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NOVEMBER2012

Regional CementSector Outlook

Research DivisionCompany Reports

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Arabian Cement Co. Initiation Report3Q12 Results for Cement companies

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Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

RESEARCHDIVISION

AGM - Head of ResearchAbdullah Alawi+966 2 [email protected]

Senior Analyst Syed Taimure Akhtar +966 2 6618271 [email protected]

AnalystSaleh Al-Quati+966 2 [email protected]

BROKERAGE AND INVESTMENT CENTERS

DIVISION

General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 [email protected]

AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 [email protected]

Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 [email protected]

Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 [email protected]

November2012

1

Cement Price per ton 2010 2011 1Q2012 2Q2012 3Q2012

YAMAMAH CEMENT 232 240 254 244 244 SAUDI CEMENT 226 238 242 236 264 EASTERN CEMENT 223 241 249 247 255 QASSIM CEMENT 229 244 255 250 249 YANBU CEMENT 232 255 260 249 250 ARABIAN CEMENT CO* 233 284 272 274 285 SOUTHERN CEMENT 240 248 252 240 243 TABUK CEMENT 205 209 241 248 248 NAJRAN CEMENT 209 232 255 240 242 JOUF CEMENT 265 211 228 243 235 Average 228 240 250 243 250

Source: Reuters, Yamama Cement Co, Aljazira Research. *Arabian cement includes data from Qatrana cement

Cost per ton 2010 2011 1Q2012 2Q2012 3Q2012

YAMAMAH CEMENT 101 106 100 110 103 SAUDI CEMENT 111 106 116 123 106 EASTERN CEMENT 135 117 120 120 120 QASSIM CEMENT 98 99 104 112 105 YANBU CEMENT 112 130 125 114 122 ARABIAN CEMENT CO* 134 151 138 144 207 SOUTHERN CEMENT 113 109 101 106 104 TABUK CEMENT 104 124 105 102 112 NAJRAN CEMENT 110 133 127 147 87 JOUF CEMENT 142 134 143 144 134 Average 113 117 116 121 124

Source: Reuters, Yamama Cement Co, Aljazira Research, *Arabian cement includes data from Qatrana cement

Saudi Arabian Cement sector has shown strong performance on the back of rising construction activity. The cement sector on the Tadawul exchange has outperformed TASI by 32.2%. The sector has moved up by 7.7% YTD. This is all on the back of improving sales volume and higher realization per ton.

Ex-factory price caped at SAR 240/tonne- hindering revenue growth

The Ministry of Commerce and industry in light of the irrational increase in prices, announced measure to curb the inflated prices. The government announced a price cap of SAR 240/tonne towards the end of 1Q-2012. The impact of which was fully felt in the 2Q-2012 as industry average per ton realization fell by 3%QoQ to SAR 243/tonne as compared to 250/tonne in 1Q-2012.However in 3Q-2012, prices have showed a recovery to 1Q-2012 levels.

The curb by the government we believe will continue over a long period of time given the government initiative to infrastructure development and the mega construction projects that are expected in the long run.

Cost per ton on the rise

Fuel and power cost is considered one of the most important factors in manufacturing cement. Throughout the world fuel and power cost constitutes 50% to 60% of the total cost of goods sold. But due to the Kingdom’s abundant supply of oil, cement manufacturers acquire fuel at a subsidized rate hence resulting in very low input costs. Cost per ton of the sector has shown an increase of 2%QoQ. With inventory levels at the lowest the sector has seen a rise in cost, a couple of the major players are seeing the rise on the back of excess demand as their capacities are not enough to fulfill existing demand. Qassim cement, Arabian cement and a couple other producers has an agreement with Saudi Cement to buy 200,000tons of clinker till the end of 2012, which has resulted in an uptick in cost per ton.

Saudi Arabian Cement Sector: Overview

November2012

2

Going forward with new capacities coming online case on case basis cost per ton is expected to come down.

On the back of rising price and rising cost the sectors margins have remained flat QoQ.

Mortgage Law-to boost demand

Saudi Arabia over the years have shown strong demand for mid level residential real estate as the segment has been highly under penetrated due to the absence of any mortgage law, to protect the rights of the lenders. Banks and Financial institutions have been wary of lending to the general public as there was no law to protect their rights. Real estate service company Jones Lang LaSalle estimates annual demand for housing to be between 150,000 and 200,000 units per year. With the changing household pattern and a huge population segment under the age of 30, residential property demand is expected to remain high. Contrary to that housing demand has been subdued over the year due to no proper regulations. About 3.5% of all home purchases in the Kingdom, the world’s largest oil exporter, are financed through mortgages. That compares with 17% in the United Arab Emirates and 70% in the U.K.

The Saudi real estate mortgage law has been the bone of contention over the last decade as it has been put on hold time and again due to lack of consensus. The government on 2nd July 2012 announced the introduction of the Mortgage law. The package of five separate laws will overhaul the home-finance market including the creation of mortgage providers, the foreclosure process and the oversight of lenders. Regulations required to implement the law are yet to be published.

The residential real estate market is USD 16bn market out of which only 4% is financed through banks. The market is expected to double its size over the next couple of years, given the easy flow of liquidity in the system.

Cement demand consequently is expected to rise on the back of the boom expected in the real estate construction activity, which will sustain over a long period of time.

Gross Margins 2010 2011 1Q2012 2Q2012 3Q2012

YAMAMAH CEMENT 56% 56% 61% 55% 58%

SAUDI CEMENT 51% 55% 52% 48% 60%

EASTERN CEMENT 39% 51% 52% 51% 53%

QASSIM CEMENT 57% 59% 59% 55% 58%

YANBU CEMENT 52% 49% 52% 54% 51%

ARABIAN CEMENT CO 42% 47% 49% 47% 27%

SOUTHERN CEMENT 53% 56% 60% 56% 57%

TABUK CEMENT 49% 41% 56% 59% 55%

NAJRAN CEMENT 47% 42% 50% 39% 64%

JOUF CEMENT 46% 37% 37% 41% 43%

Average 51% 51% 54% 50% 51%

Source: Reuters, Yamama Cement Co, Aljazira Research.

November2012

3

Mega projects driving demand

Saudi Arabia construction sector is expected to see a boom over the coming years, as estimated value, of the projects currently under construction or planning phase, is USD 629bn. As for 2012 alone the construction projects are worth around USD 237.4bn.This huge influx of construction project is bound to pent up cement demand. The Saudi Government’s 2012 budget is currently funding construction-intensive, multibillion-riyal projects ranging from ports and roads to rail networks and communications facilities.

ProjectNameCity/town

Budget (USD mn)

Budget (SAR mn)

Project Status

Profile Type Completion

JDURC - Jeddah Low Cost Housing Project Jeddah 400 1500 Main Contract Bid Parent Megaprojects 01/09/2015Emaar - KAEC - Bay La Sun - Business Park - Phase 1 Rabigh 46 172.5 Execution Sub Megaprojects 01/03/2013Emaar - KAEC - Bay La Sun - Business Park - Phase 2 Rabigh 104 390 Execution Sub Megaprojects 01/03/2013MODON - Sudair Industrial City: Phase 1 Majmaah 1000 3750 Execution Sub Megaprojects 01/09/2014Rayadah - RKAFD: Phase 2: Towers (Parcel 2.10) Riyadh 100 375 Execution Sub Megaprojects 01/07/2013Rayadah - RKAFD: Phase 2: World Trade Center (Parcel 1.15) Riyadh 68 255 Execution Sub Megaprojects 01/10/2012Rayadah - RKAFD: Phase 2: GCC Bank HQ (Parcel 1.14) Riyadh 55 206.25 Execution Sub Megaprojects 01/10/2013Rayadah - RKAFD: Phase 2: Towers Riyadh 3700 13875 Execution Sub Megaprojects 01/03/2013Rayadah - RKAFD: Phase 2: Towers: CMA HQ Riyadh 300 1125 Execution Sub Megaprojects 01/10/2014MODON - Sudair Industrial City: Phase 1: Infrastructure: Package A Majmaah 133 498.75 Execution Sub Megaprojects 01/03/2013Rayadah - Riyadh Information Technology & Communication Complex (ITCC) Riyadh 1300 4875 Execution Parent Megaprojects 01/08/2015Rayadah - RKAFD: Phase 2: Samba Headquarters Riyadh 240 900 Execution Sub Megaprojects 01/01/2014MODON - Sudair Industrial City: Phase 1: Infrastructure: Package B Majmaah 53 198.75 Execution Sub Megaprojects 01/12/2012Saudi Housing Project: Phase 1: Riyadh: Majmaa Riyadh 60 225 Execution Sub Megaprojects 01/03/2015Al Akaria - Al Akaria Village (Banban): Phase 1 Riyadh 200 750 Design Sub Megaprojects 01/10/2016Rayadah Investment Company - RKAFD: Phase 1: Package 1 Riyadh 374 1402.5 Execution Sub Megaprojects 01/12/2012Rayadah - RKAFD: Infrastructure Package 2 Riyadh 93 348.75 Execution Sub Megaprojects 01/06/2013Kingdom Holding - Kingdom City: Kingdom Tower Jeddah 1500 5625 Execution Sub Megaprojects 01/10/2017Ministry of Interior - Security Compound: KAP 1 2019 7571.25 Execution Sub Megaprojects 01/01/2014Ministry of Interior - Security Compound: KAP 2 5292 19845 Execution Sub Megaprojects 01/07/2014Saudi National Guard - Housing Development - Phase 1 1800 6750 Execution Sub Megaprojects 01/06/2015Rayadah - ITCC: Data Centre Riyadh 160 600 Execution Sub Megaprojects 01/01/2014Al Akaria - Al Akaria Village (Banban) Riyadh 600 2250 Design Parent Megaprojects 01/03/2017Al Akaria - Al Akaria Village (Banban): Infrastructure Riyadh 60 225 Study Sub Megaprojects 01/09/2016King Abdul Aziz Endowment - Abraj Al-Bayt Complex: Swisshotel Mecca 600 2250 Execution Sub Megaprojects 01/08/2012King Abdul Aziz Endowment - Abraj Al-Bayt Complex Mecca 3180 11925 Execution Parent Megaprojects 01/08/2012Al Mal - PAMEC: Infrastructure Hail 100 375 On Hold Sub Megaprojects 01/07/2015Injaz - Al Marina Development Dammam 3000 11250 Execution Parent Megaprojects 01/06/2013Injaz - Al Marina Development: Infrastructure Dammam 300 1125 Execution Sub Megaprojects 01/06/2013Aramco - King Abdullah Petroleum Studies & Research Centre: Residential Package Riyadh 506 1897.5 Execution Sub Megaprojects 01/04/2013Aramco - King Abdullah Petroleum Studies & Research Centre: Iconic Building Riyadh 533 1998.75 Execution Sub Megaprojects 01/12/2012

Ministry of Interior - Security Compound: KAP 3 1000 3750 Main Contract Bid Sub Megaprojects 01/04/2015Saudi Stock Exchange - RKAFD: Phase 2: Tadawul Tower Riyadh 267 1001.25 Main Contract Bid Sub Megaprojects 01/07/2015Rayadah - RKAFD: Phase 1: Package 2 Riyadh 427 1601.25 Execution Sub Megaprojects 01/10/2012Rayadah - RKAFD: Phase 1: Package 4 Riyadh 306 1147.5 Execution Sub Megaprojects 01/10/2012King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project: Karch Jizan 318 1192.5 Execution Sub Megaprojects 01/11/2012King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project: Rawan Jizan 285 1068.75 Execution Sub Megaprojects 01/11/2012King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project: Siha Jizan 128 480 Execution Sub Megaprojects 01/11/2012King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project: Ramada Jizan 260 975 Execution Sub Megaprojects 01/11/2012King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project Jizan 1600 6000 Execution Parent Megaprojects 01/11/2012Jabal Omar Development Company - Jabal Omar: Phase 1 Mecca 908 3405 Execution Sub Megaprojects 01/07/2016Jabal Omar Development Company - Jabal Omar: Phase 2 Mecca 350 1312.5 Execution Sub Megaprojects 01/03/2016Dar Al Arkan - Shams Al Riyadh Riyadh 1600 6000 Main Contract Bid Parent Megaprojects 01/09/2017Dar Al Arkan - Shams Al Arous in Jeddah: Phase 1 Jeddah 400 1500 On Hold Sub Megaprojects 01/04/2016Dar Al Arkan - Shams Al Arous in Jeddah Jeddah 2000 7500 On Hold Parent Megaprojects 01/10/2015Kingdom Holding - Kingdom City Jeddah 26600 99750 Execution Parent Megaprojects 01/10/2017Rayadah - RKAFD: Infrastructure Riyadh 200 750 Execution Sub Megaprojects 01/10/2015Ministry of Interior - Security Compound: KAP 4 1000 3750 Main Contract Bid Sub Megaprojects 01/07/2015MKEC - Mixed-Use Tower Madinah 350 1312.5 Design Sub Megaprojects 01/07/2016

November2012

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ProjectNameCity/town

Budget (USD mn)

Budget (SAR mn)

Project Status

Profile Type Completion

MKEC - Residential Complex: Stage C Madinah 57 213.75 Design Sub Megaprojects 01/07/2016MKEC - Visitors Complex Madinah 533 1998.75 Design Sub Megaprojects 01/07/2016MKEC - Gated Villas: Stage B Madinah 180 675 Main Contract Bid Sub Megaprojects 01/07/2015JDURC - Jeddah Low Cost Housing Project: Infrastructure Jeddah 107 401.25 Execution Sub Megaprojects 01/09/2014SAR - Minerals Railway: Workers Accommodation & Administration Buildings 72 270 Execution Sub Megaprojects 01/07/2013Ministry of Interior - Security Compound 7279 27296.25 Execution Parent Megaprojects 01/07/2015Emaar - KAEC - Bay La Sun - Residential Village Rabigh 577 2163.75 Execution Sub Megaprojects 01/03/2013Emaar - KAEC - Esmeralda Rabigh 500 1875 On Hold Sub Megaprojects 01/12/2017Emaar - KAEC - Esmeralda - Phase 1 Rabigh 120 450 On Hold Sub Megaprojects 01/04/2015EEC - KAEC: Millennium Seaport: Dredging & Reclamation Works: Phase 1 (A-B) Rabigh 100 375 Execution Sub Megaprojects 01/10/2013Riyadh Information Technology & Communication Complex (ITCC) - Phase 2 Riyadh 853 3198.75 Main Contract Bid Sub Megaprojects 01/08/2015Rayadah - ITCC: Office Building (17 nos.) Riyadh 100 375 Execution Sub Megaprojects 01/07/2013Saudi Housing Project: Phase 1: Tabuk: Taimah Tabuk 107 401.25 Execution Sub Megaprojects 01/02/2015Saudi National Guard - Housing Development 4000 15000 Execution Parent Megaprojects 01/06/2015Saudi National Guard - Housing Development - Phase 2 2200 8250 Execution Sub Megaprojects 01/06/2015Al Shoula The Land Al Rajhi JV - Riyadh Ajmakan: 400 Villas Riyadh 286 1072.5 Execution Sub Megaprojects 01/04/2015Al Shoula The Land Al Rajhi JV - Riyadh Ajmakan Riyadh 6200 23250 Execution Parent Megaprojects 01/09/2019Aramco - King Abdullah Petroleum Studies & Research Centre Riyadh 1039 3896.25 Execution Parent Megaprojects 01/04/2013Emaar Middle East - Jeddah City Development (Near Old Airport) - Jeddah Gate Jeddah 2800 10500 Execution Sub Megaprojects 01/10/2015EME - Jeddah City Development: Jeddah Gate: Abraj Al Hilal: Phase 1 Jeddah 1500 5625 Execution Sub Megaprojects 01/09/2012EME - Jeddah City Development: Jeddah Gate: Abraj Al Hilal: Phase 2 Jeddah 1300 4875 Main Contract Bid Sub Megaprojects 01/06/2015Emaar Middle East - Jeddah City Development (Near Old Airport) Jeddah 4700 17625 Execution Parent Megaprojects 01/10/2020Saudi Housing Project: Phase 1: Al Khobar Al-Khobar 32 120 Execution Sub Megaprojects 01/08/2012Dallah Albaraka - Tareeq Al Mawazee in Mecca: Commercial Mecca 1000 3750 Design Sub Megaprojects 01/02/2016Dallah Albaraka - Tareeq Al Mawazee in Mecca Mecca 5600 21000 Design Parent Megaprojects 01/02/2018GACA - King AbdulAziz International Airport: Airport Cities Jeddah 500 1875 On Hold Sub Megaprojects 01/08/2018Rayadah - RKAFD: Phase 1: Package 3 Riyadh 347 1301.25 Complete Sub Megaprojects 01/04/2012Jabal Omar Development Company - Jabal Omar Mecca 1495 5606.25 Execution Parent Megaprojects 01/07/2016Saudi Housing Project: Phase 1: Riyadh: Huraimla Riyadh 32 120 Design Sub Megaprojects 01/04/2014Saudi Housing Project: Phase 1: Riyadh: Hotat Bani Tamim Riyadh 75 281.25 Design Sub Megaprojects 01/10/2014Saudi Housing Project: Phase 1: Asir: Bisha Bisha 100 375 Design Sub Megaprojects 01/10/2014Saudi Housing Project: Phase 1: Riyadh: Afif Riyadh 73 273.75 Design Sub Megaprojects 01/10/2014Saudi Housing Project: Phase 1: Al Ahsa 2 Al-Ahsa 23 86.25 Execution Sub Megaprojects 01/10/2014Rayadah Investment Company - Riyadh King Abdullah Financial District (RKAFD) Riyadh 7000 26250 Execution Parent Megaprojects 01/10/2015Saudi National Guard - Villas (5000 nos.) 1330 4987.5 Execution Sub Megaprojects 01/01/2015Seera City Real Estate Development - Madinah Knowledge Economic City (MKEC) Madinah 8000 30000 Execution Parent Megaprojects 01/09/2019Seera City Real Estate Development - MKEC: Gated Villas: Stage A Madinah 70 262.5 Execution Sub Megaprojects 01/07/2013Seera City Real Estate Development - MKEC: Infrastructure Works Madinah 1500 5625 Execution Sub Megaprojects 01/07/2014Saudi Housing Project: Phase 1: Riyadh: Al Dawadmi Riyadh 170 637.5 Execution Sub Megaprojects 01/02/2015King Abdullah bin Abdulaziz Foundation - Immigrants Housing Project: Hisma Jizan 606 2272.5 Complete Sub Megaprojects 01/03/2012

Maaden/Alcoa-Aluminium Project: Ras Al-Khair Aluminium Smelter-Material Handling Ras Al-Khair 100 375 Execution Sub Megaprojects 01/01/2013

Saudi Housing Project 68000 255000 Execution Parent Megaprojects 01/11/2016Saudi Housing Project: Phase 1: Riyadh: Shaqraa Riyadh 68 255 Execution Sub Megaprojects 01/08/2014Emaar / Sanofi Aventis - King Abdullah Economic City - Pharmaceutical Facilities Rabigh 400 1500 Study Sub Megaprojects 01/10/2015Saudi Aramco - Arabiyah-Hasbah Development Programme: Wasit Site Preparation 500 1875 Complete Sub Megaprojects 01/02/2012

SAR - Minerals Railway: Main Maintenance Workshops 132 495 Execution Sub Megaprojects 01/07/2013Seera City Real Estate Development - MKEC: Display Villas Madinah 880 3300 On Hold Sub Megaprojects 01/04/2014Capri Capital Partners - King Abdullah Economic City - Mixed-use Development Rabigh 2000 7500 On Hold Sub Megaprojects 01/04/2013MMC/Saudi Binladin Group - Jizan Economic City: Industrial Zone: Port Jizan 1400 5250 Design Sub Megaprojects 01/10/2015

Source: Meed Projects, Zawya, Construction week

November2012

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Development SectorAllocation(SAR Billion)

% Share Targets

Human Resources 731 51%

25 technology colleges, 28 technical institutes, and 50 industrial training institutes,10 research centers, 15 university technological innovation centers

Social and Health 274 19% 117 hospitals, 750 primary healthcare centers, and 400 emergency centers

Economic Resources 228 16%Double the capacity of desalination plants from 1.05 billion cubic meters per year to 2.07 billion cubic meters per year.

Transportation & Communications 111 8%

Establishment of a port at Ras Azzour. Seeks to raise internet users penetration from 40.5% to 53.6% . Broadband coverage to increase from 7.8 to 11.4 for every 100 people.

Municpal and Housing Services 101 7% By the end of 2014, 1 million residential units will

be built

Total 1,444

Source: Ministry of Economic Planning

9th Development plan to support demand

Saudi Arabia construction activity has been highly dependent on its Five Year Development Plan. The Saudi council of ministers approved the 9th Five Year(2010-2014) Development plan in 2010, which allocates SAR 1.4tr ( USD 385mn) to projects across all sectors, depicting an increase of 67% over the previous budget (8th Five Year Development Plan).The spending will be dedicated to Human resource(51%), Social Health care (19%),Economic resource ( 16%), Transportation & Communication ( 8%), and Municipal and housing services (7%).

This growth in capacity will also impact the local prices. The governments measures to curb prices at SAR 240/ton will continue, but the jump in capacity can have a possible impact of making the curb redundant.

Given the long term support by the government and direct and indirect demand for cement due to the construction activity is bound to keep the cement demand high at least till the end of 2014.

Capacity expansion to cater demand-prices to remain stable

The Saudi cement industry is comprised of 18 manufacturers having a combined capacity of ~57mtpa (million tons per annum). In 2005 the industry had a combined capacity of 21.65mtpa. The cement industry has embarked on an expansion strategy on the back of increasing demand on the local front. Given the recent hike in demand the government is also supporting the industry as was evident in the recent circular by Ministry of Commerce and industry, where it announced that four extension of existing factories were being supported with fuel supply in a number of regions in order to supply additional quantity of the commodity in the market to meet the demand. We believe the government’s plans and the mortgage law will support the cement industry capacity expansion.

Saudi Arabai Cement Capacity

Source: Yamama cement,Tadawul, Zawya

33

43.8 4652.8 53.8 56.4

63.967.5

70.5

-5

5

15

25

35

45

55

65

75

2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e

MTPA

November2012

6

UAE Cement Producers Capacity (mtpa)

Arkan Building Materials Company 5.50 Star Cement 5.50 Union Cement Company 4.80 Gulf Cement Company - UAE 2.70 Fujairah Cement Industries Company 2.10 Sharjah Cement and Industrial Development Company 2.00 Binani Cement Factory 2.00 National Cement Company 1.50 Pioneer Cement Co. 1.20 Ras Al Khaimah Cement Company 1.00 Jebel Ali Cement Co. 0.84 Ras Al Khaimah Company for White Cement and Construction Materials 0.45 Umm Al Qaiwain Cement Industries Company 0.38 Industry Capacity 30.0

Source: Zawya, Company Reports

UAE Cement- Over Capacity, Low utilization

Construction activity in UAE has been on the slow side given the high number of unoccupied residential properties. This has had a negative bearing on the cement industry as its has been significantly under utilized. According to our research the industry consists of a total of 13 cement producers with a combined capacity of around 30mtpa. Whereas, the utilization level of the industry is hovering somewhere around the 55% mark. We believe the low utilization levels due to a slowdown in construction activity will continue. However a recovery in the country’s economy and a pickup in construction activity will bring the utilization levels up to respectable levels.

The value of the total construction projects in UAE is USD 690.2bn,out of which USD 429.23bn have been put on hold. This poses the industry with a lot of challenges as most of the companies embarked on an expansion strategy on the back of the these projects, but with almost 62% of these project put on hold, the cement producers have been experiencing a tough period.

Currently, the under utilization of the industry’s capacity, provides UAE producers with an opportunity to Export cement. With heavy construction activity expected in the MENA regions ( likes of KSA and Qatar), cement producers can tap these markets to stay afloat.

UAE Cement Sector: Overview

November2012

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Qatar-High on Demand, Low on Capacity

Qatar has been selected by FIFA ( the governing body of Football) to host the 2022 FIFA world cup. Due to which the country has embarked on a heavy investment strategy, consequently boosting the construction activity in the country. Following the announcement in 2011, the government chalked out an extensive infrastructural investment plan estimated at over USD 100bn in the coming 12 years. Qatar has planned mega projects in sectors like hospitality, education, science, arts and entertainment.

Qatar cement industry currently has a total capacity of 6.3mtpa, out of which Qatar National Cement Company is the biggest contributor, accounting for almost 72% of the total market capacity.

Qatar National Cement Company has announced to further expand its capacity by 0.9mtpa taking its total capacity to 5.4mtpa. With no capacity expansion announced by any other cement producer, and expected surge in demand in the coming years, the country is expected to see a shortage in supply, which will make room for producers in UAE , Oman and other regional countries, which have a glut in supply.

Jordan –Low demand

Jordan utilizes almost 30% to 40% of its cement capacity of 13mtpa. With a small geographical area and a small population resulting in low housing demand , Jordan cement demand is on the lower side. This leaves the country with a potential to exports to neighboring countries like Saudi Arabia, Syria and Iraq, and to the other GCC countries. Although and influx of refugees from the neighboring Syria is expected to form a short term demand pressure on housing but still a significant rise in demand is unlikely.

Qatar Cement Capacity Capacity (mtpa)

Qatar National Cement Company 4.50 Aljabor Cement Industries 1.50 Al Khalij Holding 0.29 Industry Capacity 6.29

Source: Zawya, Company Reports/Website

Jordan Cement Capacity Capacity (mtpa)

Lafarge Jordan Cement Company 3.80 Northern Cement Company 1.00 Qatrana Cement Co. 2.00 Modern Jordanian for Cement and Mining 1.20 Al Rajhi Cement 2.00 Thab Investment for Building Material 3.00 Industry Capacity 13.00

Source: Zawya, Company Reports/Website

Qatar Cement Sector :Overview

Jordan Cement Sector :Overview

November2012

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Egypt- facing challenges

The slowdown in the Egyptian cement industry was a result of the slowdown in dispatches due to the revolution in the country. The slowdown in dispatches was less than what was being expected in 2011. Cement sales went down by 2%YoY, to 45.2mn tonnes in 2011,considering that the industry was expecting a higher fall in sales. The 2% YoY fall in sales was being touted as a positive indicator. The industry was expecting a further slowdown in dispatches but so far the data released by the industry is showing positive growth till end of March-2012. This we believe is due to the prevalent under supply and an initiative by the current government to provide cheap housing to the masses has resulted in an uptick in demand.

Egypt currently has a total cement capacity of 50mtpa, which is expected to reach 65mtpa by the end of 2012. The previous government on the back of rising demand due to the shortfall in residential units, gave away 14 new licenses. The expansion has come under some threat as the current government has cancelled the gas subsidy provided to the producers due to the slowdown in economy, as a result of the uprising in the country. The Egyptian cement industry has over the years maintained its above 90% capacity utilization even in 2010 and 2011, capacity utilization has remained above 90%. We believe the current status of the industry will bring the capacity utilization at a lower level amid the political uncertainty in the county. However the prevalent fundamentals of systematic demand will stay intact . Hence resulting in improvement in future cement demand.

Egypt Cement Capacity Capacity (mtpa)

Alexandria Portland Cement Company 1.5 Egyptian Tourah Portland Cement Company 3.7 Misr Qena Cement Company 1.9 Misr Beni Suef Cement 1.9 National Cement Company - Egypt 3.0 Sinai Cement Company 3.8 South Valley Cement Company 1.5 Suez Cement Company 4.2 Lafarge Cement 10.5 Helwan Cement Company 3.5 Wadi El Nile Cement Company 1.7 Amreyah Cement Company 4.0 Cemex 5.4 Others 3.5 Industry Capacity 50.0

Source: Zawya

Egypt Cement Sector :Overview

November2012

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• Arabian Cement Strategically Located: Arabian Cement Company is one of the oldest and largest cement producer in the country with a cement capacity of 3.8mtpa (11,500tpd based on 300 working days) .It is strategically located in the western province, 130km north of Jeddah in the city of Rabigh.

• Jordan Acquisition not going according to the plan: Qatrana Cement was setup with a capacity of 2mtpa of cement capacity. The plant was suppose to become operational in the second quarter of 2010. However, the plant faced a delay of at least 11months and became operational in April-2011, by then the dynamic of the industry had taken a turn for the worst, as the world went through a Global financial crisis, which resulted in a slowdown of overall demand. The company’s plight has not ended here, it is still facing problem on economic and internal fronts as in 2Q 2012, a strike by the work force resulted in suspension of production for 16days from 10th June-12 to 16th June-12, which according to the company resulted in a loss of SAR 1.7mn.

• Clinker Purchase, depressing margins: Due to heavy construction activity, the company is finding it difficult to meet the current demand. In order to fulfill its demand the company entered in an agreement with Saudi Cement Company to purchase 200,000 tons of clinker. This has had a negative impact on company’s margins, as the cost of producing clinker for the company stands at around 105-120/tonne, but cost of purchase of clinker cost at around 200-220/ tonne.

• Strong Capacity Utilization giving reasons for expansion: Given the recent upsurge in demand Arabian cement like all other cement producer saw a rise in dispatches. In 10M-2012 company dispatches have stood at 3.56 mn tons showing a capacity utilization of 112.5%. In light of the current demand, and the future expected demand, Arabian cement is currently studying the possibility of raising it capacity by 7,000tpd. The company has already submitted application for fuel allocation to ARAMCO and another to Saudi Electricity Company to meets the needs of the electric power of the new plant.

• Valuation: We initiate our coverage on Arabian cement, with a price target of SAR 59.85/share. The company is currently trading at a trailing PE of 10.18x, compared to our Target PE of 11.8x, based on our price target and 2012 earnings estimates. Given the recent slowdown in production due to the fire in one of its mills, and weakness in demand from its Jordan based operation we are a bit cautious towards the stock, however, and due the rising local demand. We initiate with a “Overweight” recommendation.

• Risks to Valuation: Our recommendation is based on a couple of premise, which if changes in the future can have a material impact on the company’s earning and valuations’

h Higher demand from Syria and Jordan, will have a strong impact on company’s earnings and its prices target. Any fall from current level of production will push Arabian cement margins down, and will negatively impact the company’s earnings and our Price target.

h Lower Capacity Utilization, due to any reason like slowdown in demand, closure of a line or any other reason will impact the company’s estimates and price target.

h Movement in prices, in either direction will result in a deviation of earnings estimates and price target.

Arabian Cement Company: Coverage Initiation

Rating: OVERWEIGHT

Current Price: SAR 45.3

12-month price target: SAR 59.85

Upside/(Downside): 32.1%

Key Information

Reuters Code 3010.se

Bloomberg Code ARCCO AB

Country: UAE

Sector: Cement

Primary Listing: Tadawul

M-Cap: SAR 3,624mn

52 Weeks H/L: SAR 64.00/40.70

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Valuations

Discounted Cash Flow

We have used the Discounted Cash Flow valuation to attain company’s 12 month value. Following are the key basic steps & assumptions we have assumed to value Arabian Cement.

• 4-year forecasted cash flow

• Terminal value calculation based on Gordon Growth model

h Expected Terminal growth of 2%

• Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables

h Risk free rate of 2.7% based on 10 years US bond Yield of 2.0% + country risk premium of Saudi Arabia of 0.7%

h Equity Risk Premium of 11.2%

h Beta of 1.13

• We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables

h Cost of equity based on CAPM

h Cost of Debt at 4.5%

h Contribution from equity and debt in Arabian Cement’s Capital structure is taken at 76% & 24%, respectively

Using the above assumption, we arrived at DCF based value of SAR 50.7 /share for the company.

EV/tonne

Arabian Cement :Based on the Saudi sector EV/tonne of USD 455.2mn (SAR 1707mn/tonne) , value of Arabian cement Saudi operation stand at SAR 81.08/Share.

Qqtrana Cement: Based on the Jordian Cement Sector EV/tonne of USD 76mn/ton ( SAR 285mn/tonne), value of Qatrana cement comes at SAR 7.13/share.Since Arabian cement holds 86.7% of the Qatrana cement, it add SAR 6.18 per share to the company valuation.

Our EV ton value based on the above assumption is SAR 87.26/share.

Price Target

• We have assigned 70% weight to our DCF valuation and 30% to our EV/tonne valuation.

• Based on the above assumption our price target for the company is SAR 59.85, we initiate our coverage on Arabian cement with an “Overweight” stance.

Arabian Cement

Introduction

Arabian Cement Company is one of the oldest and largest cement producer in the country with a cement capacity of 3.8mtpa (11,500tpd based on 300 working days) .It is strategically located in the western province, 130km north of Jeddah in the city of Rabigh. With heavy construction activity expected to take place in the cities of Jeddah, Makkah and Madina, the company is expected to show above 100% utilization in the coming years .

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Share holding Pattern

Public holds the major chunk of 76% in the company. Abdulaziz Bin Abdullah Suleiman Al Suleiman is the biggest individual shareholder with 7.5% share in the company.

Qatrana cement- Not providing the desired results

Qatrana cement was established by the Arabian Cement Co in Jordan. On the back of heavy investment by the government in 2007, the decision was taken by Arabian Cement to take advantage of the future demand. The company holds 86.7% in the company. Qatrana Cement was setup with a capacity of 2mtpa of cement capacity. The plant was suppose to become operational in the second quarter of 2010. However, the plant faced a delay of at least 11months and became operational in April-2011, by then the dynamics of the industry had taken a turn for the worst, as firstly, the world went through a Global financial crisis, which resulted in a slowdown of overall demand. As Arab world was emerging from the crisis another crisis in the shape of Arab spring struck the region, resulting in the further slowdown of the regional economies. Jordan also saw its fair share of uprising, resulting in the slowdown of the economy.

We believe the rationale behind expansion in Jordan was Iraq, which at that time was going through war. As Jordan already had a supply glut, expecting heavy demand from the country would be considered flawed. Arabian cement was considering Jordan as a gateway to Iraq, however things did not pan out the way as expected. Demand for Jordan based cement in Iraq is not strong due to high competition from cement producers in the region. We believe the only redeeming factors for the company can be supply shortfall in Saudi Arabia, as Arabian Cement can direct production from Qatrana Cement to the country. Current crisis in Syria can result in future demand from the country once the internal civil strife comes to an end, and the rebuilding process starts in the country.

The company in 2011, was able to produce 390mn tons of cement, depicting a capacity utilization of only 30%.resulting in sales of SAR 150mn, and net loss of SAR 57mn. The company attributed its struggle to the economic recession in the Jordanian market, an oversupply position, and lack of construction activity which resulted in weak demand.

Chronology of Saudi Capacity Expansion

Years Choronology of Capacity Expasnsion Clinker

Capacity (tpd)

Clinker Capacity

(mtpa)

Cement Capacity

(mtpa)

1956 Initiated production with a capacity of 300 tpd of clinker and 100tpd of lime in Jeddah 400 0.12 0.13

1968 Increased capacity of 1,000tpd of clinker 1,000 0.30 0.33 1974 Capacity increased to 2,000tpd of clinker 2,000 0.60 0.66

1984 New factory with a clinker capacity of 4,000tpd setup in Rabigh 4,000 1.20 1.32

1993 Clinker capacity expaned by another 4,000tpd plant 8,000 2.40 2.64

2009 Expanded capacity by 3,500tpd taking total capacity to 11,500tpd 11,500 3.45 3.80

Source: Arabian cement website

Major Shareholders

Source: Zawya 76%

7%6% 6% 5%

Public

Abdulaziz Bin AbdullahSuleiman Al Suleiman

National CommercialBank

Abdullah Bin AbdulazizSaleh Al Rajhi

Public Pension Agency

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Qatrana Cement Capacity and Dispatches

Source: Arabian Cement Company

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Capacity Cement Prod/Sales Capacity Utilization

The company’s plight has not ended here, it is still facing problem on economic and internal fronts as in 2Q 2012, a strike by the work force resulted in suspension of production for 16days from 10th June-12 to 16th June-12, which according to the company resulted in a loss of SAR 1.7mn. Going forward we expect company’s utilization level to stay around the 35% mark given the lack of certainty on the demand front. Jordan is not expected to see a boom in construction and secondly a solution in Syria، given the current situation seems distant.

Dispatches- High Capacity utilization

Given the recent rise in demand, Arabian cement like all other cement producers saw an upsurge in its demand. In the 10M-2012 so far company dispatches have stood at 3.56mn tons showing a capacity utilization of 112.5%. For full year we expect the capacity utilization to stand at 115%, given that the company has experienced a shutdown in one of its lines due to fire. The company reported on 10th Oct-12 that due to recent fire in one of its mills, sales are expected to drop by 1000tpd for a period of 3 to 4 months. The company is expecting to lose SAR 24mn in sales revenue. Going forward we expect the company to show strong capacity utilization levels of above 100%.We expect local dispatches to grow at a 4 year CAGR of 5.4%.

Cement Dispatches

Source:Yamama Cement, Aljazira Research

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Capacity-in KTPD (LHS) Dispatches- in KTPD (LHS) Capacity Utilization-(RHS)

Purchase of Clinker- Margins under pressure

The company reached an agreement with Saudi Cement in Feb-2012 to purchase 200,000 tons of clinker, to grind and pack the later cement in bags to meet the rising demand in the Western region. We believe this will have a negative impact on the company’s profitability margins. As the cost of production is expected to go up due to higher purchase cost of clinker as compared to its production cost. The cost of production for cement producer in the Kingdom varies from SAR 105-120/tonne, as for purchasing clinker the cost stand at around SAR 200-220/tonne, this we believe will take the overall cost higher consequently resulting in lower margins.

Capacity Expansion-to add to the top line

In light of the current demand, and the future expected demand, Arabian cement is currently studying the possibility of raising it capacity by 7,000tpd. The company has already submitted application for fuel allocation to ARAMCO and another to Saudi Electricity Company to meets the needs of the electric power of the new plant. The increase in capacity will take the total clinker capacity of the company to 5.6mtpa. we believe given the current situation. According to the company, if every things goes according to the plan, the new plant will be operational by the end of 2014.We have not incorporated the plant expansion given the lack of clarity regarding the allocation of fuel stock gas by ARAMCO.

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Financial Statements 2010 2011 2012e 2013e 2014e 2015eIncome StatementSales 744,588 1,078,559 1,412,304 1,543,560 1,528,960 1,513,670% Growth In sales 1% 45% 31% 9% -1% -1%Cost of Sales -425,658 -574,701 -806,481 -865,619 -882,504 -909,053Gross Income 318,930 503,858 605,823 677,941 646,455 604,617Sales and Marketing Expenses -44,558 -45,451 -45,552 -48,236 -46,987 -47,653Income from Operations 288,052 446,992 443,444 618,257 589,038 546,109% Growth In Operating Profits 18% 55% -1% 39% -5% -7%Income before Zakat & Minority Interest 263,022 409,601 411,233 573,600 548,249 529,341Net Income for the Period 255,440 407,233 404,826 564,472 539,617 520,962% Growth In Net Income 48% 59% -1% 39% -4% -3%Balance Sheet Current AssetsCash and Cash Equivalent 147,061 303,758 387,218 371,972 616,288 417,358Total Current Assets 565,478 866,414 1,088,841 1,142,403 1,375,307 1,173,001Non-Current AssetsProperty ,Plant & Equipment 3,315,560 3,244,789 3,245,734 3,257,628 3,264,275 3,265,313Total Non Current Assets 3,589,467 3,580,363 3,580,400 3,591,386 3,597,125 3,597,255Total Assets 4,154,945 4,446,777 4,669,241 4,733,789 4,972,432 4,770,256Current liabilitiesCurrent Portion of Long Term Loans 213,891 286,342 365,230 358,508 484,148 146,849Total Current Liabilities 425,433 508,484 608,152 608,536 733,510 399,021Non-Current liabilitiesLong term loan 1,190,953 1,104,735 1,064,505 805,997 621,849 475,000Total Non-Current Liabilities 1,226,837 1,143,668 1,103,438 844,930 660,782 513,933Total Liabilities 1,652,270 1,652,152 1,711,590 1,453,466 1,394,292 912,954Shareholders EquityCapital 800,000 800,000 800,000 800,000 800,000 800,000Retained Earnings 677,503 922,936 1,085,962 1,408,634 1,706,451 1,985,613Total Shareholders Equity 2,444,131 2,743,550 2,906,576 3,229,248 3,527,065 3,806,227Minority Interests 58,544 51,075 51,075 51,075 51,075 51,075Total Equity 2,502,675 2,794,625 2,957,651 3,280,323 3,578,140 3,857,302Total Liabilities and Equity 4,154,945 4,446,777 4,669,241 4,733,789 4,972,432 4,770,256Cash Flow Statement Net Income 255,440 407,233 404,826 564,472 539,617 520,962Changes in Working Capital (78,496) (146,655) 20,780 7,105 (666) 2,810Cash Flow from Operating Activities 305,993 421,282 487,135 721,264 770,552 728,877Cash Flow from Investing Activities (304,029) (84,778) (161,257) (179,933) (179,247) (179,118)Cash Flow from Financing Activities 93,522 (179,807) (242,418) (556,578) (346,989) (748,691)Changes in Cash 95,486 156,697 83,460 (15,247) 244,317 (198,931)Cash Opening Balance 51,575 147,061 303,758 387,218 371,972 616,288Cash Ending Balance 147,061 303,758 387,218 371,972 616,288 417,358RatiosLiquidity RatioCurrent Ratio(x) 1.33 1.70 1.79 1.88 1.87 2.94Quick Ratio (x) 0.83 1.10 1.16 1.19 1.32 1.91Efficiency Ratios Receivables Days Turnover 71 78 71 70 71 71Inventory Days Turnover 105 105 99 99 98 99Payables Days Turnover 27 30 30 30 30 30Cash Cycle 149 153 140 139 139 140Asset Turnover 0.19 0.25 0.31 0.33 0.32 0.31Profitability ROE 10.2% 14.6% 13.7% 17.2% 15.1% 13.5%ROA 6.1% 9.2% 8.7% 11.9% 10.9% 10.9%ROIC 6.5% 9.7% 9.2% 12.7% 11.5% 11.6%Gross Margins 43% 47% 43% 44% 42% 40%EBITDA Margins 55% 57% 43% 51% 50% 48%EBIT Margins 39% 41% 31% 40% 39% 36%Net Margins 34% 38% 29% 37% 35% 34%Leverage Ratios Debt/Equity 56% 50% 48% 35% 31% 16%Debt/Capital 36% 33% 33% 26% 24% 14%Debt/Assets 34% 31% 31% 25% 22% 13%TIE 35.3 7.4 7.3 10.6 10.7 17.6Valuations Dividend Yeild 0.6% 4.6% 6.3% 6.3% 6.3% 6.3%Book Valuer Per Share (BVPS) 31 35 37 41 45 48Market Capitalization(in SAR Bn) 3.6 3.5 3.8 3.8 3.8 3.8Enterprise value (in SAR Bn) 4.7 4.3 4.5 4.3 3.9 3.9PE (x) 14.1 8.5 9.5 6.8 7.1 7.4PB (x) 1.44 1.25 1.30 1.17 1.07 0.99EV/EBITDA (x) 11.3 7.1 7.4 5.4 5.0 5.4

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• Fuel allocation hindering capacity expansion; Given the rapid rise in cement demand, and an expected surge in demand, QCC has been looking to increase its production capacity. However the company is facing hurdles as Aramco has declined to provide fuel for the proposed new line. Given the limited fuel supply by Aramco any further expansion by the company will not be viable. Although the company has indicated that it will still proceed with its plans and will follow up with the concerned authorities.

• Lower price realization: Qassim’s prices realization in 3Q-2011, stood at SAR 250/tonne .The price realization in the last two quarters is lower than SAR 255/tonne realized during the 1Q-2012. Lower realization of the prices is the result of the restriction by the government to keep the prices fixed at around SAR 240/tonne.

• Dispatches staying strong as capacity utilization stays +100%: the company is fully utilizing its current capacity of 4.0mtpa, as in 10M-2012 the company sold 3.45mn tons as compared to 3.56mn tons in 10M-2011. The little growth in dispatches is entirely due to the full capacity utilization as the company has no room to increase its output. We believe the company will continue to suffer from this shortage in capacity, and will find difficult in fulfilling any excess demand.

• Clinker purchase, depressing margins: Qassim cement entered in an agreement with Saudi cement to buy 200,000 tons of clinker to cater the rising demand of the region. The agreement will remain valid until Dec-2012.The purchase of clinker will have a negative impact on the company’s per tonne cost which are expected to rise, as the cost of production for Qassim cement is SAR 104-105/tonne, whereas for acquiring clinker it will have to pay at least SAR 200-210/tonne . This was quite evident in 2Q-2012 result where cost per tonne showed an increase of 7.7% resulting in an eventual decline of gross margins to 55%.During 3Q-2012 due to slowdown in construction, the company showed favorable fall in its cost per tonne as they returned to levels attainted during 1Q-2012, going forward in 4Q-2012 Cost per tonne is expect to go up given the high demand season .

• Valuation: Given that the company’s 3Q-2012 result was 8.2% below our expectation. We have cut down our price target to SAR 81.95/share, maintaining our “Neutral” stance.

• Risks: Major risks to our valuation are

h Slowdown in dispatches will result in a drop in revenues, hence resulting in lower earnings and a cut down in price target.

h Further measures by the government to control prices will result in weakening of the top line, depressing margins, lower earnings and a cut in price target

h An unexpected loss of production, due to unforeseen circumstance, will result in a one time drop in earnings.

h Higher requirement of clinker, to fulfill demand will, result in margin compression .

Qassim Cement Company: Investment Update

Rating: NEUTRAL



Updated12-month price target: SAR 81.95


Key Information

Reuters Code 3040.SE

Bloomberg Code QACC AB

Country: Saudi Arabia

Sector: Cement


M-Cap: SAR 6,975mn

52 Weeks H/L: SAR 66.75/93.75

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All fig in SAR mn, unless otherwise stated 2010 2011 2012E 2013E 2014E 2015E

Income Statement Revenue 968 1,035 1,059 1,093 1,087 1,081 Growth YoY (%) -1.8% 6.9% 2.3% 3.2% -0.5% -0.6% Cost of Sales (412) (426) (452) (455) (458) (460) Gross Profit 557 609 606 637 629 621 Growth YoY (%) -2.2% 9.4% -0.5% 5.1% -1.3% -1.4% Selling and Marketing Expenses (7) (10) (10) (11) (11) (11) General and administrative Expenses (31) (28) (22) (25) (25) (25) Operating Profit 519 572 574 602 594 585 Growth YoY (%) -3.0% 10.2% 0.4% 4.8% -1.3% -1.4% Other Income 12 10 11 11 11 11 Other Expense (8) - - - - - Profit Before Tax 523 582 585 613 605 596 Zakat Provision (22) (29) (27) (30) (30) (30) Net Profit 501 553 558 582 575 567 Growth YoY (%) -16.9% 10.4% 1.0% 4.3% -1.3% -1.4%Balance Sheet Assets Property, Plant & Equipment 1,223 1,170 1,113 1,059 1,006 955 Deferred Expenses net 36 32 29 26 24 21 Cash and Cash Equivalent 20 245 414 606 790 965 Trading Investments 469 413 413 413 413 413 Trade Receivables, net 51 46 47 49 48 48 Inventories, net 187 189 202 203 204 202 Total Assets 2,023 2,123 2,237 2,370 2,496 2,613 Liabilities & Owners Equity Trade Payables 12 13 14 14 14 14 Accrued Expenses and Other Current Liabilities 82 69 73 74 75 76 Capital 900 900 900 900 900 900 Statutory Reserves 135 191 246 305 362 419 General Reserves 376 376 376 376 376 376 Retained Earnings 445 490 543 617 684 744 Minority Interest (1) (1) (1) (1) (1) (1) Total Equity & Liabilities 2,023 2,123 2,237 2,370 2,496 2,613 Cash flows statement Cash Flow from Operating Activities 547 630 637 666 660 652 Cash Flow from Investing Activities 130 43 (18) (24) (26) (27) Cash Flow from Financing Activities (674) (448) (450) (450) (450) (450) Change in cash 4,122 225,008 169,347 192,230 183,450 174,957 Net Cash at hand 20 245 414 606 790 965 Key fundamental ratios Liquidity ratios Current ratio (x) 5.0 8.0 7.7 7.7 7.6 7.5 Quick Ratio (x) 3.7 4.9 5.9 7.1 8.2 9.3 Efficiency ratios Receivables Days Turnover 19.2 16.4 16.4 16.4 16.4 16.4 Inventory Days Turnover 166.3 166.5 167.6 163.5 163.2 161.6 Payables Days Turnover 10.8 11.0 11.0 11.2 11.4 11.4 Cash Cycle 174.7 171.8 172.9 168.6 168.1 166.5 Profitability ratios Gross Margin 57.5% 58.9% 57.3% 58.3% 57.9% 57.4% Operating margin 53.6% 55.2% 54.2% 55.1% 54.6% 54.1% Net Income Margin 51.7% 53.4% 52.7% 53.3% 52.9% 52.4% EBITDA margin 63.7% 63.6% 62.3% 63.3% 62.6% 62.1% Return on average assets 23.5% 26.7% 26.6% 25.6% 23.8% 22.2% Return on average equity 27.0% 28.3% 27.9% 26.7% 24.8% 23.2% Market/Valuation ratios EV/Sales (x) 7.02 6.57 6.42 6.22 6.25 6.29 EV/EBITDA (x) 11.02 10.33 10.27 9.89 10.03 10.19 EPS (SAR) 5.56 6.14 6.20 6.47 6.39 6.30 BVPS (SAR) 20.61 21.73 22.93 24.40 25.79 27.08 Market Price (SAR)* 62.25 72.75 79.50 79.50 79.50 79.50 Market-Cap (SAR mn) 5,603 6,548 7,155 7,155 7,155 7,155 Dividend Yield 6.6% 6.3% 6.3% 6.3% 6.3% 6.3% P/E ratio (x) 11.19 11.85 12.82 12.29 12.45 12.63 P/BV ratio (x) 3.02 3.35 3.47 3.26 3.08 2.94

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• New plant to support future demand: The company has already expanded it capacity by 1.5mtpa and further expansion in Jizan will drive revenue growth. We expect volumes to grow 8.8% YoY in 2012 due to an increase in demand for cement and commencement of a new production. In September 2012, the company announced its third mill in Jazan has been delayed by four months and is scheduled to commence operations towards the end of January 2013. SPCC had entered into an agreement with Christian Pfeiffer, a German firm, to deliver, design and install the new cement mill. We have not incorporated the Jazan plant capacity addition in our expectations due to the delay.

• Rising Sales volume: The expansion by the company has already started paying dividends, as in 10M-2012, volumetric sales during the period stood at 5.94mn tons as compared to 5.63mn tons during 10M-2011, depicting a jump of 5.4%. For full year 2012 we expect the dispatches to stand at 7.29mn tons. Although the increase in capacity has resulted in higher volumetric sales, however the capacity utilization of the company has gone down from 125% in 10M-2011 to 103% in 10M-2012. Given the high demand and a new capacity expansion we expect the utilization levels to stay around 100% level. In case of extraordinary demand, the company has shown in the past to ramp up its production, and take its utilization level higher.

• Price realization going down: On the back of the curb by the government on the prices, Southern Cement has also seen its prices realization go down. The company has seen a descend in its prices from SAR 252/tonne in 1Q-2012 to SAR243/tonne in 3Q-2012. Cost realization per tonne for the company stood at SAR 104 as compared to SAR 106/tonne realized in 2Q-2012. Although lower then 2Q-2012 but still higher then cost realized during the Q1-2012. This has impacted the company in a negative manner as the company has seen its gross margins drop from 60% in 1Q-2012 to 57% in 2Q-2012.

• Valuation: Given that the company’s result was just 0.3% below our expectation we recommend and “Overweight” stance, with a price target of SAR 106.1.

• Risks: Major risks to our valuation are


h Further measures by the government to control prices will result in weakening of the top line, depressing margins, lower earnings and a cut in price target

h An unexpected loss of production, due to unforeseen circumstance, will result in a one time drop in earnings.

h Higher requirement of clinker, to fulfill demand will, result in margin compression .

Southern Cement Company: Investment Update

Rating: Overweight





Key Information


Bloomberg Code SOCCO AB


Sector: Cement


M-Cap: SAR13,265mn

52 Weeks H/L: SAR 115.5/72.00

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Income Statement Revenue 1,309 1,691 1,811 2,075 2,095 2,116 Growth YoY (%) -0.7% 29.2% 7.1% 14.5% 1.0% 1.0% Cost of Sales (600) (734) (759) (874) (893) (911) Gross Profit 710 957 1,053 1,201 1,202 1,205 Growth YoY (%) -7.5% 34.9% 10.0% 14.1% 0.1% 0.2% General and administrative Expenses (38) (49) (42) (49) (50) (50) Operating Profit 671 908 1,010 1,152 1,152 1,154 Growth YoY (%) 11.1% 27.6% -13.2% 17.0% 1.0% 1.0% Other Income 12 11 19 13 14 6 Profit Before Tax 681 919 1,029 1,165 1,166 1,160 Zakat Provision (23) (23) (26) (29) (29) (29) Net Profit 659 896 1,003 1,135 1,137 1,131 Growth YoY (%) -10.2% 36.0% 12.0% 13.2% 0.2% -0.6%Balance Sheet Assets Propert, Plant & Equipment 1,648 1,554 2,220 2,146 2,065 1,990 Capital Work in Progress 187 517 13 0 0 0 Investment in Securities 116 116 116 116 116 116 Cash and Cash Equivalent 547 529 313 372 437 497 Trade Receivables, net 24 34 41 53 59 61 Inventories, net 239 166 224 265 278 294 Total Assets 2,832 2,992 3,012 3,049 3,071 3,093 Liabilities & Owners Equity Trade Payables 20 29 28 30 27 25 Accrued Expenses and Other Current Liabilities 52 68 65 73 72 71 Dividends 165 138 138 138 138 138 Employees End of Service Benefit 85 85 86 87 87 88 Capital 1,400 1,400 1,400 1,400 1,400 1,400 Statutory Reserves 700 700 700 700 700 700 Retained Earnings 36 55 76 101 125 149 Others 352 493 493 493 493 493 Total Equity & Liabilities 2,832 2,992 3,012 3,049 3,071 3,093 Cash flows statement Cash Flow from Operating Activities 777 1,128 1,057 1,208 1,219 1,210 Cash Flow from Investing Activities (217) (383) (290) (39) (42) (45) Cash Flow from Financing Activities (620) (764) (982) (1,111) (1,113) (1,106) Change in cash (60) (18) (215) 59 65 59 Net Cash at hand 547 529 313 372 437 497 Key fundamental ratios Liquidity ratios Current ratio (x) 3.3 2.4 3.4 3.8 4.4 5.0 Quick Ratio (x) 2.4 2.3 1.6 1.9 2.2 2.6 Efficiency ratios Receivables Days Turnover 6.6 7.2 8.2 9.2 10.2 10.5 Inventory Days Turnover 118.8 97.5 81.5 99.9 108.8 111.9 Payables Days Turnover 12.1 14.7 13.4 12.4 11.0 10.0 Cash Cycle 113.3 90.1 76.3 96.7 108.0 112.4 Profitability ratios Gross Margin 54.2% 56.6% 58.1% 57.9% 57.4% 56.9% Operating margin 51.3% 53.7% 55.8% 55.5% 55.0% 54.6% Net Income Margin 50.3% 53.0% 55.4% 54.7% 54.3% 53.4% EBITDA margin 61.0% 61.9% 63.3% 61.9% 61.1% 60.4% Return on average assets 23.4% 30.8% 33.4% 37.5% 37.2% 36.7% Return on average equity 26.5% 33.8% 37.6% 42.1% 41.8% 41.2% Market/Valuation ratios EV/Sales (x) 9.59 7.43 6.93 6.05 5.99 5.94 EV/EBITDA (x) 15.74 12.00 10.96 9.78 9.81 9.83 EPS (SAR) 4.70 6.40 7.17 8.11 8.12 8.08 BVPS (SAR) 17.77 18.91 19.06 19.24 19.41 19.59 Market Price (SAR)* 61.25 86.00 95.00 95.00 95.00 95.00 Market-Cap (SAR mn) 8,575 12,040 13,300 13,300 13,300 13,300 Dividend Yield 7.3% 7.3% 7.4% 8.3% 8.4% 8.3% P/E ratio (x) 13.02 13.44 13.26 11.72 11.70 11.76 P/BV ratio (x) 3.45 4.55 4.98 4.94 4.89 4.85

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• Prices remaining flat in 3Q-2012: The company during 3Q-2012 showed price realization of SAR 244.4/tonne, as compared to SAR 243.7/tonne realized during 2Q-2012, witnessing a jump of 0.2% QoQ. We believe the marginal increase in prices is due to the upper cap set the government to control the prices. Going forward we expect the company to maintin prices at the same level.

• Lower cost realization, pushing the margins north: The company in 3Q-2012 showed an QoQ improvement in its gross profits margins by 263bps. This was due to a 6.5%QoQ fall in costs as they stood at SAR 102.5/tonne during 3Q-2012.We believe the lower production cost during the quarter resulted in overall fall in cost, and the maintenance of high margins.

• Recovery in sales expected: The company in 10M-2012 has been able to sell 5.33mn tons of cement in the local market, as compared to 5.03mn tons during 10M-2012. Unlike a fall of 3.8% in 2Q-2012, the company showed strong growth of 11.4% during 3Q-2012, which we believe is a positive sign for the company. For full year we expect the dispatches to stand at 6.57mn tons depicting a jump of 9.3%.In 10M-2012 the company has showed capacity utilization level of 101.5%. On a conservative note we expect for full year 2012, capacity utilization to stand at 102.5%.

• New capacity addition: Yamama’s management is now focusing on upgrading its production line to meet the spike in local demand, as well as lower its operating cost. To that end, the company is evaluating the possibility of adding a 10,000 tonne per day production line; its existing five lines have a combined daily capacity of 5,600 tonne. Yamama also expects its expansion plan to be boosted by its SAR75mn investment in the Adan-based Yemen Saudi Cement Company. However, we have not factored in Yemen Saudi Cement’s 1.4mtpa production capacity in our projections, as the plant is not operational yet.

• Valution & Risk: The company’s 3Q-2012 result was 3.3% below our estimate for the quarter .We maintain our “Overweight” stance with a price taget of SAR 55.8/share.

• Risks to our valuation: Major risks to our valuation are


h Further measures by the government to control prices will result in weakening of the top line, depressing margins, lower earnings and a cut in price target.

h An unexpected loss of production, due to unforeseen circumstance will result in a onetime drop in earnings.

h Higher requirement of clinker, to fulfill demand will result margin compression .

Yamamah Saudi Cement Company: Investment Update

Rating: OVERWEIGHT





Key Information


Bloomberg Code YACCO AB


Sector: Cement


M-Cap: SAR 9,072mn

52 Weeks H/L: SAR 57.00/40.30

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Income Statement Revenue 1,272 1,442 1,595 1,556 1,541 1,525 Growth YoY (%) 9.4% 13.4% 10.6% -2.4% -1.0% -1.0% Cost of Sales (560) (633) (671) (656) (649) (643) Gross Profit 712 809 924 900 891 882 Growth YoY (%) 14.8% 13.7% 14.2% -2.6% -1.0% -1.0% Selling and Marketing Expenses (43) (56) (46) (58) (58) (57) Operating Profit 666 751 876 840 831 823 Growth YoY (%) 15.6% 12.7% 16.7% -4.1% -1.0% -1.0% Net interest income (6) (5) (4) (1) (1) (1) Other Income 22 18 24 23 23 23 Profit Before Tax 682 764 896 862 853 845 Zakat Provision (25.0) (24.0) (48) (46) (46) (45) Net Profit 657 740 848 816 808 800 Growth YoY (%) 17.0% 12.6% 14.6% -3.8% -1.0% -1.0% Balance Sheet Assets Investments 394 419 419 419 419 419 Property, Plant & Equipment 2,106 1,959 1,822 1,670 1,512 1,352 Other non current assets 26 63 59 55 52 50 Cash & cash Equivalents 28 66 75 95 116 138 Inventories 132 137 158 158 160 163 Account receivables, prepayments and other recievables 295 346 360 366 370 374

Short Term Investment 672 832 954 1,201 1,471 1,742 Total Assets 3,653 3,822 3,848 3,964 4,101 4,238 Liabilities & Owners Equity Account payable & Other current liabilities 127 153 159 155 153 152 Current portion of long term loans 77 142 21 3 0 0 Accrued dividends 41 39 53 51 51 50 Long term financial liabilities 190 48 27 24 23 23 Employees' Terminal Benefits 59 64 62 59 57 54 Share capital 1,350 1,350 1,350 1,350 1,350 1,350 Statutory Reserve 251 390 475 557 637 717 Retained earnings 550 565 590 611 633 653 Consensual Reserve 958 1,000 1,042 1,084 1,126 1,168 Unrealised Gains 50 70 70 70 70 70 Total Equity & Liabilities 3,653 3,822 3,848 3,964 4,101 4,238 Cash flows statement Cash Flow from Operating Activities 797 913 1,016 997 992 985 Cash Flow from Investing Activities (123) (253) 786 (39) (34) (35) Cash Flow from Financing Activities (692) (623) (838) (691) (667) (658) Change in cash (18) 38 964 267 291 293 Net Cash at hand 28 66 1,030 1,296 1,587 1,880 Key fundamental ratios Liquidity ratios Current ratio (x) 4.6 4.1 6.6 8.7 10.4 12.0 Quick Ratio (x) 4.0 3.7 6.0 7.9 9.6 11.2 Efficency ratios Receivables Days Turover 84.6 87.5 82.4 85.8 87.6 89.4 Inventory Days Turnover 38.0 34.6 36.3 37.0 38.0 39.0 Payables Days Turnover 39.8 39.3 39.7 39.7 39.7 39.7 Cash Cycle 82.7 82.8 79.1 83.1 85.9 88.8 Profitability ratios Gross Margin 56.0% 56.1% 58.0% 57.9% 57.9% 57.9% Operating margin 52.4% 52.0% 54.9% 53.9% 53.9% 53.9% Net Income Margin 51.6% 51.3% 53.2% 52.4% 52.4% 52.4% EBITDA margin 52.6% 52.2% 55.0% 54.1% 54.1% 54.1% Return on average assets 17.9% 19.8% 22.1% 20.9% 20.0% 19.2% Return on average equity 21.2% 22.6% 24.6% 22.7% 21.6% 20.6% Leverage ratio Debt/Equity (x) 0.08 0.06 0.01 0.01 0.01 0.01 Interest Coverage (x) 111.63 149.13 229.95 751.43 ,103.85 1,178.63 Market/Valuation ratios EV/Sales (x) 5.46 6.55 5.90 6.05 6.11 6.17 EV/EBITDA (x) 10.40 9.23 10.72 11.18 11.30 11.41 EPS (SAR) 4.87 5.48 5.02 4.03 3.99 3.95 BVPS (SAR) 23.40 25.00 20.90 18.13 18.85 19.55 Market Price (SAR)* 34.33 46.67 44.60 44.60 44.60 44.60 Market-Cap (SAR mn) 4,635 6,300 7,526 9,032 9,032 9,032 Dividend Yield 8.6% 6.5% 9.0% 7.1% 7.0% 7.0% P/E ratio (x) 7.05 8.52 8.88 11.07 11.18 11.29 P/BV ratio (x) 1.47 1.87 2.13 2.46 2.37 2.28

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Closed Joint Stock company and operating under the regulatory supervision of the

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Capital is expanding its brokerage capabilities to offer further value-added services,

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Overweight: This rating implies that the stock is currently trading at a discount to its

12 months price target. Stocks rated “Overweight” will typically provide an upside

potential of over 10% from the current price levels over next twelve months.

Underweight: This rating implies that the stock is currently trading at a premium to

its 12 months price target. Stocks rated “Underweight” would typically decline by

over 10% from the current price levels over next twelve months.

Neutral: The rating implies that the stock is trading in the proximate range of its 12

months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10%

range from the current price levels over next twelve months.

Suspension of rating or rating on hold (SR/RH): This basically implies suspension

of a rating pending further analysis of a material change in the fundamentals of the

company.

For further queries about our special services, contact us at the toll free number 800 116 9999.

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Disclaimer

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