Media Banks Food & Stapl Ret HC Equip & Svc Transport Cap Goods Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Individual Portfolio investors Corporates Strategic Partners Mutual Funds GRE's Market ownership: Gainers/ losers since Aug 15 6.0% 4.0% 2.0% -2.0% -4.0% -6.0% -4.4% -1.9% -0.6% 3.5% Individuals ownership stabilizes in last two months 67.0% 65.0% 63.0% 61.0% 59.0% Saudi Institutions market ownership Saudi Individuals market ownership - RHS 5.0% 33.0% 31.0% 29.0% 27.0% Major sectoral gainers/ losers in last 3 months* 150% 100% 50% 0% -50% Change in market ownership 111.6% 13.3% 5.0% -2.5% -4.5% -6.0% *Note: Above data is until end of August 29, 2017 Mazen Al-Sudairi, Head of Research Tel +966 11 2119449, alsudairim@alrajhi-capital.com Nivedan Reddy Patlolla, CFA Senior Research Analyst patlollan@alrajhi-capital.com +620 bps -530 bps % change in sector index level : August 2017 TASI in recovery mode TASI rose 2.3% m-o-m in August 2017 to end at 7,259. We believe that (a) average oil price (WTI) rising 3.0% m-o-m in August 2017, and (b) better Q2 fiscal deficit numbers, may have driven the TASI strength. TASI average daily traded value (ADTV) declined by 42% y-o-y during Feb-May 2017, but it improved to just 11% y-o-y decline in June-August 2017. Our market positioning study in the last 3 months reveals Banks continues to attract investor attention due to better than expected Q2 results and as stated in our previous report increased dividends. REITs, which witnessed price correction for the first time in June 2017 and resumed uptrend in July, witnessed significant buying interest in August 2017 (refer to the REITs section on page 2). Despite 6.7% m-o-m increase in average Brent prices in August 2017, the heavyweight Petrochemicals sector did not witness significant buying interest (most stocks ended flattish m-o-m), as they were already fairly valued in our opinion. Cement (due to weak Q2 results and no visibility on capex cycle) and Healthcare stocks were the other laggards. Following are the key takeaways from the August 2017 market trends: (a) Saudi Individuals ownership stabilizes in the last two months: Saudi Individuals ownership consistently declined since August 2015 without any respite. Over the last 2 years itself, Saudi Individuals ownership declined 530 bps to 27.3%. However, over the last two months, the ownership of Saudi Individuals appeared to have stabilized. If the Saudi Individuals market ownership stabilizes/ rises from the current levels, then it is positive for the market traded value as Individuals have higher portfolio churn 1.95x vs. 0.13x for Saudi Institutions. (b) REITs traded value volatility returns: The volatility in REITs traded value, which started showing signs of normalizing since the 2 nd week of May 2017, has stabilized further in July 2017. However, the volatility made a comeback in August 2017. Most of the activity was concentrated between 16-27 August 2017. On 24 August 2017, two days after listing of Al Maather REIT, the total REITs trading value accounted for 23.6% of total TASI traded value, the second highest instance in the REITs trading history. (c) QFI ownership resumes uptrend: Direct QFI ownership has been consistently increasing in the last couple of years with some of the gains due to switch from Swaps. However, in July 2017, both direct QFI ownership and Swap ownership declined. We had stated in our previous report that this could just be a blip in the long term trajectory of QFI ownership increase. In-line with our view, the QFI ownership has resumed the uptrend, increasing to 0.42% in August 2017 vs. 0.39% in July 2017. The swap ownership was also flat, standing at 0.59% in August 2017 vs. 0.58% in July 2017. (d) Key takeaways from market positioning: The sectors with high interest (both price increase and higher than average traded value) in the last 3 months were Banks, consumer sector/ yield plays (Food & Beverages, REITs and Utilities) and Media (mainly due to Saudi Research & Marketing). Conversely, witnessing low interest were Materials (Petchem and Cement), Capital Goods, Transport, Energy and Pharma. Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
1-Jan-11 1-Apr-11 1-Jul-11 1-Oct-11 1-Jan-12 1-Apr-12 1-Jul-12 1-Oct-12 1-Jan-13 1-Apr-13 1-Jul-13 1-Oct-13 1-Jan-14 1-Apr-14 1-Jul-14 1-Oct-14 1-Jan-15 1-Apr-15 1-Jul-15 1-Oct-15 1-Jan-16 1-Apr-16 1-Jul-16 1-Oct-16 1-Jan-17 1-Apr-17 1-Jul-17 Key trends August 2017: TASI in recovery mode TASI rose 2.3% m-o-m in August 2017 to end at 7,259. We believe that (a) average oil price (WTI) rising 3.0% m-o-m in August 2017, and (b) better Q2 fiscal deficit numbers, may have driven the TASI strength. The traded value at for August stood at SAR60.2bn, flattish m-o-m, but the average daily traded value (ADTV) rose to SAR2.9bn, a rise of 4.2% m-o-m on the back of lower number of trading days in August due to the commencement of Hajj holidays. The TASI traded value for YTD 2017 stood at SAR556.9bn, a decline of 32% y-o-y. The bulk of this decline is due to lower TASI trading volume in February May 2017 period, when TASI traded value declined 43% y-o-y. The TASI traded value declined by just 15% y-o-y during June-August 2017 period. However, to remove the impact of holidays, we consider ADTV for like to like analysis. ADTV during the June-August 2017 period fell by just 11% y-o-y, compared to 42% decline during the February May 2017 period. This suggests that the TASI trading volumes are starting to stabilize on y-o-y basis. November December 2016 period had significantly higher traded value compared to June October 2016 period. It remains to be seen if this repeats this year too. Figure 1 TASI average daily trading value below long term average for extended period of time 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 Long term average: SAR5.9bn 12,000 11,000 10,000 9,000 8,000 7,000 6,000-5,000 Avg daily traded value (SAR bn) Traded value - long term average (SAR bn) TASI - RHS REITs traded value volatility makes a comeback in August 2017 The REITs traded value has been highly volatile, especially in the initial few months of their listing. As we mentioned in the previous reports, the traded value listed REITs comprised as high as 20% of the total Tadawul traded value on some trading days. On 15 trading days in YTD 2017, the traded value of REITs accounted for 10%+ of TASI traded value. This is despite the fact that the combined market cap of all the listed REIT funds stands at just ~SAR2.8bn vs. ~SAR1,760bn market cap of TASI. The volatility in REITs traded value, which started showing signs of normalizing (i.e. REIT traded value <10% of TASI traded value) since the 2 nd week of May 2017 (see chart 3), has stabilized further in July 2017. REIT funds traded value comprised just 2.4% of TASI traded value in July 2017, an all-time low. However, the volatility made a comeback in August 2017 (see below chart). Most of the activity was concentrated between 16-27 August 2017. On 24 August 2017, two days after Disclosures Please refer to the important disclosures at the back of this report. 2
Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 H1 2013 H2 2013 H1 2014 H2 2014 H1 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 1-Jan-17 5-Jan-17 11-Jan-17 17-Jan-17 23-Jan-17 29-Jan-17 2-Feb-17 8-Feb-17 14-Feb-17 20-Feb-17 26-Feb-17 2-Mar-17 8-Mar-17 14-Mar-17 20-Mar-17 26-Mar-17 30-Mar-17 5-Apr-17 11-Apr-17 17-Apr-17 23-Apr-17 27-Apr-17 3-May-17 9-May-17 15-May-17 21-May-17 25-May-17 31-May-17 6-Jun-17 12-Jun-17 18-Jun-17 22-Jun-17 5-Jul-17 11-Jul-17 17-Jul-17 23-Jul-17 27-Jul-17 2-Aug-17 8-Aug-17 14-Aug-17 20-Aug-17 24-Aug-17 6-Sep-17 listing of Al Maather REIT, the total REITs trading value accounted for 23.6% of total TASI traded value, the second highest instance in the REITs trading history. Figure 2 Volatility of REIT trading volumes subsided in May-July 2017 period, however made a comeback in late August 2017, around the time of Al Maather REIT listing 12 0.3 10 0.25 8 0.2 6 0.15 4 0.1 2 0.05 0 0 TASI traded value (SAR bn) REIT traded value as % of TASI traded value - RHS Figure 3 Saudi Individuals market ownership stabilizes in the last two months Saudi Individuals ownership stabilizes in July-August 2017 Saudi Individuals ownership (comprised of Retail + High net-worth individuals + IPIs + Individual DPMs, refer Appendix for more details ) consistently declined since August 2015 without any respite. Over the last 2 years itself, Saudi Individuals ownership declined 530 bps to 27.3%. However, over the last two months, the ownership of Saudi Individuals appeared to have stabilized (see chart below). Whether this trend will sustain going forward remains to be seen. If the Saudi Individuals market ownership stabilizes, or even better rises from the current levels, then it is positive for the market traded value as Individuals have higher portfolio churn. This must be seen in the context of Saudi Individuals, with 1.95x portfolio turnover, mainly losing market ownership to GREs (refer chart 4) with almost nil turnover, over the last 2 years which resulted in ownership share loss. Figure 4 GREs gained market ownership at the expense of Saudi Individuals 67.0% 66.0% 65.0% 64.0% 63.0% 62.0% 61.0% 6 59.0% 32.5% 59.8% 66.0% +620 bps -530bps 27.3% 33.0% 32.0% 31.0% 3 29.0% 28.0% 27.0% 4 38.0% 36.0% 34.0% 32.0% 3 28.0% 26.0% 36.6% 33.7% 40.8% +710 bps -930 bps 27.4% Saudi Institutions market ownership Saudi Individuals market ownership - RHS GRE (part of Saudi Institutions) market ownership Saudi Individuals market ownership Source: Tadawul Source: CMA, Tadawul Disclosures Please refer to the important disclosures at the back of this report. 3
1-Aug-15 1-Oct-15 1-Dec-15 1-Feb-16 1-Apr-16 1-Jun-16 1-Aug-16 1-Oct-16 1-Dec-16 1-Feb-17 1-Apr-17 1-Jun-17 1-Aug-17 1-Aug-15 1-Oct-15 1-Dec-15 1-Feb-16 1-Apr-16 1-Jun-16 1-Aug-16 1-Oct-16 1-Dec-16 1-Feb-17 1-Apr-17 1-Jun-17 1-Aug-17 Figure 5 Saudi Individuals have the highest portfolio turnover 2.50 2.00 1.95 1.50 1.00 0.50 0.54 0.53 0.13 0.00 Saudi Individuals GCC FPIs Saudi Institutions Annual portfolio turnover (x) Source: Tadawul QFI ownership resumes uptrend The QFI ownership has been steadily increasing since August 2015, however it accelerated from February 2017, mainly due to switch from swaps. However in July 2017, both QFI ownership and swap ownership declined in tandem. We had stated in our previous report that this could just be a blip in the long term trajectory of QFI ownership increase. In-line with our view, the QFI ownership has resumed the uptrend, increasing to 0.42% in August 2017 vs. 0.39% in July 2017. The swap ownership was also flat, standing at 0.59% in August 2017 vs. 0.58% in July 2017. We believe the QFI ownership may start inching up as MSCI has already placed Saudi stocks on the watch-list for potential MSCI EM inclusion. Further, Aramco IPO will also trigger higher institutional investor interest for the broader n equity market in our view. Figure 6 QFI ownership resumes uptrend in August 2017 Figure 7 SWAP ownership remains flat in August 2017 3.00 2.50 2.00 1.50 1.00 0.42% 0.37% 0.32% 0.27% 0.22% 0.17% 2.00 1.50 1.00 0.50 - (0.50) (1.00) 1.15% 1.05% 0.95% 0.85% 0.50-0.12% 0.07% 0.02% (1.50) (2.00) (2.50) 0.75% 0.65% (0.50) -0.03% (3.00) 0.55% QFI net buying (SAR bn) QFI ownership - RHS SWAP net buying (SAR bn) SWAP ownership - RHS Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4
Media Banks Food & Stapl Ret Consumer Svc Retailing Tel Svc (L2) Utilities (L2) Cons Dura & App Comm & Prof Svc Food & Beverages Diversified Fin REITs Insurance Materials (L2) Energy (L2) RE Mgmt & Dev Phar, Bio & LS HC Equip & Svc Transport Cap Goods Materials Banks Insurance RE Mgmt & Dev Cap Goods Food & Beverages Consumer service Telecom Energy Retailing Media Transport REITs Comm & Prof Svc Healthcare Food & Stapl Ret Utilities Cons Dura & App Diversified Financials Phar, Bio & LS What is the market thinking? In this report, we tried to pick broad trends in the market using trading volumes and price action of various sectors: By traded value, Banks, REITs and Media witnessed heightened investor interest in the last 3 months, while Insurance, Materials (Petchem + Cement) and Capital Goods sectors witnessed lower investor interest. By price level, Media gained the most due to price appreciation of Saudi Research and Marketing group, followed by Banks and Food and Staples Retailing. Capital Goods, Transportation and Healthcare were the sectors which witnessed the most price decline in the last 3 months. In the following charts, we outline the sectors which witnessed higher investor interest over the last 3 months. If the sector s current contribution to Tadawul s traded value is higher/ lower vs. its historical average, it potentially indicates higher/ lower investor interest respectively in the sector. Figure 8 Major sectors: Traded value vs. historical average Figure 9 Other sectors: Traded value vs. historical average 3 3 4.0% 4.5% 25.0% 2 15.0% 1 5.0% 25.0% 2 15.0% 1 5.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% Sector traded value/ (Historical) Sector traded value/ (last 3 months) - RHS Sector traded value/ (Historical) Sector traded value/ (last 3 months) - RHS Figure 10 Changes in price levels (June - August 2017) 12 111.6% 10 8 6 4 2 13.3% 11.7% 1 7.9% 6.0% 4.1% 3.7% 3.6% 3.4% 2.1% 1.4% 1.3% -2-0.3% -0.6% -1.7% -2.3% -2.5% -4.5% -6.0% Change in index level - last 3 months (%) Note: Sectors which are currently witnessing heightened investor interest (or vice versa) are determined by comparing the sector s contribution to Tadawul traded value over June August 2017 vs. historical average (last 2 years). Further, sectors which are currently in-favour or out-of-favour are determined based on price change (levels of sectoral indices). Disclosures Please refer to the important disclosures at the back of this report. 5
Key takeaways from market positioning Sectors with high investor interest (both price increase and traded value) were Banks, consumer sector/ yield plays (Food & Beverages, REITs and Utilities) and Media (mainly due to Saudi Research & Marketing). We had stated in the previous report that increased dividends from major banks post Q2 results may have attracted investor interest in the Banking sector. Banking sector Q2 results were also better than expected which led to rerating of a number of banks. REITs, which witnessed price correction for the first time in June 2017 and resumed the uptrend in July, witnessed significant buying interest in August 2017 (refer to the REITs section earlier in the report). The market positioning in the last 3 months implies that investors were still focused on (a) high yield plays i.e. Banks with increased dividends and REITs, and (b) consumer sectors such as Retailing and Food. Despite 6.7% m-o-m increase in average Brent prices in August 2017, the heavyweight Petrochemicals sector did not witness significant buying interest (most stocks ended flattish m-o-m), as they were already fairly valued in our opinion. In the following table, we attribute fundamental reasons for the significant price action of some stocks over June 2017 August 2017 period: Figure 11 Stocks with significant price action Company 3M price perf (%) Comments United Electronics Co 45 Solid Q2 results due to accelerated market share gains. SG&A costs well under control. National Commercial Bank 28 Sharp increase in dividends and among the few stocks which witnessed significant buying in June. n Mining Co 26 Ma'aden was one of the few stocks which witnessed significant buying in late June, resulting in sharp sustained increase in stock price. Arab National Bank 25 Good set of results in Q2 and also among the few stocks that witnessed significant buying in June. Banque Saudi Fransi 23 Decent results in Q2 and doubling of DPS for H1 2017. Middle East Healthcare Co (13) Q2 results were impacted by pricing revisions with a major government client. Saudi Cement Co (13) Weak Q2 results due to sharp fall in sales volume as well as the implementation of export fees on Bahrain's dispatches. Al Hammadi (14) The stock corrected by ~ 9% post announcing the study of a possible merger with NMCC (Care). Etihad Etisalat Co (15) Weak set of results in Q2 and lower market expectations for H2 2017 resulted in the decline. Medgulf (22) Source: Al Rajhi Capital Company said its accumulated losses amounted to SAR 733.97 million by the end of the second quarter of 2017, representing 73.4% of its capital. Combining the traded value and price data points, the following heat map shows sectors allocated to various quadrants on the traded value and price axes. Generally, sectors with both higher than average traded value and price increase are considered to have bullish bias and vice versa. Figure 12 Sectoral heat map: Traded value and price action in last 3 months Lower than average volume Higher than average volume Price Decline Materials Transport Capital Goods Energy Pharma & Bio Healthcare Real Estate Mgmt & Dev Price Increase Food & Staples Retail Telecom services Insurance Consumer services Diversified Financials Consumer Durables Banks Utilities Food & Beverages REITs Media Comm & Prof services Disclosures Please refer to the important disclosures at the back of this report. 6
Appendix Figure 13 Investor categories as classified by Tadawul Naitonality Investor category Definition Individuals Retail Retail investors are Saudi individuals, excluding IPIs (see below) and HNWIs High Net Worth Investors (HNWIs) HNWIs are Saudi individuals who have had an average portfolio size of SAR 1m (and above) for the preceding 12 months, excluding IPIs IPIs are Saudi individuals who have had an average portfolio size of SAR 50m (and above) for the preceding 12 Saudi Individual Professional Investors (IPIs) months and a portfolio turnover ratio of not more than 4 times annually Saudi individual investment account in which the manager (Authorized Person) makes the buy/sell decisions for Individual DPMs its client without referring to the account owner (based on to the agreed terms between them) Institutions Corporates Saudi company with a commercial registration permitting its investment in the stock market Mutual Funds A mutual fund managed by an Authorized Person and licensed by the CMA Government Related Entities (GREs) A Government entity or a supranational authority recognized by the CMA Saudi institutional investment account in which the manager (Authorized Person) makes the buy/sell decisions for Institutional DPMs its client without referring to the account owner (based on to the agreed terms between them) GCC Individuals GCC natural person Institutions GCC legal person with a commercial registration certificate (corporate or mutual fund), in addition to GCC government entities Foreign Source: Tadawul GCC DPMs SWAP Holders Foreign Residents QFIs Foreign DPMs Strategic Partners GCC investment account (institutional or individual) in which the manager (Authorized Person) makes the buy/sell decisions for its client without referring to the account owner (based on to the agreed terms between them) Authorized Person with the permission to enter into SWAP agreements to transfer the economic benefits of its ownership of shares in Saudi companies listed on the Saudi Stock Exchange to its non-resident foreign clients Foreign investors domiciled in the Kingdom with a valid residency permit (Iqama) (excluding GCC nationals) Qualified Foreign Institutional investors registered with the CMA in accordance with the QFI Rules, to invest in shares listed on the Saudi Stock Exchange Foreign resident investment account in which the manager (Authorized Person) makes the buy/sell decisions for its client without referring to the account owner (based on to the agreed terms between them) Foreign investors considered founders and partners of Saudi listed companies Disclosures Please refer to the important disclosures at the back of this report. 7
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Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh,. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. 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Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction. Explanation of Al Rajhi Capital s rating system Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price on a 12 month time horizon. "Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12 month time horizon. "Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company s profits or operating performance exceed or fall short of our expectations. Contact us Mazen AlSudairi Head of Research Tel : +966 11 211 9449 Email: alsudairim@alrajhi-capital.com Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561, Riyadh 11432 Kingdom of Email: research@alrajhi-capital.com Al Rajhi Capital is licensed by the n Capital Market Authority, License No. 07068/37. Disclosures Please refer to the important disclosures at the back of this report. 9