Qatar Shipping Industry Initiation of Coverage Equities Energy & Utilities Thursday, 23 June Navigating through rough waters

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1 Qatar Shipping Industry Initiation of Coverage Equities Energy & Utilities Navigating through rough waters 2016: A stumbling year for most shipping industry segments; muted growth expected in global trade. Tanker shipping companies will outperform their peers. Industry players expected to adopt more cost defensive measures. A China slowdown means slowdown in the shipping industry. Qatar s container shipping expected to shine over increasing economic growth expectations. Qatar maintains its stronghold as the world largest LNG exporter in We initiate coverage on Milaha (PT QAR99.19) and Nakilat (PT QAR27.62); both with Buy ratings. Amr ElDaly Senior Equity Analyst Mubasher International Amr.ElDaly@MubasherFS.com Mohamed Bassuny Analyst Mubasher International Mohamed.Bassuny@MubasherFS.com Milaha and Nakilat price performance vs. Clarksea index performance Unpredictability is the new normal; muted growth in global trade is expected: The volatility the shipping industry experienced in 2015 may have been severe, but it is becoming more evident that such unpredictability is the new normal. The year 2016 is expected to witness muted growth in global trade as a result of decelerating economic activity in emerging markets, particularly China, which will likely exacerbate overcapacity causing declining and volatile freight rates. Performance will vary across the segments with dry-bulk and container shipping companies probably continuing to be pressured, while tanker and LNG shipping companies should perform better. Container shipping capacity is expected to rise 6% in 2016 on top of a 9% increase in 2015, outpacing demand growth of 3-4.5% in Tanker shipping companies will likely outperform their peers in other segments due to a more moderate fleet growth and healthy demand resulting from oil stockpiling and high refinery throughput due to low oil prices. Implementation of more cost defensive measures from smaller companies is expected in an effort to partially offset expected losses. Meanwhile, larger shipping companies should remain profitable in A China slowdown means slowdown in the shipping industry: In view of the recent deceleration in China's economic growth and its lower demand for commodities, the shipping industry is expected to be negatively Page 1 affected by slowdown from one of the key drivers of shipping demand growth, constituting 35% of world containership demand, 70% of world seaborne iron ore imports, and 20% of world coal imports. Qatar s maritime transport sector has taken advantage of the country s economic diversification plans and infrastructure boom despite slowdown in global shipping: The container trade and maritime sector in Qatar is expected to continue to rise, fueled by an impressive GDP growth, rising consumer demand, and increasing trade between Qatar, the UAE, and India. The maritime infrastructure required to support future growth is going through continuous improvement. We initiate on Milaha with a Buy rating and a Price Target of QAR99.19 (ETR: +16%): We believe the company will leverage on Qatar's overall economic growth and on its position as a market share leader in the container shipping traffic. However, we remain cautious in the short term due to uncertainty and volatility in the global energy markets. We initiate on Nakilat with a Buy rating and a Price Target of QAR27.62 (ETR: +19%): We believe the longterm nature of contracts on Nakilat vessels will ensure the company s financial performance is not vulnerable to fluctuations in oil price over the coming years. However, we remain cautious in the short term due to uncertainty on the LNG vessel rates. Source: Clarksons, MubasherTrade Research analysis * Weekly stock price performance The Clarksea index is a strong indicator for the global maritime transport sector s health. It measures average weekly freight rates of all commercial vessel types in this industry. From the above graph, it is clear that there is a strong correlation between the stock performance of Nakilat (QGTS), Milaha (QNNS) and the Clarksea index. This proves that the Clarksea index can be used as a general proxy on how companies operating in the maritime industry might be performing. Companies analyzed in this report Milaha Nakilat Stock Price (QAR) Mubasher 1-year Price Target (QAR) Rating Buy/Low Risk Buy/Low Risk EPS DPS BVPS PER 13.1x 11.8x PBV 0.7x 2.7x EV/Sales 4.6x 10.4x EV/EBITDA 15.0x 13.9x Dividend Yield 4% 6% Price as at 22 June, Ratios are calculated based on 2016 estimates Source: MubasherTrade Research estimates

2 Qatar Shipping Industry Sector Note Qatar Table of Contents MARITIME INDUSTRY OVERVIEW I. Background of maritime transport 3 II. Developments in international seaborne trade 5 III. General market indicators overview 5 IV. Maritime transport segments A. Dry bulk shipping 6 B. Liquid bulk shipping 7 C. Container shipping 11 D. Off-shore support market 12 V. Qatar overview 13 QATAR NAVIGATION (MILAHA) Investment summary 15 Valuation & recommendation 16 Financial summary 18 Business model 19 QATAR GAS TRANSPORT (NAKILAT) Investment summary 27 Valuation & recommendation 28 Financial summary 30 Business model 31 Page 2

3 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview I. Background of Maritime Transport Maritime (seaborne) business is the backbone of world trade as it represents around 80% of trade volumes globally. Over the last four decades, total seaborne trade have grown by more than 6x from just over 8,000bn ton-miles in 1968 to over 53,165bn tonmiles in 2015, thanks to increasing industrialization and the liberalization of national economies that have fuelled free trade. Growing demand for consumer products and advances in technology were the results of healthier free trade, making shipping an increasingly efficient and swift method of transportation. The shipping business is done through charters. The chartering of a ship, in its simplest terms, is an agreement in which a cargo owner (charterer) agrees to lease a vessel from its owner. Types of Charters 1) Voyage Charter refers to a single journey with the hiring of both vessel and crew. The charterer/cargo owner pays the vessel owner on a per-ton or lump-sum basis. Ship owner is responsible for the port, fuel and crew costs. Voyage charter rates are determined based on spot market rates, which are updated on a daily basis and affected by supply and demand. 2) Time Charter refers to the hiring of a vessel for a specific amount of time. The charterer pays for all expenses except for crew costs. Time charter rates can be on monthly or yearly basis at a negotiated rate. 3) Bareboat Charter is when the charterer takes complete control of the vessel including crew management. The ship owner is not responsible for any costs. This type of chartering is not commonly used because of its characterized high costs on cargo owners. The Maritime Transport Industry Key Indicators The maritime transport market is analyzed according to: 1) Freight rates: Earnings indicators for all charter types. The determining factors of freight rate are weight, size, distance, and points of pick-up and delivery of goods being shipped. 2) Indices: Famous indicators that measure spot freight rate. Liquid and dry bulks rates are measured by three indices: (1) Baltic index which measures the daily spot earnings of crude, product and dry bulk vessels; (2) Clarksea index which measures the weekly earnings of all the main commercial vessel types and is considered a good proxy for the sector s health and (3) China Containerized Freight Rate index which measures container shipping rates. 3) Order-book: The order-book contains the number of new ships ordered. It provides an insight on long-term demand for vessels and how their supply is likely to change as it takes 2-3 years to build a ship. 4) Average age of fleet: The age of a ship ranges between years, at that age the ship will most probably be scrapped. In the shipping market, there is an indirect relation between average age of a fleet, and scrapping activity. If a fleet is as old as 20 years then scrapping activity is very low due to higher demand for ships and vice versa. 5) Second-hand ship values: Price movements in older vessels often reflect the nearer-term fundamental outlook and they tend to lead new build prices. Value of second hand vessels is affected by the age, fuel prices and freight rates at time of evaluation. If an available-for-sale vessel is young and fuel prices are low, freight rates are likely to be high and in turn second-hand ship should create more profits, making it more attractive to buy than ordering a new-build. 6) Distance-Adjusted Demand: Distance-adjusted demand (expressed in ton-miles) offers a more accurate measure of demand for shipping services and tonnage. It mainly expresses the distance travelled by a ship to reach its final destination. The supply of vessels can be limited if demand for long-haul trade routes is increasing, while fleet size remains constant, which eventually causes a shortage in capacities, resulting in an undersupply situation, and freight rates hike. 7) Ports: Ports play a vital role in sustaining growth in a country s trade and commerce, if handled capacity and port expansion capacity is sufficient to meet trade demand. Both cargo tonnage and container traffic are the commonly-used measures for ports activity. Maritime Transport Segments There are three main categories of merchandise dominating the world market: a) liquid bulk, b) dry bulk, and c) general cargo (containerized goods) shipping: 1) Liquid bulk shipping (30% of global seaborne trade in 2015) consists of crude oil, petroleum products, liquefied gases (Liquefied Natural Gas LNG and Liquefied Petroleum Gas LPG ) and chemicals. Oil is usually carried by tankers and measured in deadweight tons (DWT), while liquefied gases are carried by gas carriers and measured in cubic meters (CBM or CU.M). 2) Dry bulk shipping (54% of global seaborne trade in 2015) consists of solid raw materials mainly of iron ore, coal, grain, or minor bulks, which are all shipped in bulk, carried by bulk carriers, and measured in DWT. Dry bulk shipping is a critical contributor to seaborne trade growth. 3) General cargo/container (16% of global seaborne trade in 2015) consists mainly of manufactured goods measured by twenty-foot equivalent units (TEU) and carried by container ships. An intermodal container is a twenty-foot or forty-foot in length. Container shipping is considered to be one of the key elements in transportation, offering minimum cost as compared to air and land transportation. International seaborne trade in 2014 Market share of each segment *Total Liquid bulk 32% **Total Dry bulk 52% Source: UNCTAD secretariat, based on Clarksons Research, Seaborne Trade Monitor, May Page 3

4 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) The fleet analysis is composed of various sub-types having their own momentum in the market Shipping/Maritime Transport General Cargo (Container) Dry Bulk Off-Shore Support Liquid Bulk (Oil & Gas) Container Ships TEU Bulk Carriers DWT Driving Support Crude Oil Tankers DWT Handy size Tanker/(Medium Range-MR) (10,000-50,000) Aframax/(Long range1-lr2) (80, ,000) Very Large Crude Carrier(VLCC) (200, ,000) Construction Support Product Oil Tankers DWT Panamax/(Long range1-lr1) (60,000-80,000) Suezmax (120, ,000) Ultra Large Crude Carrier(ULCC) (320, ,000) Feeders (<1,000 TEU) Panamax (3,001-5,100 TEU) Ultra Large Container Vessels (15,000+TEU) Handysize (1, TEU) Post/New Panamax (5,101-14,500 TEU) Handysize (10,000-40,000) Handy max (40,000-65,000) Panamax (65, ,000) Capesize (100,000+) Anchor Handling Tug Platform Supply Safety Standby LNG Tankers m3 or cf LPG Tankers m3 or cf Small Gas Carrier (<20,000 m3) Medium Gas Carrier (20,000-40,000 m3) Large Gas Carrier (40,000-60,000 m3) Very Large Gas Carrier (>60,000 m3) Feeder vessels are ships of various sizes, but mostly understood to be seagoing vessels. Feeders collect shipping containers from different ports and transport them to container terminals. Handysize vessels refer to container, dry bulk or oil vessels. Due to their small dimensions, handysize ships can serve ports and terminals of all sizes. As a result, handysize vessels make up the majority of bulk carriers. Handy-max/Supramax vessels: These bulkers are well suited for small ports and are primarily used for carrying dry cargo, such as iron ore, coal, cement, finished steel, fertilizers, and grains. Sometimes this category is also used to define small-sized oil tankers. Panamax vessels are mid-sized cargo ships that are capable of passing through the lock chambers of the Panama Canal. They are built strictly in accordance with the dimensions of the lock chambers and the height of the Bridge of the Americas. Suezmax vessels: Named after the Suez Canal. Suezmax are medium- to large-sized ships. They are the largest marine vessels that meet the restrictions of the Suez Canal. Aframax vessels are medium-sized crude oil tankers, smaller in size relative to Very Large Crude Carriers (VLCC) and Ultra Large Crude Carriers (ULCC). They are just ideal for short- to mediumhaul oil trades and are primarily used in regions of lower crude production or the areas that lack large ports to accommodate giant oil carriers. Capesize vessels are large-sized bulk carriers/tankers, typically above 150,000 DWT. They are categorized under VLCC, ULCC carriers. Nowadays, capesize vessels can reach up to 400,000 DWT. Capesize vessels are too large in size to pass through the Panama Canal. As a result, they must transit via Cape Horn to travel between the Atlantic and Pacific oceans, hence comes their name. Very Large Crude Carriers (VLCC) are the largest operating crude oil vessels in the world with a capacity in excess of 250,000 DWT. Known also as Supertankers, these vessels are primarily used for long-haul crude transportation from the Arabian Gulf to Europe, Asia and North America. Driving Support Vessels (DSV): Vessels that are used as a floating base for professional diving projects often performed around oil platforms and related installations in open water. Construction Support Vessels (CSV): Vessels that are used to support complex offshore construction, installation, maintenance and other sophisticated operations. CSVs are significantly larger and more specialized than other offshore vessels. Anchor Handling Tug Supply Vessels (AHTS): Vessels that are mainly built to handle anchors for oil rigs, tow them to location, anchor them up, and in a few cases serve as an Emergency Response & Rescue Vessel (ERRV). They are also used to transport supplies to and from offshore drilling rigs. Platform Supply Vessels (PSV): Vessels that are used to carry crew and supplies to the oil platform deep inside oceans and bring cargo and personnel back to shore. Their size varies from small 20 meter long ships to 100meter large ships. Safety Standby Vessels: Vessels that are used to protect offshore installations from wandering vessels. They are also used to provide standby, rescue and emergency duties, and to aid closely in the installation and preparation of rescue operations, such as helicopter landing and take-offs, and helping personnel working over side and near or in the water. Page 4

5 2.8% 2.2% 2.4% 2.5% 2.6% 2.5% 2.4% 2.8% 2.9% 3.1% 3.1% 4.1% 3.9% 4.3% 4.5% 5.3% Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) II.Developments in International Seaborne Trade World Economic Situation Since 2012, the global economy has continued to experience slow growth on the back of weak economic activities in key emerging and developing countries, especially from the BRICS countries (Brazil, Russian Federation, India, China, and South Africa). According to World Bank s data, BRICS account for 40% of global primary energy and food commodity consumption and more than 50% of global metal consumption. The rebalance in China's economy from commodity-intensive to service-intensive, besides lower GDP contribution from investment and over-capacity in the industrial and construction sectors, has led to the shrinking of the country s imports. The rise in financial market volatility, currencies depreciation, sharp fall in capital inflows and declines in commodity prices are also contributing factors to the fall in global trade activities. As a result, 2015 global trade witnessed a slowdown in growth, increasing only by 0.3% versus Despite the above adverse factors, the World Trade Organization s (WTO) Secretariat for Trade remains positive about the sector s growth and forecasts world merchandise trade to pick up and increase by 3.9% in 2016, 4.3% and 4.5% for 2017and 2018, respectively. World Seaborne Trade Seaborne trade general trends: Demand for maritime transport services and seaborne trade volumes continue to be shaped by global economic growth and the need to carry on merchandise trade. There is a close correlation between industrial production, seaborne trade, and world GDP growth. As industrial activities and commodities production rise, demand improves on seaborne trade, directly leading GDPs to grow, since trade is a main component of GDP. According to the latest available data, the industrial production in 2014 increased by 2.4% on average, which reflected a 3.4% increase in seaborne trade, adding 2.6% to the world GDP. Going forward in terms of ton-miles: World seaborne trade in ton-miles should increase by a CAGR of 2.4% through 2018, an assumption based on IHS Global insight data and forecasts. Going forward in terms of volumes: World seaborne trade volume should witness steady growth in the coming three years (as a percentage of total merchandise trade growth) by 3.1% in 2016, 3.4% in 2017, and 3.6% in 2018 as per WTO s data. These slow growth expectations are mainly triggered by the previouslymentioned adverse factors for the world economic situation. III. General Market Indicators Overview Over the period, average freight rates fell by roughly 50%, compared to the period, as the world fleet was underutilized due to sluggish demand following the world economic downturn and vessel oversupply. In 2015, the performance of the Clarksea Index improved by 24% YoY, led by a spike in tanker vessel demand, increasing freight rates above the pre-financial crisis levels on the back of low oil prices which led to an unprecedented surge in oil demand for stock build-ups and refinery in-take. Meanwhile, the dry bulk and off-shore segments experienced a huge vessel supply glut and faced fluctuating demand for both lines of business. However, in Q1 2016, the index kept falling to reach USD10,000/day, reflecting a 30% YoY decline compared to This fall indicates an imbalance in the market across the major segments. Second-hand ship values were up 4% YoY for the same scenario that boosted the Clarksea index, as second-hand vessels became a more lucrative option for buyers (as the lead time to order a new vessel is around two years from order date to delivery). Age of the fleet and order-book indicates that at end of November 2015, only 9% of the world fleet (162.3mn DWT) is aged 20 years or older, while the order-book/current fleet ratio stands at 17%. This may intensify pre-mature scrapping of vessels as demand is not enough to bring the huge inflow of vessels entering the market into use. According to Clarksons, more than 70% of the order-book (215mn DWT) is scheduled to be delivered in If demand remains at the current levels, there is high probability that most vessels older than 15 years would need to be scrapped within the next two to three years. The exception will be the tanker segment, as it is less likely to experience high scrapping activity, given their profitability. Relation between industrial production, GDP & seaborne trade Merchandise trade & real GDP growth Clarksea index Clarksea tanker and dry bulk indices 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% E 2016F 2017F 2018F World GDP World Merchandise trade Source: IMF, UNCTAD Statistics Source: World Bank, WTO Secretariat Source: Clarksons, Danish Ship Finance Source: Clarksons, Danish Ship Finance Page 5

6 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) IV. Maritime Transport Segments A. Dry Bulk Shipping Dry bulk shipping has been struggling because of weak demand (mainly from China) for coal, iron ore, and minor bulks, leading to a 0.3% fall of dry bulk distance-adjusted demand in In addition, vessel supply was 29% higher than demand. This, coupled with the decline in distance-adjusted demand, led dry bulk shipping earnings to fall by 29% in The slowdown in global seaborne coal shipments (23% of total dry bulk shipments) in 2015 was led mainly by the 5.7% fall of coal demand in China (which accounts for c.50% of total global consumption) caused by the Chinese electricity-sector transformation to using natural gas instead. This was translated into a YoY drop of 30% in Chinese coal imports in Q Additionally, the 15% decline in US imports in 2015 further curbed seaborne thermal coal imports. Global iron ore (25% of dry bulk shipments) trade grew by only 2% in 2015 as compared to 15% in 2014 according to a report by Clarksons Research in January This was mainly ascribed to the slowdown in industrial activities of China, depressing steel production growth by 2.6%. China s iron ore imports increased by 2.2% YoY in 2015 despite a 2.6% contraction in Chinese steel production and weak domestic demand. This rise in iron ore imports was due to substituting the majority of domestic iron ore portion, which has low iron (Fe) content, with imported iron ore from Australia and Brazil. To compensate for shrinking demand at home, steelmakers in China exported excess supply at record levels, causing global prices to fall sharply to USD40/ton (more than 50% decline compared to 2014). Minor bulks trades (28.8% of dry bulk shipments) are dominated by various inputs going into either the manufacturing or the construction sector. Growth in minor bulk trade is estimated to have increased by only 1.5% in 2015, aided by lower Chinese demand for imports of forest products, steel products, nickel ore, and various other smaller cargoes. A 3-4% growth in other minor bulks (fertilizers and agricultural) in 2015 failed to keep growth in minor bulks from slowing. Dry bulk carriers spot rates: Weak dry bulk demand has heavily affected spot rates. The Baltic Dry Index, an indicator of bulk-carrier spot rates, declined to its second lowest annual average of 718 points in 2015, or USD7,000/day, the lowest annual average bulk carrier earnings. On 17 June 2016, the Baltic dry index decreased an average 587 points to reach an average spot rate of USD5,566. (The average is calculated based on all sizes of dry bulk ships.) The Outlook China is expected to be the main consumer affecting dry bulk demand as it accounted for 38% of global seaborne dry bulk demand in 2015 as per IHS Global Insight and Danish Ship Finance. This means that any changes in the Chinese seaborne dry bulk trade will have a significant impact globally. In the medium-term outlook, Seaborne Dry Bulk demand is expected to grow by only 3.0% annually from 2015 to 2018 compared to 5.1% annually from 2010 to 2015 (IHS Global Insight - November 2015). Slower growth in demand is forecasted based on the following factors: Global coal import demand is forecasted to decline at a 5.3% CAGR until 2021, according to the Institute of Energy Economics & Financial Analysis (IEEFA) and Energy Information Administration (EIA). The Chinese Metallurgical Industry Planning & Research Institute forecasts the country's iron ore demand would be 1.073bn tons in 2016 (4.2% lower than in 2015), 920mn tons in 2020, and 710mn tons in This will increase pressure on seaborne iron ore trade. Grain exporters and trade may face a fallout if China (which accounts for 25% of seaborne grain demand) manages to rebalance its economy, modernize its agricultural sector and increase its domestic grain output. In the long term, it is expected that grain demand will continue to grow, especially in Africa and Asia, as the urbanization process pulls more people out of poverty and increases demand for both food and feed. Minor bulk demand and trade are also expected to take their share of the fallout from the current slowdown in China s economy. Given the global slowdown in the manufacturing and construction sectors, growth in minor bulk trade is expected to slow to only 1% annually until 2018, according to Danish Ship Finance. Dry bulk carriers Fleet is expected to grow 4% in 2016 after delivering vessels that were postponed in addition to new orders, but thereafter the order-book would shrink considerably, and if contracting continues to be low, fleet growth could fall to around 2% in 2017 as per Danish Ship Finance. The Chinese steel exports in 2015 rose 20% YoY. But this trend is not expected to continue as the US, UK and other steel-producing countries are implementing protection strategies to mitigate the risk of losing domestic steel producers. Signs emerged in January 2016 as Chinese steel products exports fell by 5.3% YoY and 8.6% MoM, compared to December This was in line with recent warnings by China Iron & Steel Association (CISA) that sustained increases were unlikely, given a rise in foreign anti-dumping measures against Chinese producers. Developing countries are currently benefiting from the current oversupply in iron ore and steel products, especially countries with high construction activities. Accounting for 23% of seaborne dry bulk trade in 2015, coal is expected to weigh heavily on that trade. Iron ore trade is expected to be weak because of expectations of lower demand in China. The supply surplus is expected to be larger in the coming three years as demand is seen failing to absorb the world dry bulk fleet. Dry bulk demand/supply balance to 2018 Source: Clarksons, IHS Global Insight, Danish Ship Finance Dry bulk order-book expectations to 2017 Source: Clarksons, Danish Ship Finance Page 6

7 USD/barrel Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) B. Liquid Bulk Shipping Crude Oil (Dirty Oil) Starting 2012, global crude oil production has been leaping, lifted by sharp a rise in US crude oil production after the US started utilizing its shale oil and increasing its oil production by 55% to 9.3mnbpd in 2015, making it the highest since May Meanwhile, other crude producers, such as Brazil, Iraq and Saudi Arabia, also increased their production by 600,000bpd in According to IHS Global Insight data, overall crude oil production in 2015 increased by 2mnbpd. That said, demand for crude oil did not increase as much, translating into a sharp fall in prices. Demand has been declining in some regions, including the US which used to be one of highest importers and cut its imports by c.19% from its peak in Again, the slowdown in China s economy reduced the country s share of global crude oil demand to only 24% in 2015 compared to 30% in 2014 and 60% in 2011 as per EIA data. Crude oil prices fell from over USD100 per barrel in 2014 to around USD31 per barrel by end of January 2016, which marks the lowest level since Low oil prices drove seaborne crude oil demand to increase by 4.8%, reaching 2.93bn tons in 2015 compared to 2.79bn tons in 2014, according to Clarksons Research The fall in oil prices encouraged countries to increase their crude oil reserve build-ups. The IEA estimated global oil consumption rising by an average of 1.7mnbpd or 1.8% in 2015, while global oil inventories increased by 1.9mnbpd in 2015, marking the second consecutive year of inventory builds. Floating storage build-ups forced cargoes to stay longer offshore which in turn benefited the crude tankers. Asia, China in particular, continued to be the main driver of growth in seaborne crude oil trade in The Crude Oil Tanker Market Freight rates: Lower crude oil prices boosted crude oil tanker demand which translated into higher freight rates. According to Lloyd s List Intelligence, spot rates in the Baltic Dirty Tanker Index (BDTI) rose 6% YoY throughout 2015 as compared to 2014 average. Time charter rates responded stronger to the low oil prices as one-year charter rates spiked to the highest level since 2010, reaching an average of USD49,500 in 2015, up 50% YoY from USD33,000 for Page 7 Overall, average tanker earnings (spot and time-charter) rose 73% YoY with the VLCCs in the lead as their average earnings hit over USD60,000/day in 2015, a 120% increase from 2014 rates. Fleet growth: The inflow of new vessels continued to be low (up only 2% YoY), while crude oil demand remained high, up by 4.8% YoY. Slower growth in supply resulted from owners postponing scrapping to take advantage of high freight rates. Demand/supply balance: Despite the 4.8% rise in seaborne crude oil trade, distance-adjusted demand increased by only 1% while vessel supply rose by 2%, increasing vessel supply surplus to 29% (above demand) in This was due to temporary factors supporting demand in 2015, such as floating storage, inventory build-ups and refinery intake which did not affect the end-user consumption (demand). The Outlook Storage builds (both commercial and strategic petroleum reserves) are expected to support growth in demand for seaborne crude oil volumes, driven by low oil prices, a trend that is expected to continue in Overall, global seaborne crude oil imports are expected to increase at a CAGR of 1.7% through 2020, driven by Asian demand and global refinery additions, which are expected to grow by close to 5.5mnbpd in the coming five years, according to IHS Global Insight and EIA estimates. Meanwhile, new crude oil tankers are expected to increase by 4% in 2016 and 2017 with expectations of unchanged supply surplus. Major oil exporters like Saudi Arabia increased output in 2015 to retain market share which increased oil oversupply. Moreover, the meeting of top oil exporters in Doha, Qatar to cut production back in April 2016 had failed. This implies that the global market will likely remain flooded, increasing depression in oil prices, while overall end-user demand growth will not offset the oversupply. Crude oil prices forecasts Source: World Bank oil forecasts Crude tankers one-year time charter rates Source: Clarksons, Danish Ship Finance Crude tanker fleet order-book to 2017 Source: Clarksons, Danish Ship Finance Crude oil prices (World Bank), average, spot USD/bbl

8 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) Product Oil (Clean Oil) Product oil (petroleum products) is (are) refined from crude oil, unlike petrochemicals which are a collection of well-defined, usually pure chemical compounds. Petroleum products are complex mixtures. The majority of crude oil is converted to petroleum products which include several classes of fuels, such as gasoline, jet fuel, diesel fuel, and heating oil. Developments in refinery capacities can significantly shape crude and product trade patterns as mentioned in the crude oil tanker section. The fall in oil prices stimulated demand which led refineries to operate at near maximum capacities, achieving their highest margins in years. This happened because refined products prices lagged behind crude oil prices. Also, high US and China gasoline demand has increased by more than 8% and 15%, respectively, boosting demand for petroleum products in This high demand encouraged Saudi Arabia and the United Arab Emirates to increase their refinery capacities in 2015 by 400,000bpd, adding significant volumes to the markets, topped by Asia, and benefiting the LR2 market in particular as the Middle East mainly uses LR2 product tankers for oil shipping, according to Clarksons and Danish Ship Finance. That said, distance-adjusted demand for product tankers increased by only 1% because the majority of seaborne petroleum products trade routes are characterized as being shorthaul, which negatively affects distance-adjusted demand. Supply surplus widened in the product tanker market in 2015, reaching 33% as product tanker fleet grew by 7%, while distance-adjusted demand remained almost flat (+1% YoY). Product Tanker Market Overview Freight rates: After a few years with a growing imbalance between supply and demand, the product tanker market has improved significantly in Average tanker earnings jumped 73% YoY in The recovery started from the end of 2014, when higher refinery throughputs and lower oil prices boosted product tanker demand. This development has reflected in average Baltic Clean Tanker Index (BCTI) (spot rates index) which reached 676 in the first three quarters of 2015, compared with 566 in the same period in Time charter rates have benefited from the surge in spot rates, especially the LR1 and LR2 time charter rates, which doubled to USD30,000 in 2015 from an average of USD15,000 in MR time charter rates have reacted slower, due to weak demand for MR vessels. The spike in freight rates dragged the scrapping activity to a new record low and supported fleet growth expectations in Consequently, secondhand prices rose sharply by 10% at the start of 2015 and remained fairly stable since. The Outlook Seaborne petroleum products demand is expected to increase slightly by 1.3% annually over the coming five years, mainly driven by Asia, according to IHS Global Insight forecasts. The Middle East in particular is expected to supply much of Asia s additional import volumes. Even though the Middle East refineries may be operating at near-maximum capacities, they are set to grow by 1.3mnbpd over the coming five years. This will boost demand for LR2 tankers in particular, given that loading facilities in the Middle East are built to handle these types of vessels. Asia, mainly China, will continue demanding higher-quality petroleum products which contain less sulphur content and could result in a surplus of low-quality petroleum product barrels in the market. But these barrels may be exported to Africa because their standards of fuel are lower, and in turn Africa will increase its imported volumes of petroleum products by 5% per annum, overtaking Europe as the world s third-largest import region. In addition, Asia, Europe and the Middle East are expected to become larger suppliers, especially the Middle East given its closer location to African countries. This situation may generate large volumes and stimulate inter-regional trading while the African port infrastructure is hardly able to handle LR tankers. MR tankers are expected to benefit the most from increasing African import volumes. Product tanker fleet is expected to grow at a slower rate than 2015 due to the large oversupply that occurred in Moreover, the new tanker orders during the intense contracting activity in 2013 amplified the supply surplus in 2015 as per Danish Ship Finance. Seaborne petroleum products imports to 2020 by region Source: IHS Global Insight, Danish Ship Finance Demand/supply balance for product tankers in 2015 Source: IHS Global Insight, Danish Ship Finance 1-year product tanker time charter rates Source: Clarksons, Danish Ship Finance Product tanker order-book Source: Clarksons, Danish Ship Finance Page 8

9 USD USD 000 s/day Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) Liquefied Natural Gas (LNG) Shipping LNG is natural gas (mostly methane, CH 4 ) that has been converted to liquid form for ease of storage or transportation. LNG trade increased by more than 50% between 2006 and Top LNG importing countries are the Japan, South Korea and China, while the top LNG exporters are Qatar, Australia and Malaysia. LNG Supply: Supply has grown in 2015 as LNG trades and production increased by 1.6% compared to 2.5% in Meanwhile, Australia s LNG export increased by 8.8bn CUM to reach 42bn CUM, thanks to a new plant coming online. North America made a Final Investment Decision (FID) to increase its production capacity by 25.1bn CUM per annum. This means that North America has completed the financing and defined its strategy for the year to come. LNG Demand in 2015 Demand in key Asian markets declined in 2015 as China, which has one of the biggest LNG markets, saw a surprise drop by over 1% (26.5bn CUM) in consumption in 2015 after years of growth of 10%+. Moreover, LNG demand in Japan, the world's biggest importer, dropped 4%, while South Korean demand was 11% down due to weaker energy demand and stronger nuclear and coal energy output, according to Wood Mackenzie. Weak Asian demand was partially offset by new emerging buyers and Europe, such as Egypt, Jordan and Pakistan as they started heavily importing LNG in H through floating storage and regasification units (FSRUs) totaling 7.86bn CUM of LNG imports, accounting for 20% of global LNG imports in 2015 (2.7bn CUM were sourced from Qatar). The three countries contracted more than 27bn CUM to be delivered through Europe s imports for 2015 were estimated at 50bn CUM (+14% YoY), offsetting the fall in Atlantic to Pacific LNG trade flows (-16% YoY). Overall, world LNG trade rose by 2% in Natural gas prices in 2015: The natural gas price index fell by 15% in Q only, as all three main importing markets (the US, Europe and Japan) remained in surplus according to World Bank data. US gas prices plunged 23% reaching USD2.1 per million British thermal units (mmbtu) while European gas prices fell 9 % to USD6.26/mmBtu, as stocks touched record highs, and consumption was weakened by mild weather. Natural gas spot price in 2015 for deliveries to Japan fell by roughly 2% to USD9.06/mmBtu, while spot cargoes of LNG flowing into Asia traded at USD7/mmBtu and to Europe at under USD6/mmBtu. LNG Shipping Market Overview Freight rates: Spot/term-charter rates (T/C) at the beginning of 2015 averaged USD70,000/day, but at year-end, rates fell below USD40,000/day on average (-43%). Spot charter rates for a 160,000 cubic meter dual fuel diesel electric (DFDE) LNG carrier are currently around USD32,000 per day, down 57% from 2014, according to data from RS Platou. The Outlook In the short-term outlook, the global LNG carrier fleet growth is forecasted to sharply rise in 2016 by 12% compared to 8% in Meanwhile, 19 new LNG vessel orders are expected to be delivered and operational in 2016 (12 of which to be dedicated to US export projects and three to FSRUs), as per Drewry Research There are no signs of owners willing to scrap older vessels, suggesting LNG shipping will likely go through a prolonged period of overcapacity. New sources of LNG supply from projects coming online in Australia are expected to reduce demand for spot cargoes from the Middle East, and in turn lowering the overall ton-mile demand for LNG shipping. Natural gas prices are projected by the World Bank to fall in Delivery price to Japan dropped 19% to USD7.90/mmBtu, and price in Europe also lost 19% to reach USD5.57/mmBtu, on continued supply surplus and mounting competitive pressures on oil-linked import contracts. Moreover, natural gas prices in the US are expected to fall by 6% to an average of USD2.32/mmBtu. Long-term LNG demand through 2025 is forecasted to increase by 2% annually, according to British Petroleum (BP) energy outlook for 2015, as natural gas demand will be dominated by the power and industrial sectors. Moreover, the World Bank expects prices to rise due to continuing strong growth in future demand, rising pipeline and LNG exports, prompting a surge in petrochemicals demand. Natural gas prices to Source: IMF and World Bank average forecasts Natural Gas prices USD/MMBTU - Europe Natural Gas prices USD/MMBTU - US Natural Gas prices USD/MMBTU - Japan LNG imports by country in 2015 Source: Wood Mackenzie, Bloomberg LNG vessels time charter rates Years Source: RS Plateau Research report Page 9

10 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) Liquefied Petroleum Gas (LPG) Shipping LPG is a portable fuel that can be used for cooking, heating, and powering vehicles. It also has a range of commercial applications across the manufacturing and agriculture industries. LPG is a classification of hydrocarbon fuel, including propane, butane and other hydrocarbons. LPG is produced during oil refining (using oil derivative naphtha as a base that is derived from crude oil) or is extracted during the natural gas production process (using ethane as a base gas). Instead of destroying or burning off this byproduct, the LPG is captured and used as fuel source on its own. Demand in 2015: Global imports of LPG grew by 5% in 2015, as Asia continued to fuel demand for seaborne LPG volumes. This demand was supported by: The feedstock demand for propylene (using propane as feedstock) which has benefited distance-adjusted demand and VLGC vessels in particular. Sharp rises in prices of ethylene (using ethane as feedstock) boosted its margins and led steam crackers to operate near maximum capacity, increasing the use of LPG as a feedstock, as LPG has a higher ethylene production yield than naphtha (a byproduct from refined crude oil). Supply in 2015: The Middle East remains the leading supplier of LPG to the Asian market (48% market share as of November 2015), but the US is increasingly strengthening its position. The US increased its Asian market share to 7%, thanks to its competitive prices and high propane content and the desire of Asian countries to diversify their supply. Demand/supply balance in 2015: Supply surplus has widened to 11% as the fleet grew sharply on back of higher distance-adjusted demand growing by 5%, while supply surged by 16% in Overview of the LPG Tanker Market Growing LPG demand pushed freight rates during 2015, as the average spot rate reached USD97 per ton. However, during Q VLGC spot rates have dropped 75% compared to their highs in July This is similar to what was seen in the Dry Bulk market in 2008 due to a massive inflow of new LPG tankers in the market while demand hasn t been enough to keep up with the rapidly expanding LPG fleet. Time charter rates have fairly risen throughout most of the past two years, up from around USD1mn per month at the beginning of 2014 to close to USD2.2mn per month in July 2015 (+120%). LPG carrier fleet has grown by 16% in 2015 according to Clarksons data and Danish Ship Finance estimates, as during the first nine months of 2015, 2.4mn cubic meters or 87% of scheduled orders were delivered on time. High freight rates have also led owners, particularly of larger vessel types, to postpone scrapping, which left a bigger LPG carrier fleet and made second-hand ships more valuable. The Outlook Demand for seaborne LPG volumes is expected to keep growing strongly in the coming years (a 5-year CAGR of 5.7%), fueled by rising demand from both the residential and the petrochemical sectors around the world, especially Asia, as the country is by far the world s largest importer of seaborne LPG volumes (IHS Global Insight, November 2015). Over the coming five years, Asian LPG imports are estimated to grow even further, expanding at a rate of 5% per annum to reach 52mn tons in Propane dehydrogenation plants are expected to expand their capacity by more than 8mn tons during the next five years. The expansion forecasts also assume the US will continue expanding its export facilities by roughly 25mn tons (equivalent to almost 45mn cubic meters) over the coming five years, which will improve LPG trade growth. LPG demand in Asia does not only stem from demand from the petrochemical sector, but as well from the residential sector, as the majority of LPG is used for heating appliances and vehicles. In rural areas in Asia, millions of households are currently switching from kerosene and solid biofuels to LPG, which is easier to handle and more environmentallyfriendly. Fleet Growth Expectations The majority of the order-book is scheduled to be delivered in 2016, consistent with the high level of contracting activity that took place in 2014, according to data from Clarksons and Danish Ship Finance in November While postponements are likely to increase, fleet growth is still expected to reach a massive 19% in 2016 as an order-book equivalent to 42% of the fleet is scheduled to be delivered by This will be the highest level ever recorded. Scrapping is expected to counterbalance some of this but only slightly, as only 16% of the fleet is older than 20 years. LPG carrier order-book to 2017 Source: Clarksons, Danish Ship Finance LPG carrier 1-year time charter rates in 2015 Source: Clarksons, Danish Ship Finance Demand/supply balance in 2015 Source: Clarksons, IHS Global Insight, Danish Ship Finance Seaborne LPG forecasted imports by region till 2020 Source: IHS Global Insight, Danish Ship Finance Page 10

11 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) C. Container Shipping The container shipping sector is driven by demand from the market user. As a result, it is more linked to global GDP growth than dry bulk or tankers. Container shipping was developed after World War II and was a major element in globalization. As of 2015, containerized trade represented 15% of total seaborne trade. China accounted for 26.5% of the containerized trade, while North America, along with Central America and the Middle East, were the largest contributors to seaborne container trade growth in Containerized trade consists mainly of manufactured goods. According to data by Clarksons Research in January 2016, seaborne container trade grew by only 2.5% in 2015 compared to 5.3% in Containerized trade in 2015 was affected by global merchandise trade which slowed on the back of the following factors: Economic slowdown of BRICS. Contractions in China s manufacturing sector since Sluggish demand in the container shipping from Europe (which contracted by 1%) compared to a 6% growth in As an overall result, Mainlane container trade routes witnessed their slowest growth of only 0.4%, especially the Far East-Europe trade route which contracted by around 4% in 2015 YoY. Moreover, the North/South container trade route only grew by 1.8%. Container shipping market in 2015 Freight spot rates: Fleet grew by 8% in 2015, outpacing demand growth, which was up by only 2.5%, resulting in a wider supply surplus, and lower fleet utilization rates at 78% compared to 81% in During H1 2015, spot rates soared on the back of temporary factors: Port congestion in the US West Cost (led to limited supply) and the new Intra-Asian services that were introduced at the start of 2015, raising demand sharply, especially for small- and medium-sized containerships (feeders and handy-sized fleets). Limited capacity growth in the small- and medium-sized containership fleets due to increased scrapping activity. This trend was bucked by Q3 2015, as the factors that supported demand diminished causing spot rates to decline sharply. The China Containerized Freight Index (CCFI Composite Index) in 2015 showed that the average container box spot rate fell by 15% compared with the 2014 average. While in the Shanghai Container Freight Index (SCFI Composite index), spot rates were pushed down by 32% reaching USD724/TEU compared to USD1,072/TEU in 2014, according to Clarksons data in January Time charter rates: Ship owners exploited the sharp rise in spot rates in H and succeeded in securing charters at attractive rates, resulting in an overall average growth of 12.6% in Small- and medium-sized vessels benefited the most, reaching USD8,842/TEU on average in 2015 for a 1,700TEU vessel, while large size vessels (Post-Panamax) declined by 7.8% YoY. Starting Q3 2015, time charter rates declined simultaneously with spot rates, as supply was 30% higher than demand in Moving into the first two months of 2016, freight market remained under severe pressure; however supply-side fundamentals still look potentially solid. It appears unlikely in 2016 that there will be any significant upside for time charter rates until demand steps up, which will take time. The Outlook IHS Global Insight expects containerized trade to increase at a 3-year CAGR of 5.2% through However, there are downside risks, as the current market is oversupplied with super-large vessels. This is a trend that is expected to continue since most of the vessel order-book is estimated to be delivered in the coming three years. Three demand growth scenarios described by Danish Ship Finance, 3-year CAGR of 5.2%, 4% and 2% scenarios, respectively, showed that even if demand reaches 4%, the oversupply will remain at the current levels. The container industry will continue to be idled by low fleet utilization in the coming years, despite market fundamentals indicating that current and future demand will fail to employ the capacity. Ship owners' priorities now are to retain market shares and lower marginal costs, but the result is a deflationary market. Demand/supply balance for different demand scenarios till 2018 Seaborne container trade volumes in 2015 Source: IHS Global Insight, Danish Ship Finance China Containerized Freight Index (CCF) Source: Clarksons, Danish Ship Finance Container fleet, order-book vs. Utilization rates Source: Clarksons, IHS Global Insight, Danish Ship Finance Source: Clarksons, IHS Global Insight, Danish Ship Finance Page 11

12 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) D. Off-Shore Support Market Offshore support vessels (OSVs) are ocean-going vessels used for transporting cargo, goods, supplies, crew, as well as carrying out off-shore exploration and production across oil platforms. OSVs support marine off-shore drilling activities through transportation of off-shore energy resources. They also facilitate installation of oil rigs. They are mostly used by oil and gas companies for providing services for exploration and production activities. The OSVs are either operated by ship owners or ship lessees. In addition, OSVs facilitate maritime logistic operations for different industries such as subsea and deep water mining. Off-Shore Market in 2015 The off-shore market is fundamentally linked to oil prices, and the activity of oil exploration and production. In January 2015, Brent price recovered to stand at USD49/barrel after falling sharply from Q Brent prices were rising in the beginning of 2015 and reached USD65/barrel but were knocked down in December 2015 to below USD37/barrel due to oil oversupply. The year 2015 ended with an increase 2.9% in oil supply, while demand rose by only 1.8%. During 2015, a lot of factors led to the oil supply glut and falling prices, including OPEC policies, persisting US shale oil segment and the weakening global economic outlook. Oil producing companies reacted to the falling oil prices by severely cutting exploration and production spending by around 19% and laying off jobs as final investment decisions knocked the off-shore development projects 49% down, as operators were reluctant to commit capital to long lead-time projects. Off-shore discoveries in 2015 were the lowest in over a decade after declining globally by 19% compared to 2014 and 41% compared to the average. Only 68 off-shore fields started up in Off-shore support vessels (OSVs) index fell by 21% in 2015 as oil activity weakened. OSVs order-book fell by 32% and the fleet grew by 3.5% compared to 5.3% on average in the period. Also, off-shore new-build vessel contracting suffered a 68% drop compared to Off-shore term rates in 2015: The North Sea Term Index was 54%, down YoY compared to 2014, as the rate for a large Anchor Handling Tug Supply vessel (AHTS) was only USD16,000/day on average compared to USD35,000/day in Also, the rate for a large Platform Supply Vessel (PSV) declined at the same rate reaching USD6,000/day, compared to USD13,000/day in Global oil rig fleet utilization stood at 73% at year-end 2015, compared to 87% in 2014 and 96% in The Outlook For 2016, expectations of steady recovery were disappointed with exploration and production cuts and oil prices still falling. Off-shore seems to be facing a downturn that is expected to continue in During the next five years, oil prices are forecasted to experience a slow recovery but remain low compared to 2014 and 2013 levels, reaching only USD58.8/barrel in This forecast is based on a gradual pick-up in oil demand along with better management of the oversupplied market by The slow price recovery will tighten the lid on E&P activity, choking down oil producing companies. Field discoveries and start-ups Source: Clarksons Research 2016 Page 12

13 8.9% 15.0% 11.1% 10.2% 10.6% 10.6% 10.1% 9.9% 10.0% 28.5% QAR mn Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) V.Qatar Overview Qatar is a high-income economy backed by its position as the world's third largest owner of natural gas reserves after Russia and Iran. Qatar has enjoyed significant economic growth with real GDP increasing by 10.7% per annum on average since It is now one of the richest nations in the world with GDP per capita exceeding USD100,000 at PPP (Purchasing Power Parity) exchange rates. Qatar is currently the largest LNG exporter in the world. Qatar managed to sustain growth as crude oil prices continued falling: Qatar has made considerable efforts and managed to reduce the dependency of its economic growth on revenues generated from the hydrocarbons sector, as the government encouraged investing in sectors such as financial services, construction, health, transportation, and manufacturing. Qatar s economy managed to grow by 3.7% in 2015 driven by the nonhydrocarbon sector which climbed 10.1%, while the hydrocarbon sector has witnessed a 2.2% decline in growth, according to Ministry of Development Planning & Statistics (MDP&S). Annual inflation, as measured by the change in the consumer price index, is estimated to have averaged 1.5% in 2015 as inflation of residential properties decelerated sharply in Moreover, falling prices of food and other commodity are estimated to keep foreign inflation low. Gas production: Since the end of the ramp-up phase in LNG production in 2011, LNG exports have flattened to account for 58.3% of total production in Qatar exports 11.3% of its gas production via pipelines. Due to the price fluctuations and postponements of further gas development in the North Field, no further increases in gas exports are expected. Qatar Economic Outlook Qatar s economy is expected to grow by 4.3% in 2016, followed by a slowdown to 3.9% in 2017, as non-hydrocarbon should grow by 9.9% in 2016 and 10% in 2017, according to MDP&S forecasts. Hydrocarbons are expected to grow by 0.4% in 2016 as output will get a boost from Barzan, a new pipeline gas production facility scheduled to come on stream in Barzan will reach full capacity in In 2017 the hydrocarbon sector is predicted to contract by 0.3%, affected by oil prices which are expected to fall further reaching an average of USD37/barrel in 2016 and USD58.8/barrel by The combination of shutdowns and maintenance of production facilities, as well as declining output from maturing oil fields is expected to continue. Qatar Transport Sector Outlook The Qatari shipping sector continues to be dominated by the export of the country's key commodities, which are mostly transported by the national carrier Nakilat. However, Qatar also aims to increase its container and dry bulk shipping presence through the new Hamad Port, which is being developed to focus on capturing some highly profitable transshipment trades. In addition, Qatar is opening new container trade lines, such as the one recently opened with India using Milaha as the shipping base that would boost Qatar s future container shipping sector. The development of the local transport and logistics sector is a strategic priority for Qatar. There are more than USD35.8bn transport contracts scheduled to be awarded in , as the country installs the infrastructure it needs to deliver the 2022 FIFA World Cup. The future of LNG & LPG shipping in Qatar remains robust LNG and LPG shipping in Qatar is expected to grow strongly on the back of the Brazan project which will boost natural gas output. Qatar is also working aggressively on securing its global market share as it recently secured long-term LNG contracts with Pakistan and revised the LNG prices on some of its existing contracts with key importers. Global demand for LPG is expected to increase by 5.7% per annum till 2020, which will highly benefit LPG in Qatar. Qatar s LPG shipping is forecast to grow by the same rate. Dry bulk & container shipping While global dry bulk and container shipping has plummeted in 2015 due to oversupply of vessels, demand for dry bulks and containers are expected to recover in the coming three years at an average of 3% per annum. The dry bulk and container shipping in Qatar is expected to be boosted by the demand from infrastructure and construction projects as containerized trade in Qatar has been growing by 11.5% per annum since Off-shore support services The off-shore support segment is directly affected by oil exploration and production activity. Production and budget cuts are already occurring and expected to continue in both 2016 and 2017 and slightly inch up by 2020 as oil producers manage the oversupplied market. Petroleum products shipping The export volumes from Qatar of petroleum products shipping is expected to grow slowly by 1.3% annually until 2020 on the back of low oil prices, oversupply and weaker demand. Qatar containerized imports trade 12,000 10,000 8,000 6,000 4,000 2,000 - Jan-13 Jan-14 Jan-15 Jan-16 Source: MDP&S Qatar real GDP growth % year on year Hydrocarbons Non-hydrocarbons Real GDP Growth 19.6% 13.4% 4.9% 4.6% 4.1% 3.7% 4.3% 3.9% 1.2% 0.1% 0.4% -1.5% -2.2% -0.3% f 2016f 2017f Source: MDP&S Page 13

14 Qatar Shipping Industry Sector Note Qatar Maritime Industry Overview (Cont. d) We initiate coverage in this report on Qatar Navigation Milaha and Qatar Gas Transport Nakilat with a Buy/Low Risk rating for each. Of the two stocks, we favor Nakilat as we believe it is more defensive given: Its long-term agreements that ensure a stable revenue stream and margins, Growing demand for LNG as the best alternative to meet increasing environmental standards, and Minimal earnings fluctuation exposure to oil prices due the nature of its long-term contracts. Total Revenues (QARmn) 2015a 2016e 2017e 2018e 2019e 2020e 2021e CAGR - 6 years Milaha 2,998 2,767 2,448 2,456 2,590 2,672 2, % Nakilat 3,140 3,167 3,195 3,222 3,251 3,279 3, % EBITDA (QARmn) Milaha 1, % Nakilat 2,329 2,367 2,388 2,408 2,429 2,451 2, % EBITDA margin Milaha 39.3% 30.5% 31.7% 31.5% 31.3% 31.1% 30.8% Nakilat 74.2% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7% Net Income (QARmn) Milaha 1, % Nakilat 982 1,094 1,185 1,255 1,328 1,388 1, % Total Revenues - YoY growth Milaha 13.8% -7.7% -11.6% 0.3% 5.5% 3.2% 1.1% Nakilat 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9% EBITDA - YoY growth Milaha 23.1% -28.4% -7.9% -0.3% 4.7% 2.5% 0.1% Nakilat 0.1% 1.6% 0.9% 0.9% 0.9% 0.9% 0.9% Net Income - YoY growth Milaha 4.3% -31.6% -17.6% 1.9% 7.9% 6.2% 8.5% Nakilat 9.9% 11.3% 8.3% 6.0% 5.8% 4.6% 5.0% Source: MubasherTrade Research estimates Page 14

15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Qatar Navigation (Milaha) Qatar Equities Energy & Utilities Initiation of Coverage A diversified business model with growing demand and consistent dividend stream Initiate with a Buy/Low Risk Buy Low Risk Price Target: QAR99.19 ETR: +15.7% One of the few companies in Qatar that strongly leverage on the country s overall economic growth. Leading market share in the container shipping line between Qatar and the UAE. Largest shareholder in the world s leading LNG transporter: Nakilat. Promising portfolio of both financial and real estate investments. Initiate with Buy/Low Risk; PT QAR99.19/share (ETR: +15.7%) Deeply linked to Qatar s economic growth story: Qatar Navigation s (Milaha) diversified business model makes it well positioned to benefit from the exceptional growth in all aspects of the Qatari economy, aided by an increase in trade volumes, substantial investments in infrastructure and transportation projects, and the boost in Qatar s property market. Strong position in the container shipping: The container feedering unit of Milaha is the dominant player in the container trade traffic between Doha and the UAE (main trade hub to Qatar), with a 90% market share and over 66% of the overall import traffic between Qatar and the UAE. Milaha also secures several exclusive containerized export contracts, such as with Muntajat (gateway to Qatar s exports of over 10mn tons of chemicals and petrochemicals products) and other main companies. Nakilat the catalyst to Milaha s bottom line: The 30% stake in affiliate Qatar Gas Transport Company (Nakilat), the world s leading LNG transporter, secures Milaha over QAR280mn annually in share of profits. An investment arm managing promising real estate development projects and financial portfolio: With huge growth anticipated in Qatar s infrastructure development creating opportunities for more warehousing and distribution projects, Milaha Capital has a relatively large portfolio of real estate assets that are spread across Qatar with exposure to the residential, commercial, and showrooms/retail market. In addition, it also manages a large portfolio of blue chip stocks listed on the Qatar Exchange, which generates attractive dividend yields. Initiate with Buy/Low Risk; PT of QAR99.19 (Expected Total Return ETR +15.7%): We initiate coverage on Milaha (QNNS.QE) with a Buy/Low Risk rating and a one-year Price Target (PT) of QAR99.19/share based on sum-of-theparts (SOTP) methodology for the business operations of each segment using a 5-year DCF valuation model and a DCF-based value for Milaha s 30% stake in Nakilat. At our PT, QNNS would be valued at 15.2x 2016e PER. Stock Performance & Details QNNS (QAR) vs. DSM Rebased Volume (RHS) QNNS DSM Rebased Stock Details Last price (QAR) W High (QAR) W Low (QAR) M-ADVT (QARmn) 2.88 % Chg: MoM -1.7 % Chg: YoY % Chg: YTD Mubasher Ticker QNNS.QE Bloomberg Ticker QNNS QD Capital Details No. of Shares (mn) Mkt Cap (QARmn) 9,791.9 Mkt. Cap (USDmn) 2,689.6 Free Float (%) 48.0% QARmn 2013a 2014a 2015a 2016f 2017f 2018f Revenue 2,305 2,633 2,998 2,767 2,448 2,456 EBITDA , Net Income 950 1,049 1, Revenue Growth (%) 0.6% 14.3% 13.8% -7.7% -11.6% 0.3% EBITDA Growth (%) 8.5% 8.5% 23.1% -28.4% -7.9% -0.3% Net Income Growth (%) 13.7% 10.5% 4.3% -31.6% -17.6% 1.9% EBITDA Margin (%) 38.2% 36.3% 39.3% 30.5% 31.7% 31.5% Net Margin (%) 41.2% 39.8% 36.5% 27.1% 25.2% 25.6% Net Debt (Cash) 1,044 1,645 2,844 2,778 2,475 2,141 EPS (QAR) BVPS (QAR) DPS (QAR) PER (x) 9.0x 10.3x 9.9x 13.1x 15.9x 15.6x PBV (x) 0.7x 0.8x 0.8x 0.7x 0.7x 0.7x Dividend Yield (%) 6.7% 5.8% 5.2% 4.3% 3.5% 3.6% Source: Company reports, MubasherTrade Research estimates Amr ElDaly Senior Equity Analyst Mubasher International Amr.ElDaly@MubasherFS.com Page 15

16 Qatar Navigation Milaha Qatar Initiation of Coverage Valuation & Recommendation DCF One-year PT of QAR99.19/share: We used the DCF model to value Milaha. We have built a twostage forecasting model: A high-growth period through 2021, followed by a stable-growth terminal period. We have discounted free cash flow to the firm (FCFF) at a weighted average cost of capital (WACC) of 6.52%, resulting from a cost of equity (COE) of 8.18% and an after-tax cost of debt of 2.38%. We derived COE as follows: 10-year US Treasury yield of 1.69%. Qatar s equity risk premium (ERP) of 7.29%, derived from US ERP of 6.12% and a country risk premium of 1.17% based on its Aa2 country rating. Adjusted 5-year monthly historical beta of Terminal growth rate (TGR): 3.0%. We reached a one-year fair value (FV) of QAR95.54/share. PT of QAR99.19/share (ETR: +15.7%), initiate with Buy/Low Risk: We reached a one-year PT of QAR99.19/share (including 2016e DPS), implying an upside potential of 15.7%. At our PT, QNNS would be valued at 2016e PER of 15.2x and 2016e EV/EBITDA of 16.9x. We see 2016e dividend yield at 4.3%. In reaching our PT of QNNS, we added: Our estimated market value of 370,000 sqm raw land at a 50% discount to fair value. We applied this conservative discount factor according to our estimates or the utilization period. Our estimated book value of long-term loans extended to LNG and LPG companies as of 31 December Book value of Investments in subsidiaries and other long-term investments, excluding Nakilat as of 31 December The fair value balance of financial assets of Milaha group as of 31 December In addition to the above, we added our estimated excess cash, deducted our estimated value of debt and accumulated minority interest as of December 2016 to reach the fair value of Milaha s equity. We also considered deducting our estimated 2016 projected balance of employees end of service benefits. Rather than using the market value of Nakilat, we separately valued Milaha s 30% stake in Nakilat, which is treated as an investment in an associate using DCF valuation to arrive at a fair value of QAR26.13/share discounted by a WACC of 6.96% based on a US risk free rate of 1.69%, Qatar equity risk premium of 7.29%, a beta of 0.829, and a TGR of 3.0%. We did not take into account revenues from new Hamad Port which will replace the existing Doha Port as the main commercial port in the country. We believe that in case Milaha wins the operation tender, this can potentially increase our PT of QNNS by 15% or QAR15.34/share to QAR114.52/share, (ETR: +33.6%). Investment Rationale Capitalizing on the Qatari growth story. Dominant player in Qatar, enjoying government support. Business diversification that plays a major role in decreasing overall operational risks. Expanding fleet, state-of-the art equipment and world-class partners. A strong investment and development properties portfolio that secure recurring income. Growing dividends is one of QNNS s key positives with a solid dividend payout ratio averaging 57% over with an average yield of 5.9%. Key Risks In current market conditions, profits/dividends yields are threatened by the volatility in charter rates from crude oil price fluctuations. Concentration risk, as the majority of the container shipping business (c.35% of MM&L revenues and c.14% of group revenue as of 2015) is with the UAE only. Possibility of lack of focus in business strategy due to the large number of business lines. Rising competition from key transportation and port management players. Uncertainty of wining the management contract of the new Hamad Port. Company Profile Incorporated in 1957, Milaha is headquartered in Doha. Milaha along with its subsidiaries are engaged in (a) maritime and logistics services, including marine transport, acting as an agent on behalf of foreign shipping lines, (b) offshore support vessels services, serving the offshore oil and gas sector, (c) gas and petrochem services, operating LNG and LPG carriers, in addition to, harbor marine services, (d) investment, encompassing investment in real estate, a portfolio of investments in listed and unlisted securities, and (e) trading activities, including building materials, heavy vehicles, lubricants and the operation of a travel agency. The company has a branch in Dubai, UAE that operates the NVOCC service. Board of directors structure Sheikh Jassim bin Hamad AlThani Member Sheikh Ali bin Jassim Al-Than Chariman Adil Ali Bin Ali Member Ali Ahmad Al- Kuwari Member Sheikh Khalid bin Khalifa Al-Thani Vice Chairman Saad Mohammad Al-Romaihi Member Sulaiman Haidar Sulaiman Member Source: Company reports Ali Hussain Al- Sada Member Hamad Mohammad Al-Mana Member Dr. Mazen Jassim Jaidah Member Salman Abdullah Abdulghani Member Page 16

17 Qatar Navigation Milaha Qatar Initiation of Coverage Valuation & Recommendation (Cont. d) DCF valuation Economic Profit Analysis 2017f 2018f 2019f 2020f 2021f TV ROIC (excluding goodwill & intangibles) 5.4% 5.6% 6.4% 7.1% 8.3% 7.3% WACC 6.7% 7.0% 7.3% 7.4% 7.5% 7.7% Terminal growth rate 3.0% QARmn, except per-share figures 2017f 2018f 2019f 2020f 2021f TV EBIT (1 - t) Non-Cash Items (D&A) Gross Cash Flow Change in Operating Working Capital (56) (32) (7) Capital Expenditures (382) (291) (55) (19) (19) Gross Investment (254) (289) (110) (51) (25) Free Cash Flow to the Firm (FCFF) ,240 Present Value of FCFF ,489 PER and PBV EV/Sales and EV/EBITDA DCF Enterprise Value 7,205 Net Debt (2,778) Minority Interest (82) Long Term Investments 6,683 Value of land 4 Employees end of service benefits (91) DCF Equity Value 10,942 Number of Shares Outstanding 115 DCF Price Target (QAR) DPS year Price Target (QAR) Source: MubasherTrade Research estimates Sum-of-the-parts (SOTP) valuation summary Sensitivity analysis of our PT Cost of Equity (COE) Terminal Growth Rate (TGR) % 2.5% 3.00% 3.5% 4.5% 6.18% % % % % Dividend payout and dividend yield Enterprise Value (QAR7,205mn) Source: MubasherTrade Research estimates Source: MubasherTrade Research estimates Page 17

18 Qatar Navigation Milaha Qatar Initiation of Coverage Financial Summary Balance Sheet (QARmn) Per-Share Data FY End: December 2013a 2014a 2015a 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f Current Assets Price Cash & Cash Equivalent 1,458 3,129 5,586 1,935 1,447 1,086 # Shares (WA,in mn) Marketable securities 4,119 4,822 4,329 4,417 4,508 4,601 EPS Trade & other receivables DPS Other Current Assets BVPS Total Current Assets 6,327 8,867 10,915 7,338 6,824 6,562 Fixed Assets (net) 2,510 3,356 4,385 4,665 4,592 4,526 Valuation Indicators Other Non-Current Assets 6,813 6,464 6,833 6,777 6,805 6, a 2014a 2015a 2016f 2017f 2018f Total Assets 15,650 18,687 22,132 18,780 18,221 17,844 Liabilities & Equity PER (x) 9.0x 10.3x 9.9x 13.1x 15.9x 15.6x Short-Term Debt PBV (x) 0.7x 0.8x 0.8x 0.7x 0.7x 0.7x Current Portion of LT Debt 767 1,437 4, EV/Sales (x) 4.2x 4.7x 4.6x 4.6x 5.1x 4.9x Accounts Payable EV/EBITDA (x) 10.9x 13.1x 11.7x 15.0x 15.9x 15.6x Other Current Liabilities Dividend Payout Ratio 59.8% 59.6% 51.9% 55.8% 55.7% 56.6% Total Current Liabilities 1,328 1,852 5,438 1,328 1,247 1,255 Dividend Yield 6.7% 5.8% 5.2% 4.3% 3.5% 3.6% Long-Term Debt 1,408 3,028 2,693 3,226 2,527 1,833 Other Non-Current Liabilities Profitability & Growth Ratios Total Liabilities 3,008 5,144 8,381 4,838 4,072 3, a 2014a 2015a 2016f 2017f 2018f Minority Interest Total Equity 12,586 13,485 13,679 13,860 14,059 14,344 Revenue Growth 0.6% 14.3% 13.8% -7.7% -11.6% 0.3% Total Liabilities & Equity 15,650 18,687 22,132 18,780 18,221 17,844 EBITDA Growth 8.5% 8.5% 23.1% -28.4% -7.9% -0.3% EPS Growth 13.7% 10.5% 4.3% -31.6% -17.6% 1.9% Income Statement (QARmn) EBITDA Margin 38.2% 36.3% 39.3% 30.5% 31.7% 31.5% 2013a 2014a 2015a 2016f 2017f 2018f Net Margin 41.2% 39.8% 36.5% 27.1% 25.2% 25.6% Total Revenue 2,305 2,633 2,998 2,767 2,448 2,456 ROAE 8.1% 8.0% 8.1% 5.4% 4.4% 4.4% COGS (808) (1,043) (1,139) (1,295) (1,130) (1,154) ROAA 6.4% 6.1% 5.4% 3.7% 3.3% 3.5% GP 1,496 1,590 1,859 1,472 1,317 1,302 Other operating (exp.)/ Inc. (615) (634) (682) (629) (541) (528) Liquidity & Solvency Multiples EBITDA , a 2014a 2015a 2016f 2017f 2018f Depreciation & Amortization (229) (264) (308) (427) (454) (447) Other income Net Debt (Cash) 1,044 1,645 2,844 2,778 2,475 2,141 Investment Income Net Debt/Equity 8.3% 12.2% 20.8% 20.0% 17.6% 14.9% Net finance exp., taxes (42) (42) (106) (102) (66) (56) Net debt to EBITDA 1.2x 1.7x 2.4x 3.3x 3.2x 2.8x NP Before XO & MI 942 1,052 1, Debt to Assets 0.14x 0.24x 0.34x 0.21x 0.18x 0.14x XO & Minority Interest 8 (2) (127) (10) (8) (8) Current ratio 4.8x 4.8x 2.0x 5.5x 5.5x 5.2x Net Income 950 1,049 1, Consensus Estimates Cash Flow Statement (QARmn) 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f Revenues 3,209 3,247 3,455 Cash from Operating , MubasherTrade Research vs. Consensus -13.8% -24.6% -28.9% Cash from Investing (1,611) (1,132) (997) (371) (146) (61) Net Income 1,290 1,261 1,380 Cash from Financing 635 2,065 2,221 (4,214) (1,157) (1,080) MubasherTrade Research vs. Consensus -42.0% -51.1% -54.5% Net Change in Cash (262) 1,597 1,914 (3,585) (397) (364) Fwd PER (x), Last Price 13.1x 15.9x 15.6x Fwd PER (x), Price Target 15.2x 18.4x 18.1x Capex (417) (955) (1,374) (569) (382) (291) Fwd DY (%), Last price 4.3% 3.5% 3.6% Source: Company data, MubasherTrade Research estimates a = Actual; f = Forecasted Share price at 22-Jun-16 Page 18

19 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model Milaha which means navigation in Arabic is a Qatarbased public shareholding company originally incorporated in 1957 under the name of Qatar National Navigation Transport Company (QNNTC), the first shipping agent in the country. Milaha is a holding company with a number of interests ranging across the maritime and logistics spectrum. Along with its subsidiaries, Milaha is a diversified maritime transport and logistics group of companies primarily engaged in (1) Maritime and logistics services offering services in the form of container feeder shipping, port management, bulk shipping, shipyard and steel fabrication services, shipping agency & ship repair services; (2) Offshore support vessels services including vessels chartering, diving and construction and maintenance services; (3) Gas and petrochem shipping through the transport of LPG, LNG and clean/dirty petroleum products; (4) Trading activities through the sale of international brands for trucks and heavy equipment, such as Hino (Japan), Fassi (Italy), Sennebogen (Germany), Doosan (Korea), and Sany (China); (5) Investments through the construction of real estate projects (commercial and residential) and the management of a large portfolio of financial investments (quoted and unquoted) on the Qatar Exchange. Milaha also provides other non-core businesses, such as travel and tourism services including travel packages, airline ticketing and reservations, car rentals and accommodation. The merger of Qatar s top three maritime service providers into Milaha: The year 2010 was a significant year for Milaha after its merger to become Qatar Navigation with the legacy Qatar Shipping Company and Halul Offshore Services. The acquisition changed Milaha's operations fundamentally and gave it significant exposure to other business segments within the shipping industry, such as LNG, LPG, and petrochems. In July 2015, through Qatar Shipping, Milaha acquired the residual 60% holding percentage in its associates, Milaha Ras Laffan Gmbh Company ("KG 1") and Milaha Qatar Gmbh & Company ("KG 2"). KG 1 owns and operates oil and gas tankers, while KG 2 operates one liquefied natural gas (LNG) vessel. Both companies are based in Hamburg, Germany. Milaha s journey from individual services to a group of complete solutions Milaha s business segments Milaha s shareholder structure Individuals, 48% Milaha Maritime & Logistics Milaha Gas & Petrochem Milaha Offshore Companies, 30% Governments, 14% Milaha Capital Milaha Trading Institutions, 8% Source: Company reports Page 19 Source: Company reports Source: Company reports

20 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) During 2011, Milaha rebranded itself under its current name and reorganized its operations into five business segments: Milaha Maritime and Logistics MM&L (35% of revenues in 2015) MM&L focuses primarily on Qatar and the Arabian Gulf region. The business offers a diverse set of activities from logistics and marine transport to port management, ship repairs and complete shipping agency services. This business includes seven sub-segments as follows: Milaha Capital (16% of revenues in 2015) Milaha Capital is considered the investment arm of Milaha group. It manages a portfolio of financial and real estate investments. This is in addition to a 50% investment in Qatar Quarries & Building Materials Company WLL (the company involved in aggregate import trade). Real Estate Investment Portfolio Developed Real Estate Investment Portfolio In Progress Flagship 52-Story Tower Ain Khaled Commercial Building Other Diversified Commercial & Residential Properties Ain Khaled Residential Compound Al Thammama Logistics Warehouses Ras Laffan Technical Workshop CONTAINER FEEDER PORT SERVICES LOGISTICS SHIP YARD Listed Equity Portfolio includes QAR3.8bn available for sale (AFS) and QAR499mn held for trading (HFT) portfolio as of 31 December 2015, all actively managed and traded in-house. QNL (NVOCC) SHIPPING AGENCIES BULK SHIPPING Milaha s Container Shipping unit (35% of MM&L revenues in 2015) operates in the GCC region with a fleet of seven fully-owned containerized vessels and two pairs of tugs and barges. Milaha s Container Shipping unit primarily consists of two operations: Container Feeder and Non-Vessel Operating Common Carrier (NVOCC). According to company data, the feeder service captures over 90% of the feeder market between the UAE and Qatar and over 65% of the overall traffic between Qatar and the UAE. In terms of volumes, the unit handled a total of 568,166 TEUs (Twenty-foot Equivalent Units) in 2015, an increase of 21% YoY from In March 2015, to facilitate and enhance this unit, Milaha announced the launch of the first direct container service between Qatar and India. Milaha s Port Services unit (44% of MM&L revenues in 2015) manages Doha Port, the main commercial port in Qatar, on behalf of Qatar Ports Management Company (Mwani). In addition, it manages Container Terminal 7 at Mesaieed Port on behalf of Qatar Petroleum, and provides cargo handling and stevedoring services for the general cargo berth. Milaha Gas and Petrochem MGP" (14% of revenues in 2015) MGP fully owns and operates a fleet of five tankers (four Handy / LR product tankers and one Aframax crude carrier), two gas carriers and LNG carriers. In addition, the segment also owns partial stakes ranging from 15% to 30% in seven LNG carriers and is the largest shareholder in Nakilat with a 30% stake. MGP also owns a 50% stake in Gulf LPG, a JV company with Nakilat, which owns and operates four Very Large Gas Carriers (VLGCs) transporting petroleum products. The segment also owns and operates harbor and marine service vessels at Mesaieed Port on behalf of Qatar Petroleum. 45.7%* 24.8%* 6.7%* 5.2%* * % of Available for Sale listed equity portfolio Milaha Trading (12% of revenues in 2015) Milaha Trading focuses on commercial agency activities and is comprised of four separate businesses: Navigation Trading Agencies, Navigation Marine Service Center, and Bunker Sales. This is in addition to owning one of the country s oldest travel agencies Navigation Travel & Tourism operating since Milaha Offshore (24% of revenues in 2015) Milaha Offshore is the offshore services arm of the group and currently owns and operates a diverse fleet of 40 offshore support vessels in Qatar and Saudi Arabia, servicing the offshore oil and gas sector. Diving Operations operates a fleet of three diving vessels and provides offshore subsea maintenance and repair services. Development and Commercial operates a diverse fleet of 31 Offshore Support Vessels (OSV), ranging from Anchor Handling Tugs (AHTs) and Plat Form Support Vessels (PSVs) to crew boats. Construction and Services operates a fleet of 6 construction service vessels and provide offshore topside maintenance and repair services. Page 20

21 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Q financial highlights Milaha financials for Q recorded negative results across all business units, except for Milaha Gas and Petrochem which witnessed a growth of 63% YoY driven by additional revenue from 2 LNG vessels that were fully acquired in Q Q earnings dropped 3% YoY to QAR352mn compared to QAR352mn in the yearago period, mainly as a result of a hike in finance costs by 132% YoY and increase in depreciation expense by 9% YoY. On the other hand, the decline in Q operating revenues (-2% YoY) compared to QAR786mn in Q came mainly on the back of lower heavy equipment and lower Bunker sales due to oil price drop from Trading (-22% YoY) supported by a decline by 12% YoY from Capital mainly due to lower dividends income (a declined of QAR41m) full-year financial highlights Operating revenues for 2015 increased by 14% YoY to QAR2.9bn compared to QAR2.6bn in 2014, while earnings of QAR1.094bn represented a 4% upturn when set against QAR1.049mn in The rise in 2015 operating revenues was mainly attributed to a set of strong positive results from Milaha Maritime & Logistics, especially in the container shipping unit (+21% YoY) and the Port Services unit (+15% YoY), largely driven by population growth, healthy construction activities and first direct container liner services effect between India and Qatar. Meanwhile, Milaha Gas & Petrochem showed an exceptional performance leveraging on tanker market freight rates. Offshore revenues jumped by 21% YoY, mostly driven by the increases in the diving operations, namely Shaddad vessel and the full-year effect of new vessels additions from the development and commercial segment during Despite the above, net margin declined by 3% to Page 21 37% relative to 2014, mainly due to increase in one-off expenses related to vessel/equipment impairments (+65% YoY) to align book values with market values. Milaha incurred a total of QAR58mn higher vessels impairment charges in addition to QAR4mn in AFS investments impairment. The company also accounted for QAR27mn in relation to disposal of investment in KG1 & KG2 LNG vessel. Excluding these one-offs, clean earnings increased by 13% YoY to QAR1.2bn in 2015 with net margin remaining flat at 41%. Q vs. Q profitability Source: Company data Revenue mix by segment 2015 Avg. 3 years, Source: Company data, MubasherTrade Research Historical income statement Source: Company data, MubasherTrade Research Profitability margins Source: Company data, MubasherTrade Research 12m FY13 12m FY14 12m FY15 Q Q In QAR 000s (Audited) (Audited) (Audited) (Reviewed) (Reviewed) Milaha Capital 610, , , , ,786 Milaha Maritime and Logistics 834, ,031 1,165, , ,286 Milaha Offshore 595, , , , ,030 Milaha Trading 281, , , ,808 99,515 Milaha Gas and Petrochem 179, , ,324 76, ,625 Gross Sales 2,500,520 2,814,545 3,204, , ,242 Eliminations (195,776) (181,313) (206,214) (54,048) (40,284) Net Sales 2,304,744 2,633,232 2,997, , ,958 Cost of sales (808,458) (1,042,936) (1,138,741) (266,764) (272,889) Gross profit 1,496,286 1,590,296 1,859, , ,069 GP Margin 65% 60% 62% 66% 65% G&A (615,064) (634,091) (682,210) (166,829) (159,286) EBITDA 881, ,205 1,176, , ,783 EBITDA Margin (RHS) 38% 36% 39% 45% 44% Depreciation (229,259) (264,444) (307,776) (72,902) (79,600) EBIT 651, , , , ,183 EBIT Margin 28% 26% 29% 36% 34% Finance Cost (41,576) (42,474) (106,363) (16,156) (37,511) Other Income 82,595 93, ,277 21,020 40,212 Investment Income 250, , ,277 79,566 89,495 Gain (loss) on disposal of property, vessels & equipment 13, ,716 (8) (3) Impairments (7,900) (36,214) (100,545) - - Net gain (loss) on foreign exchange (1,148) 2, ,297 2,791 Loss on deemed disposals - - (28,955) - - Minority (1,736) (1,894) (14,679) (369) (2,379) Profit for the period (LHS) 946,321 1,049,193 1,094, , ,788 Net Income Margin 41% 40% 37% 46% 46% Clean Profit of the period 954,221 1,085,407 1,224, , ,788 Clean Net Income Margin 41% 41% 41% 46% 46% TEUs handled Source: Company data, MubasherTrade Research

22 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Forecast Assumptions Revenues Milaha MM&L We assumed average revenues of container shipping to grow at a CAGR of 6.7% over for this business unit. We assumed the strong expansion in the non-hydrocarbon sectors in Qatar will continue to drive up the growth in GDP, which we relate to the growth in handled TEU s of MM&L s container shipping unit. We assumed revenue per TEU to grow at an average of 2.5%, accounting for inflation. We assumed a conservative assumption that the Doha Port management sharing agreement with Mwani that will expire end of 2016 will not be renewed and that Milaha will not be awarded the management contact of the new Hamad Port for which it is currently bidding. As such, we forecast Milaha MM&L will mainly depend on container feedering as its main source of revenues. In case of not winning new Hamad Port management agreement, we expect port services to lose 90% of its current revenues. Milaha Offshore We expect the diving fleet to operate at an average utilization rate of 56% throughout the projected years apart from Shaddad vessel that we assumed will have a utilization rate of 100% based on its 5-year contract with Qatar Petroleum ending In the case of not winning new contracts, we assumed Shaddad utilization rate to drop to 50%. We expect a weak performance from commercial and construction units, driven by the steep decline in oil prices and the cutbacks on capital spending by E&P companies. Milaha Gas and Petrochem We assumed the product tankers fleet will operate at an overall average utilization rate of 83% industry forecasts, with different charter rates depending on tanker type. We assumed the 19 Harbour Marine unit vessels to contribute steady revenues on the back of the long-term contract with Qatar Petroleum that rewards QAR95mn annually. We assumed medium gas/ammonia carrier time charter rates to rise in 2016 to reach USD40,000, falling 2017 onwards as owners kill the market with vessels on a pre-contracted order book which are expected to be gradually delivered over 2016/17, according to Drewry Research. We assumed that the incremental value to revenues from the acquisition of KG1 and KG2 vessels to be allocated under Milaha Gas and Petrochem will be around 39% based on their long-term contracts. Milaha Trading We forecasted Milaha Trading revenues to be driven by the growth of GDP of Qatar, backed by the huge infrastructure development plan of the country which exceeds USD200bn, aligning with the country s National Vision Milaha Capital We highlight that revenues of Milaha capital are generated from the following assets: (1) Qatar Gas long-term rental contract with annual rental income of QAR110mn, for which we assumed no lease rate growth. (2) Ain Khaled residential project (in progress) which comprises 180 villas. We expect this project to start contributing to revenues from 2017 at an average monthly rental rate of QAR13,000 per villa. (3) Ein Khaled Retail Project (in progress) which we expect to start contributing to revenues from 2016 with six showrooms and to increase gradually to reach full capacity of 18 showrooms in We expect c.qar30,000/month in showroom rent from each unit. (4) AlThamama Logistics Center (in progress) which is a warehouse project spread over 60,000 sqm land area. We assumed this project to start contributing to revenues from 2017 at an average monthly rental income of QAR30/sqm. This is in addition to recurring rental income generated from real estate properties, investment income from a portfolio of available-for-sale and held-for-trading investments in quoted and unquoted securities on the Qatar Exchange and income generated from Qatar Quarries. We estimate overall revenue to increase at a CAGR of 2.5% over We did not factor any revenues from new direct container service route between Qatar and India. We estimate revenue mix of Milaha to change in the future with higher contribution from Milaha Capital and Milaha Trading. Projected net operating revenues by segment Source: Company reports, MubasherTrade Research estimates Revenue mix by segment, 2015 vs a 2021f Source: Company reports, MubasherTrade Research estimates Source: Management guidance, MubasherTrade Research estimates Page 22

23 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Profitability We assumed overall profitability margins to be sustained within historical trend (average gross margin of 53%, average EBITDA margin of 31%) and assumed net profit margin to decrease gradually from an average of 39% over to an average 27% over We assumed Milaha Capital to contribute the most to overall group EBITDA with an average of 49% through the years of projections driven by the strong construction activities in Qatar. The weights on the right reflect the segmental contribution to EBITDA, net of allocations relating to Milaha corporate. We assumed a conservative estimate that accrued interest income on loans to subsidiaries (LNG and LPG companies) 2015 balance to be based on an annual interest rate of 0.4% with the debt principals to retire in We assumed COGS to average at 47% and G&A at an average of 22% of total sales of the group over We assumed allocated expenses related to Milaha corporate based on each segment s historical average as a percentage of group revenues. Total allocated expenses depressed group preadjusted EBITDA over the forecast period ( ) by 17%. Dividends and Leverage We assumed the dividend policy to be sustained (payout ratio of 56%), with the DPS growing at a CAGR of 6.1%, on the back of an average EPS growth of 27% over the period ; to reach QAR6.82 by Shipping is a high-capex industry and a brand new vessel can reach up to USD100mn. Any vessel purchased by Milaha is most likely going to be debt financed for a tenor of 7-10 years with an average effective interest rate of 2% p.a. Based on historical refinancing trends, we assumed Milaha will refinance part of its long-term debt to avoid cash deficits. Capex In terms of expansion capex, we expect the development and commercial segment of Milaha Offshore to introduce four new vessels during 2016 (two Anchor Handling Tugs and two Jack ups) with estimated purchase cost of QAR mn. We further estimate QAR1bn remaining capex for completing both residential and warehouses projects of Milaha Capital over We assumed (a) annual maintenance capex of QAR5mn for MM&L and QAR15mn for Gas and Petrochem and (b) major dry docking maintenance service for KG1 oil tanker in 2016 and KG2 LNG vessel in 2019 at an average cost of USD10mn, each. Page 23 Projected segmental contribution to EBITDA Projected net income & returns, consolidated Projected net debt/ebitda, consolidated Source: Management guidance, MubasherTrade Research estimates Projected profitability margins, consolidated DPS & dividend yield, consolidated Projected capex as a percentage of sales, consolidated

24 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Milaha Maritime and Logistics In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f GDP growth 4.3% 3.9% 3.9% 4.0% 4.0% 4.1% No. of TEUs 592, , , , , ,617 Qatar inflation rate 2.4% 2.7% 2.8% 2.6% 2.4% 2.4% Rate/TEU Container Shipping revenues 437, , , , , ,775 Port Services revenues 546,806 56,962 57,087 56,984 56,883 56,906 Others revenues 259, , , , , ,181 Gross revenues 1,244, , , , , ,862 Eliminations 14.7% 182, , , , , ,088 Net revenues 1,061, , , , , ,774 Comments Buoyed by population growth, the non-hydrocarbon sector is projected to remain the drivetrain of the Qatari economy, with the number of handled TEUs annually, projected to grow by the growth of Qatar s GDP. We assumed 2015 rates/teu as the base of our forecasts and assumed rates to grow at an annual average of 2.5% based on IMF estimates to Qatar inflation, April We related other revenues (logistics, shipping agencies, bulk shipping and shipyard services) to the performance of the container shipping and port services. This is based on the historical average percentage of total container and port services revenues. We assumed a conservative assumption that Milaha will not win port management tender of new Hamad Port; accordingly, revenues were cut by 90% from We assumed eliminations of inter-segment revenues transactions of 14.7% of gross revenues to be eliminated on consolidation. Milaha Offshore In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f Vessels utiliazation rates Khattaf 50% 50% 50% 60% 60% 60% Halul 41 50% 50% 50% 60% 60% 60% Shaddad 100% 100% 100% 100% 100% 50% Avg. daily rates (USD) $50,000 Total Diving Operations revenues 132, , , , , ,621 Development & Commercial revenues 117, , , , , ,005 Construction & Maintance revenues 36,964 65,838 54,345 65,047 65,226 65,146 Net revenues 286, , , , , ,772 Forecasted crude oil prices 2016f 2017f 2018f 2019f 2020f 2021f Crude/barrel - average spot (USD) Source: World bank commodity price forecast report, February 2016 Comments In an oversupplied Offshore Support Vessels (OSV) market, we forecast all vessels of the diving operations unit to operate at a conservative utilization rates apart from Shaddad vessel which is currently fully utilized on a service contract with Qatar Petroleum that began September 2014 and expected to end in As a consequence of low oil prices, drilling rig utilization rates are expected to continue decreasing on the short-term (global rig utilization decreased to 73% in 2015, according to Clarkson research), we applied an average annual spot rate of USD50,000 on all diving vessels based on industry-average forecasts. According to market research leaders, the last decade has seen high offshore vessel and building activity, driven by rising oil prices. In the current weak oil price environment that is forecasted to continue for the medium term, we expect to see more contractions in explorations and production activities. As such, we expect performance of both development & commercial and construction & maintenance units to be affected during and to start re-gaining momentum from The near-term demand generated by fixed platforms is likely to be mainly from maintenance and repair services, according to Clarkson research. Milaha Trading Comments In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f GDP growth 4.3% 3.9% 3.9% 4.0% 4.0% 4.1% Gross revenues 439, , , , , ,848 Eliminations 15.1% 66,204 68,786 71,500 74,354 77,354 80,506 Net revenues 372, , , , , ,342 Source: Management guidance, MubasherTrade Research estimates Page 24 We project this segment to grow by Qatar s GDP growth rate. Despite recent signs of slowdown in projects, the State of Qatar reaffirmed its commitment to continue investing in infrastructure projects, which will likely have a positive impact on this unit. We assumed heavy equipment sales to continue supporting segment growth, backed by massive infrastructure projects in the country. We assumed eliminations of inter-segment revenues transactions of 15.1% of gross revenues to be eliminated on consolidation.

25 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Milaha Gas and Petrochem In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f No. of Product tankers (Handy) Average spot rate (USD) 9,000 9,500 9,750 10,000 10,250 10,500 Average utilzation rate 80% No. of Product tankers (LR2) Average spot rate (USD) 30,000 30,000 30,000 30,000 35,000 35,000 Average utilzation rate 85% No. of Aframax crude carriers Average spot rate (USD) 29,742 28,396 28,396 28,396 28,396 28,396 Average utilzation rate 85% Product Tanker revenues 126, , , , , ,555 In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f No. of Pilot boats under contract No. of Mooring boats under contract Utilization rate 100% Annual revenue/boat 5,000 Marine Services revenues 95,000 95,000 95,000 95,000 95,000 95,000 In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f No. of carriers Daily rate (USD) 40,000 17,500 15,375 15,375 15,375 15,375 Utilization rate 56% 87% 50% 50% 50% 50% Gas Carrier revenues 59,358 40,113 20,371 20,371 20,371 20,371 Wholly Owned LNG Vessels reveneus 179, , , , , ,148 Gross revenues 459, , , , , ,074 Eliminations 0.1% Net revenues 459, , , , , ,526 Comments The recovery in product tanker shipping market started from the end of 2014, when higher refinery throughputs and lower oil prices boosted product tanker demand. The sharp rise of demand on Aframax vessels has created a squeeze in supply and promoted the Handy/LR2 tankers to turn dirty to help offset the supply/demand gap. Accordingly, we assumed an 85% average utilization rate. According to Danish ship finance and Clarksons research, during 2015, the Middle East has been able to increase its exports to Asia as refinery additions in the region have begun to be fully operational. In Saudi Arabia, the latest of its two new mega refineries, Yanbu, has boosted utilization to roughly 80%. and the expansion unit at Ruwais in the UAE has ramped up utilization rates to between 80% and 90%. We assumed a 100% utilization rate for all 19 harbor and marine services vessels from Nakilat Damen Shipyards Qatar (NDSQ) which are all under a 20-year contract worth QAR1.9bn. The contract provides harbor marine services for Qatar Petroleum at Mesaieed Port. According to management guidance, under contract each vessel generates an annual income of QAR5mn. According to leading industry information providers, average short-term daily rates for medium size gas carriers are expected to fall globally to around USD40,000 in 2016, before easing to an average of USD15,000 in following years. This estimate was based on projected decrease in fleet utilization, largely driven by expected excess supply of vessels. We project the recent acquisition of KG1 and KG2 vessels to fuel revenues of Milaha Gas and Petrochem and add up QAR179mn annually backed up by long-term charter contracts. We assumed eliminations of inter-segment revenues transactions of 0.1% of gross revenues to be eliminated on consolidation. Milaha Capital In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f Investment Income 230, , , , , ,916 Qatar Gas rental contract 110, , , , , ,000 Other rental income generated properties 61,437 61,598 61,706 61,568 61,433 61,433 Qatar Quarries 204, , , , , ,000 Residential project - 14,040 28,080 28,080 28,080 28,080 Showrooms project 2,160 4,320 6,480 6,674 6,875 7,081 Logistics project - 21,600 21,600 21,600 21,600 21,600 Gross revenues 607, , , , , ,111 Eliminations 3.4% 20,528 22,016 22,933 23,625 24,015 24,453 Net revenues 587, , , , , ,657 Source: Management guidance, MubasherTrade Research estimates Page 25 Comments Long-term rental income from Qatar Gas is expected to secure an average of 15% of total revenues throughout years of projections. We assumed a conservative assumption that the investment portfolio will only grow by 3% on an annual basis. Qatar s non-oil and gas sector is estimated to have posted double-digit growth in 2015, again spearheaded by construction activities, which is expected to expand by 13.5% in 2015, according to MDPS update report. We retain a promising view on the future of the real estate market on account of the booming domestic economy from increased demand in investment spending and population growth. The residential segment is the largest contributor of the real estate sector in Qatar.

26 Qatar Navigation Milaha Qatar Initiation of Coverage Business Model (Cont. d) Expenses relating to Milaha corporate in 2015 came in at QAR158mn. These expenses (81% in salaries and benefits) constitute an average of c.13% of total group COGS. The group allocates these expenses to each segment. We forecast these expenses to average at QAR160mn throughout projected years and were allocated pro-rata based on historical trends as a percentage of group revenues. We believe these allocations are the main reason causing operating margins to be suppressed across all segments. Milaha Maritime & Logistics Milaha Offshore Milaha Gas and Petrochem Milaha Trading Milaha Capital Operating Revenues Gross Profit EBITDA Source: MubasherTrade Research estimates Amount of related allocations Page 26

27 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Qatar Gas Transport (Nakilat) Qatar Equities Energy & Utilities Initiation of Coverage A steady operating model with low risk profile and consistent dividend stream Initiate with Buy/Low Risk Buy Low Risk Price Target: QAR27.62 ETR: +18.5% Qatar s floating pipeline, carrying its LNG to global markets. Secured revenues visibility backed by long-term charter contracts. A fleet of 61 wholly and jointly owned vessels, representing one of the world s newest and largest LNG fleets. High governmental support ensuring leading market position. Initiate with Buy/Low Risk; PT QAR27.62/Share (ETR: +18.5%). Qatar s primary LNG carrier: Qatar Gas Transport Company (Nakilat) plays a vital role in Qatar s LNG supply chain with its technologically-advanced fleet and exclusive agreements with statecontrolled LNG producers, Qatargas and RasGas (both have exclusive rights to process natural gas from North field), Nakilat is positioned as the main shipping company of all Qatar s gas output to global customers. Stable revenues and recurring cash flows: Nakilat enjoys steady revenues and cash flows through its 25-year time charter agreements fixed for both price and quantity. This ensures forecasted returns and a comfortable covered debt service capacity. A state-of-the-art fleet: Nakilat owns and operates LNG shipping fleet that is considered the largest in the world, growing to 61 vessels in Roughly, 75% of these vessels are of the Q-Max and Q-Flex type, which have the largest capacity in the world. Nakilat also jointly owns four LPG ships with Milaha. High support from the Qatari government: Backed up by the government, Nakilat has a close relationship with the State of Qatar with government entities collectively owning 51% of the company. Initiate with Buy/Low Risk; Price Target (PT) of QAR27.62 with Expected Total Return (ETR) of +18.5%: We initiate coverage on Nakilat (QGTS.QE) with a Buy/Low Risk rating and a oneyear Price Target (PT) of QAR27.62/share based on a 5-year DCF valuation model. At our PT, QGTS would be valued at 14.0x 2016e PER. Meanwhile, growing dividends is one of QGTS key positives with a solid dividend payout ratio, averaging of 74% over with expected attractive dividend yield of 6.4%. We expect this dividend distribution trend to continue. Stock Performance & Details QGTS (QAR) vs. DSM Rebased Volume (RHS) QGTS DSM Rebased Stock Details Last price (QAR) W High (QAR) W Low (QAR) M-ADVT (QARmn) 7.40 % Chg: MoM 0.5 % Chg: YoY 3.66 % Chg: YTD -0.6 Mubasher Ticker QGTS.QE Bloomberg Ticker QGTS QD Capital Details No. of Shares (mn) Mkt Cap (QARmn) 12,864.5 Mkt. Cap (USDmn) 3,533.5 Free Float (%) 49.0% QARmn 2013a 2014a 2015a 2016f 2017f 2018f Revenue 3,083 3,115 3,140 3,167 3,195 3,222 EBITDA 2,330 2,327 2,329 2,367 2,388 2,408 Net Income ,094 1,185 1,255 Revenue Growth (%) -1.1% 1.0% 0.8% 0.9% 0.9% 0.9% EBITDA Growth (%) -3.9% -0.1% 0.1% 1.6% 0.9% 0.9% Net Income Growth (%) -4.8% 22.6% 9.9% 11.3% 8.3% 6.0% EBITDA Margin (%) 75.6% 74.7% 74.2% 74.7% 74.7% 74.7% Net Margin (%) 23.6% 28.7% 31.3% 34.5% 37.1% 39.0% Net Debt (Cash) 22,608 20,495 20,776 20,046 19,021 18,269 EPS (QAR) BVPS (QAR) DPS (QAR) PER (x) 13.9x 13.6x 13.2x 11.8x 10.9x 10.3x PBV (x) 2.3x 3.2x 2.9x 2.7x 2.5x 2.3x Dividend Yield (%) 6.0% 5.5% 5.4% 6.4% 7.0% 7.2% Source: Company reports, MubasherTrade Research estimates Amr ElDaly Senior Equity Analyst Mubasher International Amr.ElDaly@MubasherFS.com Page 27

28 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Valuation & Recommendation Valuation models: We used the DCF model to value Nakilat. In reaching our FV in each model and hence PT of QGTS, we added: Our estimated fair value of Subsidiaries & Other Long-Term Investments as of 31 December 2016; Book value of long term loans to subsidiaries as of 31 December In addition to, adding our estimated excess cash, deducting the value of debt and accumulated minority interest as of December 2016 to reach Nakilat Equity Value. DCF One-year FV of QAR27.62/share: We have built a two-stage forecasting model a high-growth period through 2021, followed by a stable-growth terminal period. We have discounted free cash flow to the firm (FCFF) at a weighted average cost of capital (WACC) of 6.96%, resulting from a cost of equity (COE) of 9.51% and after-tax cost of debt of 5.42%. We derived COE as follows: 10-year US Treasury yield of 1.69%. Qatar equity risk premium (ERP) of 7.29% derived from US Equity risk premium of 6.12% and a country risk premium of 1.17% based on Aa2 rating. Adjusted 5-year monthly historical beta of Terminal growth rate (TGR): 3.0%. We reached a one-year fair value (FV) of QAR27.62/share. One-year PT QAR27.62/share (+18.5%), initiate with Buy/Low Risk: We reached a one-year PT of QAR27.62/share (including 2016e DPS), implying an upside potential of 18.5%. At our PT, QGTS would be valued at 2016e PER of 14.0x and 2016e EV/EBITDA of 14.9x. We forecast the 2016e dividend yield at 6.4%. Investment Rationale Long-term agreements that ensures stable revenue stream and margins. Largest LNG ship owner globally with 15% global share of LNG shipping tonnage capacity. Main shipper for Qatari LNG to global markets. Promising outlook for LNG demand, as it is expected to grow at c.1.9% annually till 2035, according to BP Energy, reaching around 490bnbncf/d. Qatar is the world s largest LNG exporter, with a 30% market share of global LNG supply and an estimated 13.3% of the world s natural gas reserves. Low cost of debt. High barriers to entry, as the industry is capital intensive. Key Risks A highly leveraged model with debt to Equity ratio of 5x as compared to global industry norm of 1x as of Minimal top-line growth given the long-term contracts nature limits the benefit of any anticipated increase in spot rates arising from any demand-supply. Nakilat s revenues rely on shipping LNG vessels through the Straits of Hormuz, the Suez Canal and other international waterways, blockage of theses waters arising from any political tension would adversely affect Nakilat. Australia becoming the new wave in LNG exports. Industry analysts forecast it to be the worlds largest LNG supplier by 2019 Company Profile Qatar Gas Transport Company (Nakilat) was established in 2004 by Qatari Government to own, operate and manage LNG vessels and provide shipping and marine-related services. Nakilat owns the world s largest LNG shipping fleet, consisting of 61 LNG vessels (with a combined capacity of 8.5mn+ cu mt; representing 15% of the global capacity) along with 4 LPG-VLGCs. It also owns and operates a shipyard and a ship repair facility. In addition to, a port agency, warehousing, vessel support services and towage are provided at the Port of Ras Laffan. Board of directors structure HE Dr. Mohammed Bin Saleh Al Sada Chariman Mr. Khalid Bin Khalifa Al-Than Vice Chariman Dr. Abdullah Bin Ali Bin Seoud Al-Thani Member Mr. Hitmi Ali Al-Hitmi Member Mr. Ali Ahmad Al-Kuwari Member Ms. Aisha Fahad S A Al- Nuaimi Member Mr. Ismail Omar Al-Dafa Member Source: Company reports Page 28

29 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Valuation & Recommendation (Cont. d) DCF valuation Economic Profit Analysis 2017f 2018f 2019f 2020f 2021f TV ROIC (excluding goodwill & intangibles) 7.0% 7.3% 7.6% 7.8% 8.1% 8.4% WACC 7.0% 7.0% 7.0% 7.1% 7.1% 7.1% Terminal growth rate 3.0% QARmn, except per-share figures 2017f 2018f 2019f 2020f 2020f TV EBIT (1 - t) 1,727 1,760 1,793 1,825 1,857 Non-Cash Items (D&A) Gross Cash Flow 2,388 2,408 2,429 2,451 2,472 Change in Operating Working Capital (10) (10) (10) (10) (10) Capital Expenditures (240) (242) (244) (246) (249) Gross Investment (250) (252) (254) (256) (259) Free Cash Flow to the Firm (FCFF) 2,138 2,156 2,175 2,194 2,213 29,433 Present Value of FCFF 2,063 1,945 1,833 1,725 1,623 21,585 PER and PBV EV/Sales and EV/EBITDA DCF Enterprise Value 30,775 Net Debt (20,046) Minority Interest (6) Long Term Investments 3,748 DCF Equity Value 14,471 Number of Shares Outstanding 554 DCF Price Target (QAR) DPS year Price Target (QAR) Source: MubasherTrade Research estimates Sensitivity analysis of our PT Cost of Equity (COE) Terminal Growth Rate (TGR) % 2.5% 3.00% 3.5% 4.5% 7.51% % % % % Source: MubasherTrade Research estimates Dividend payout and dividend yield Source: MubasherTrade Research estimates Page 29

30 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Financial Summary Balance Sheet (QARmn) Per-Share Data FY End: December 2013a 2014a 2015a 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f Current Assets Price Cash & Cash Equivalent 1,931 2,902 2,736 2,699 3,010 3,074 # Shares (WA,in mn) Marketable securities EPS Trade & other receivables DPS Other Current Assets BVPS Total Current Assets 2,216 3,222 3,043 3,009 3,323 3,389 Fixed Assets (net) 24,855 24,395 23,829 23,394 22,974 22,568 Valuation Indicators Other Non-Current Assets 3,622 3,452 3,869 3,801 3,733 3, a 2014a 2015a 2016f 2017f 2018f Total Assets 30,693 31,069 30,740 30,205 30,030 29,620 Liabilities & Equity PER (x) 13.9x 13.6x 13.2x 11.8x 10.9x 10.3x Short-Term Debt PBV (x) 2.3x 3.2x 2.9x 2.7x 2.5x 2.3x Current Portion of LT Debt EV/Sales (x) 10.6x 10.5x 10.7x 10.4x 10.0x 9.7x Accounts Payable EV/EBITDA (x) 14.1x 14.0x 14.5x 13.9x 13.4x 12.9x Other Current Liabilities Dividend Payout Ratio 83.6% 74.4% 70.5% 75.2% 75.9% 74.0% Total Current Liabilities 1,191 1,252 1,295 1,233 1,213 1,194 Dividend Yield 6.0% 5.5% 5.4% 6.4% 7.0% 7.2% Long-Term Debt 22,274 22,188 21,415 20,690 19,989 19,312 Other Non-Current Liabilities 2,881 3,829 3,583 3,432 3,615 3,543 Profitability & Growth Ratios Total Liabilities 26,346 27,269 26,293 25,355 24,816 24, a 2014a 2015a 2016f 2017f 2018f Minority Interest Total Equity 4,340 3,792 4,443 4,844 5,206 5,562 Revenue Growth -1.1% 1.0% 0.8% 0.9% 0.9% 0.9% Total Liabilities & Equity 30,693 31,069 30,740 30,205 30,030 29,620 EBITDA Growth -3.9% -0.1% 0.1% 1.6% 0.9% 0.9% EPS Growth -4.8% 22.6% 9.9% 11.3% 8.3% 6.0% Income Statement (QARmn) EBITDA Margin 75.6% 74.7% 74.2% 74.7% 74.7% 74.7% 2013a 2014a 2015a 2016f 2017f 2018f Net Margin 23.6% 28.7% 31.3% 34.5% 37.1% 39.0% Total Revenue 3,083 3,115 3,140 3,167 3,195 3,222 ROAE 23.9% 22.0% 23.9% 23.5% 23.6% 23.3% COGS (650) (676) (698) (687) (693) (699) ROAA 2.4% 2.9% 3.2% 3.6% 3.9% 4.2% GP 2,433 2,439 2,441 2,480 2,502 2,524 Other operating (exp.)/ Inc. (103) (111) (113) (113) (114) (115) Liquidity & Solvency Multiples EBITDA 2,330 2,327 2,329 2,367 2,388 2, a 2014a 2015a 2016f 2017f 2018f Depreciation & Amortization (606) (661) (688) (672) (660) (648) Interest Income Net Debt (Cash) 22,608 20,495 20,776 20,046 19,021 18,269 Investment Income Net Debt/Equity 521.0% 540.5% 467.6% 413.8% 365.4% 328.5% Net finance exp., taxes (1,306) (1,246) (1,199) (1,202) (1,150) (1,107) Net debt to EBITDA 9.7x 8.8x 8.9x 8.5x 8.0x 7.6x NP Before XO & MI ,095 1,186 1,257 Debt to Assets 0.75x 0.74x 0.72x 0.71x 0.69x 0.67x XO & Minority Interest (27) (1) (1) (2) (2) (2) Current ratio 1.9x 2.6x 2.3x 2.4x 2.7x 2.8x Net Income ,094 1,185 1,255 Consensus Estimates Cash Flow Statement (QARmn) 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f Revenues 3,715 3,760 3,791 Cash from Operating 2,421 3,412 1,497 2,343 2,378 2,398 MubasherTrade Research vs. Consensus -14.8% -15.0% -15.0% Cash from Investing (2,319) 1,348 (287) Net Income 1,128 1,208 1,311 Cash from Financing (239) (2,825) (2,239) (2,634) (2,661) (2,671) MubasherTrade Research vs. Consensus -3.1% -1.9% -4.2% Net Change in Cash (138) 1,935 (1,028) (48) Fwd PER (x), Last Price 11.8x 10.9x 10.3x Fwd PER (x), Price Target 14.0x 12.9x 12.2x Capex (269) (261) (116) (238) (240) (242) Fwd DY (%), Last price 6.4% 7.0% 7.2% Source: Company data, MubasherTrade Research estimates a = Actual; f = Forecasted Share price at 22-Jun-16 Page 30

31 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Business Model Nakilat is a marine company established in 2004 by the Qatari government to own, operate and manage LNG vessels and provide shipping and marine-related services. Nakilat is considered the world s leading owner and operator of vessels for the transportation of liquefied natural gas (LNG), and associated products. The company also provides ship repair and construction services. Its LNG shipping fleet is the largest in the world, growing to 61 LNG vessels in Nakilat s business operates through the following services: (1) Fleet: This segment has a fleet of 61 wholly- and jointly-owned vessels, which represents one of the world s youngest and largest LNG fleets. (2) Shipyard: Nakilat operates the shipyard via two joint ventures: Leading ship repairer NAKILAT-KEPPEL OFFSHORE & MARINE (N-KOM) to focus on the repair, conversion and maintenance of marine vessels and conversion as well as fabrication of offshore and onshore structures, such as jack-up drilling rigs, lift-boats, land rigs and their components. Premier shipbuilder NAKILAT DAMEN SHIPYARDS QATAR (NDSQ) to focus on the construction of steel, aluminum and fiber-reinforced plastic (FRP) boats, of up to 170m in length. Its production capability includes a wide range of commercial vessels (such as tugs, offshore supply boats and cargo vessels), naval vessels and super yachts. NDSQ can also undertake the refit of super yachts and naval vessels. (3) Marine Services: Nakilat offers a comprehensive range of marine services to vessels operating in Qatari waters and for those calling at the Ports of Ras Laffan and Mesaieed through (A) Port agency services via Nakilat Agency Company (NAC) offering port and shipping agency services, (B) Warehousing services via Nakilat s Vessel Support Unit (VSU). VSU offers the ability to manage, store, preserve and maintain any ship materials and provide a broad range of material supplies, and (C) Marine support services via Nakilat- SvitzerWijsmuller (NSW) operating a fleet of 30 vessels, including 25 NSW-owned vessels. NSW offers a range of services including towing, escorting, berthing, pilot support, line handling services afloat and ashore, emergency response, and marine maintenance support. Through its subsidiary Nakilat Shipping Qatar Limited (NSQL), Nakilat manages and operates four very large LPG carriers through Gulf LPG, a joint venture owned 50% by Nakilat and 50% by Milaha. Gulf LPG s four very large LPG carriers are fully operated and managed by Nakilat Shipping Qatar Limited (NSQL), a wholly-owned subsidiary of Nakilat. Nakilat currently operates 67 LNG and 4 VLGC vessels with a total investment of approximately USD11bn 25 wholly-owned LNG vessels Source: Company reports Nakilat fleet of vessels 36 jointly-owned LNG vessels 4 jointly-owned LPG vessels Nakilat operates through several subsidiaries and joint ventures NSQL Fleet Shipyard Marine Services Nakilat s shareholder structure Qatar LNG flow process North Field gas reserve LNG shipping LNG Sales to global markets Qatar liquefies 77mn tons per annum of LNG Processing & Liquefied plant Ship repair and construction Marine support services Warehousing services Port agency services Source: Company reports Page 31 Nakilat transport to LNG from Rad Laffan port Source: Company reports, MubasherTrade Research analysis Source: Company reports

32 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Business Model (Cont. d) Nakilat s LNG fleet composition Nakilat LNG fleet is one of the world s newest and largest LNG fleets, with all vessels incorporating state-of-theart technology to ensure the safe, environmentally-sound and cost-effective transportation of LNG. Around 78% of these vessels are Q-Max and Q-Flex types which have the world s largest capacities and most advanced LNG vessels technology. Nakilat fleet has a combined aggregate carrying capacity of nearly 9mn cubic meters of LNG cargo space. Nakilat connects Qatar s natural gas to most major natural gas consuming markets which include the US, Mexico, the UK, Belgium, France, Spain, Italy, India, South Korea, Japan and Taiwan. Nakilat s history and background 2014 N-KOM signs contracts worth USD130mn; NDSQ signs two MoUs worth a total of QAR3.1bn with Qatar Armed Forces; Nakilat add 3 new vessels to its JV Maran Nakilat Co Nakilat increases its ownership in Maran Nakilat Co.; Nakilat signs MoU with Algerian state energy company Sonatrach; NDSQ and NSW signs contracts with QP 2012 Nakilat assumes management of its four LPG carriers; NDSQ completes construction of its first vessel; First Qatari marine cadets sign with Nakilat N-KOM completes first LNG dry-docking project; Gulf Drilling International and N-KOM sign major contract. Source: Company reports Q-Flex has c.40% more cargo and consumes 40% less energy than conventional LNG carriers. Prior to the introduction of Q-Max (please see below), Q-Flex ships were the largest LNG carriers with a maximum capacity of 216,000 cubic meters. Q-Max has c.80% more cargo capacity and consumes 40% less energy than conventional LNG carriers. Q-Max ship can transfer up to 266,000 cubic meters of LNG which according to estimates can light up 70,000 US homes for one year NDSQ incorporated; N-KOM and NDSQ begin operations; delivery of 3 LNG vessels Delivery of 4 LPG vessels; delivery of 18 LNG vessels Delivery of first Q-Max; N-KOM incorporated; delivery of 21 LNG vessels NSQL awarded 25-year time charter by Qatargas for 8 LNG carriers; delivery of first Q-Flex; delivery of 8 LNG vessels. Nakilat s LNG vessels are chartered through long-term (25-year) charter agreements with Qatargas and RasGas and mid-term charters to British Gas (BG) through joint venture with Maran Gas. Nakilat s four LPG carriers are chartered for between two and four years to Shell, Clearlake (Guvnor) and ExxonMobil. Experienced operating partner: Nakilat partners with Shell International Trading & Shipping Company Ltd. (STASCO), a leading international vessel operator for operating and managing of Nakilat s 26 wholly-owned LNG ships NSQL awarded a 25-year time charter by Qatargas for 17 LNG vessels; NSW awarded 22- year service contract by Qatar Petroleum; strategic alliance with STASCO; delivery of 2 LNG vessels Listing of Nakilat on Qatar Exchange; NAC formed; delivery of 2 LNG vessels Establishment of Nakilat. Source: Company reports Page 32

33 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Business Model (Cont. d) Historical Performance Review Nakilat mainly recognizes its revenues from transportation of LNG through its whollyowned vessels. Q financial highlights Nakilat s earnings rose 7.9% YoY to QAR240mn in Q compared to QAR222mn a year ago, beating market consensus of QAR234mn by 3%. YoY earnings growth in Q came mainly on the back of better performance from JV companies, higher dividend and interest income from Islamic banks, and lower finance cost. Meanwhile, Q revenues grew by 2% to QAR782mn from QAR765mn in Q full-year financial highlights 2015 net income grew by 10% YoY to QAR982mn compared to QAR894mn in This was clearly demonstrated by the addition of three new LNG vessels to Nakilat s fleet during This is in addition to the growing operating activities at the shipyard facilities, which the company believes will continue to underpin the future financial results of the company. Profits from JVs showed a better a performance and increased 14% YoY to QAR498mn. This was driven by significant gains in LPG shipping rates and expansion of the jointly-held LNG fleet (through the Maran Nakilat JV). Stable EBITDA margins and bottom line growth have allowed EPS and dividends of the company to consistently increase QGTS EPS grew to QAR1.77 with recommendations to pay a dividend of QAR1.25 per share (a 71% payout ratio), implying a yield of 5.4% at time of announcement. Historical income statement 12m FY13 12m FY14 12m FY15 Q Q In QAR 000s (Audited) (Audited) (Audited) (Reviewed) (Reviewed) Vessels 3,015,138 3,040,313 3,045, , ,936 Marine and Agency services 47,108 58,345 60,624 14,045 13,962 Sub Catering & Other income 21,234 16,268 33,013 6,535 8,119 Revenues 3,083,480 3,114,926 3,139, , ,017 Cost of sales (650,301) (676,287) (698,196) (153,720) (163,410) Gross profit 2,433,179 2,438,639 2,441, , ,607 GP Margin 79% 78% 78% 80% 79% G&A (103,407) (111,428) (112,570) (30,899) (31,962) EBITDA 2,329,772 2,327,211 2,328, , ,645 EBITDA Margin 76% 75% 74% 76% 75% Depreciation (606,129) (661,029) (688,330) (167,981) (173,081) EBIT 1,723,643 1,666,182 1,640, , ,564 EBIT Margin 56% 53% 52% 54% 53% Finance Cost (1,305,597) (1,245,552) (1,198,602) (297,899) (296,795) Share from JV Profits 300, , ,954 91, ,152 Interest income on loans JV 19,687 13,432 10,334 2,755 2,552 Interest&Dividend income from Islamic banks 17,259 25,734 33,559 13,206 14,811 Gains/ Losses on derivative from JV (25,713) Minority (1,006) (1,412) (1,423) (281) (313) Profit for the period 729, , , , ,971 Net Income Margin 24% 29% 31% 29% 31% Source: Company data, MubasherTrade Research analysis Revenue mix by segment Q vs. Q profitability Profitability margins Source: Company data, MubasherTrade Research analysis Source: Company data, MubasherTrade Research analysis Source: Company data, MubasherTrade Research analysis Page 33

34 Qatar Gas Transport Nakilat Qatar Initiation of Coverage Business Model (Cont. d) Forecast Assumptions* Revenue mix, Revenue contribution by segment Revenues Revenues from wholly-owned vessels, marine and agency services and vessels sub-chartering and other income are assumed to grow at a conservative marginal rate of 1% per annum. Through the long-term agreements signed, we assumed charter rates are fixed and inflation has been factored into these long-term deals. We assumed a 100% utilization rate and operating number of days per vessel to be at 350 days, with the remaining days of the year accounted for scheduled maintenance. Overall, Nakilat s revenues are projected to grow 4.4% over at a CAGR of 0.9%. Profitability We expect operating margins to stabilize and remain in the range of 78% and 74% for the gross profit and EBITDA margins, respectively. Profit from joint venture ships is assumed to grow at similar rates to that registered during Weforecast operating cost at 22% of total revenues. We assumed G&A at a conservative 3.6% of total revenues. 2015a Profitability margins 2021f DPS & dividends yield Dividends and Leverage We assumed the dividend policy to continue at the same trend over the forecast period and EPS to grow at a CAGR of 8.5% over We assumed no additional financing to be obtained in the medium term, and current high leverage profile of QGTS (QAR20.6bn as of 2015 at an effective interest rate of 5.4%) will decrease, which will easily allow QGTS to meet its debt repayments and lead to EPS acceleration. We believe Nakilat retains the cash ability to expand its fleet, targeting acquisitions without obtaining new debts. Capex Due to the lack of management guidance, we expect no further expansionary capex in the medium term. We assumed 2015 capital work-in-progress balance (QAR54mn) will be transferred to fixed assets during We assumed average maintenance capex of 7.5% of total sales. Debt to invested capital Interest coverage ratio Stable cash flows with no additional debt allows QGTS to comfortably cover its debt obligations * Our assumptions are made based on the best of our knowledge, industry and sector research, absent management guidance. Page 34 Source: Company reports, MubasherTrade Research estimates