revenue came in strong, up 30% at SAR13.1 billion. Food revenue edged down 2% due to decreased raw material prices (mostly edible oil) which were largely passed on to consumers. Nevertheless, food sales volumes rose significantly on the back of: i) the consolidation of the Iranian edible oil operation, Savola Behshahr (2Q2009), after Savola increased its effective ownership to 68.5% from 44.4% in 2H2008, and ii) higher sales from new operations: sugar in Egypt and oil in Algeria. Retail revenue soared 32%, driven by the consolidation of Giant stores (in 4Q2008) as well as the launching of new stores. The companys 9M2009 EBITDA (including other operating income) surged 115% to SAR472 million, while the adjusted EBITDA margin widened to 9.3%; up by 370 bps. So far this year, margins have improved significantly owing to: i) not fully passing on the decline in average raw material prices to consumers, ii) the consolidation of the higher-margin Iranian oil operation, and iii) an improved margin at start-up operations. Net profit was mostly generated from core operations, compared to the reporting of a significant investment gain in 9M2008. 9M2009 normalised net profit grew 36% to SAR656 million. For FY2009e, we forecast revenue of SAR17.6 billion, EBITDA of SAR1.5 billion (a margin of 8.4%), and normalised net profit of SAR851 million (up 23%).
2010 - the good gets better

For FY2010e, we estimate that revenue will be 21% higher at SAR21.3 billion. Growth will be driven by new operations, ongoing expansion in the oil segment, the consolidation of Savola Behshahr for a full year, retail store additions, and reasonable growth in other segments. We expect EBITDA of SAR1.75 billion, an increase of 18%. However, we expect the EBITDA margin will contract slightly, to 8.2%, as we assume the benefits of 2009s lower raw material prices will diminish. We forecast net profit will climb 19% to SAR1.0 billion.

We have a Buy recommendation and an FV of SAR39.4 per share, of which food (including the Almarai stake), retail and packaging account for around 85%. We forecast a strong bottom line CAGR of 16% over 2010e-2012e. Upside risks include acquisition announcements in the food segment, sustainability of high margins and fully realising the value of investments. Downside risks include: i) competition in mature markets that may lead to loss of market share and margin contraction, ii) new government regulations in key markets that negatively affect Savolas competitive position, and iii) any negative impact on investments due to volatility in asset prices.
OTHER SECTOR
106
JARIR MARKETING COMPANY

Rating : Buy

180 160 140 120 100

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 131.0 on 08 December 2009 JARIR:AB / 4190.SE SAR5,240 / 40 SAR173.7 43% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Al Agil Family 45% Jarir Investment Co. 12% Management: Managing Director: Mr. Abdulla Al-Agil, CEO: Mr. Abdul Karim Al-Agil CFO: Mr. Mohamed Saleh Amin

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / EBITDA* (x) EV / IC (x)
2008a 8.32 6.75 17.17 15.7 5.2% 7.6 4.9% 14.2 6.4
2009e 9.13 6.83 17.85 14.3 5.2% 7.3 6.0% 13.2 6.0
2010e 10.35 8.48 20.14 12.7 6.5% 6.5 6.1% 11.7 5.4
2011e 12.02 9.85 22.64 10.9 7.5% 5.8 7.1% 10.1 4.9

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROAE ROAIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA* EBITDA* / Net Commission Expense 2008a 24 83 391 107 522 36 1,163 42 160 91 150 33 476 687 2,520 368 (14) 15 368 (13) (14) 342 (9) 333 368 324 (52) 272 (266) 6 2009e 32 102 385 122 553 36 1,230 72 162 91 150 41 516 714 2,463 396 (17) 17 396 (14) (5) 377 (11) 365 404 378 (48) 329 (322) 8
2008a 44.7% 2.1% 14.6% 14.6% 2.6% 51.4% 43.9% 81.1% 24.4% 0.44 29.5
2009e -2.3% 2.0% 16.1% 16.1% 3.0% 52.1% 43.7% 74.7% 26.6% 0.46 30.3 2010e 36 105 426 126 610 36 1,339 103 180 77 125 50 534 805 2,732 444 (19) 20 444 (15) (3) 427 (13) 414 446 411 (76) 335 (332) 3
2010e 10.9% 2.8% 16.2% 16.3% 3.0% 54.5% 45.4% 82.0% 23.9% 0.41 30.7
2011e 16.5% 2.7% 16.1% 16.1% 3.0% 56.2% 47.5% 82.0% 22.0% 0.37 35.1 2011e 85 123 497 136 674 36 1,552 160 217 88 125 56 646 906 3,182 512 (22) 24 514 (15) (3) 495 (15) 481 524 474 (85) 388 (338) 50

Balance Sheet Cash & Time Deposits Net Receivables Inventory Other Current Assets Net Plant Investments Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Provisions Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation Other Operating Income EBIT Net Commission Income (Expense) Other Income (Expense) Net Profit before Zakat Zakat Net Profit Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
*Including other operating income Source: Jarir Marketing Company, EFG-Hermes estimates
WAFAA BADDOUR, CFA / NOURAN KASHEF
SAUDI ARABIA
Research Yearbook
CONSUMER STAPLES
2 0 1 0
background
Jarir Marketing Company (JMC) is a one-stop organised GCC retailer covering IT, office and education products. Its activities combine retail (under the brand name Jarir Bookstores) and wholesale trading. Its business model is not comparable to other organised retailers in the MENA region, as its stores encompass a complementary and wide, albeit focused, mix of products. The product range includes IT products (mostly laptops and computer supplies), office supplies, school supplies, books, newspapers and magazines, electronics, gifts and movies. In the retail segment (87% of revenue in 9M2009), JMC has a chain of 27 Jarir bookstores, with 23 in Saudi Arabia, two in Qatar, one in Kuwait and one in the UAE, encompassing a total area of about 85,000 sqm; as well as four corporate sales offices. Wholesale activity (13% of revenue) is based in Saudi Arabia, and has five showrooms and several sales offices mostly catering to local demand and, recently, some MENA countries. In Saudi Arabia, which accounted for 88% of revenue and 83% of earnings in 9M2009, JMC has a blended market share of 19%. It dominates over 50% of market sales in laptops, 15-20% in computer supplies, office supplies and books, and less than 10% in the fragmented school supplies and electronics segments. JMC plans to add four to five stores annually, to reach 40 to 45 stores by 2013. These will mostly focus on the GCC, with JMC consolidating its store network in Saudi Arabia while also launching in underpenetrated GCC markets like Oman and Bahrain. Saudi Arabia will remain the main revenue growth driver over this period. Additionally, management recently stated its intention to tap into North Africa, particularly Egypt, after 2012.
2009 - a difficult year ending with growth

In 9M2009, revenue remained flat at SAR1.8 billion. Laptops, electronics and office products, which boomed in 2008, were most negatively affected by the economic slowdown. School and computer supplies grew strongly, particularly with the opening of three bookstores in 2008 and a further three in 9M2009. Laptop revenue was pulled down by lower prices charged by manufacturers and sales growth in lower-priced netbooks, which accounted for c20% of total laptop volumes compared to a negligible rate in 2008. The EBITDA margin expanded to 16.0% in 9M2009, from 14.7% in 9M2008, helped by a shift in Jarirs sales mix to higher-margin school and computer supplies. Lower laptop revenue together with the delay in the Back to School season to October from September meant that Jarir missed its 3Q peak for the second year in a row. Accordingly, we believe the growth in school supply sales will continue in 4Q2009e. In 2009, JMC opened a total of four new stores. For 2009e, we estimate a 2% decline in revenue to SAR2.5 billion, an EBITDA margin of 16.1% and growth of 10% in net profit to SAR365 million. We expect the DPS will total SAR6.83 for the year, inching up 1%.
2010 - top line recovery expected

We expect Jarir will increase its store chain by four bookstores next year, to reach 31 stores by the end of 2010e. We forecast that a recovery in revenue will start in 2010e, with revenue growth of 11%, driven by: i) a modest 7% increase in laptop revenue, as we believe standard laptop volumes will start to recover from 2009es depressed levels, and ii) a sustained, strong expansion in computer and school supplies. We forecast moderate growth in all segments by customer type: i) 11% for bookstore revenue, driven mostly by store expansions as we expect a 4% drop in revenue per sqm; ii) 5% for corporate; and iii) 10% for wholesale. We believe 2009s shift in Jarirs sales mix to higher-margin products, resulting in a high EBITDA margin in FY2009e, is sustainable into 2010e. We forecast a 13% increase in net profit in FY2010e, to SAR414 million.

We have a Buy recommendation on the stock and we estimate an FV of SAR162.5 per share. We forecast a strong bottom line CAGR of 17% over 2010e-2013e. Being a one-stop organised retailer operating in fast growing GCC markets or market niches, the company is well positioned to benefit in the medium term from the regions favourable demographics, increased spending on education and expansion in PC penetration (particularly in laptops). We continue to believe JMC has the financial strength and expertise to expand beyond the confines of the GCC more aggressively than currently planned, and to benefit from the significant opportunities that exist for organised retailers in the fragmented, underpenetrated MENA markets. Upside risks to our forecasts and valuation include a faster-than-estimated recovery in sales and an aggressive entry into other MENA markets (outside the GCC). Downside risks include: i) loss of market share and a faster narrowing of margins as laptop sales pick-up, ii) slower-than-estimated recovery in demand, and iii) loss of opportunities if management does not expand outside the GCC in the medium term.
OTHER SECTOR
108
NATIONAL SHIPPING CO. OF SAUDI ARABIA (NSCSA)

Rating : Sell

22 20 18 16 14 12
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09 08-Jan-09 08-Jun-09 08-Oct-09 08-Apr-09 08-Dec-09 08-Sep-09 08-Feb-09 08-Aug-09 08-Dec-08

Price (SAR) Bloomberg / Reuters Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit Major Shareholders: Government of Saudi Arabia 28.1% Management: CEO: Mr. Humoud Al Ajlan CFO: Mr. Mohammed Al-Otaibi 17.45 on 08 December 2009 NSCSA AB / 4030.SE SAR27.83 71.90% Accessible via swaps only
Price (SAR)
TASI (Rebased)
MKT Cap (mn) / Shares (mn) SAR5,496.9 / 315

2008a 2.38 1.50 16.16 7.3 8.6% 1.08 -21.8% 8.9 1.11
2009e 1.21 1.50 15.87 14.4 8.6% 1.10 -13.9% 15.1 1.03
2010e 1.56 1.50 15.93 11.2 8.6% 1.10 -3.0% 10.5 1.00
2011e 2.03 1.50 16.45 8.6 8.6% 1.06 0.2% 8.2 0.95

Revenue Growth Capex / Sales EBITDA Margin EBIT Margin Effective Tax Rate (Zakat) ROE ROIC Dividend Payout Ratio Net Debt (Cash) / BV Net Debt (Cash) / EBITDA EBITDA / Net Commission Expense 2008a 1,108 199 272 5,659 2,581 9,819 297 304 217 3,710 38 163 4,729 5,091 2,595 1,121 (266) 855 (106) 65 814 (9) 804 (54) 750 1174 1142 (2,107) (964) 1,262 208 2009e 701 140 157 6,315 2,990 10,302 418 197 168 4,289 37 194 5,303 4,999 1,646 661 (292) 369 (96) 176 449 (31) 418 (37) 381 599 589 (1,200) (610) 235 (405)
2008a 52.3% 0.81 43.2% 33.0% 6.8% 14.7% 8.3% 63.0% 0.57 2.59 (10.6)
2009e -36.6% 0.73 40.2% 22.4% 8.9% 7.6% 3.9% 124.0% 0.80 6.06 (6.9) 2010e 525 144 154 7,293 2,560 10,675 338 184 223 4,651 37 225 5,659 5,017 1,843 952 (331) 621 (137) 109 593 (31) 561 (71) 490 937 922 (880) 43 (190) (130)
2010e 12.0% 0.48 51.7% 33.7% 12.7% 9.8% 4.9% 96.4% 0.89 4.69 (6.9)
2011e 19.3% 0.41 55.4% 37.7% 12.7% 12.3% 6.1% 73.9% 0.91 3.88 (7.3) 2011e 567 145 162 8,719 1,653 11,246 338 176 294 4,951 37 268 6,063 5,183 2,198 1,217 (389) 828 (166) 113 774 (42) 732 (93) 639 1170 1151 (908) 243 (173) 42

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Commission Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Attributable Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: National Shipping Co. of Saudi Arabia (NSCSA), EFG-Hermes estimates
REDWAN AHMED
SAUDI ARABIA
Research Yearbook
SHIPPING
2 0 1 0
background
The National Shipping Company of Saudi Arabia (NSCSA) was established in 1979 and has grown to become one of the largest shipping companies in the world. NSCSA started as a containership owner/operator company, but subsequently expanded horizontally and is now involved in Crude, Chemical, LPG and General Cargo. NSCSAs current portfolio consists of 17 oil tankers, 13 chemical tankers and four container vessels. In addition, the group has a further 16 chemical tankers, which are due for delivery between now and 2011e. The chemical operation is managed by National Chemical Carriers (NCC), which is 80% owned by NSCSA and 20% owned by SABIC. The group also owns 30.3% of LPG owner/operator Petredec Ltd.
2009 - tough year

For NSCSA, 2009 has been a difficult year with 9M2009 revenues of SAR 1.2 billion down 37% Y-o-Y. Furthermore, 3Q2009 revenues are down 45% Y-o-Y, compared to 1Q2009 revenues being only down 20% Y-o-Y. This highlights the fact that the market has deteriorated during the year. Average VLCC rates were cUSD60,000/day in January 2009, but fell below USD10,000/day in May 2009 before bouncing back to cUSD40,000/day in December 2009. Petrochemical rates have also remained weak throughout the year. At the operating level, the impact has been more severe, with 9M2009 operating income of SAR293 million down 62% Y-o-Y. This highlights the high operational gearing effect of the shipping business. The group has taken delivery of four new VLCCs during the year, which has increased its exposure to the weak spot market. NSCSAs 9M2009 net profit of SAR314 million fell by 52% Y-o-Y. It was more resilient relative to the operating profit line, helped by a surprisingly strong performance from the LPG business, after being loss making in 2008. Elsewhere, the group has also announced the set-up of a new bulk dry carrier business, but the operation is yet to begin.
2010 - hoping for improved market conditions

We expect a modest recovery in mid-2010e, as the industry begins to deal with the existing overcapacity problem. Currently, the vessel order book stands at 40% of the total global fleet, but we expect cancellations to increase substantially as shipowners struggle to raise funding. In addition, we believe demolition rates for older vessels will accelerate, as it is no longer financially attractive to operate old ships. These measures should help to stabilise the market and any improvement on the demand side is likely to give rates a further boost. We have started to see some positive signs in late-2009. For example, the Baltic Dry Index (BDI) rallied strongly in late November on the back of increasing demand from China. In addition, activity on the crude market also picked up and VLCC rates rose by 50%, albeit from a low base. While this is encouraging, we remain cautious, as we have been here before, only to be left disappointed. For instance, both the BDI and VLCC markets rallied earlier in 2009, only to fall back to near record lows as demand slowed down after a burst of activity. The market remains volatile with little visibility, and we believe it is too early to call the end of the downturn.

NSCSA is highly geared to a recovery in the VLCC market as it has 11 out of 17 vessels trading on the volatile spot market. Market sentiment around the stock improved in late 2009 as the VLCC daily rate rallied to cUSD40,000/day. In addition, the stock, on a 2010e P/E of 11.2x, appears to offer good value, in our view. However, it is worth emphasising that our FY2010e and FY2011e estimates already assume an average rate of USD50,000/day and USD60,000/day, respectively. Therefore our forecasts and our fair value are already pricing in a recovery and we do not foresee the market returning to 2008 levels in the near future. Given this, we believe that further downgrades to our forecasts are entirely possible should VLCC rates not continue to move upwards. Furthermore, we estimate the adjusted net asset value is SAR13.75, as the price of vessels has fallen significantly. As a result, we remain bearish on the stock and retain our Sell rating.
OTHER SECTOR
110
SAUDI ELECTRICITY COMPANY (SEC)

Rating : Buy

13 12 11 10 9 8 7
08-May-09 08-Nov-09 08-Jul-09 08-Mar-09

Price (SAR) Bloomberg / Reuters MKT Cap (mn) / Shares (mn) Avg. Mthly Liquidity (mn) Float Foreign Ownshp Limit 10.85 on 08 December 2009 SECO AB / 5110.SE SAR45,208 / 4,167 SAR34.75 19% Accessible via swaps only
Price (SAR)
TASI (Rebased)
Major Shareholders: Saudi Government 74.3% Saudi Aramco 6.9%

08-Jan-09
08-Jun-09 08-Oct-09 08-Apr-09 08-Dec-09 08-Sep-09 08-Feb-09 08-Aug-09
08-Dec-08
Management: CEO: Mr. Ali Bin Saleh Al Barrak CFO: Mr. Ahmed M. Al-Jogaiman; IR: Mr. AbdelSalam Bin AbdelAziz AlYamani

EPS DPS BVPS P/E (x) Div Yield P/BV (x) FCF Yield EV / EBITDA (x) EV / IC (x)
2008a 0.27 0.70 11.65 40.9 6.5% 0.93 -14.0% 13.4 0.98
2009e 0.39 0.70 11.92 27.5 6.5% 0.91 -33.6% 11.5 0.80
2010e 0.43 0.70 12.21 25.2 6.5% 0.89 -21.7% 10.8 0.73
2011e 0.49 0.70 12.57 22.3 6.5% 0.86 2.9% 10.2 0.72
2008a
2009e 8.2% 0.94 36.3% 6.2% 2.5% 3.3% 1.3% 177.5% 1.32 7.5 N/R 2010e 8,675 4,242 8,413 145,442 2,448 169,220 502 26,067 1,985 83,852 5,921 118,327 50,893 25,805 9,342 (7,708) 1,634 206 1,840 1,840 (46) 1,794 9,300 9,703 (19,330) (9,627) 10,745 1,118
2010e 7.0% 0.75 36.2% 6.3% 2.5% 3.5% 1.2% 162.5% 1.48 8.0 N/R
2011e 6.8% 0.32 36.0% 6.7% 2.5% 3.9% 1.3% 143.9% 1.41 7.4 N/R 2011e 9,529 4,530 8,791 146,284 2,606 171,740 477 27,254 2,088 83,375 6,174 119,368 52,372 27,560 9,922 (8,064) 1,858 220 2,079 2,079 (52) 2,027 9,876 10,269 (8,779) 1,490 (637) 853
Revenue Growth 7.0% Capex / Sales 1.02 EBITDA Margin 33.7% EBIT Margin 3.4% Effective Tax Rate (Zakat) 0.0% ROE 2.3% ROIC 0.8% Dividend Payout Ratio 264.1% Net Debt (Cash) / BV 1.03 Net Debt (Cash) / EBITDA 6.7 EBITDA / Net Commission Expense N/R 2008a 1,232 15,074 8,705 118,212 2,160 145,382 556 38,279 1,314 51,234 5,447 96,830 48,553 22,289 7,508 (6,744) 764 340 1,104 1,104 1,104 10,002 18,461 (22,668) (4,207) (150) (4,357) 2009e 7,558 3,965 7,987 133,701 2,299 155,509 528 24,911 1,890 72,854 5,679 105,862 49,647 24,121 8,757 (7,265) 1,492 193 1,685 1,685 (42) 1,643 8,757 7,664 (22,641) (14,977) 21,303 6,326

Balance Sheet Cash & Time Deposits Net Receivables Other Current Assets Net Plant Intangibles and Others Total Assets ST Debt Payables and Suppliers Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Total Liabilities Net Worth Income Statement Revenue EBITDA Depreciation and Amortisation EBIT Net Commission Income (Expense) Other Income (Expense) Net Profit before Minority Interest Minority Interest Net Profit before Zakat Zakat Net Attributable Income Cash Flow Statement Cash Operating Profit after Tax Cash Flow after Change in Working Capital Capex and Investments Free Cash Flow Net Financing Change in Cash
Source: Saudi Electricity Company (SEC), EFG-Hermes estimates
ABID RIAZ / NADINE HASSOUNA
SAUDI ARABIA
Research Yearbook
UTILITIES
2009 - dividend waiver extended 2010 - another big capex year 2 0 1 0
background
Saudi Electricity Company (SEC) was established in December 1999, an amalgamation of all 10 regional electricity companies and other electricity projects of the Saudi General Electricity Authority. It became fully operational in April 2000. SEC is the main entity responsible for generating and transmitting electricity and distributing it to residential, commercial, industrial and agricultural customers. The company also invests in power projects and undertakes research and development. Growth in the electricity sector is expected to remain strong, driven primarily by a growing population and economic growth and development, and we expect electricity consumption to grow at a CAGR of 6% between 2007 and 2016e. SEC had an estimated installed capacity of around 37,000 megawatts (MW) at the end of 2009, accounting for almost 90% of all power generated in the Kingdom. At the end of 2008, its 85 plants served approximately 5.3 million subscribers. The company, whose operations are divided among the countrys four main regions, generates and transmits electricity either directly or through wholly-owned subsidiaries, and then distributes it to approximately 80% of Saudi households. The Saudi government holds direct and indirect stakes totalling 81% in SEC, while the remaining 19% is publicly held (free-float).
2009 - government shows its ongoing support for sec

SEC reported 3Q2009 revenue of SAR7.8 billion, up 9.3% Y-o-Y, and in line with our estimate of SAR8 billion. Net profit of SAR1.7 billion also came broadly in line with our expectations for the quarter. The third quarter, when SEC benefits from a major surge in demand in the summer, has historically been by far the largest contributor to the company's earnings, traditionally contributing more than 100% of earnings, as the first and fourth quarters are generally loss-making. Revenue in 9M2009 grew 7% Y-o-Y, to SAR18.4 billion, driven by the growth in electricity sales as the Kingdoms overall consumption continued to increase. The company saw some improvement at the gross margin level, which increased by 120 bps to 38.7%, as cost of sales increased proportionately less than revenue during the period. This resulted in a net profit of SAR1.67 billion, up 10.8% Y-o-Y. These results underpin our FY2009e forecasts, which look for revenue of SAR24.1 billion and net income of SAR1.6 billion. During the course of the year, the Saudi Government announced that it plans to waive its right to dividend payments from SEC for a further ten years (until 2019e), thus renewing an existing agreement that extended for an initial ten years ending in 2009. This came as positive news for the stock and reaffirmed the governments ongoing commitment towards SEC.
2010 - capacity expansion growth expected to peak

We continue to believe SEC will play a major role in helping Saudi Arabia to meet its future electricity requirements as it is responsible for the vast majority of the Kingdoms electricity generation and all of its transmission and distribution activities. However, this will result in extensive capital expenditure in the short to medium term (SAR40 billion over the next three years). We expect 2010e to be a continuation of 2009, and forecast a similar steady increase to installed capacity, driven by further plant openings. We therefore expect SEC to continue with its significant capital expenditure programme to boost its installed capacity to meet the growing demand for electricity in Saudi Arabia, with the company looking to add a further estimated 2,000 MW in 2010e. We estimate SEC will spend SAR20 billion in capex in 2010e (on top of the cSAR23 billion spent in 2009). With the build-out phase expected to reach its peak in 2010e, we expect earnings growth for SEC to accelerate from 2010e onwards. We expect revenues of SAR25.8 billion and net income of SAR1.8 billion in 2010e.

The company benefits from considerable government support through interest-free loans and its further 10-year extension to its dividend waiver (equivalent to a cash subsidy of SAR2.3 billion per annum). Moreover, SEC sources its entire feedstock (fuel) from Saudi Aramco under subsidised long-term agreements, with prices set by the government below international levels. At the same time, however, the company is required to charge low fixed tariffs, which is not a situation we anticipate changing in the near term. With the shares offering a strong dividend yield of 6.5%, we have a Buy recommendation and an FV of SAR12.7.
OTHER SECTOR
SAUDI ARABIA UAE
Research Yearbook Research Yearbook
CONTACTS
2 2 0 0 0 1 9 0
EGYPT SALES TEAM

Local call center 16900 Intl call center +20 2 33 33 94 00 cc-hsb@efg-hermes.com Head of Western Institutional Sales Mohamed Ebeid +20 2 33 32 1054 mebeid@efg-hermes.com Local Institutional Sales Amr El Khamissy +20 2 33 32 1045 amrk@efg-hermes.com
UAE SALES TEAM

call center +971 4 306 9333 uaerequests@efg-hermes.com
KSA SALES TEAM

call center +800 123 4566 RiyadhCallCenter@efg-hermes.com RiyadhTraders@efg-hermes.com
RESEARCH MANAGEMENT
Cairo General + 20 2 33 38 8864 UAE General + 971 4 363 4000 efgresearch@efg-hermes.com Head of Research Wael Ziada +20 2 33 32 1154 +971 4 363 4006 wziada@efg-hermes.com Head of Publ. and Distribution Rasha Samir +20 2 33 32 1142 rsamir@efg-hermes.com
Western Institutional Sales Julian Bruce +971 4 363 4092 jbruce@efg-hermes.com Head of GCC Institutional Sales Amro Diab +971 4 363 4086 adiab@efg-hermes.com Gulf HNW Sales Chahir Hosni +971 4 363 4090 chosni@efg-hermes.com UAE Retail Sales Reham Tawfik +971 4 306 9418 rtawfik@efg-hermes.com
Deputy Head of Gulf Sales Ahmed Sharawy +9661 279 8677 asharawy@efg-hermes.com
ECONOMICS
Monica Malik Director Vice President Associate Vice President Vice President Analyst Analyst Vice President Analyst Analyst Director Vice President Director Analyst Analyst Analyst +971 4 363 4002 +971 4 363 4004 +971 4 363 4019 +966 1 279 8649 +20 2 33 32 1152 +20 2 33 32 1051 +20 2 33 31 8988 +20 2 33 32 1143 +20 2 33 32 1044 +20 2 33 31 8987 +971 4 363 4005 +971 4 364 1905 +20 2 33 32 1163 +20 2 33 31 8985 +971 4 363 4003 +20 2 33 32 1151 mmalik@efg-hermes.com fiqbal@efg-hermes.com hnessim@efg-hermes.com mansari@efg-hermes.com mananian@efg-hermes.com nghobrial@efg-hermes.com omaher@efg-hermes.com ashamseldin@efg-hermes.com mayoussef@efg-hermes.com rguindy@efg-hermes.com ariaz@efg-hermes.com rahmed@efg-hermes.com wbaddour@efg-hermes.com namin@efg-hermes.com nhassouna@efg-hermes.com nmkashef@efg-hermes.com
STRATEGY
Fahd Iqbal Hanzada Nessim
BANKING
Murad Ansari
TELECOMS
Marise Ananian Nadine Ghobrial Omar Maher
CHEMICALS & FERTLISERS

Ahmed Shams El Din Malak Youssef Rita Guindy
OTHER
Abid Riaz Redwan Ahmed Wafaa Baddour, CFA Nada Amin Nadine Hassouna Nouran Kashef
CONTACTS
disclosures
We, EFG-Hermes Research Team, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities that are traded in the Tadawul stock exchange. EFG-Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are the subject of this report. Funds managed by EFG-Hermes Holding and its subsidiaries for third parties may own the securities that are the subject of this report. EFG-Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion. The Investment Banking division of EFG-Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report.
disclaimer
Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG-Hermes believes to be reliable, we do not guarantee its accuracy, and such information may be condensed or incomplete. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation and is intended for general information purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs. No part of this document may be reproduced without the written permission of EFG-Hermes
_______________________________________________________________________________________________ guide to analysis

EFG-Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment. Effective 16 December 2009, EFG-Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential together with any applicable dividend yield into consideration. In special situations, EFG-Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value. For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms: Rating Buy Neutral Sell Potential Upside (Downside)% Above 15% (10%) and 15% Below (10%)
EFG-Hermes policy is to update research reports when appropriate based on material changes in a companys financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analysts outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating. _______________________________________________________________________________________________________________________
copyright and confidentiality

No part of this document may be reproduced without the written permission of EFG-Hermes. The information within this research report must not be disclosed to any other person if and until EFG-Hermes has made the information publicly available.
contacts and statements

Background research prepared by EFG-Hermes Holding SAE. Report prepared by EFG-Hermes Holding SAE (main office), 58 Tahrir Street, Dokki, Egypt 12311, Tel +20 2 33 32 1140 | Fax +20 2 33 36 1536 which has an issued capital of EGP 1,939,320,000. Reviewed and approved by EFG-Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534, and EFG-Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it.
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SAuDI ARABIA

FAHD IQBAL / MONICA MALIK

global risk appetite

financial gearing and credit growth

earnings expectations cycle

small and mid caps

foreign investor restrictions

Fig 2: Saudi Arabia Performance and Value Traded

Turnover (20d MA) (RHS) Saudi Arabi Tadawul Index (LHS)

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Source: Bloomberg, Reuters

Note: 20d MA = 20-day moving average Source: Reuters

Prices as at 08 December 2009

2009 - resilience in a turbulent year 2010 - recapturing the premium rating

Figure 3: Summary of Tadawul Performance over 2009

Source: Reuters, EFG-Hermes

Fig 5: Best Performing Stocks on a Trough-to-Peak Basis

b. revenue and earnings growth

Fig 6: Breakdown of Revenue Growth Y-o-Y by Sector

Fig 7: Breakdown of Earnings Growth Y-o-Y by Sector

Financials & Ins. Telecoms

Energy & Materials Others

Real Estate Saudi Arabia

Energy & Materials Telecoms

Financials & Ins. Others

Real Estate Saudi Arabia

Source: Zawya, company data, and EFG-Hermes calculations

Source: Zawya, company data, and EFG-Hermes calculations

c. initial public offerings

Fig 9: Relative Performance of IPOs over 2009

30,000 20 20,000 15 10 10,000 5 0 0

Source: Zawya, EFG-Hermes calculations

Source: Zawya, EFG-Hermes calculations

2009 - resilience in a turbulent year 2010 - recapturing the premium rating

2010 - top down outlook

Fig 11: Saudi Arabia Forecast P/E Multiples by Sector

Saudi Arabia (LHS) GCC (LHS)

MSCI Emerging Market (LHS) Saudi Arabia Premium to GCC (RHS)

Source: Bloomberg, Zawya, company data, and EFG-Hermes calculations

Source: EFG-Hermes estimates

b. outlook for 2010 market well positioned for 1h2010

risks moving into 2h2010

2009 - resilience in a turbulent year 2010 - recapturing the premium rating

key investments themes

Fig 13: MENA Region Real Interest Rates Forecasts in 2010e

Source: Bloomberg, EFG-Hermes calculations

Source: EFG-Hermes estimates

Figure 16: Long-Term Monthly Correlation Analysis

global macro risks

2009 - resilience in a turbulent year 2010 - recapturing the premium rating

b. financial gearing and credit growth

Fig 18: Credit to the Private Sector as % of Nominal GDP

Fig 20: Correlation of Saudi Arabias Tadawul Index to its Sub-Indices

Source: EFG-Hermes estimates

El Khayyat for Trading and Engineering Construction

Saudi Electronic Information Exchange

*Privatisation Source: Zawya

bonds and sukuk

2009 - resilience in a turbulent year 2010 - recapturing the premium rating

Sovereign: Rest of MENA