Impact of Japan s natural disaster on Saudi Arabia Challenges and Opportunities

Transcription

1 Saudi Capital Markets ALJAZIRA CAPITAL Impact of Japan s natural disaster on Saudi Arabia Challenges and Opportunities Research Division Economic Reports April 2011 Please read Disclaimer on the back Page 1 of 36 All rights reserved, AlJAZIRA April CAPITAL 2010

2 Research Division Division Manager Abdullah Alawi a.alawi@aljaziracapital.com.sa Assistant Manager Saleh Al-Quati s.alquati@aljaziracapital.com.sa Brokerage Division General Manager - Brokerage Division Ala a Al-Yousef a.yousef@aljaziracapital.com.sa Regional Manager West and South Regions Abdullah Al-Misbahi a.almisbahi@aljaziracapital.com.sa Regional Manager Central Region Sultan Al-Mutawa s.almutawa@aljaziracapital.com.sa Area Manager - Qassim Abdullah Al-Rahit aalrahit@aljaziracapital.com.sa Area Manager - Eastern Province Maher Al-Ajaji m.alajaji@aljaziracapital.com.sa International, GCC, and Corporate Stocks Department Manager Amjad Subeih a.subeih@aljaziracapital.com.sa Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No April 2011

3 Table of Contents Trade relations between Saudi Arabia and Japan 1 Japanese economy paralyzed by natural catastrophe 2 Infrastructure sector 2 Power sector 2 Automobile sector 3 Electronics sector 3 Massive reconstruction efforts to begin soon 4 Japan earthquake: Impact on Saudi Arabia 4 Trade Relations 4 Impact on crude oil exports 4 Impact on petrochemical exports 5 Saudi imports from Japan to take a hit due to production halts 5 Impact on joint ventures 6 Impact on Japan as a destination for education 7 Impact on Saudi investments and future prospects 7 Movement in equity markets of both countries 7 Impact on Saudi mutual funds 8 Lucrative investment opportunities in Japanese equity markets 8 Conclusion 9 April 2011

4 Trade relations between Saudi Arabia and Japan Saudi Arabia is net exporter to Japan Saudi Arabia is a net exporter to Japan. According to data released by the Saudi Arabian Monetary Agency (SAMA), the Kingdom s trade balance with Japan stood at a surplus of SAR 81.8 billion during Saudi Arabia s net exports to Japan grew 34% YoY to SAR billion during Exhibit 1: Saudi Arabia s net exports to Japan (SAR billion) Exports Imports Net exports Source: Saudi Arabian Monetary Agency and Japan External Trade Organization During 2009, Japan accounted for 15.7% of Saudi Arabia s exports The two countries depend on each other to meet demand for commodities. During 2009, about 90% of Saudi Arabia s exports comprised oil and petrochemicals. Japan (as per 2009 figures) was KSA s biggest export destination, accounting for 15.7% of total exports. On the other hand, the Kingdom depends on Japan primarily for the import of cars, automobile parts, tires, electronics and machinery. Cars: As per industry estimates, car sales in Saudi Arabia totaled USD 19 billion during This figure is expected to rise to USD 25 billion by Car imports from Japan, the US, Australia, Germany and South Korea constitute nearly 80% of total vehicles imported by Saudi Arabia. Notably, Japanese brand Toyota commands around 50% share in the automobile market in the Kingdom. Supplies from Japan dominate Saudi Arabia s car, automobile parts, tire markets Automobile Parts: As per 2008 estimates, Saudi Arabia s total import of automobile parts stood at approximately USD 650 million, with the highest contribution from Japanese manufacturers (40%). Tires and Tubes: KSA depends completely on other countries for the import of tires and tubes due to the absence of local tire production facilities. During 2008, the Kingdom imported tires and tubes worth USD 773 million. Japanese producers accounted for nearly 41% of the total supply. Page 1 of 9 April 2011

5 Japanese economy paralyzed by natural catastrophe Quake leads to temporary closure of power plants with 20 GW capacity The earthquake (commonly referred to as the Tohuku earthquake) that measured 9.0 on the Richter scale and struck Japan on March 11, 2011 and the resultant tsunami claimed many lives and damaged the country s economy. It severely impacted key ports, power supply and the transport infrastructure. According to the World Bank, the calamity would cost up to USD 235 billion (equivalent to 4% of GDP) to the Japanese economy. The World Bank also projects a % decline in the nation s exports for every % contraction in its GDP. Moreover, with some of the key sectors in the country facing operational issues, its economic woes are only getting worse. The key sectors affected by the natural disaster are highlighted below: Infrastructure sector The Tohoku earthquake and the consequent tsunami temporarily brought the domestic infrastructure in Japan to a standstill. The situation in the quake-affected northeastern region was aggravated by equipment failures and radiation leaks from the Fukushima nuclear power plant. The earthquake caused temporary closure of nuclear and thermal power plants with combined capacity of 20 gigawatts (GW). Transport system return to normalcy after being in abeyance for fortnight due to the quake All ports were closed briefly as safeguard measures due to high tides following the tsunami and nuclear radiations. However, ports in the southern region, including the Port of Tokyo that remained largely unaffected by the quake, were operational within a week. Of the 66 ports in Japan, the 15 located in the quake-affected northeastern region were closed for longer durations but resumed partial operations within a month. Inland transportation in the country was disrupted by the quake with major damages to the Tohoku expressway and the Sendai airport. The transportation system in Japan faced suspension for a fortnight. However, the long-term impact was contained within the Iwate, Miyagi, Fukushima and Ibaraki prefectures. Transport infrastructure in these impacted regions, which contribute over 6% to the domestic economy, would require significant investment and reconstruction efforts over the coming years to return to normalcy. Power sector Prior to the earthquake, Japan met nearly 30% of demand for power from nuclear energy, 25% each from coal and natural gas, and 10% from oil. Exhibit 2: Japan s electricity generation source Pre-quake Nuclear energy accounts for 30% of power generation in Japan Coal 25% Nuclear 30% Natural Gas 25% Others 10% Oil 10% Source: Forbes.com Page 2 of 9 April 2011

6 LNG terminal mostly unaffected LNG: Japan s liquefied natural gas (LNG) importing network remains largely unaffected. Following the earthquake, just one small re-gasification terminal out of the 40 operating in the country was shut down. Hence, LNG would continue to contribute to the nation s power generation. Japan s top six LNG suppliers accounted for 85% of the country s 2010 LNG import: Malaysia 20%, Australia 19%, Indonesia 18%, Qatar 11%, Russia 9% and Brunei 8%. Nuclear: Of the 50 nuclear reactors in Japan, 11 have been shut down following the quake. Some estimates peg the loss of nuclear output at 25 50%. According to an Economist Intelligence Unit official, nuclear facilities that contributed 3% (10% of the nuclear power generated) to the nation s electricity supply have been closed permanently. Nuclear-powered electricity generator that contributes 3% to the nation s capacity has been decommissioned; it can be replaced by unutilized oil-fired power generation plants This factor coupled with the damage to the electricity distribution system has led to power outages in the country. Since LNG and coal-fired electricity generators are already operating in full capacity, power generation from oil-fired facilities with unutilized capacity seems to be the most feasible option. Japan s oil imports have suffered due to the destruction of ports in the country s northeastern region. Uncertainty hovers over the future prospects of nuclear power plants in the quakeaffected regions. The alert level for radiations from the Fukushima nuclear power plant has been elevated from 5 to 7 on April 12, 2011, implying higher probability of spread of radiation to regions in the vicinity. Automobile sector This sector generated 17% of the nation s industrial output in Manufacturers pursue the just-in-time approach for inventory system. This operating efficiency of Japanese producers has become an issue as disruption in transportation and infrastructure led to closure of manufacturing units. The sector is also impacted by power failure. Production facilities of all manufacturers, including key players, in the sector have suffered. According to Reuters, Toyota suspended operations at 18 assembly plants. In addition, tire manufacturers Toyo Tires Group, Bridgestone, Yokohama Tire Corp, and Michelin temporarily shut down plants. Most facilities were closed just for a fortnight. Toyota resumed operations at two facilities March 28 onwards and at its manufacturing unit (producing parts for overseas production) was operational from March 21. Honda extended the opening of its production facilities to April 03, while Nissan Motor resumed operations March 24 onwards. Certain plants still remain closed and are likely to resume operations once power supply is restored. Electronics sector According to a report by Citigroup Global Markets, Japan accounts for 16 30% of the supply of electronic components globally. This is because big manufacturers are either based in Japan or source key components from the country. Japan accounts for 20% of semiconductors and 40% of flash memory chips produced globally. Flash memory chips are used in cell phones, smartphones, PCs and tablets. IHS isuppli research estimates Japan contributed 6.2% to the global production of large-size LCD panels (the world market for LCDs is projected at USD 86.3 billion). Sony, Toshiba, Canon, Nikon Corp, Panasonic and Renesas had announced the temporary closure of plants. Although most of these companies have resumed operations, their production lines are hurt by the shortage of components due to the shutdown of smallscale units in quake-impacted areas. International manufacturers such as Samsung Electronics and LG Electronics are facing issues in production due to the shortage of components sourced from Japan. Page 3 of 9 April 2011

7 Massive reconstruction efforts to begin soon World Bank estimates reconstruction to cost up to USD 235 billion over the next five years Following a ruinous earthquake and the consequent tsunami a month ago, Japan is bracing up for massive reconstruction of its largely-affected northeastern region. The government has set up a 15-member Reconstruction Design Council to set up plans for the reconstruction of the devastated areas. The council is expected to come up with its plan and effort estimate by June World Bank expects the reconstruction efforts to continue over more than five years and cost up to USD 235 billion; of this, over USD 12 billion would be spent during With a massive debt burden, the Japanese government is not in a position to finance the entire reconstruction and is expected to seek capital from the private sector. Besides, the government is likely to promote new schemes to attract private capital into the affected areas for future development. Saudi financial institutions and individual investors with ample liquidity and strong ties with Japan may provide capital for the reconstruction and future development of the quake-affected regions, which is also a lucrative long-term investment opportunity. Japan Earthquake: Impact on Saudi Arabia Trade Relations We believe that impact of natural disaster on Saudi Arabia s trade relations with Japan is likely to be minimal and be of short-lived. The partial closure of ports following the quake resulted in postponement of crude shipments to Japan, while the imports of automobiles and electronics by Saudi were affected as manufacturing capacities went temporarily out of production. However, most manufacturing facilities in Japan resumed operations within weeks of the quake; the impact on imports would thus be minimal and short-term. Over the medium to long term, demand for petroleum products in Japan is expected to increase in order to compensate for the closure of nuclear energy generation capacity. Import from the country would largely depend upon its safety and reliability of products and processes, given the imminent threat of nuclear radiations blowing out of proportion. This is one of the most critical factors that are likely to have a material impact on goods exported to Saudi. However, as the Japanese government struggles to keep radiations under check, we cannot ascertain the full impact on Saudi imports currently. Saudi Arabia, for now, has declared that most food products imported from Japan are radiation free. The Kingdom has also allowed its nationals studying in Japan to return to their educational institutes, located in unaffected areas, end of April 2011 onwards. Impact on crude oil exports Japan is third largest consumer of oil with daily consumption of 4.42 million barrels per day Saudi Arabia s 15.7% exports were shipped to Japan in 2009 Japan is the world s third-largest consumer of oil. According to a report by the International Energy Agency (IEA), the country is estimated to have consumed 4.42 million barrels of oil per day during Japan meets its entire oil requirement through imports. Oil and petrochemicals account for nearly 90% of exports from KSA. During 2009, Japan was the Kingdom s leading export destination, accounting for 15.7% of total exports. In FY 2009, Japan imported 62.4 million kiloliters of crude oil, equivalent to 29% of the country s total imports. Considering the power supply structure in Japan, producing energy from oil seems to be the most feasible option to make up for the loss in supply from nuclear energy. Japan s coal and natural gas-fired plants are already operating near full capacity. However, its oil-fired electricity generators that were primarily used to produce extra electricity during peak demand would now be employed to stabilize the demandsupply equation. Demand for crude is expected to increase in Japan with the start of reconstruction. Page 4 of 9 April 2011

8 With spare capacity of 4 million barrels per day (bpd) of the total OPEC capacity of 5 million bpd, Saudi Arabia has ample potential to increase oil exports to Japan Saudi Arabia has suspended the transportation of crude to Japan until the latter s ports are fit to handle vessels. This move was prompted by the closure of most shipping berths in the northeastern part of Japan (the region most affected by the earthquake) for more than two weeks. The temporary halt in Saudi Arabia s oil sales to Japan is expected to impact the Kingdom s earnings. However, KSA s hydrocarbon revenues are not likely to take a big hit considering that import of oil to Japan would pick up amid growing demand for power. Oil shipments are also expected to get a boost from the partial restoration of operations at Japanese ports. According to the IEA, as oil-fueled production units replace nuclear power plants, Japan would require additional 200,000 barrels of crude per day to generate electricity. Saudi Arabia is well placed to benefit from the rise in demand from Japan s power generating sector. According to Reuters, towards the end of February 2011, the Kingdom had spare capacity of 4 million barrels per day (bpd) of total OPEC spare capacity of 5 million bpd. Therefore, Saudi Arabia has the potential to increase oil exports to Japan. Saudi Aramco has a crude storage tank in Okinawa, (southwest Japan), with a capacity of 3.8 million barrels Saudi Arabia is also likely to benefit from its oil concord with Japan. Its national oil company Saudi Aramco and the Japan Oil, Gas and Metals National Corporation (JOGMEC) signed an agreement during December 2010 that allowed Saudi Aramco to maintain strategic reserves of oil in the latter s storage tank in Okinawa, southwest of Japan. Under the deal, the leased storage tank with a storage capacity of 600,000 kiloliters (3.8 million barrels) of oil is to be used preferentially to supply oil to Japan in case of emergency. The first oil tanker was shipped during February 2011 to launch the reserves. As Okinawa remains largely unaffected by the quake, it would serve as a base for Saudi Arabia to increase its oil exports to meet the rise in demand in Japan. Thus, Saudi Arabia s oil exports to Japan would surge over the long term, despite the short-term glitch following the quake. Impact on petrochemical exports The Middle East exports approximately 15% of its petrochemical output (primarily comprises ethylene derivatives such as polyethylene) to Japan. According to SABIC, the largest petrochemical producer in Saudi Arabia, the quake did not have significant impact on its exports as no major shipments were scheduled at the time of the disaster. Japanese factories that consume petrochemicals were closed partially and just for a brief period. Most of these companies have resumed production and are operating at normal rates. Despite the recent glitch due to the disaster, demand for petrochemicals in Japan is anticipated to improve over the medium to long term. Consumption of petrochemical products such as plastic-form building blocks for various materials used in construction would receive a fillip due to the reconstruction activity necessitated by the quake. Among petrochemical players in the Kingdom, SABIC and Petro Rabigh due to their size and joint ventures in Japan would be the prime beneficiaries from the uptick in petrochemical demand. Saudi imports from Japan to take a hit due to production halts Japan is the largest supplier of cars, automobile parts, tires and electronics to the Kingdom. However, these products can be sourced from other countries if needed. Japanese manufacturing plants are finding it difficult to resume operations. Besides loss of manpower, production has been affected by a shortage of basic supplies such as power, raw materials and other components. The nation is struggling with short supply of power. As of now, there is no clarity on the reinstallation of power production capacity. The just-in-time approach adopted by Japanese manufacturers (primarily automakers) has aggravated the supply situation in the manufacturing sector. The recent disaster has destroyed the infrastructure to such an extent that it is difficult to deploy officials to even evaluate the damage. Consequently, the time required to restore the situation cannot be determined. Furthermore, transportation issues have made it difficult for Japanese manufacturers to access raw materials. Page 5 of 9 April 2011

9 Japan is the largest supplier of cars, automobile parts, tires and electronics to the Kingdom. In the face of disruption of imports from Japan and until production is resumed, some of these products can be sourced from other countries. In addition, as per Moody s Analytics, Japanese manufacturers are unlikely to suffer from a drop in exports given their global footprint and large-scale supply chain. Wide operations would ensure continuity of export business in other parts of the world. Impact on joint ventures Operations of existing Japanese-Saudi joint ventures not materially impacted by the earth quake Japan is the largest investor in Saudi Arabia. With most Saudi-Japan joint ventures (JVs) located in Saudi Arabia, operations remained largely unaffected by the quake. Those with operations in Japan such as Sabic s compounding unit were shut down as a precautionary measure following the quake. The largest of such JVs, between Petro Rabigh and Sumitomo, has confirmed that operations and future plans have been not materially impacted by the disaster in Japan. Similarly, state-owned petrochemical major Sabic maintained its intention to continue pursuing JVs with Japanese players to access their technical knowhow. Exhibit 3: Saudi-Japan Joint Ventures recent Joint Venture PetroRabigh Petrochemical Complex SABIC Mitshubishi Rayon Monomer Plant Rabigh Arabian Water & Electricity Company Saudi Arabia North South Railway Arabian Japanese Membrane Company SABIC Carbon Fiber JV USD 10 bn 2009 USD 1 bn 2010 USD 1.2 bn 2008 USD 765 mn - USD 350 mn Sector Construction Petrochemical Status Capital Investment Commencement of operation Petrochemical Operational Petrochemical Operational Infrastructure Operational Infrastructure Construction Infrastructure Planning Impact of Tohuku Quake Company confirmed that quake wont have any major impact on operations or future expansion plans No major impact on operations or future expansion plans No major impact on operations or future expansion plans No Updates available Project schedule on track with expected operations in Q2 11 Project was proposed after the quake Source: SAGIA, Industry, News articles Impact on Japan as a destination for education Saudi students set to return to Japanese education institutes by April end The Saudi Arabian government arranged for the return of its students in Japan back home following the earthquake. The Saudi embassy in Japan is now working out plans to facilitate the return of these students to their respective educations institutes that are not affected by the disaster. Existing students are expected to arrive in Japan end of April 2011 onwards. New students would commence joining their institutes during the first week of May. Thus, the immediate effect on studies was contained for less than six weeks. With uncertainty over the impact of radiation leaks from nuclear plants and frequent quake tremors, it is difficult to ascertain the impact on Japan as an education hub for foreign nationals. Page 6 of 9 April 2011

10 Impact on Saudi investments and future prospects Movement in equity markets of both countries Exhibit 4: Weak correlation between equity markets Saudi Arabia and Japan Japan s Nikkei Index declined 15% after the quake April 05 April 06 April 07 April 08 April 09 April 10 April 11 TASI Nikkei Source: Bloomberg Note: Saudi Arabia Tadawul All Share Index(TASI); Japan Nikkei Index Saudi Arabia and Japan are key economies from a global perspective. Their equity markets have not moved in the same direction as their correlation factor was weak at around 2% for the past 3 years; however, Saudi markets have been more volatile than their Japanese counterparts. Investor apprehensions over the future prospects of the Japanese economy following the Tohoku quake led to a 15% slide in the country s benchmark indices. Nikkei recovers more than 10% from its recent lows. However, bottom fishing of value stocks and the anticipated improvement in corporate earnings over the long term (due to excess demand for construction materials such as cement and steel, led by reconstruction activities) have driven an approximately 10% rise in the Japanese equity market from its recent lows. Impact on Saudi mutual funds Three mutual funds in Saudi Arabia largely focus on Japanese equities. Of these, Riyad Bank s Japan Stock Fund, which is quoted in the Japanese Yen, was the worst hit after the quake (down 11.2%). ANB Invest s Al-Arabi Japan Equity Fund, quoted in the US dollar, trades at its pre-tremor levels partly due to depreciation of the US dollar over the past month. On the other hand, AlJazira Capital s AlMashareq Japanese Equities outperformed its peers it gained 6.0% since the quake. Besides Japan-focused funds, several Saudi Arabia-based mutual funds have exposure to Japanese equity markets. However, a diversified portfolio hinders the effort to ascertain the impact of Japan s earthquake on the return on such funds. Mutual Fund Japan Stock Fund Al-Arabi Japan Equity Fund AlMashareq Japanese Equities Issuing Institution Riyad Bank Currency Japanese Yen Price on 09 March 2011 Price on 11 April ANB Invest US Dollar Aljazira Capital US Dollar Change (%) Page 7 of 9 April 2011

11 Lucrative investment opportunities in Japanese equity markets Panic selling creates huge upside potential amongst Japanese stocks Overseas focused companies like Sony, Toyota over penalized for the quake making attractive investments for long term investors Steel Companies to benefit from incremental consumption due to reconstruction A prolonged period of low growth has dented the valuation of Japanese companies over the past five years. The already-low valuations have been pressurized due to panic selling following the earthquake. Although the natural disaster hurt the prospects of Japanese companies, the decline in prices has been more-than-expected. The benchmark indices in Japan trade at attractive valuations, with the Nikkei 225 at 12.1x the expected earnings for 2011 compared to approximately 13.5x prior to the quake. Companies such as Sony, Toyota and Hitachi, which derive the majority of revenues from overseas markets and operate across the world, have seen their stock prices plummet over 15% since the quake. The fundamentals of these companies have not been significantly dented, as their international operations remain unaffected and Japanese operations were partly impacted by the quake. These companies with strong brand value, impressive product lines and acclaimed production processes can thus be attractive investment opportunities for long-term investors. Companies such as Nippon Steel and JFE Holdings are expected to benefit from the increase in demand for domestic steel to reconstruct the regions destroyed by the quake. This coupled with an over 10% slide in stock prices over the past month leaves the companies with ample upside potential over the medium to long term. Although financial companies are trading nearly 15% below early-march levels, the impact of insurance claims and provisioning from quake-affected areas make them a riskier investment proposition with uncertain returns. Attractive investment opportunities for Saudi investors in Japanese equity markets and Quake impact to be minimal and short term on Saudi Arabia s trade with Japan Company Price Change in 5 year (%) Price Change since 11 March 2011 (%) Mizuho Financial Sumitomo Mitsui Financial Mitsubishi UFJ Financial JFE Holdings Nippon Steel Panasonic Sony Kansai Electric Power Hitachi Nissan Motor Toyota Motor Corp Source: Bloomberg Page 8 of 9 April 2011

12 Conclusion Quake impact to be minimal and short term on Saudi Arabia s trade with Japan Saudi Arabia well poised to benefit from expected increase in Japan s crude oil demand over the coming years The earthquake and tsunami that rocked Japan recently have inflicted severe damage on the country. Besides affecting its economy, they have impacted the prospects of the nation s trading partners. However, we believe, trade between Saudi Arabia and Japan would suffer only for a short period of time. KSA s crude exports earnings to Japan are expected to take a slight hit considering the temporary damper on economic activity in the disaster-ravaged country. Nonetheless, as most oil ports in Japan commence operations, reconstruction activity starts and the country prepare to make up for the loss in nuclear power generation, demand for oil would increase. Saudi Arabia, with spare oil production capacity, seems well placed to benefit from this scenario. Operations of existing Saudi-Japan JVs would remain largely unaffected by the Tohoku quake; however, future investment into these ventures may take a hit due to delay in the transfer of cash and technology from Japanese ventures to Saudi associates. On the investment front, Saudi financial investors had limited exposure to Japanese markets; of these, Japan-focused mutual funds largely outperformed the benchmark. Panic selling following the earthquake depressed the valuation of Japanese companies, thus providing longterm investment opportunities for Saudi investors in Japanese markets. Saudi investors can also participate in impending reconstruction activity that would require significant investment from the government as well as private sectors. Page 9 of 9 April 2011

13 Saudi Pharmaceutical Industries & Medical Appliances Corporation COMPANY PROFILE AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. Rating Terminology 1. 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. 2. 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. 3. 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. 4. 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 Page 1 of 27 April 2010

14 Saudi Pharmaceutical Industries & Medical Appliances Corporation Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report. This report has been produced independently and separately and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report. No part of this document may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations. Asset Management Brokerage Corporate Finance Custody Advisory Head Office: Madinah Road, Mosadia P.O. Box: 6277, Jeddah 21442, Saudi Arabia Tel: Fax: Page 2 of 27 April 2010