Saudi Arabian Equities round up Q3 earnings and trade flows

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1 Q3 earnings performance by sector Q Q3 201 % Chg Banks,373,5.7% Petrochemicals,50,561.0% Telecom 2,3 2,660.% Real estate (213) 472 NM Food/agri 1,76-4.% Insurance % Healthcare/Pharma % Retail % Cement (1.1) NM Industrials % Others 6,4 5, % Total 32,244 32,5 1.1% Total (ex. Banks and Petchem),021, % Source: Company data, Al Rajhi Capital Earnings by market segregation Q Q3 201 % Chg Banks,373,5.7% Petchem,50,561.0% Consumers 2,176 1, % Electronic retailers % Other retailers % Food/agri 1,76-4.% Infra/others,45,12-6.7% Total 32,244 32,5 1.1% Source: Company data, Al Rajhi Capital Mazen Al-Sudairi Tel alsudairim@alrajhi-capital.com Pritish Devassy, CFA Tel devassyp@alrajhi-capital.com Yazeed AlSaqaby Tel alsaqaby@alrajhi-capital.com AbdulMalik AlSalem Tel asalema@alrajhi-capital.com n Equities round up Q3 earnings and trade flows Earnings of Saudi companies grew ~1% y-o-y in Q However excluding mainstay Banks and Petrochemicals sectors, Q3 earnings declined ~13% y-o-y, reflecting the weight of these two sectors in overall earnings. In fact, top 5 companies (by mcap, accounting for ~57% of overall earnings) reported ~4% earnings growth in Q3. For our analysis, we segregated the overall market into following sectors, a) Banks b) Petchem c) Consumers d) Infra/others, to understand the underlying economic trends. Both Banks and Petrochemicals posted healthy earnings growth (+.7% and % respectively), with Banks tracking SAIBOR increases and Petchem following product price-feedstock movements. Performance of electronic retailers was excellent, while for most other consumer companies, LFL performance was still weak. Infra/others sector continued to report decline in profits. In Banks, growth in loan book still remained weak. Notably, we saw a ~26% y-o-y increase in interest costs as depositors were taking advantage of higher interest rates. However, thanks to low interest bearing deposit base, the costs did not impact profit by much. Given the weak lending opportunities, banks increased treasury investments by SAR2.bn y-o-y in Q3 201, compared to net loan book growth of SAR6.2bn, mainly to the Government to help fund the deficit. In Petchem, product prices already have seen a drop of -15% from mid- 201 which we believe is high given that their demand, coming from consumer products mostly, is generally defensive. Unless cost structure changes dramatically lower (as we had seen in mid-2014 when oil price plummeted and whose derivative naphtha is input for the marginal cost producer) the prices are unlikely to drop meaningfully. However, near term disruptions such as plant shutdowns could cause near term price fluctuations. Most petchem firms have improved their efficiencies over time. Plants of petchems such as Kayan, Tasnee, Hadeed, Ibn Rushd, SAMAPCO etc. have seen their manufacturing capabilities improve significantly in the last year and hence the impairments and write-offs across most lines are much lower now. In consumer sector (including Food, Retail and Telecom), a decline in expat population by over 1.3mn YTD (as per CCHI) was expected to show up in the results. While Telecom companies reported ~6% y-o-y top-line growth, looking closer into the mix, two of the three telecom firms benefited from business contracts without which the revenue would have declined slightly. Among dairy companies, Almarai witnessed a slight decline (-4.% y-o-y) in Q3 earnings, which would have been much lower had it not been for the turnaround in poultry. Almarai had also gained market share across of its 1 categories. SADAFCO too witnessed a pressure in its earnings (-2% y-oy), due to higher raw material costs. Nadec was an exception, showing an doubling in net profit, driven by robust top-line (+.5% y-o-y) and improved production efficiencies. Electronics retailers, such as Jarir, Extra etc. showed stand-out performances purely by their market share gains as smaller competitors continued to lose market share. These companies have only 15% exposure to Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 134 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

2 Qatar Dubai Abu Dhabi Kuwait Oman Bahrain MSCI EM Qatar Dubai Abu Dhabi Kuwait Oman Bahrain MSCI EM expats are hence are relatively more defensive. While some of these companies were conservative in their guidance for the future, we believe that they are likely to report high single digit or double digit earnings performances in the coming year, on the back of introduction of new product lines apart from further market share gains. Notably, there were increased purchases at the end of Q4 last year, on account of pre-purchasing ahead of VAT and hence growth in Q4 may not fully reflect the core strength on a y/y basis. Retailers could also benefit from e-commerce as companies are laying out plans for tapping online market. On the other hand, Panda and AlHokair continued to show topline weakness amidst restructuring activities. In nutshell, larger companies gained further strength and overall consumer spending sentiments are expected to gradually improve from here on. Cement sector registered losses of SAR1.1mn during Q3 201, compared to profits of SAR300.3mn in Q Seven companies out of 14 listed cement companies reported losses this quarter, including Yamama Cement, with losses of ~SAR46.4mn, followed by both Najran Cement and Tabuk Cement, which incurred losses of ~SAR23.7mn and ~SAR1.2mn, respectively. Though demand is still weak, some cement firms are planning to increase prices, which may help them to improve their bottom-line performance. As for healthcare, given the recent commercial opening of hospitals, the financial performance was weak and may remain so in the near to medium term. While most sectors exposed to expats started showing weakness in earnings right from 2015, healthcare started seeing weakness of late. This is because when hospitals started construction of its expansions, decline in expats was not foreseen and not factored in their assumptions. Thus when the hospitals started their commercial operations, they were affected by pre-operating costs, higher discounts to insurance and receivables issues. We now expect a slower than expected recovery though this is one of our better picks for the long term. For insurance, we believe there could be weakness expected for motor segment due to No Claim Discounts. We believe the sector may become attractive after a few more quarters as the discounts fade and companies improve their efficiencies and as market consolidation starts. Healthcare and insurance are more exposed to expats as compared to the retailers discussed above. Trading patterns Market movement: In October, due to geopolitical issues and also sell off sentiments in the emerging markets, Saudi market declined heavily intraday but eventually pulled back a large part of declines on most days. In its peak, we saw trading value of more than SARbn. Average daily trading volumes increased to SAR4.2bn in October as compared to Q3 average of SAR3.0bn and m average of SAR3.6bn. Figure 1 QTD markets performance 6.0% 4.1% 4.0% 2.4% 2.0% 0.0% Figure 2 YTD markets performance 25.0% 1.% 20.0% 14.% 15.0%.0% 6.0% 5.0%.5% -2.0% -4.0% -6.0% -.0% -4.2% -2.0% -0.% -2.0% -2.2% -6.4% 0.0% -5.0% -.0% -15.0% -20.0% -17.5% -.7% -1.7% -15.0% Disclosures Please refer to the important disclosures at the back of this report. 2

3 Figure 3 Net Buyers (FPIs) and QFI + Swap There was heavy net selling recently as reflected in QFI+Swap ownership data. Foreigners (QFI/Swap) held 1.05% in January 201, which increased to 1.7% in June 201. However, it declined to 1.24% in October on account of weak market sentiments and stayed at 1.23% during the mid of Nov. We had seen selling pressure from QFIs in emerging markets as well. We believe local institutional investors were buying what was being sold by QFIs. However the total foreign holding which includes other categories such as Strategic foreign owners, Foreign DPMs etc., saw only a small dip from 5% in September to 4.7% currently. This may have been because of reclassification (in Foreign DPMs) and increase in strategic foreign holding in certain companies (eg. Bupa). We saw PPA buying large stakes in companies thereby increasing their market share to 3.03% in Nov from 0.74% in Q Total GRE ownership stands at 3.4% in Nov (37.0% in Q3 201). However this may not be entirely accurate as company holdings below 5% are not disclosed publicly. We also noted certain reclassifications from Mutual funds to DPMs (Figure 6 & 7), which was mostly reallocation of portfolios in our view. A large part of this reallocation may have been attributed to Govt. rejigging its portfolios across various fund managers. Negotiated deals: There were quite a large number of negotiated deals, which we believe were both due to Govt s and some corporate reallocation of portfolio funds across APs. We believe this may have been post new reporting guidelines. Overall retail trading continued to decline while institutional ownership continued to increase (Figure 4). Net buying/selling by categories Net Buyers - FPIs (SAR bn) YTD QTD SWAP Holders (0.7) (0.70) (0.55) (2.0) (0.1) 0.0 (3.0) Foreign Residents (0.14) (0.1) (0.20) (0.3) (0.2) (0.25) (0.23) (0.) (0.2) (0.36) (0.07) (2.51) (0.43) QFIs (3.34) (0.27) 4.7 (3.61) Foreign DPMs (0.1) 0.02 (0.01) (0.00) (0.00) 0.00 (0.17) 0.00 Strategic Partners 0.00 (0.00) (0.01) (0.01) (0.76) (0.3) 0.00 QFI + Swap (0.63) 0.43 (6.24) (0.44) 5.5 (6.6) Source: Tadawul, Al Rajhi Capital. Data calculated till 15th Nov 201. Ownership pattern Figure 4 Ownership (%) Ownership (%) Saudi Individuals 27.1% 26.% 26.4% 26.4% 25.7% 25.% 25.% 25.% 25.% 25.3% 25.6% Saudi Institutions 66.4% 66.6% 66.% 66.4% 67.3% 67.1% 66.% 67.0% 67.0% 67.% 67.7% GCC 2.0% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.0% 2.0% Foreign 4.4% 4.5% 4.7% 5.0% 4.% 5.0% 5.1% 5.1% 5.0% 4.7% 4.7% Total 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Institutional 7.5% 7.5% 7.7% 7.6% 7.% 7.7% 7.% 7.7% 7.%.1% 7.% Non-Institutional.5%.5%.3%.4%.2%.3%.2%.3%.2%.%.1% Source: Tadawul, Al Rajhi Capital. Data calculated till 15th Nov 201. Disclosures Please refer to the important disclosures at the back of this report. 3

4 PIF, GOSI and PPA Holdings Figure 5 GRE Holdings (%) 35.00% 30.00% 26.42% 2.% 30.16% 30.47% 30.44% 25.00% 20.00% 22.04% 20.0% 21.45% 21.74% 21.1% 15.00%.00% 5.00% 0.00% 5.73% 5.70% 5.61% 5.61% 5.65% 5.65% 6.40% 6.43% 6.5% 6.3% 3.03% 0.40% 0.47% 0.43% 0.02% 0.03% 0.03% 0.73% 0.76% 0.74% Q Q Q Q Q Q Q1 201 Q2 201 Q3 201 PIF GOSI PPA Source: Bloomberg, Argaam, Al Rajhi Capital. Data calculated till 15th Nov 201. Mutual Funds and Institution DPM Holdings Figure 6 Mutual Funds Holdings Figure 7 Institution DPM Holdings.00%.%.%.%.00%.00% 7.00% 6.00% 5.1% 5.1% 5.1% 5.0% 5.0% 5.0% 5.0% 4.% 4.% 4.% 4.% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%.00% 7.00% 6.00% 5.00% 4.00% 3.2% 3.2% 3.2% 3.00% 2.00% 1.00% 0.00% 6.% 7.1% 6.% 7.1% 7.1% 6.% 6.% 6.6% 6.% 6.4% 6.4% Source: Tadawul, Al Rajhi Capital Mutual Funds Holdings Source: Tadawul, Al Rajhi Capital Institution DPM Holdings How to position now? Oil continues to remain the key driver of the market (Figure 14) and sentiments continue to remain weak in the recent trading sessions. This is because some countries have temporary waiver from sanctions on importing oil from Iran, while there is pick up seen in shale production. Meanwhile demand indicators, such as auto sales across the globe, were weak. On the other hand, the sanctions are temporary for 10 days and we do believe that concerns on supply will be addressed by OPEC+. Even in 2017, OPEC was able to cut supply and manage the gap. We believe the demand concerns may have been exaggerated at this point as there were specific factors driving the weak auto sales. Overall at these levels, the probability of an improvement in oil price is more than a downside in our view and thereby TASI could witness some upside. Most large caps stocks are at-least 20% below their 52 week high, implying that there is further upside when optimism around global indices inclusions come back. The Saudi Govt. announced its M fiscal position and revised its budgetary spending in 201 upwards by %, which implies ~31% of annual spending likely to take place in Q4. In our view, it is more of current expenditure than on capital / infrastructure spending. Bonuses for Govt. employees, which were cut in 2016, will be reinstated from 201, all of which bode well for consumer spending sentiments in the near term, especially for those companies heavily exposed to Saudi national clientele. Disclosures Please refer to the important disclosures at the back of this report. 4

5 In terms of valuation multiples, specifically P/E multiples, the 1Y forward P/E for Banks is.0x (3-year average:.2x), while for Petchems, it is 13.0x (3-year average: 13.5x). For consumers (including Retail, Consumer service and Food & Beverage), the average 1Y PE multiple is 1x (20m average: 17.6x). For overall market the forward PE multiple stands at 13.1x, lower than its 3Y historical average of 13.4x. Sector outlook: As for Banks, the trigger continues to be Fed rate hikes. We see no signs of recovery for lending growth. Currently, the key growth areas are mainly within mortgage loans and hence those banks with high exposure to retail banking, could see some benefit. As for petrochemical product prices, post a good decline in basic polymer product prices, which are mostly defensive we believe prices may hold up at these levels. The feedstock prices has in general declined in last month but could increase due to spill over effects from natural gas rally due to seasonal factors. We believe consumer spending sentiments are expected to gradually improve from hereon while insurance and healthcare sectors are expected to see a longer than previously expected time frame for recovery. Disclosures Please refer to the important disclosures at the back of this report. 5

6 Retail Food & Staples Retail Insurance Comm & Prof Svc Banks Materials Cons Dura & App Telecom Consumer Services Transport Food & Beverages Energy Cap Goods Media Pharma Real Estate Utilities Diversified Financials Healthcare TASI vs. MSCI EM Performance Figure TASI vs. MSCI EM YTD Performance Figure TASI vs. MSCI EM QTD Performance, ,300.0, ,200.0, ,200.0, ,0.0, ,0.0, , , , , , , TASI MSCI EM (RHS) TASI MSCI EM (RHS). As of Nov 1, As of Nov 1, 201. Figure TASI vs. MSCI EM 1Y Fwd PE Trend Figure TASI vs. MSCI EM TTM PE Trend 16.0x 20.0x 15.0x 1.0x 1.0x 14.0x 17.0x 16.0x 13.0x 15.0x.0x 14.0x 13.0x.0x.0x.0x.0x.0x TASI 1Y Fwd PE MSCI EM 1Y Fwd PE Max Avg. Min TASI TTM PE MSCI EM TTM PE Max Avg. Min. As of Nov 1, As of Nov 1, 201. Market Movers Figure Changes in price levels by sectors (QTD) 6.0% 4.7% 4.0% 2.0% 0.0% 0.4% 0.1% -2.0% -4.0% -1.3% -1.% -2.3% -2.% -3.0% -3.1% -3.5% -6.0% -.0% -.0% -4.7% -4.% -5.0% -5.6% -6.0% -6.0% -7.% -.% -.0% -14.0% -.%. As of Nov 1, 201. Disclosures Please refer to the important disclosures at the back of this report. 6

7 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 US$/bbl Retail Insurance Food & Staples Retail Cons Dura & App Comm & Prof Svc Pharma Media Transport Consumer Services Diversified Financials Cap Goods Energy Utilities Telecom Healthcare Food & Beverages Real Estate Materials Banks Figure 13 Sector contribution to Tadawul performance (QTD) 0.20% 0.% 0.00% -0.% -0.20% -0.30% -0.40% -0.50% -0.60% -0.70% -0.0% -0.0% 0.13% 0.00% 0.00% -0.01% -0.01% -0.01% -0.02% -0.03% -0.03% -0.03% -0.04% -0.0% -0.% -0.14% -0.15% -0.17% -0.42% -0.64% -0.76%. As of Nov 1, 201. Oil Prices vs. TASI Figure 14 Oil price vs. TASI TASI (LHS) WTI prices. PE Bands of top heavyweights Figure 15 Al Rajhi Bank M forward PE Band Figure 16 SABIC M forward PE Band Al Rajhi Bank Average +1 SD -1 SD SABIC Average +1 SD -1 SD Disclosures Please refer to the important disclosures at the back of this report. 7

8 Figure 17 NCB M forward PE Band Figure 1 SAMBA M forward PE Band NCB Average +1 SD -1 SD SAMBA Average +1 SD -1 SD Figure 1 STC M forward PE Band Figure 20 RIBL M forward PE Band STC Average +1 SD -1 SD RIBL Average +1 SD -1 SD Figure 21 ALINMAM forward PE Band Figure 22 BFSRM forward PE Band ALINMA Average +1 SD -1 SD BSFR Average +1 SD -1 SD Disclosures Please refer to the important disclosures at the back of this report.

9 Figure 23 MAADEN M forward PE Band Figure 24 KAYAN M forward PE Band MAADEN Average +1 SD -1 SD KAYAN Average +1 SD -1 SD Stocks with a significant price action Figure 25 Stocks with significant price action Company QTD price perf (%) Yanbu Cement Co Herfy Food Services Co United Electronics Co Saudia Dairy & Foodstuff Co 7 Southern Province Cement Co 6 Saudi Kayan Petrochemical Co (1) Emaar Economic City (16) Dar Al Arkan Real Estate Development Co (16) National Industrialization Co (16) Knowledge Economic City Co (14). As of Nov 1, 201. Disclosures Please refer to the important disclosures at the back of this report.

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