Quarterly Review of Cement Sector in Saudi Arabia

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CEMENT SECTOR QUARTERLY REVIEW

December 2018

CEMENT SECTOR QUARTERLY REVIEW

December 2018 2

Executive Summary

The key highlights of Saudi Cement Sector are:

Cement sales in Saudi Arabia dropped 11.4% YoY to 38.2 million tons during the

first eleven months of 2018, compared to 43.2 million tons during the same period

in 2017.

Clinker production, on the other hand, fell only 4.7% YoY to 43.9 million tons

during the first eleven months of 2018, compared to 46.1 million tons during the

same period in 2017, leading to an increase in inventories at a new all-time high

of 42.0 million tons in November 2018 across cement producers in KSA.

Cement prices in KSA have been continuously falling since the start of 2018, due

to a decline in sales amid weak demand and build-up in inventories. The prices

reached a new record low of SAR 11.81 per 50 kg bag in October 2018.

Cement demand is weighed down by lower government spending on

infrastructure sector during the first three quarters of 2018, coupled with lower

credit exposure to construction activity amid rising interest rates as well as the

downtrend in the real estate sector.

Cement exports slowly started to pick up after the Saudi government scrapped

export duties on cement in February 2018, after having reduced it by 50% in July

2017. Cement exports stood at 977 thousand tons in YTD 2018. Saudi Cement was

the single-largest exporter of cement with a market share of 60.2%, accounting

for 588,000 tons of export during the period.

During the first eleven months of 2018, market share of cement companies from

Eastern and Southern regions improved to 17.3% (up 2.1% YoY) and 17.2% (up

1.8% YoY), respectively, compared to the year-earlier period.

The quarterly earnings performance of cement companies continued to be

under pressure in Q3 2018, although the aggregate net loss was reduced to SAR

3.3 million from SAR 54.2 million in the previous quarter. Aggregate revenue of

cement companies declined 18.6% YoY in Q3 2018.

We remain cautious on the sector, with weak demand weighing down on

cement prices. Expected increase in government spending may marginally lift

the demand going forward, but prices are unlikely to pick up significantly in the

next year, owing to high level of excess inventory and stiff competition in the

sector. Cement demand is expected to pick up by the end of 2019, when large-

scale work on megaprojects such as the Red Sea and NEOM starts.

CEMENT SECTOR QUARTERLY REVIEW

December 2018 3

Cement Sector Review: Demand—Supply Trends

Cement sales continue to fall, as inventories rise to new record high

Cement sales fell 9.2% YoY during the month of November, following a decline of 11.3%

YoY during October. During the first eleven months of 2018, cement sales dropped 11.4%

YoY to 38.2 million tons, compared to 43.2 million tons during the same period in 2017. The

cement sector continued to be under pressure during Q3 2018, with sales volume

dropping 8.6% YoY (higher pace than the previous quarter’s decline of 5.3% YoY). As can

be seen from Figure 2, YTD sales up to November 2018 have been the lowest since 2012.

Figure 1: Cement Prices (SAR, 50kg) Figure 2: Cement Sales (Mn tons)

Source: General Authority of Statistics Source: Yamama Cement

Clinker production, on the other hand, fell 4.7% YoY to 43.9 million tons during the first

eleven months of 2018, compared to 46.1 million tons during the same period in 2017. This

has led to build-up in inventories to record levels across cement producers in KSA, which

stood at a new all-time high of 42.0 million tons in November 2018. One marginally positive

observation is that inventories are rising at a slower rate in last three months (September,

October and November) compared to the first half of 2018, with YoY growth of 17.8%,

18.4% and 18.0% during September, October and November, respectively, compared to

the average of 22.6% over the first eight months. On MoM basis, cement sales declined

5.3% in November, keeping up with the seasonal trend seen in recent years. Cement

prices in KSA have also been continuously falling since the start of 2018, due to a decline

in sales amid weak demand and increase in inventories. The prices reached a new record

low of SAR 11.81 per 50 kg bag in October 2018.

Figure 3: Cement Sales vs Clinker

Production (mn tons)

Figure 4: Monthly Changes in Clinker

Inventory (mn tons) vs YoY Growth (%)

Source: Yamama Cement Source: Yamama Cement

Oct-18,

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Cement Sales Clinker Production

42.0

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YoY Growth (%) - RHS

CEMENT SECTOR QUARTERLY REVIEW

December 2018 4

Cement exports reach 977 thousand tons, led by Saudi Cement

There were no exports of cement from Saudi cement companies during the period of

April 2017 to January 2018. Cement exports slowly started to pick up after the Saudi

government scrapped export duties on cement in February 2018, after having reduced it

by 50% in July 2017. Cement exports stood at 977,000 tons in YTD 2018. Saudi Cement was

the single-largest exporter of cement with a market share of 60.2%, accounting for 588,000

tons of export during the period, leveraging on the favorable location of its plant, and

being the only cement company having its own port terminal in Saudi Arabia. Southern

Cement Co., which had not exported cement so far, has recently signed a deal to export

20,000 tons of cement to Yemen over the duration of three months.

In terms of overall cement sales, majority of the cement companies saw their volumes

decline on YoY basis during first eleven months of 2018. However, Hail Cement posted the

highest YoY growth of 56.5% during this period. Other companies which posted growth in

volumes were Tabuk, Saudi, and Southern Cement, witnessing volume growth of 10.0%,

2.6%, and 1.4% YoY, respectively.

Figure 5: Cement and Clinker Exports

Volume (‘000 tons)

Figure 6: 2018 YTD (till November) Sales

Volume change – Company wise (YoY

%)

Source: Yamama Cement Source: Yamama Cement

Lower infrastructure spending by the government, real estate sector slowdown

weigh on construction activity

One of the major dampeners of cement demand was government spending on

infrastructure sector, which has remained low 2018 (only SAR 55bn), compared to the

total budget expenditure of SAR 1 trillion. The mega projects announced (such as NEOM)

are expected to generate major construction orders only in second half of 2019. With the

pace of new construction reducing, and higher interest rates, major banks’ credit

exposure to Building & Construction sector also decreased 4.3% YoY during the first three

quarters of 2018, possibly contributing to lower demand for cement. In addition to

construction activity being subdued, the total value of real estate transactions from

January to October 2018 has declined 17% YoY to SAR 182 bn. The real estate deals data

extended its downtrend for the fourth consecutive year in 2018.

Figure 7 shows the graph of quarterly GDP growth in construction sector and quarterly

cement sales volume growth. It can be seen that both have slipped into negative territory

since Q1 2016.

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Cement Clinker

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CEMENT SECTOR QUARTERLY REVIEW

December 2018 5

Figure 7: Construction Sector GDP Growth vs. Quarterly Cement Sales Volume (YoY %)

Source: General Authority of Statistics, Yamama Cement

Eastern and Southern regions gain market share

During the first eleven months of 2018, market share of cement companies from Eastern

and Southern regions improved to 17.3% (up 2.1% YoY) and 17.2% (up 1.8% YoY),

respectively, during the year-earlier period. Companies in eastern region particularly

benefitted from the scrapping of export duties, with exports resuming compared to the

year-ago period. Bahrain resumed importing cement from Saudi Arabia during Q2 2018.

Bahrain remains one of the most preferred export destinations for Saudi cement

companies, as shipping takes only about 36 hours as compared to five days for the UAE.

On the other hand, northern region cement companies likely benefitted from the start of

the initial stages of the NEOM megacity project.

Figure 8: Region-wise Market Share:

January—November 2018

Figure 9: Region-wise Market Share:

January— November 2017

Source: Yamama Cement Source: Yamama Cement

In terms of company-wise market share (See Figure 10), the top three companies were

Southern Cement, Saudi Cement and Yanbu Cement, which commanded a market

share of 13.5%, 12.3%, and 10.5%, respectively in the first eleven months of 2018. Southern

Cement (which had the highest gain in market share YoY) and Saudi Cement expanded

their market share by 1.7% each compared to the year-earlier period, while Yanbu

Cement’s market share declined by 0.9% during the same period.

In terms of operational efficiency (Figure 11), the average capacity utilization rate across

the sector was 59% during the last 12 months (December 2017 to November 2018). Hail

Cement had the highest capacity utilization (88.4%), followed by Qassim Cement (77.9%).

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Construction Sector GDP YoY % Cement Sales YoY %

Central

30.6%

Eastern

17.3%

Northern

7.5%

Southern

17.2%

Western

27.4% Central,

32.7%

Eastern,

15.2% Northern,

7.7%

Southern,

15.4%

Western,

28.9%

CEMENT SECTOR QUARTERLY REVIEW

December 2018 6

Figure 10: Company wise market share

(%)

Figure 11: Company wise cement

utilization rates (TTM %)

Source: Yamama Cement Source: Yamama Cement, Company Reports

Comparative Performance and Valuations of Key Saudi Cement

Companies

Q3 2018 Earnings Performance: Another subdued quarter in spite of marginal

recovery

Saudi Cement companies marginally recovered from the downturn faced during Q2

2018, reducing their aggregate net loss to SAR 3.3 million in Q3 2018 from SAR 54.2 million

in the previous quarter. Some companies recorded significantly lower cost per ton, which

could be due to higher than normal clinker production compared to cement production.

The sector still remains under pressure, with aggregate revenue declining 18.6% YoY in Q3.

All companies saw significant YoY fall in quarterly earnings, with six of the companies in

the sector posting net losses. Operating margins also declined significantly in Q3 2018 as

compared to year-earlier period, while five of the companies posted operating losses.

Declining sales volumes and prices amid weak demand, high inventory levels and

relatively lower capacity utilization rates have all contributed to weak earnings

performance. Rise in fuel and electricity costs since the start of the year have also

contributed to higher cost of production among other factors, as evident from the

significant drop in operating margins. Valuations have been hit by weak operational and

earnings performance, as prices of all but one listed cement stocks in Saudi Arabia have

fallen significantly in 2018 so far, with average YTD decline being 21% (See Table 2).

Saudi Cement, the largest cement company by market capitalization, is the only stock

which is in the positive territory (1.1%) amongst the sector, in terms of YTD 2018 price

performance. Saudi Cement had by far the least YoY fall (-13.7%) in Q3 2018 earnings

compared to other cement stocks, while its operating margin (33.6% in 3Q18) remains

highest in the sector, and significantly higher compared to the sector average (See Table

1).

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Cement Plant Utilization Rate

Mean

CEMENT SECTOR QUARTERLY REVIEW

December 2018 7

Table 1: Saudi Listed Cement Companies – Quarterly Earnings performance (sorted

by YoY Growth)

Company 3Q18 PAT

(SAR mn) YoY %

QoQ

%

3Q18

Operating

Margin %

3Q17

Operating

Margin %

Change in

Operating

margin (bps)

Saudi Cement 75.4 -13.7 29.9 33.6 37.5 -381

Yanbu Cement 13.6 -24.9 190.4 8.1 11.3 -314

Eastern Cement 8.9 -36.1 -52.8 5.7 14.8 -910

Najran Cement -23.7 -39.1 25.2 -27.9 -16.2 -1171

Arabian Cement 15.6 -52.5 127.0 22.0 26.4 -438

Tabuk Cement -19.2 -57.3 46.8 -51.5 -38.9 -1257

Northern Cement 5.0 -60.4 174.6 20.3 21.3 -101

Qassim Cement 5.7 -88.9 -69.1 4.4 36.0 -3155

Southern Cement 5.4 -90.6 -85.1 5.2 26.3 -2112

City Cement -2.4 -112.4 -124.2 -1.8 19.9 -2162

Umm Al Qura -3.9 -177.1 -2071 5.9 24.0 -1812

Yamama Cement -46.4 -259.1 -27.9 -36.5 15.5 -5198

Al Jouf Cement -18.9 -423.0 -37.7 -62.2 9.8 -7195

Hail Cement -18.3 -2915.1 -1.7 -38.7 8.4 -4710

Sector -3.3

-101.1 93.9 4.4 20.9 -1655

Source: Tadawul, Reuters Eikon,; Note: The rows are color-coded as per the company’s region:

Western Eastern Central Northern Southern

Table 2: Saudi Listed Cement Companies – Price and Valuations (sorted by Market Cap)

Company Mcap (SAR

mn) P/E (TTM)

EV/EBITDA

(TTM) P/B (TTM)

Price

performance

% (2018 YTD)

Saudi Cement 7,336 16.0 19.7 2.76 1.1

Southern Cement 5,390 18.3 20.3 1.74 -20.5

Yanbu Cement 3,833 16.7 26.9 1.21 -28.0

Qassim Cement 3,150 16.1 17.6 1.89 -22.2

Yamama Cement 2,794 32.7 NA 0.83 -21.7

Arabian Cement 2,320 13.1 37.9 0.84 -32.4

City Cement 1,803 24.0 23.1 0.87 -19.4

Eastern Cement 1,677 21.2 28.2 0.77 -26.1

Northern Cement 1,512 36.6 41.2 0.74 -21.3

Najran Cement 1,496 NA NA 0.77 -15.6

Al Jouf Cement 1,130 35.0 NA 0.71 -21.5

Tabuk Cement 1,042 NA NA 0.96 -17.2

Hail Cement 793 62.4 NA 0.80 -18.2

Umm Al Qura 638 14.1 32.9 1.13 -31.0

Sector 34,913

25.5* 27.6* 1.14* -21.0*

Source: Tadawul, Reuters Eikon

Note: Mcap & Valuation data as of December 05, 2018, *- Average of all listed cement companies

CEMENT SECTOR QUARTERLY REVIEW

December 2018 8

Outlook

We remain cautious on the sector, with weak demand weighing down on cement prices.

Expected increase in government spending may marginally lift the demand going forward,

but prices are unlikely to pick up significantly in the next year, owing to high level of excess

inventory and stiff competition in the sector. Cement demand is expected to pick up by the

end of 2019, when large-scale work on megaprojects such as the Red Sea and NEOM City

starts.

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