Saudi Arabia – A Curtain RaiserSaudi Arabia – A Curtain Raiser Macro Focus Equity Research Saudi...

28 March 2006

Saudi Arabia – A Curtain Raiser

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Vijay RabindranathHead of [email protected](965) 224 5023

Girish PatilResearch [email protected](965) 224-5000 Ext. 5155

KREB Building, 12 th FloorBanking ComplexP. O. Box 819 Safat 13009 KuwaitTel : (+965) 224 5000Fax : (+965) 244 0627Email : [email protected] : www.kmefic.com.kw

KUWAIT AND MIDDLE EAST FINANCIAL INVESTMENT COMPANY k.s.c.c

Contents

3 Executive Summary

5 Capital Markets: A New Frontier

7 Economic Review

Impact of oil prices on nominal and real GDP

Role of Government

10 Banking

Credit growth and maturity profile

Personal loans growth and maturity profile

Market capitalization and asset trends

Valuation and outlook

16 Telecommunication

STC profile and outlook

19 Petrochemicals

SABIC profile and outlook

23 Cement

Production trend and outlook

Profile of cement companies

List of tables and charts

5 Chart 1: Five years of bull run

5 Chart 2: TASI on a roller coaster in 2006

6 Table 1: Market Capitalization distribution

7 Chart 3: Huge difference in Nominal and Real GDP

7 Chart 4: Nominal GDP growth tightly linked to oil

7 Chart 5: Net Exports track oil prices

8 Chart 6: Real GDP less influenced by the oil price

8 Table 2: Composition of Nominal GDP

8 Chart 7: PCE dominates US GDP

9 Chart 8: Oil revenues impact budget deficit

10 Table 3: Market Capitalization of Saudi Banks

10 Table 4: Physical network of Saudi Banks

10 Chart 9: Rapid growth in assets in the last two years

10 Chart 10: Bank credit steadily increases

11 Chart 11: Bank credit, interest rates and oil prices

11 Chart 12: Declining share of foreign assets

12 Chart 13: Shift towards long term financing

12 Chart 14: Rapid growth in personal loans

12 Chart 15: More leveraged individuals and economy

12 Table 5: Growth of Personal loans components

13 Table 6: Composition of Personal loans

13 Table 7: Maturity profile tilts in favor of long term

13 Chart 16: Long term personal loans increase to 93%

14 Table 8: Al Rajhi’s market capitalization grows faster

14 Table 9: Al Rajhi dominates in market capitalization

14 Table 10: Saudi American Bank leads in asset size

14 Table 11: Market share of assets of listed banks

15 Chart 17: P/BV and ROE sharply increase in 2005

16 Table 12: Mobile penetration more than doubles

16 Table 13: Internet penetration stands at 11%

17 Chart 16: STC’s stock price has almost doubled

17 Table 14: STC’s Profit and Loss Account

17 Table 15: STC’s Balance Sheet

17 Chart 17: Government charges decline; margins up

18 Chart 18: STC’s rising P/E and ROE

20 Chart 19: Stock Price and M. Cap up more than 14x

20 Table 16: EPS Growth

20 Table 17: Profit and Loss Account

20 Table 18: Balance Sheet

21 Chart 20: OPM steadily expands; P/E re-rated

21 Chart 21: Price and Volume Trends

23 Chart 22: Cement - Net imports on rise

23 Table 19: Clinker Capacity

24 Table 20: Annual Cement Production (‘000 tonnes)

24 Table 21: Annual Clinker Production (‘000 tonnes)

24 Table 22: Domestic Cement Sales (‘000 tonnes)

24 Chart 23: P/E has increased substantially

26-28 Charts 24-31: Price and Volume trends of cement companies

3Saudi Arabia – A Curtain Raiser

Talk about Saudi Arabia and we intuitively link it to oil and Mecca

and Medina. The thought that Saudi Arabia could be a big economic

power with a flourishing stock market rarely crosses our mind.

Well its time to change our glasses. With a market capitalization

of around SAR 2,500 bn ($675 bn), Saudi Arabia’s stock market is

bigger than most emerging markets. To top it all Saudi Aramco,

the world’s largest oil company is not listed on the exchange. If it

were to list, the stock market capitalization could reach SAR 3,750

bn (USD 1 trillion).

The spectacular increase in the stock prices and market capitalization

can be mainly attributed to an increase in oil prices and repatriation

of Arab investment from the US markets to domestic markets after

9/11.

As an investor a number of questions would have popped in your

mind like – What are the main industries in Saudi Arabia, what are

their prospects, valuations etc. and importantly will these high

oil prices sustain? In this report, we review the capital market’s

performance so far, the economic outlook and prospects for some

of the key sectors – Banking, Telecommunications, Petrochemicals

and Cement.

First, the all important question; Where is the oil price headed? We

candidly admit, it’s a tough call. Say what happens if there is an UN

embargo on Iran? Oil prices are governed by several unquantifiable

variables, thus making oil price forecast a maze of caveats. To do

proper justice to prediction of oil would be beyond the scope of

this report. We would just like to highlight that the oil price has

averaged about $31 per bbl so far in this decade as compared to

$20 per bbl in the last decade. In our view, oil prices of $35 to $40

per bbl appear to be sustainable in the medium term. These prices

are way above what most producers would have hoped for at the

beginning of this decade and should do wonders to the Middle

East economies and the Saudi economy in particular.

Considering that the Saudi economy is susceptible to the ‘Dutch

disease’, it has done reasonably well. During 1994-2004 Saudi

Arabia’s real GDP increased by 2.6% (CAGR) while the nominal

GDP increased by 6.4% (CAGR). Oil and the government are the

two main building blocks of the Saudi economy. While some 80%

of the government revenues are derived from oil, government

consumption and capital expenditure account for 30% of GDP. Prior

to 2003, Saudi budgets suffered from chronic deficits resulting in

piling of debt. However, since 2003, the budgets have recorded big

surpluses on the back of increase in oil prices. The government has

used these surpluses to repay the debts, build infrastructure and

increase the salaries of the government employees by 15% - first

such increase in many years. Rising GDP and debt repayments have

reduced the debt level to less than 50% of GDP. This, in particular, is

good for sustaining the long term real economic growth rate as the

government can maintain its expenditure during periods of low oil

prices by taking on debt to finance the budget deficits. The 2005

budget surplus is expected at a whooping SAR 214 bn.

A fast growing economy is a boon for the banking sector as demand

for retail as well as corporate credit tends to increase briskly. Saudi

banking sector is no different. It has seen an impressive growth in

the last couple of years with assets increasing by over 15% (CAGR).

Large chunk of the credit has flown into domestic private sector at

the expense of foreign and government assets.

The maturity profile of private sector lending is now grossly in

favor of long term loans (maturity period of three years or more).

Personal loans which include consumer and credit card loans have

seen a tremendous rise in the past few years. The rise in unsecured

personal credit has been so fast that it even prompted SAMA to put

restriction on personal loans. This was necessitated by the huge

assets inflation (stocks as well as real estate) driven by easy access

to funds.

Valuations of the banking sector have increased tremendously with

the average P/BV for the sector between 11-12x. This is at a time

when credit growth is likely to slow down due to rise in interest

rates. If there is an economic slowdown assets price may decline

and banks will have to face the problem of rising non-performing

assets.

The petrochemical industry in Saudi Arabia enjoys a sustainable

competitive advantage due to the availability of low cost feedstock

on account of abundant oil and gas reserves. The cost of natural

gas for the Saudi Arabian petrochemical industry is just US$ 0.75

per mmbtu.

For a long time, the bone of contention between Saudi Arabia

and rest of the world has been low feedstock costs enjoyed by the

petrochemical industry in Saudi Arabia. With the accession of Saudi

Arabia to WTO, this issue has been somewhat resolved. Saudi Arabia

was not required to make any direct commitment to increase its

feedstock prices. However Saudi Arabia will get the advantage of

lowered tariffs on account of its accession to WTO. For instance,

tariffs on polymers in the European Union are to be reduced by

about half, from 12.5 percent to 6.5 percent.

Saudi Basic Industries (SABIC) dominates the petrochemical sector

accounting for 95% of the petrochemical production in Saudi

Arabia. SABIC is on a major expansion drive and its total capacity is

expected to increase from 43 million tonnes in 2004 to 51 million

tonnes in 2006 and to 64 million tonnes by 2008. SABIC plans to invest

about SAR 75 bn ($20 bn) in next three years. Private companies

like Sahara Petrochemicals are also setting up petrochemical

plants. Considering that the new capacities are being built not just

in Saudi Arabia but in rest of the world as well, there is likely to be

an excess supply situation post 2008. Petrochemical margins are

likely to come under pressure, in our view.

Saudi Arabia’s telecom industry has a huge growth potential.

Saudi Arabia has one of the lowest tele-density among the GCC

countries and accounts for more than 2/3rd of the GCC population.

Mobile penetration is about 60% while the fixed line penetration

Executive Summary

4 Saudi Arabia – A Curtain Raiser

is about 16%. Saudi Telecom Company (STC) is the legacy player

still enjoying monopoly in the fixed line segment. Mobile sector

has seen the entry of a second operator Etihad Etisalat. This has

resulted in reduction in the cost of mobile services. Licenses for

third mobile operator and second fixed line operator are expected

to be issued in 2006.

STC has seen increase in profit margins mainly due to decline in

government charges. With increasing competition in mobile as well

as fixed segment profit margins for STC may come under pressure,

going forward. STC will have to price its services as per market rates

while on the other hand it could have a bloated cost structure due

to unthrifty culture of the monopoly days.

Cement sector accounts for 4.4% of the total market capitalization.

Saudi Arabia has huge limestone deposits, a key raw material for

cement industry and low energy costs. Cement industry has seen

capacity utilization in excess of 100% due to the construction

boom in Saudi Arabia as well as other Middle East countries leading

to an increase in cement prices. This has prompted the cement

companies to go in for capacity expansions. By 2008 the cement

production capacity is likely to be 37 million tonnes while the

demand for cement is expected to be 31 million tonnes resulting

in an overcapacity of 6 mn tonnes or about 16%. The average P/E

for the cement sector has increased considerably from about 20x at

end of 2004 to current level of 39x. Investors need to concentrate

on sustainable earnings and not get swayed by the earnings for the

next couple of years.

The Saudi markets are quoting at high valuations. A P/E of 40x when

earnings growth is expected to slow down, calls for caution. Here

we would like to narrate a Quranic parable related to the Prophet

Joseph’s interpretation of the Egyptian King’s dream.

One day morning the King of Egypt woke up distressed from a

dream he had during the night and called his chiefs to his presence

and described his dream. The king had dreamt that seven fat cows

were grazing in a nice green meadow on the banks of a river. Seven

lean cows came out of the river and devoured the seven fat cows.

He also saw seven green ears of corn and seven dry ears of corn.

Most dismissed the dream as meaningless. The King asked for

Joseph’s interpretation. Joseph said that the dream signified that

Egypt will have seven years of record agricultural harvest followed

by seven years of drought and famine. The King accepted Prophet

Joseph’s interpretation of the dream and put him in charge of

Egypt’s food supply. Prophet Joseph ordered the people of Egypt

to save part of their harvests during prosperous years; to be used for

survival during the lean years to come. Prophet Joseph accurately

interpreted the king’s dream and recommended a plan of action

that saved Egypt. For this, Prophet Joseph was made king.

This age old Quranic parable holds words of wisdom for investing

community of today. Spectacular run in the stock prices cannot be

perpetual. No matter how skewed the supply demand scenario

may be in favor of high oil prices, these cannot be taken for granted.

South East Asian crisis of late 1990’s and resulting crash in oil prices

can’t be easily forgotten. In other sectors higher cash flows and

easy access to capital may lead to creation of excess production.

This excess capacity build up will create pricing pressure and result

in lower corporate profits.

On the positive side, oil prices have seen a structural shift and

are unlikely to test the lows seen in 1990’s. Government finances

are in a healthy state after many years. This will help in sustaining

government expenditure. The economy is more open and

competitive; Saudi Arabia’s accession to the WTO is a testimony to

that. Due to record profits, corporate balance sheets are in a better

shape. A couple of bad years definitely won’t turn them into sick

units.

For the past one month or so, the stock market movement has been

extremely volatile. After touching a high of 20,634 TASI declined

28% to reach a low of 14,900 before recovering to about 16,500.

Investors need to be cautious while investing in stocks. Leveraged

positions are strictly not recommended. We think 2006 may not

see the hysterical run in stock prices as seen in the last couple of

years. Investors would be better off by shifting their positions from

speculative stocks to reasonably valued blue chip companies.


Saudi Arabia’s stock market has seen a spectacular rise in the last

few years. Between the year 2002 and 2005 the Saudi market

capitalization increased by over 8.5 times while the Tadawul All

Share Index (TASI) increased by over 6.5 times.

Chart 1: Five years of bull run

Reasons behind the bull run

The spectacular rise in TASI and market capitalization may be

attributed to the following factors:

ü Increase in oil prices has generated tremendous amount of

domestic liquidity.

ü Increase in oil prices has lead to an improved fiscal situation and

hence led to an increase in government expenditure.

ü The increase in private and public expenditure has led to an

increase in corporate profits.

ü Repatriation of Arab investment from the US markets to

domestic markets after 9/11.

ü Lower interest rates (till very recently).

ü Opening up the economy for more competition and private

participation.

Market gyrations

As illustrated in Chart 1, Saudi stock market has seen a phenomenal

rise particularly in the last 3 years. In 2006, the market further rallied

significantly and broke the 20,000 barrier only to witness a painful

correction to 14,900 just weeks later. This led to an emotional

response from the investing community especially from the

retail investors. Charges are being made that stocks have been

manipulated by few speculators.

Chart 2: TASI on a roller coaster in 2006

We fully endorse firm action against rule breakers. The Saudi stock

market regulator - Capital Market Authority (CMA) should be

proactive in tackling price manipulation and insider trading. In the

same breath we would like to caution the investors as well. Stock

markets are not a one way street. Just as stocks have appreciated

remarkably over the last few years, they can decline as well. Stock

prices are ultimately determined by the profits of the companies

which in turn are determined by business conditions.

The stock market is quoting at P/E in excess of 40. Average P/BV

for banks is around 12x. Operating margins for petrochemical and

cement companies are at their cyclical highs.

Capital Markets: A New Frontier

Source: Tadawul, KMEFIC Research



Lucrative returns are attracting more players into various industries,

at the same time existing players are increasing capacities. This can

lead to erosion in profit margin in the future.

The key factor for the surge in the stock markets and increase in

economic growth rates is the substantial rise in oil prices. Any

reversal in oil prices will only make things more difficult.

View on oil prices

Oil prices have seen a sharp rise in last 3 years rising from about $26

per bbl (WTI oil price) in 2002 to current level of $60 per bbl. The

world has largely absorbed the impact of high oil prices without

any major blow to the economic growth. This has strengthened

our belief that oil prices have seen a structural shift. Currently we

would refrain from citing any particular oil price target. However

considering the fact that oil price has averaged about $31 per bbl

so far in this decade as compared to $20 per bbl in the last decade,

going forward oil price of $35 -$40 per bbl looks sustainable.

Market Capitalization Distribution

Currently there are 79 companies listed on the exchange. However

the market lacks breadth with the top 10 companies accounting

for 72% of the total market capitalization.

Table 1: Market Capitalization* Distribution

In the following section, we will briefly discuss the economic

scenario for Saudi Arabia and the four key sectors – Banking,

Petrochemicals, Telecom and Cement as they account for 78% of

the total market capitalization.

Source: Tadawul, KMEFIC Research *Market cap. as of 16 March 2006


The large difference between the nominal GDP and the real GDP

is due to the impact of higher oil export revenues driven by higher

oil prices. The increase in oil price is reflected in nominal GDP and

not in the real GDP.

The wide variation in nominal and real GDP figures pops up the issue

as to what would be a more appropriate measure for economic

analysis. Given the structural shift in the oil prices and low CPI of less

than 1%, we feel that nominal GDP would be a more appropriate

indicator for gauging the health of the Saudi economy.

Source: SAMA, EIU, KMEFIC estimates


Economic ReviewNominal GDP driven by higher oil prices

Since the nominal GDP is primarily influenced by oil export

revenues, changes in oil prices would have a significant impact

on the nominal GDP. As can be seen from chart 4 and 5, a decline

in oil prices has led to a fall in net exports growth, thus resulting

in a decline in the nominal GDP growth rates and vice versa. In

1998 when the oil prices declined by over 33% to a low of about

$10 per bbl, net exports declined by 72.5% while the nominal GDP

declined by about 12%.

Chart 4: Nominal GDP growth tightly linked to oil

Chart 5: Net Exports track oil prices


Managing an economy that is largely dependent on exports of

natural resources is a tricky job. It is susceptible to what is popularly

known as the ‘Dutch Disease’. For one, export of natural resources

results in strengthening of the local currency, thus making other

economic activities uncompetitive vis-à-vis other countries.

Secondly, since the government is generating huge amount of

revenue by exporting natural resources, it becomes imperative

for the government to spend a large portion of these revenues

on public welfare. A substantial chunk of public welfare consists

of salaries for government employees and subsidies for the

general public. This makes sustained increase in real GDP driven by

diversification of economic activities and increase in productivity a

more difficult task. It is an even more challenging task if you are the

world’s largest producer and exporter of Black Gold (oil).

In the face of these inherent challenges we believe the Saudi

economy has done reasonably well. During 1994-2004 Saudi

Arabia’s real GDP increased at a CAGR of 2.6% while the nominal

GDP increased at a CAGR of 6.4%.

Chart 3: Huge difference in Nominal and Real GDP


Real GDP and Oil Prices

Chart 6: Real GDP less influenced by the oil price


Unlike in case of the nominal GDP, changes in oil prices do not have

a significant impact on the real GDP. But this does not mean that oil

prices are irrelevant as far as real GDP growth is concerned. Crude

oil and petroleum refining together account for 31% of Saudi

Arabia’s real GDP. In the ultimate sense oil revenues are important

for sustaining the economic growth as they directly or indirectly

determine government expenditure, corporate profitability and

private investments. Sustained low oil prices can reduce the trend

in real economic growth rate. As can be seen from chart 6, real GDP

growth rate has stagnated or fallen when oil prices have declined

and increased when oil prices have risen. The impact of low oil

prices can be mitigated by increasing the economic productivity

through economic reforms and a better trained work force.

Government plays a critical role

If we look at the composition of the nominal GDP (Table 2), we can

see that private consumption expenditure (PCE) has declined as a

percentage of nominal GDP from 46.9% in 1995 to 30.1% in 2004,

largely due to an increase in net exports. However during the same

period the government consumption expenditure as a percentage

of nominal GDP increased from 23.6% in 1995 to 28.4% in 1998 and

then declined to 23.2% in 2004.

Break up of gross fixed capital formation is not available. In our view,

it is reasonable to assume that the gross fixed capital formation

will largely comprise government fixed capital formation. Hence

we estimate that the government expenditure (Consumption +

Capital) accounts for close to 30% of nominal GDP.

Source: SAMA, KMEFIC Research *Estimates

As compared to the above, in the US, the private consumption

expenditure constitutes about 70% of GDP while the government

expenditure (consumption + Capital) accounts for 19% of GDP.

Chart 7: PCE dominates US GDP

In case of Saudi Arabia, since the government plays an important role

in the economy, the health of public finances assumes even greater

significance.

Source: BEA, KMEFIC Research

Table 2: Composition of Nominal GDP


Source: SAMA, KMEFIC Research

Saudi Arabia’s budgets have run into deficits for prolonged periods.

The budget deficits were particularly severe in 1998 and 1999,

the time when oil prices averaged about $14 and $19 per bbl

respectively. For the last couple for years the budget has run into

high surplus.

During 2005 the government has increased the salaries of

government employees by 15%, first such increase in over 20

years.

For the year 2005 the budget surplus is expected to be SAR 214

bn or 38.6% of total government revenues. The government is

planning to use the surplus to retire public debt, implement special

infrastructure projects and replenish the resources of development

funds.

Economic Outlook

Year 2006 seems to be another bountiful year on the back of higher

oil revenues. This is likely to propel government expenditure and

ensure a higher economic growth rate. We expect the economy to

grow at a real growth rate of 6.5%. Only a steep fall in oil prices can

have a material negative impact on the growth rate.

Dependent on oil revenues

The government is heavily dependent on oil as a source of revenue

for meeting its expenditure. Per se it is not a bad idea; since the

government can generate revenues from oil exports, there is no

need to have additional sources of revenues like income tax, excise

duty etc. The downside is that given the fluctuations in oil prices,

oil revenues tend to be volatile resulting in budget deficits. Hence

there is a need for stabilization fund where budget surpluses can

be parked and used during the time of low oil prices.

Chart 8: Oil revenues impact budget deficit


BankingAn efficient banking system is the corner stone of a healthy

economy. Saudi Arabia has a vibrant banking sector. In 1953, The

National Commercial Bank became the first bank to be established

in Saudi Arabia. Currently ten banks are listed on Tadawul (Saudi

Arabian Stock Exchange). The banking sector accounts for a

significant 32% of the total market capitalization. Al-Rajhi Bank

leads the sector measured by market capitalization. Apart from the

listed banks, additional four banks are operating in Saudi Arabia,

namely the National Commercial Bank, Gulf International Bank,

United Saudi Bank and Emirate Bank. With Saudi Arabia becoming

a member of WTO, more banks are expected to start operations in

Saudi Arabia.

Table 3: Market Capitalization* of Saudi Banks

Table 4: Physical network of Saudi Banks

Steady growth in commercial bank assets

The total assets of commercial banks in Saudi Arabia have increased

from SAR 341 bn in 1995 to SAR 759 bn in 2005 at a CAGR of 8.3%.

The asset growth has been particularly rapid in the last two years. In

2004 and 2005 assets increased by 20.2% and 15.8% respectively.

Chart 9: Rapid growth in assets in the last two years

Chart 10: Bank credit steadily increases

Source: SAMA, KMEFIC estimates

Source: Tadawul, KMEFIC Research * As of March 16, 2006



Impact on bank credit growth

The sharp growth in credit is mainly driven by low interest rates and

high oil prices. In chart 11 we can see that the average 3 month

deposit rate declined from 6.7% in 2000 to 1.6% in 2003. During

the same period, the bank credit growth increased from 4% to

17%. In 2004, while the low interest rate scenario continued, the oil

prices shot up by 34%; resulting in an expansion of the bank credit

coincidentally by 34%. In 2005, though the average interest rates

increased to 3.8%, the bank credit still increased by 46% mainly on

account of increase in oil prices by more than 45%.

Chart 11: Bank credit, interest rates and oil prices


Since the Saudi Riyal is pegged with the US dollar, interest rates in

Saudi Arabia move in tandem with the US interest rates. In 2003-04

the interest rate in Saudi Arabia remained low as the US federal

funds rate was low, even though there was an increase in domestic

liquidity driven by rise in oil prices. Thus liquidity increased due to

rise in oil prices and fall in interest rates which led to an increase in

bank credit. Now that the interest rates are on the rise, we expect a

slowdown in the bank credit.

The main aim of the central bank is to control the inflation rate.

Sustaining economic growth and tackling asset price inflation

come in later.

Though, in our view, the monetary agencies in Saudi Arabia primarily

need to tackle the asset price inflation as excessive liquidity has inflated

the value of all the asset classes that has lead to a bubble kind of

situation. However, consumer price inflation remains under control

since the country imports a lot of goods and is dependent on

expatriate labor.

Shift towards domestic private credit

Foreign assets held by banks as a percentage of total assets has

steadily declined. During the period 1996 to 2003 the foreign as-

sets as percentage of total assets declined from about 30% to 15%.

This was accompanied by an increase in claims on private sector

as well government sector. However in the last two years even the

government assets have witnessed a steep fall from 32.4 % in 2003

to 21.8% in 2005. In the same period claims on private sector has

gone up from 42% to 56.7%.

This clearly demonstrates that banks have extended credit to the

domestic private sector in a big way. The effect of this is evident

from the increased investments in local businesses as well as boom

in the stock market and real estate.

Chart 12: Declining share of foreign assets



Maturity profile of bank credit changes

In 1995 loans of more than 3 yrs duration constituted just 6% of

the total private sector loans. This number has increased to 32% in

2005, while loans of duration of 1 year or less declined from 87% in

1995 to 56% in 2005.

Chart 13: Shift towards long term financing

Chart 14: Rapid growth in personal loans

Personal loans comprise consumer (real estate financing, cars

and equipment financing and other loans) and credit card loans.

Personal loans have witnessed a rapid growth during the last eight

years from SAR 11 bn in 1998 to SAR 185 bn in 2005 registering a

CAGR of almost 50%.

Chart 15: More leveraged individuals and economy

Table 5: Growth of Personal loans components

During the period 1998-2005, the credit card loans increased at a

CAGR of just 10.3% while other loans increased at a CAGR of 59.5%.

Car and other equipment loans increased at a CAGR of 46.5%. Real

estate financing has picked up in recent years and exhibited a

growth of 69.3% in 2004 and 55.4% in 2005. This coincides with the

real estate boom seen in the Middle East region.





Table 6: Composition of Personal loans

Since 1999 credit card loans have witnessed a secular decline

as a percentage of personal loans. Real estate financing also has

declined substantially as a percentage of personal loans, though

it has increased in absolute terms. The share of personals granted

towards cars and equipments increased from 17.9% in 1998 to 46%

in 2002 and since then has declined to 15.7% in 2005.

We are assuming that the Other loans will be largely constituted

of unsecured personal loans whose end usage cannot be easily

monitored and ascertained. In 2002 about 46% of the total personal

loans were of unsecured type (summation of other loans and credit

card loans), and this has shot up to 77% in 2005. Thus the risk profile

of the consumer loans has drastically changed in the last couple

of years. Given the massive rise in stock prices, we strongly believe

that there could be a diversion of funds from the personal loans to

the stock market. Thus a crash in stock prices could cause payment

defaults.

Maturity profile of personal loans

Over the last few years there has been a distinct change in the

maturity profile of personal loans. Loans of more than three year

duration have increased considerably at the expense of one year

duration loans. In 1998 short term personal loans constituted

about 50% of total personal loans while long term personal loans

accounted for 29%. In 2005 the contribution of short term personal

loans to total personal loans declined to 8.7% while the proportion

of long term loans increased to 75.1%.

Table 7: Maturity profile tilts in favor of long term

Personal loans as a percentage of total bank credit have increased

from just under 10% in 1998 to over 40.8% in 2005. The striking

feature is that during the same period long term personal loans as

percentage of long term bank credit have increased from under

20% to over 93%.

Chart 16: Long term personal loans increase to 93%


We can see a trend towards consumer financing and hence a more

consumer demand driven economy. However, we suspect that

money from personal loans is flowing into the stock markets. SAMA

has already taken steps to curb what seems to be an excessive

growth in personal loans. As per SAMA instructions from Nov. 26,

the maturity period of the personal loans has been reduced from

120 months to 60 months while the volume of loans has been

brought down from 27 times to 15-17 times of the monthly salary.

Source: SAMA, KMEFIC Research Source: SAMA, KMEFIC Research


Banks’ market capitalization trend

Table 8: Al Rajhi’s market capitalization grows faster


Table 9: Al Rajhi dominates in market capitalization

Distribution of bank assets

National Commercial Bank (not listed) is the largest bank with

assets exceeding SAR 130 bn, which is equivalent to 26% of the

assets held by the listed banks.

Riyad bank’s assets as a percentage of total assets of listed banks

have declined from17.2% in 2002 to 14.8% in 2004. (See Table 11).


Table 10: Saudi American Bank leads in asset size

Table 11: Market share of assets of listed banks

Source: Zawya, KMEFIC Research



Valuation’s of listed banks

The market cap weighted average P/BV of the banking sector has

increased significantly. Return on equity has increased to 33.7% in

2005 after remaining stagnant at around 20% between 2002 and

2005. Dividend yield has steadily declined from an average 3.9% in

2002 to 3.3% in 2003 to 1.6% in 2004 and to 1.1% in 2005.

Outlook

Saudi Arabian banks have seen a tremendous increase in their

valuations. Fast growing economy bodes well for the banks.

However at present the valuations look stretched with sector

P/BV in range of 11-12x and sector P/E exceeding 30x. The increase

in interest rates will have a moderating influence on the rate of

increase in loans. The banks need to be particularly cautious about

high stock and property prices as it may lead to loan defaults going

forward.

Chart 17: P/BV and ROE sharply increase in 2005

Source: Tadawul, KMEFIC estimates


Telecommunication industry has come a long way since the time

of telegraph and analog phones. To what was a largely voice based

communication platform, two new dimensions have been added:

mobility and data transfer. This has greatly enhanced the scope and

demand for telecom services. What’s more, technology has made

these services reliable as well as easily affordable.

A competitive, advanced and reliable telecom infrastructure is

imperative for economic growth. An increasing amount of business

is conducted using telecom services. Be it E-commerce, financial

transactions or simple communication with the field staff, telecom

services help in adding value and cutting down costs.

Telecommunications in Saudi Arabia

The Ministry of Communications was established in 1952 with

the responsibilities of operating post and telecommunications

services, roads, railways, and all other communications operations

in Saudi Arabia. The Ministry of Post, Telegraph, and Telephone

(PTT) replaced the Ministry of Communications in overseeing the

Saudi telecommunications sector in 1976. PTT was renamed the

Ministry of Communications and Information Technology in April

2003.

In 1998, Saudi Arabia began the privatization process by passing

control of telecommunications services to a joint stock company

called the Saudi Telecom Company (STC).

STC is the sole provider of fixed line telecom services and till very

recently enjoyed monopoly in the wireless segment as well.

Regulation

The sector is regulated by Communication and Information

Technology Commission (CITC).

Award of license for second GSM operator

In August 2004, the Saudi Cabinet awarded the second GSM mobile

telephone license to a consortium led by Etisalat of the UAE. Etisalat

submitted a bid of SAR12.21 billion ($3.25 billion) for the license, the

highest bid among the six competing consortia. The Cabinet also

approved a $201 million license for Etisalat to establish and operate

the third generation (3G) mobile phone network and to provide all

related services at local, national and international levels

Fixed line penetration

Currently there are about 3.7 million fixed line customers. STC

serves subscribers through a network that is 60 percent analog and

40 percent digital. The current fixed line penetration is estimated

at 16%.

Mobile penetration

The mobile penetration in Saudi Arabia has been increasing at

a rapid pace in the last few years. With the entry of new mobile

operator ‘Mobily,’ in May 2005, the penetration is expected to

Telecommunications increase at an even faster rate. The mobile standard in Saudi Arabia

is GSM.

Table 12: Mobile penetration more than doubles

Source: Company reports, KMEFIC estimates

Internet penetration

Internet service in Saudi Arabia is available through domestic

servers since 1998. Today, the number of internet users exceeds 2.5

million, up from 350,000 users in 2001, representing a penetration

rate of about 11 percent and the number of subscribers has reached

almost 900,000.

Table 13: Internet penetration stands at 11%

According to the CITC, the number of leased lines is expected to

increase to 40,000 by 2006, at an annual growth rate of 18.3%.

Saudi Arabia is projected to invest more than $10 billion in new

data information technologies between now and 2020.

Saudi Telecom Company (STC)

STC began operating on a commercial basis in 1998, when the

government changed its status from a government department

to a joint stock company as a first step towards privatization. At

the end of 2002, the government took the company public and

announced that starting 2004 its monopoly will gradually end.

The Saudi government divested 30% of Saudi Telecom shares. The

shares were sold to Saudi citizens & organizations; Saudi citizens

(20%), General Organization of Social Insurance (GOSI) (5%), and

Pension Fund Organization (5%).

The company has witnessed a robust growth over the last few years

on the back of an explosive growth in the mobile segment. In the

last two years the revenues have almost doubled while the EPS has

almost tripled. As a result, STC’s market capitalization has more than

doubled within the last two years.

Source: www.internetworldstats.com, KMEFIC estimates


Chart 16: STC’s stock price has almost doubled

Source: Tadawul, KMEFIC research

Table 14: STC’s Profit and Loss Account

Source: Company reports, KMEFIC research

Table 15: STC’s Balance Sheet

Source: Company reports, KMEFIC research

Chart 17: Government charges decline; margins up

Source Company reports, KMEFIC estimates


STC’s share of wireless revenues to total revenues has significantly

increased. In 2002, wireless revenues were just 45% of total revenues

while in 2004 the figure jumped to 69%. Government fees

as a percentage of total revenues have declined from 26.8% in

2002 15.9% in 2005. The reduction in government fees is due to

the opening of the sector for competition. This has helped the

company to increase its operating margins from 20.3% in 2002 to

41.1% in 2005.

Chart 18: STC’s rising P/E and ROE

STC’s P/E ratio has increased over the last few years driven by

expansion in margins and increase in ROE. Currently STC is quoting

at a P/E of 22.3x.

Etihad Etisalat Company (Mobily)

Etihad Etisalat is a part of the Etisalat group. Etisalat came into being

on 30th August 1976. The company provides telecommunication

services in United Arab Emirates and is one of the leading service

providers in the Middle East Region.

Etisalat owns a 35% stake in Eithad Etisalat while the rest of the

stake is under Saudi ownership comprising private investors (45%

stake) and public investors (20% stake)

The company launched operation in May 2005 under the brand

name ‘Mobily’. As per press reports, in a short span Mobily has been

able to garner more than two million subscribers. For FY05 Mobily

reported a loss of SAR 1040 mn.

Source Company reports, Tadawul, KMEFIC estimates

Outlook for Saudi Arabian Telecom Industry

Saudi Arabia has the one of the lowest tele-density among the GCC

countries. Moreover Saudi Arabia accounts for more than 2/3rd of

the GCC population. Thus it is a much larger market as compared

to any other GCC country. Total expenditures within the Kingdom’s

telecom sector are expected to approach $4.7 billion in 2005 and

$60 billion by 2020. Hence ample growth potential exists.

Saudi Arabia has opened its telecom sector for private participation.

Along with mobile and internet services, the fixed line telephony

sector is likely to be a multi operator play. CITC is expected to issue

licenses for third mobile operator and second fixed line operator in

2006. Increased competition will result in higher penetration rates

and decline in call charges, thus benefiting the customer at large.

Currently data services revenues are lower than voice revenues.

Improvement in the telecom services will also make the Saudi

industry more competitive globally.

When Mobily entered the market, STC had reduced its prices for

mobile services including call charges as well as charges for issuing

a new connection. In the near term we do not see any significant

price competition as there is plenty of scope for increasing

penetration and broadening the range of services. However entry

of a third telecom operator could result in a price cut as it will try

and gain market share.

As far as fixed line telephony is concerned, STC has a competitive

edge since it has an established network across the country. Hence

it will able to withstand competition in a better way as compared

to the wireless segment.

On a whole increased competition can lead to reduction in margins.

This could be problematic for STC as it has enjoyed monopoly till

very recently.


Saudi Arabia is a key player in the global petrochemical industry

commanding a 7% global market share. Saudi Arabia accounts for

75% of GCC petrochemical production. A major part of Saudi Arabia’s

petrochemical production is exported. The Saudi petrochemical

industry is mainly concentrated in the industrial cities of Jubail and

Yanbu.

Cost advantage

The Saudi Arabian petrochemical industry enjoys a natural

competitive advantage due to the availability of low cost feedstock

on account of vast crude oil and natural gas resources. The cost of

natural gas for the Saudi Arabian petrochemical industry is just US$

0.75 per mmbtu.

Global Shift

The global petrochemical industry is witnessing a shift from the

west towards the east. China has already seen a huge increase in

consumption of commodities including petrochemicals. The increase

in consumption is driven by double digit economic growth rate

and low per capita consumption. India shares similar demographic

and economic characteristics with China and is fast catching up

with China. Rising per capita petrochemical consumption in these

countries make them a growing petrochemical market. Further the

petrochemicals manufacturing is shifting to the Middle East to take

advantage of the low feed stock prices. This global shift, in out view,

augurs well for the Saudi petrochemical industry.

Impact of WTO membership

For a long time, the bone of contention between Saudi Arabia

and rest of the world has been low feedstock costs enjoyed by the

Saudi petrochemical industry. Also, Saudi Arabia has been charged

with following a dual pricing policy for natural gas, higher price

for LNG exports as compared to that for petrochemical industry.

This attracted anti dumping duties from the European Union and

United States.

Saudi Arabia’s defense was that low natural gas cost (due to lower

transportation and storage costs) was an inherent and natural

competitive advantage.

With the accession of Saudi Arabia to the WTO, this issue has been

somewhat resolved. Saudi Arabia did not have to make any direct

commitment to increase its feedstock prices. However Saudi Arabia

will get the advantage of lowered tariffs on account of its accession

to the WTO. For instance, tariffs on polymers in the European Union

are to be reduced by about half, from 12.5 percent to 6.5 percent.

Saudi Arabia will also be required to make cuts in its petrochemical

tariffs. The tariffs on key secondary petrochemicals, such as

polyethylene, polypropylene and polystyrene, are at present set at

12%, with a provision that it be reduced to 8% within an interim

period ending in year 2008, followed by a second interim period

ending in year 2010, by which time the tariff will drop to 6.5%.

Saudi Arabia is committed to reduce the tariffs on processed

plastic imports, from a ceiling of 20% to 6.5% over an interim period

ending in 2010. The reduction in import duty on processed plastic

is likely to have some adverse impact on the plastic industry in

Saudi Arabia.

Though Saudi Arabia has been able to retain its advantage of low

natural gas costs, this issue is not dead yet and is likely to crop up

from time to time.

Saudi Basic Industries Corporation (SABIC)

SABIC is a major petrochemical player in the Saudi Arabia. SABIC’s

output accounts for 95% of the domestic petrochemical output.

SABIC was established in 1976 to add value to Saudi Arabia’s

natural hydrocarbon resources. Today, SABIC is among the leading

petrochemical companies in terms of sales and product diversity.

Headquartered in Riyadh, SABIC is the Middle East’s largest non-oil

industrial company.

It is also a major player in the world petrochemical industry

accounting for 7% of the total petrochemical production. It is the

world’s 7th largest petrochemical manufacturer.

It has six strategic business units:

ü Basic Chemical

ü Intermediates

ü Polyolefins,

ü PVC and Polyester,

ü Fertilizer

ü Metals: Account for about 10% of its turnover.

The company has significant research resources and has dedicated

research and technology centers in Riyadh, Netherlands, USA and

India.

The government holds 70% of the stake and the rest is mostly

held by the public. SABIC consists of 17 world-scale manufacturing

affiliates in Saudi Arabia. Eight of these are joint ventures with

foreign partners, three are wholly owned by SABIC and six are

joint venture partnerships with local and regional private sector

investors.

Petrochemicals


Source: Tadawul, Zawya, KMEFIC estimates

Note: In March 2005, SABIC announced a one-for-three bonus share issue. The

historical stock prices have been adjusted for comparative purpose.

The increase in stock price has come due to increase in earnings

per share as well as P/E re-rating.

Table 16: EPS Growth

Note: In 2005 EPS growth has slowed down considerably due to issue of bonus

shares. Excluding the bonus effect the EPS growth would have been 40.4%.

Capacity expansion

SABIC is on a major expansion drive. Its total capacity is stated to

increase from 43 million tonnes in 2004 to 51 million tonnes and

then to 64 million tonnes by 2008. It expects to invest about SAR

75 bn ($20 bn) in next three years and about SAR 262 bn ($70 bn)

between 2004 and 2020.


Source: Tadawul, KMEFIC estimates

Table 18: Balance Sheet

The net debt to shareholder’s equity has declined from 55% in 2003

to 3.4% in 2005.


SABIC – The prolific wealth creator

Chart 19: Stock Price and M. Cap up more than 14x

Table 17: Profit and Loss Account


Chart 20: OPM steadily expands; P/E re-rated

Source: SABIC, Zawya, KMEFIC estimates

Sahara Petrochemicals

Sahara Petrochemical is a private petrochemical venture promoted

by the Zamil Group. It was established in 2004 and has a paid up

capital of SAR 1500 million.

Sahara Petrochemical and Basell jointly own the SAR 2.3 billion

($613.22 million) polypropylene project to be established in Jubail

industrial city.

The complex will include two plants. One plant will have an annual

output of 460,000 tonnes of propylene using a process owned

by UOP, a leading chemical technology company. The other will

produce 450,000 tonnes per year of polypropylene using the

advanced Spherizone process developed by Basell.

Valuations

The operating margins for SABIC have expanded enormously in

the last few years, from 16.8% in 2002 to 37.1% in 2005 due to an

increase in capacity utilization and petrochemical prices. Obviously

the operating margin expansion cannot go on for ever. SABIC

is currently quoting at a P/E of 41x. Typically for a commodity

company the P/E is high when the margins are a cyclical lows and

P/E is low when the margins are at cyclical high. However in case

of SABIC, the P/E multiple has increased along with expansion in

margins.

Chart 21: Price and Volume Trends

YANSAB

Yanbu’s National Petrochemicals Company (YANSAB) is scheduled

to go on-stream by 2008 with an annual capacity exceeding 4

million tonnes of petrochemical products, including 1.3 million

tonnes of Ethylene, 400,000 tonnes of Propylene, 900,000 tonnes

of Polyethylene, 400,000 tonnes of Polypropylene, 700,000 tonnes

of Ethylene Glycol, 250,000 tonnes of Benzene, Toluene and Xylene

compound and 100,000 tonnes of Butene-1 and Butene-2.

SABIC owns 55 percent of YANSAB shares. SABIC affiliates IBN

RUSHD and TAYF with national and regional establishments and

companies own an additional 10 percent. The remaining 35 percent

is with the public.


The polypropylene plant will use propane supplied by Saudi

Aramco and is expected to start operations in the second quarter

of 2008.


Outlook for Petrochemical Industry

It makes perfect sense for Saudi Arabia to focus on development

of petrochemical industry. The petrochemical industry can add

substantial value to the natural gas resources. Due to the natural

cost advantage, petrochemical industry will continue to play an

important role in the Saudi Arabian economy.

At present the sector is dominated by Saudi Basic Industries

Corporation (SABIC) which accounts for 95% of the domestic

petrochemical output. However a lot of other companies are

also investing in this sector. By 2010 SABIC’s share of the domestic

petrochemical production is likely to decline to 75%. The sector

is expected to witness investments of about SAR 154 bn ($41 bn)

between 2004-2009 taking Saudi Arabia’s market share in the global

petrochemical market to 13%.

Due to favorable demand-supply scenario the industry is

witnessing a period of high profitability. It is expected that as new

capacities come on-stream post 2007, margins may come under

pressure. The increase in petrochemical capacities is not restricted

to Saudi Arabia alone. New petrochemical plants are being built

and existing capacities expanded in whole of Middle East region as

well as eastern countries like India. As a stock investor the current

investments made by companies in the petrochemical sector need

to be appraised beyond the immediate cyclical highs and lows,

and not to be taken as indicator of sustained high profitability.

Post 2007 could see a drop in the profits for the petrochemical

industry. In case of SABIC, some impact of fall in margins is likely to

be mitigated by increase in volumes. SABIC is a cyclical stock which

is near the peak of the petrochemical cycle. Further it has a high

P/E multiple. Hence a fall in stock price cannot be ruled out if the

petrochemical cycle turns bad.

Even more discretion is required while investing in new

petrochemical companies. Typically such projects tend to have

cost and time overruns. In case these plants come into operation

only after the petrochemical margins have taken a hit, the pay back

period will lengthen considerably.


Saudi Arabia has a well developed cement industry. Huge limestone

deposits in the country provide the much needed raw material for

the industry. Another advantage is low energy costs due to large

natural gas reserves. The first cement company in Saudi Arabia

started production in 1959. Since then the industry has traversed

a long path. Saudi Arabia is the largest producer and consumer of

cement within the GCC block.

Cement Companies in Saudi Arabia

Currently there are eight cement companies operational in Saudi

Arabia. Namely,

ü Yamama Saudi Cement Company

ü Saudi Cement Company

ü Qassim Cement Company

ü Yanbu Cement Company

ü Arabian Cement Company

ü Tabuk Cement Company

ü Eastern Province Cement Company

ü Southern Province Cement Company

In addition to these two new companies are being set up namely

Riyadh Cement Company and Khait Cement Company.

Duty Protection and WTO

Saudi Arabian government reduced the customs duty on cement

imports from non-GCC countries to 5% from earlier level of 20% in

view of high domestic cement prices. Being a developing country

Saudi Arabia can continue its protection for cement industry even

after joining the WTO.

Cement Consumption

Cement consumption in Saudi Arabia has been increasing rapidly

in last three years led by an increase in overall construction activity.

For 2005 the cement consumption is expected to be 26.5 mn

tonnes. The domestic cement production capacity utilization levels

are over 100%. This has led to an increase in net import of cement

from about 0.5 mn tonnes in 2002 to an estimated level of 1.6 mn

tonnes in 2005.

The increase in cement consumption is not restricted just to Saudi

Arabia but spread across the MENA region. This has led to an

increase in cement prices. Hence it is attractive for the companies

to invest in capacity expansion to meet the additional demand.

CementChart 22: Cement - Net imports on rise

Production Capacity Outlook

At the end of 2005, the designed clinker capacity is estimated to be

24 million tonnes.

Table 19: Clinker Capacity

Company reports, KMEFIC estimates



Taking into account the expansion plans of the cement companies

the design clinker capacity is expected to reach 35.4 million tonnes

by the end of 2008, translating into a cement manufacturing

capacity of 37 million tonnes. The expansion in cement production

capacity is likely to cost more than SAR 8 bn.

Cement, clinker production and sales details

Table 20: Annual Cement Production (‘000 tonnes)

Table 21: Annual Clinker Production (‘000 tonnes)


Table 22: Domestic Cement Sales (‘000 tonnes)

Valuation

Between 2001 and 2004, the average P/E multiples were reasonable

in the range of 15-22x, considering that during the same period

the EPS compounded at 18%. Currently, the average P/E for cement

companies stands at a high 39.3x.

Chart 23: P/E has increased substantially





Outlook

The demand for cement has seen an increase in the past 3 years

due to an increase in construction activity related to residential and

commercial establishments as well as infrastructure projects.

Saudi Arabia is expected to report a budget surplus of SAR 214

bn for 2005. The budget surplus generated over the last couple of

years and increase in nominal GDP has led to a reduction in public

debt as percentage of GDP. The oil revenues are expected to remain

strong for the next couple of years at least. Thus the government

spending on infrastructure is likely to sustain for at least two to

three years.

In light of sustained strong economic growth, the private

construction activity is also expected to sustain for the next two

to three years.

The increase in demand for cement over the next couple of years

(2006-07) is expected to take care of increase in supply of cement

as additional production capacity comes on stream.

In 2008 as against an expected cement production capacity of 37

mn tonnes, the cement demand is expected to be 31 mn tonnes,

rendering an overcapacity of about 6 mn tonnes. The pace of

construction activity is also likely to slow down post 2007 as excess

capacity is likely to build up in housing and commercial sectors.

Thus the cement companies may see decline in operating margins

post 2008.


Saudi Cement Company

Saudi Cement Company (SCC) was established in 1955 and

became operational in 1961. The company operates two plants in

the eastern province of Saudi Arabia. Its annual clinker production

capacity is 4.14 million tonnes while annual cement grinding

capacity is 6 million tonnes.

The company is investing SAR 2.2 bn to boost its clinker production

capacity to 6.6 million tonnes.

Chart 24: Saudi - Price and Volume Trends


Riyadh Cement Company

A recently established company, Riyad Cement has begun

construction on its cement plant. The plant is likely to be operational

by early 2007. The plant is expected to cost SAR 1.1 bn and will have

an annual clinker capacity of 1.4 million tonnes.

The amount will be raised through RCC’s paid-up capital of SAR 550

million, in addition to an IPO of SAR 250 million, while the Saudi

Industrial Development Fund has pitched in with a loan facility of

SAR400 million, bringing the total amount to SAR 1.2 billion. The

company has set aside SAR 100 million as capital reserve.

Yanbu Cement Company

Yanbu Cement Company was established in 1977 and started its

operations in 1979. Currently it has annual cement capacity of 3.5

mn tonnes. It is in the process of increasing its annual capacity by

additional 0.84 million tonnes.

Chart 25: Yanbu - Price and Volume Trends

Arabian Cement Company

Arabian Cement Co. Ltd. is the first cement producer in the Kingdom

and Arabian Gulf. It was established in 1956 and production began

in 1959. It produces ordinary Portland cement, Sulphate resistant

Portland cement and Portland Pozzolan Cement. In 2004, ordinary

Portland cement constituted about 75% of its sales; SRC and

Pozzolan cement contributing the balance 25%.

The current annual clinker capacity of the company stands at 2.8

mtpa,

ACC’s proposed 50:50 joint venture with Italcementi, the world’s

fifth-largest cement producer, entails setting up of a 2.3-3.3mtpy

capacity green field cement plant, along with export facilities

and port terminal. The site for the proposed unit is located about

120kms away from ACC’s existing plant in Rabigh. The feasibility

study for the project is currently on.

This will be Italcementi’s first foray into the GCC cement market. The

Group already has a controlling stake in Suez Cement Company,

Egypt’s leading cement producer.

Profile of Saudi Cement Companies



Chart 26: Arabian - Price and Volume Trends

Tabuk Cement Company

It is engaged in the production of Ordinary Portland Cement,

Sulphate Resistant Cement, and Pozzolana Cement.

Chart 27: Tabuk - Price and Volume Trends


Southern Province Cement Company

The company was established in 1974. It is in process of setting

a new cement plant with a capacity of 1.5 mn tonne. The plant is

likely to be operational by early 2007.

Chart 28: Southern - Price and Volume Trends

Eastern Province Cement Company

The company was established in 1983 and has a cement

manufacturing capacity of 2.2 mn tonnes. It manufactures Sulphate

Resistance Type V cement and Ordinary Portland Cement Type 1 for

the local and export market.

Chart 29: Eastern - Price and Volume Trends





Yamama Saudi Cement Company

Yamama Saudi Cement Company was established in 1961 and

commercial production began in 1966. It manufactures ordinary

Portland cement and Sulphate resistant cement.

Chart 30: Yamama - Price and Volume Trends


Qassim Cement Company

Qassim Cement Company was established in 1976. The current

annual clinker capacity is 1.5 mn tonnes.

Chart 31: Qassim - Price and Volume Trends


Disclaimer;

This equity research report has been compiled and prepared by the research division of Kuwait and Middle East Financial Investment Company K.S.C.C. (“KMEFIC”), a licensed investment company regulated by the Central Bank of Kuwait. The information presented in this document was obtained from sources KMEFIC believes to be reliable, but KMEFIC does not represent nor warrant its accuracy and/or completeness nor an independent verification. KMEFIC accepts noliability whatsoever for any loss arising from the use of this document or its content or otherwise arising in connection therewith. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securi-ties mentioned herein. Neither this document nor any of its contents may be copied, transmitted or distributed to any other party without the prior written consent of KMEFIC. The opinions and estimates expressed herein are those of KMEFIC and subject to change without any prior notice. Past performance is not necessarily indicative of future performance. Neither this document nor any of its contents may be distributed in any jurisdiction outside the State of Kuwait where its distribution is restricted by law.

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