December Profitability (SAR in mn)

Cement Sector Report Sector Update KSA Cement Saudi Cement Outlook in 2015: The sales of Saudi Cement sector in 2015 is expected to witness visible rise on the back of improved demand, backed by heavy infrastructure development in Saudi Arabia and lower impact of labor shortage in the market. We expect the cement consumption during Q4-2014 to stand at 14.1MT depicting an increase of 12.5%YoY. For 2015 sales are expected to register an increase by 7.1%YoY due to higher construction activity on the back of increase in infrastructure spending by the government and a strong project pipeline in Saudi Arabia. The long-term outlook for cement companies remains bullish despite short-term problems such as labor shortage and uncertainty over the availability of subsidized fuel for capacity expansion. Key highlighted points: In light of large infrastructure projects in the coming years, the government has taken up the labor issue seriously and working towards resolving the issue of labor shortage. Therefore, we expect to see demand improvement by the end 2014. We believe with the current inventory level (21 MT Nov 2014), the sector is well set to cater the demand boom that the Kingdom is expected to see in 2015. Moreover, the recent dispatches (Jan-Nov 2014) has indicated a growth of 1.1%YoY and expected to record 56.12 MT in full year 2014 (55.26 MT in 2013). Saudi Cement Company announced the completion of rehabilitate of Kilns 4 and 5 in Al-Hofuf plant with a total designed capacity of 3000 tons of clinker/day, the company is reconsidering the feasibility of operating these two kilns, depending on market conditions. Arabian Cement Company planes to extend its capacity by adding a new production line in Rabigh, with a daily production capacity of 10,000 tons of cement, which is expected to begin operations by the end of H2-2017. Southern Province Cement Company (SPCC) plans to add a second production line in Bisha factory and it s expected to commence commercial production in Oct-2015. The 3rd production line in addition to SPCC s capacity in Tihama and Bisha project is likely to raise production capacity to 33,000 tpd of clinker. Qassim Cement showed an improvement in operational efficiency due to decline in the average cost of production from SAR 97.5pt in 2013 to SAR 94.8pt in 2014. Najran Cement continued to make significant improvement in sales and capacity utilization, recording higher than expectation growth at 24.9%YoY (11M-2014). Updated key financials & investment recommendations Company 12-month TP (SAR) Investment recommendation Profitability (SAR in mn) EPS (SAR mn) PE (x)* PBV (x)* Dividend yield* 2014E 2015E (%) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E Saudi 119.3 Overweight 1,100.1 1174.8 6.8% 7.19 7.68 14.2 13.3 4.81 4.66 6.9% 6.9% Yamamah 63.2 Overweight 679.4 707.8 4.2% 3.36 3.50 15.2 14.6 2.61 2.54 5.2% 5.2% Qassim 113.6 Overweight 575.2 592.6 3.0% 6.39 6.58 14.6 14.2 4.14 4.03 6.4% 6.4% Southern 129.1 Overweight 1,056.9 1022.1-3.3% 7.55 7.30 13.6 14.1 5.16 5.12 6.8% 6.8% Yanbu 79.4 Overweight 790.9 847.9 7.2% 5.02 5.38 12.8 11.9 3.01 2.83 6.2% 6.2% Najran 33.3 Overweight 267.4 303.7 13.6% 1.57 1.79 18.7 16.5 2.67 2.53 2.0% 3.6% Arabian 92.8 Overweight 666.3 674.6 1.2% 6.66 6.75 12.2 12.0 2.35 2.09 4.3% 4.3% Hail 34.3 Overweight 148.4 156.4 5.4% 1.52 1.69 14.1 12.6 2.08 2.05 5.2% 7.0% Eastern 66.5 Overweight 355.3 311.3-12.4% 4.13 3.62 13.6 15.5 2.07 2.06 6.2% 6.2% Northern 26.8 Overweight 236.4 243.3 2.9% 1.31 1.35 16.5 16.0 1.86 1.97 9.3% 6.9% City 27.0 Overweight 234.6 292.6 24.7% 1.24 1.55 18.6 14.9 2.2 2.1 5.4% 5.4% Source: AlJazira Capital* we used closing price of 21 st Dec 2014. Key valuation methodology (After adjustments) 12-month price targets of all cement companies under our coverage are adjusted with our amended valuation methodology. It is worthy to note that the 12-month price targets of few stocks were adjusted recently in investment/event updates of the respective companies. The key amendments in our valuation methodology are given below; Downward revision in the company s risk free rate to 2.84% (due to decrease in US 10-year bond yield to 2.14%); where, the impact of such revision on valuation is minimal due to CAPM equation. We used 5-years monthly beta to reduce the impact of volatility on our valuation. We used 10-year explicit cash flows for DCF based valuation to reduce the impact of terminal value on overall valuation. According to a press release, the complex s fixed cost is around SAR16.0mn per month (of which SAR5.0mn is depreciation). 1 Senior Analyst Talha Nazar t.nazar@aljaziracapital.com.sa +966 11 2256115 Analyst Jassim Al-Jubran j.aljabran@aljaziracapital.com.sa +966 11 2256248

Cement Sector Report Sector Update KSA Cement Saudi cement sector Short-term challenges but bullish outlook Saudi Arabia s cement sector slowed in 2014 due to labor shortage as the government intensified the deportation of 2mn illegal expatriate laborers. However, to overcome labor shortage the government intends to allow legal foreign workers. We believe that the long-term outlook for the cement sector remains bullish. The cement players across KSA have access to cheaper raw materials, resulting in global competitive advantage. Moreover, with the introduction of the mortgage law, the housing sector is expected to expand, which would increase the demand for cement. Furthermore, increased tourism activities across Makkah and Medinah are expected to result in the construction of hotels and other hospitality s segments Cement sales showing signs of recovery Saudi Arabia s cement industry witnessed steady growth in consumption over the last five years. Cement consumption in terms of volume 1 increased from 38.4MT in 2009 to 55.7MT in 2013, recording a CAGR of 9.7% from 2008 13 and the sales value increased at a CAGR of 10.3% to SAR 12.2bn in 2013 2. The robust growth was propelled by a rise in construction activity in the Kingdom. However, cumulative sales for the first nine months of 2014 declined 3.6% YoY due to low demand. This trend changed in August and September when sales grew 48% and 13%, respectively, driven by increased government investment and demand pickup. The residential segment, which accounts for ~ 54% 3 of cement consumption, is expected to benefit from government initiatives that will help meet the housing shortage; 1 mn housing units by 2020 and 3 mn by 2040. 3 Furthermore, increase in infrastructure spending by the government (80% growth in 2014) and a strong project pipeline in KSA supports the demand for cement. Moreover, of the USD 156.3bn projects (across all sectors) awarded in 2013, projects in Saudi Arabia alone constituted for USD 66bn. 4 Figure 1: Total cement and clinker sales volume and sales value Total sales volume Total sales volue (RHS) Source: Yamama Cement, Aljazira Capital 1 Production and consumption data is the aggregate of Yamama Cement, Saudi Cement, Eastern Cement, Qassim Cement, Yanbu Cement, Arabian Cement, Southern Cement, Tabuk Cement, Riyadh Cement, Najran Cement, City Cement, Northern Cement, AlJouf Cement, and Hail Cem 2 Sales value data is for Yamama Cement, Saudi Cement, Eastern Cement, Qassim Cement, Yanbu Cement, Arabian Cement, Southern Cement, Tabuk Cement, Um Al-Qura Cement, Najran Cement, City Cement, AlJouf Cement, and Hail Cem 3 Um_Al-Qura Cement Co prospectus (2014) 4 MEED s GCC Construction Projects Market 2015 report 2

Cement Sector Report Sector Update KSA Cement Increased government projects to boost cement demand Demand for cement in Saudi Arabia is strongly correlated with activity in the real estate industry (residential building construction accounts for 54% of total cement demand), with demand pickup picking up after delay of a year or two since the project announcements. Through the Ninth Development Plan (2010-2014), the government increased expenditure on construction activity to USD 385bn. However, owing to deceleration in economic growth in 2012 and 2013, construction activity in the region was weak, with total projects awarded decreasing to USD 17bn in 2012 and USD 40bn in 2013 from ~ USD 70bn in 2011. The effect trickled down to the cement sector as well, with the sales volume falling 3.6% YoY in the first nine months of 2014. However, we expect recovery of the Building & Construction sector, lead by the expansion in projects by the Ministry of Housing and the allocation of housing units. Saudi Arabia s projects (either ongoing or planned), which amount to USD 1.1tn, consist of those in the residential sector (30%), followed by the healthcare (20%) and education sector (10%). The Saudi budget for 2014 has also scheduled expenses worth SAR 855bn, rising 4.3% YoY from SAR 820bn in 2013. The transport sector, particularly aviation and rail, constitute a large proportion of the high-value construction contracts awarded over the last three years. The Kingdom is anticipated to award further contracts in the construction sector, with construction projects worth USD 195.4bn scheduled over the next three years. 2015 budget is also expected to be expansionary. A few of the major ongoing government development projects are: Project Cost (USD bn) Completion date 0.5mn new houses 67 NA King Abdullah Financial Center 7.8 NA Communications and Information Technology Complex 1.3 2015 Economic cities: King Abdullah Economic City 86 2029 Jazan Economic City 27 2037 Abdulaziz Bin Musa'ed Economic City 8 2022 Economic Knowledge City 8 2020 King Abdulaziz New International Airport 8.2 2035 Riyadh metro Project 22.5 2018 Source: Zawya, www.saudi.gov.sa, Aljazira Research With infrastructure investments growing at a rapid pace, cement manufacturers are expanding capacity in line with rising demand. Consequently, total cement capacity in the Kingdom rose to 47mn tons in 2013 from 31mn tons in 2008. Moreover, cement demand is forecast to increase at a CAGR of 4% during the next five years. 5 Saudi Arabia s Nitaqat program, aimed at increasing the number of Saudi nationals employed in a company, can affect the construction industry and cement production. Around 5.3mn foreign workers resigned from their services until September 2013 after the government announced the labor laws. According to Jeddah Chamber of Commerce and Industry, in December 2013, Saudi projects worth over USD 26bn were stalled owing to labor shortage. Furthermore, 0.01mn of the 0.25mn contracts were cancelled in 2013 due to the companies inability to fulfill contractual obligations. The construction sector relies on foreign labor for low-skilled jobs, which they have been unable to backfill from domestic workforce supply. Resultantly, construction activity declined, which, in turn, lowered cement sales. However, cement companies with strong margins are better positioned in this situation and improved results are expected over the next few quarters. 1 Um AL-Qura prospectus (2014) 3

Cement Sector Report Sector Update KSA Cement Rapid growth in construction activity According to MEED, the value of projects planned or currently underway in KSA was USD 1.1tn at the end of April 2014. These projects primarily include the construction of real estate properties as well as development of hospitality and leisure properties. The developers aim to benefit from a favorable demographic profile (47% of Saudis are below the age of 25; 45% are 25-54 years) and high per capita income (~USD25,000 at end-2013). About 29% of current construction in KSA is focused on commercial properties and infrastructure upgrade (e.g., development of transport system in Makkah and King Abdulaziz International Airport). Moreover, the cement sector is likely to benefit from the shortage of housing units, as nearly 0.5mn new housing units are in the pipeline. Some of the major projects under construction include Riyadh Metro line, Abraj Kudai in Makkah, Phase 6 of Rabigh Power Plant Extension, and rehabilitation centers for prisoners. To achieve higher non-oil economic growth, the Kingdom is witnessing a surge in the number of construction contracts being awarded. Construction projects worth USD 75.6bn (SAR 272.2bn) are expected to be awarded in 2014, representing an annual growth of 80%. Moreover, projects worth USD 195bn are expected to be awarded between 2015 and 2017. We expect construction activities to grow at a higher pace until 2020 due to several projects in the pipeline. Figure 2: Spending sector-wise (Apr 2014) Figure 3: Contracts awarded (USD bn) 75.6 USD bn 42.0 17.0 2012 2013 2014(e) Source: MEED Projects Source: Big 5 Saudi Surge in inventories Total inventories (cement + clinker) at the end of October almost doubled to an all-time high of 22.2mn tons as against 12.1mn tons a year ago. Moreover, 1.9mn tons of clinker were imported from January to October 2014 (imports were only carried out in the first three quarters), following King Abdullah s 2013 mandate to companies to import 10mn tons of cement cumulatively to plug the supply gap in the region. In 2013, cement supply was not sufficient to cater the cement demand in the Kingdom. To avoid the projects to get delayed, King Abdullah mandated companies to import cement. Massive imports have impacted the margins of the companies as imported cement is costlier than domestically produced cement. However, the project execution and cement demand dropped in 2014. Therefore, lower demand in 2014, coupled with high imports, has led to an increase in inventory levels for the year. The average number of days of stock rose to 188 days as at the end of October 2014 from 133 days last year. 6 Najran Cement Co had 412 days of inventory in its stock as of October 2014, followed by Riyadh Cement Co. with 227 days stock. However, imports have been on a decline since 2Q2014 as the firms have largely fulfilled the import mandate of importing 10mn tons of cement cumulatively. We believe that, going forward, inventory levels would decrease with decline in imports and higher demand. Figure 4: Inventory Levels (cement + clinker) Figure 5: Number of days of inventory 25,000 450.0 20,000 400.0 350.0 15,000 300.0 250.0 10,000 200.0 150.0 5,000 100.0 50.0-2007 2008 2009 2010 2011 2012 2013 YTD Cement (THD of tons) Clinker (THD of tons) - Najran Riyadh Aljouf Northern Yanbu Saudi Yamama Tabuk Hail Eastern Southern Qassim Arabian Source: Yamama Cements, Aljazira Capital Source: Yamama Cements, Aljazira Capital 6 Inventory data is the average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Riyadh Cem, Najran Cem, Northern Cem, AlJouf Cem, and Hail Cem 4

Cement Sector Report Sector Update KSA Cement Cement prices Regulated by government Increased cement demand and hoarding practices led to a higher-than-anticipated rise in cement prices across Saudi Arabia in 2012. As a result, the government imposed a price ceiling of SAR 240 per ton (down from SAR 250 per ton earlier) in March 2012. Moreover, cement exports are banned, except to selected countries such as Bahrain. However, traders continued their practice of artificially creating shortages, leading to higher prices throughout 2013. Acute labor shortage in 2014 disrupted cement production, thereby resulting in lower sales. However, cement manufacturing companies took advantage of this shortage, leading to inflated prices. Among listed players, Yanbu Cement and Qassim Cement sell cement for SAR 250 per ton. At the end of 9M 2014, the average cement prices in the Kingdom stood at SAR 246 per ton. Figure 6: Cement price realizations Figure 7: Company-wise price realization 255 250 246 251 246 360 320 280 Government cap SAR240/ton SAR/ton 245 240 235 230 234 233 237 SAR/ton 240 200 160 120 80 40 225 220 2009 2010 2011 2012 2013 TTM 0 Yamama Saudi Eastern Qassim Yanbu Arabian Southern Tabuk Najran Hail Aljouf Source: Yamama Cement, Aljazira Capital Source: Yamama Cement, Aljazira Capital Cement cost range-bound and beneficial Cement companies across KSA benefit from subsidized fuel provided by Aramco and easy availability of raw materials such as limestone, providing global competitive edge. The average production cost (primarily raw materials) was SAR 118 per ton, with an average of SAR 116 per ton over the last five years. At the end of 9M 2014, the production cost averaged SAR116 per ton, indicating that the cost remained stable and range-bound. Although cement production was affected in 2014 due to labor shortage, we expect the labor problem to be solved over the next few quarters. Moreover, we expect that Aramco will continue to provide the subsidized fuel for the current production lines, thereby keeping the production cost lower and beneficial to the sector. On the Other hand, Saudi Aramco had turned down fuel supply for new production lines in the last two years, and we believe that the risk of future shortage of fuel supply could force the companies to use an alternative fuel to run the new coming production lines, which is subject to increase the production cost. Figure 8: COGS as % of revenues Figure 9: Company-wise production cost 80.0% 180 160 60.0% 140 120 40.0% 20.0% SAR/ton 100 80 60 40 0.0% 2013 5 yrs. Avg Yamama Saudi Eastern Qassim Yanbu Arabian Southern Tabuk Najran Aljouf 20 0 Yamama Saudi Eastern Qassim Yanbu Arabian Southern Tabuk Najran Hail Aljouf Source: Company Annual Report, Aljazira Capital Source: Company Annual Report, Aljazira Capital 5

Cement Sector Report Sector Update KSA Cement Margins declining due to low demand Saudi Arabia has the highest margins than any global counterpart, primarily due to access to cheap raw material and fuel (the companies receive heavy oil at a subsidized rate from Saudi Aramco and natural gas is sourced from Aramco at USD 0.75/mmbtu compared with an average international spot market price of about USD 4.0/mmbtu). Furthermore, limestone, one of the major raw materials, is provided at highly subsidized rates to companies in the Kingdom. The average gross and net margins (TTM) for cement companies in the Kingdom stood at 52.3% and 46.4% 7, respectively, vis-à-vis the GCC average of 36.5% and 28.6% 8, respectively. Kuwait has the lowest margins among GCC countries, as it is a net importer of cement (due to lack of raw materials). Demand in The UAE and Oman has increased, leading to better price realizations and margins. Qatar, with gross and net margins of 28.6% and 35.0%, respectively, has the highest per capita consumption in the GCC region. Figure 10: Saudi Better positioned Figure 11: Trend in gross and net margins Net Margin (TTM) 60% 50% 40% 30% 20% 10% Kuwait Qatar UAE Oman Saudi 57% 54% 51% 48% 45% 0% -10% 0% 20% 40% 60% Gross Margin (TTM) 42% 2009 2010 2011 2012 2013 TTM Gross Margin Net margin Source: Bloomberg, Aljazira Capital Source: Tadawul, Bloomberg, Aljazira Capital Of the companies in Saudi Arabia, Qassim Cement maintains the highest gross margin level at 62.1% (TTM) among domestic peers, followed by Saudi Cement (61.4%) and City Cement (59.2%). Qassim Cement s high price realizations and better efficiency due to its low cost of production (high utilization due to technologically advanced plants) help the company maintain high gross margins vis-à-vis peers. Moreover, Southern Province Cement Co is the best placed among its peers, by giving the highest returns (ROE) of 40.3% along with net margins of 58.5% for the last 12 months. The companies in the in the top right quadrant are better in terms of profitability and returns, whereas companies in left bottom quadrant are the companies performing the worst amongst its peers. 7 Margins data is the average of Yamama Cem, Saudi Cem, Eastern Cem, Qassim Cem, Yanbu Cem, Arabian Cem, Southern Cem, Tabuk Cem, Riyadh Cem, City cement, Najran Cem, Northern Cem, AlJouf Cem, and Hail Cem 8 Margins data is average of listed cement companies of the repective countries 6

Cement Sector Report Sector Update KSA Cement Figure 12: Gross and net margins across Saudi cement companies (TTM) 66% 59% Qassim Southern Net Margin (TTM) 52% 45% 38% 31% City Tabuk Hail Najran Eastern Yamama Yanbu Saudi 24% Arabian 17% Aljouf 10% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% ROE Source: Yamama Cements, Tadawul, Aljazira Capital We expect local companies to post higher profits due to higher sales owing to the high demand forecast. However, if Aramco adopts a differential pricing approach (pricing capacity additions higher), profit margins would decline. The key risks to margins in the cement sector are: Fuel pricing and supply concerns: Saudi Aramco has not clarified the status of fuel supply agreements for the upcoming capacity additions in the Kingdom. Thus, limited fuel allocation to the cement sector could pose a major threat to the planned capacity expansion, pushing prices higher as companies source fuel at higher costs. This would impact margins of cement companies. Labor shortage: The Government of Saudi Arabia plans to continue the Nitaqat program to reduce the unemployment rate among Saudi nationals. Thus, the cement and construction sectors would continue to face labor shortage. However, high margins would provide headroom to companies to remain resilient and recover once the temporary shortage is plugged. Declining global oil prices: Saudi Arabia depends heavily on the revenues generated from the petroleum sector. However, the global oil prices are on the decline, touching five-year lows. This would adversely impact the Saudis Arabia revenues, thereby could impacting government spending on infrastructure. Lower government spending on infrastructure (biggest driver of cement) would impact demand, thereby affecting prices. Consequently, margins are likely to decline. Dupont Analysis: 2009 2010 2011 2012 2013 Net Margin (1) 48.5% 46.5% 46.8% 47.1% 45.8% Assets turnover (2) 0.31 0.32 0.33 0.35 0.35 Leverage (3) 1.32 1.30 1.30 1.26 1.27 ROE (1 x 2 x 3) 19.6% 19.5% 20.3% 20.9% 20.2% Source: Bloomberg 7

Eastern Province Cement Co. Initiation KSA Cement Fuel allocation of the proposed new production line is the most prominent growth Multiple (uncertain) expansions projects allowing growth prospects: The Company has been operating at more than 100% of its capacity since 2010 and witnessed a slowdown in 2013 to about 94% in 2013, primarily due to labor shortage in the market. However, we believe that the government infrastructure spending in the region and a strong industrial and housing projects pipeline would support the company s sales to show signs of recovery over next few years. Eastern cement has announced ambitious expansion plans that includes the fourth production line with capacity of 3.2 mtpa (10,000tpd), which would let the company capitalize on the anticipated growing demand for cement in the region and offers a strong potential for the stock price. However, the new expansion has not been included in our valuation of the company due to rejection of fuel allocation by the ministry, along with the company s uncertainty in implementing the new project. Ideal location and utilizing the spare capacity leads to strong growth in sales: Eastern Cement Company with a capacity of 3.3mtpa is the second largest player in the Eastern province. Strategically located in the industrial area with easy access to demand centers like Dammam, Khobar, AlJubail and Riyadh along with easy access to Bahrain that allow the company to be one out of the two cement producer who exports cement to the Kingdom of Bahrain with almost 5% of its production. Eastern cement continues to witness a rise in construction and real estate activities, which accounts for nearly 20% of the total cement consumption in the Kingdom. Modest Financial growth - Based on our expectations, the company s revenue will increase at a CAGR of 2.4%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to expected improvement in capacity utilization and upcoming new kiln capacity in Q1-2015 (150 tph). Moreover, EACCO has been able to show net margin of 37.3% during 2013 whereas we expect the company to post net margins of 44% in 2014 due to realization of gains on available for sale investment, and then an average of 37.5% over the period of our forecast. We expect improvement in the production efficiency will lead the company s net profitability to increase at 2013-17 CAGR of 2.2%. Despite some challenges, Solid financial profile to support expansion plan: the company is expected to end 2014 with cash and cash equivalents totaling SAR336.7mn, along with the absence of any debt that could provide the company with much flexibility to support most of their future expansion. Although we expect EBITDA margins to fall toward 45.1% in 2014 (47.1% in 2013), the margins could show an improvement to 47% in 2015 and over the forecast period. However, it is likely the company will face some challenges regarding the value and returns of their subsidiaries and associate companies. The company reported a decline by SAR8mn in its profit share of its associates in Yemen due to current political scenario. Although the company has sold a substantial portion of its investment in SIIG (Saudi Industrial Investment Group), however EACCO still holds a portion of its investment in the company. SIIG due to the recent fall in the market has also taken a hit, which has consequently impacted the company s investment value. Dividend payments: Dividend per share declined from SAR 4/share in 2012 to SAR 3.5/ share in 2013, depicting a dividend yield of 6.1% that is above the average D/Y of cement sector (5.5%). However, The Company s dividend payout ratio has improved from 88% in 2012 to around 97% in 2013, which we believe will remain attractive for the investor. With a healthy growth expectation, along with strong cash flows, we expect the company will maintain its payout ratios. Key financial data Recommendation Overweight 12-month price target; SAR 66.5 Current Price: SAR 57.23 Upside / (downside): 16.2% Price Chart 11000 10000 9000 8000 7000 6000 5000 1-Jan-11 1-Mar-11 1-May-11 1-Jul-11 1-Sep-11 1-Nov-11 1-Jan-12 1-Mar-12 1-May-12 1-Jul-12 1-Sep-12 1-Nov-12 1-Jan-13 1-Mar-13 1-May-13 1-Jul-13 1-Sep-13 1-Nov-13 1-Jan-14 1-Mar-14 1-May-14 1-Jul-14 1-Sep-14 1-Nov-14 Key information Reuters code: 3080.SE Bloomberg code: EACCO AB Country: Saudi Arabia Sector: Cement Primary Listing: KSA exchange M-Cap: SAR4,921.8mn 52 Weeks H/L (SAR): 65.50/49.00 Eastern Cement Company (EACCO): was founded in late 1982 with a capital of SAR860mn. The Company started its commercial production in 1985. The company is running 3 production lines with current cement capacity of 3.3mtpa (10,300 tpd) and clinker capacity of 3.1mtpa (9,800 tpd). Eastern cement produces two types of cement (1) Portland cement production (2) Sulphates resisting and trading in all building materials, cement products and related materials. Eastern Province is a major market for the company s sales, as well as it exports 4-5% of total cement products to Bahrain. Shareholding pattern Public Pension Agency 10.60% TASI GeneralOrganization for Social Insurance 10.00% Eastern Cement Public 69.40% General Fund investments 10.00% 75 70 65 60 55 50 45 40 All figures in SAR (000) 2013 E2014 E2015 E2016 E2017 E2018 Sales 828,721 805,422 853,610 891,417 909,249 931,401 Growth (%) -2.8% 6.0% 4.4% 2.0% 2.4% Net Income 309,157 355,272 311,301 328,302 335,105 336,019 Growth (%) 14.9% -12.4% 5.5% 2.1% 0.3% EPS 3.59 4.13 3.62 3.82 3.90 3.91 Gross Margins 42% 40% 42% 42% 42% 41% EBIT Margins 39% 46% 38% 38% 38% 37% Net Margins 37% 44% 36% 37% 37% 36% ROE 13.5% 15.2% 13.3% 13.9% 13.9% 13.8% ROA 12.3% 13.9% 12.1% 12.5% 12.6% 12.4% PE (x) 16.55 13.68 15.61 14.80 14.50 14.46 PB (x) 2.24 2.08 2.07 2.05 2.02 1.99 EV/EBITDA (x) 12.66 12.59 11.48 10.97 10.77 10.68.Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18 th Dec. 2014 8 Investment consideration By employing DCF valuation methodology, we arrived at a 12-month price target of SAR66.5/share for Eastern Cement. This indicates the stock, at a current market price of SAR57.23/share (as of 18 th Dec. 2014), is offering a potential upside of 16.2% and trading at prospective 2014 PE and PBV of 13.9x (17.7X after excluding the gain from asset sales) and 2.1x respectively. We, therefore initiate our coverage on Eastern Cement with Overweight recommendation.

Eastern Province Cement Co. Initiation KSA Cement Key risks to valuation We identified the following key risk associated with our valuation; Price realization pressure: weak sales performance due to labor shortage is likely to impact the sales price realization of Eastern Cement, as its cement peers with high capacity utilization have raised the competitiveness in the region. Valuation summary Our DCF based valuation methodology is based on 10-years explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions; Terminal value calculation based on Gordon Growth model Expected Terminal growth of 3% 5-years monthly raw beta of the sector 0.447 from Bloomberg; in order to reduce the impact of volatility. Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables: Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran s Equity Risk Premium; determinants, estimations & implications. KSA total market risk premium (annual 2014) is taken at 12.6% from Bloomberg. Hence, the equity risk premium is calculated at 9.77%. Capital Assets Pricing Model (CAPM) is 7.20%. We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables Cost of equity based on CAPM Contribution from equity and debt in Eastern Cement s Capital structure is taken at 100.0% & 0.0%, respectively Weighted average cost of capital (WACC) is calculated at 7.20%. DCF based valuation methodology All figures in (SAR,000; (unless specified) 2013 E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023 FCF 153,114 209,403 267,938 269,410 275,408 275,382 274,978 278,203 282,969 277,466 273,444 Terminal Value 6,699,015 No of Year - 0.17 1.17 2.17 3.17 4.17 5.17 6.17 7.17 8.17 9.17 Discount Factor 1.00 0.99 0.92 0.86 0.80 0.75 0.70 0.65 0.61 0.57 0.53 Present Value 153,114 206,989 247,051 231,715 220,956 206,087 191,956 181,156 171,877 157,209 144,518 PV of Terminal Value 3,540,506 Sum of FCF 5,500,019 Net Debt 217,183.00 5,717,202.26 Price Target 66 5 Source: Aljazira capital The table below highlights the sensitivity of Eastern Cement DCF based 12-month price target with different terminal growth & WACC. Sensitivity Analysis Terminal growth WACC 5.2% 6.2% 7.2% 8.2% 9.2% 1% 59.8 56.1 52.7 49.6 46.7 2% 66.4 62.2 58.3 54.7 51.4 3% 76.2 71.1 66.5 62.3 58.4 4% 92.1 85.7 79.9 74.5 69.7 5% 122.4 113.5 105.4 98.0 91.2 9

Eastern Province Cement Co. Initiation KSA Cement Key financial data Amount in SAR 000, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018 Income Statement Sales 828,721 805,422 853,610 891,417 909,249 931,401 % Growth In sales -2.8% 6.0% 4.4% 2.0% 2.4% Cost of Sales (480,380) (485,471) (498,446) (516,812) (527,627) (546,247) Gross Income 348,341 319,951 355,163 374,606 381,622 385,154 Sales and Marketing Expenses (4,381) (4,146) (4,264) (4,205) (4,234) (4,219) General and Admin Expenses (46,115) (47,364) (48,491) (49,604) (50,596) (51,829) Income from Operations 297,845 268,441 302,409 320,797 326,792 329,106 % Growth in operating profits -9.9% 12.7% 6.1% 1.9% 0.7% Financing Expenses (279) (359) (416) (388) (402) (395) Investment Income 13,282 4,065 4,251 4,446 4,652 4,867 Other Income (Expenses) (13,940) (500) (500) (500) (500) (500) Gains from currency exchange 1,136 1,503 1,319 1,411 1,365 1,388 Capital gain from asset sales 715 80,696 618 250 434 342 Other Income 13,903 13,512 14,101 13,388 14,110 12,591 Share of associated companies 9,616 800 810 805 808 806 Income before Zakat 322,278 368,158 322,592 340,210 347,259 348,206 Zakat (13,121) (12,886) (11,291) (11,907) (12,154) (12,187) Net Income for the Period 309,157 355,272 311,301 328,302 335,105 336,019 % Growth In net income 14 9-12 4 5 5 2 1 0 3 EPS 3.59 4.13 3.62 3.82 3.90 3.91 Balance Sheet Cash and Cash Equivalent 217,183 336,719 314,680 286,962 270,412 251,671 Accounts Receivable and Prepaid Expenses 157,156 165,014 173,264 181,928 191,024 200,575 Inventories 421,532 435,082 427,876 432,155 436,476 440,841 Total Current Assets 849,324 986,751 967,037 956,758 953,604 950,718 Fixed assets 1,183,352 1,213,563 1,244,727 1,276,873 1,310,032 1,344,238 Deferred expenses 22,279 25,774 21,340 25,405 24,322 25,730 Investments available for sale 285,363 177,742 184,642 186,942 191,542 193,842 Investments in associates 166,922 158,922 164,922 173,422 180,672 188,547 Total Non-Current Assets 1,657,916 1,576,000 1,615,631 1,662,642 1,706,569 1,752,357 Total Assets 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074 Total Current Liabilites 177,204 179,153 189,461 199,567 206,892 215,416 Total Non-Current Liabilites 46,850 47,740 48,647 49,572 50,513 51,473 Total Liabilities 224,054 226,893 238,108 249,138 257,406 266,889 Total Shareholders Equity 2,283,186 2,335,858 2,344,560 2,370,262 2,402,767 2,436,185 Total Liabilities and Equity 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074 Cash Flow Statement Cash Flow from Operating Activities 368,007 334,152 396,621 402,150 412,334 416,625 Cash Flow from Investing Activities (234,900) 87,453 (116,551) (127,805) (126,824) (133,331) Cash Flow from Financing Activities (292,275) (302,069) (302,109) (302,063) (302,060) (302,035) Changes in Cash (159,168) 119,536 (22,039) (27,718) (16,550) (18,741) Cash Opening Balance 376,351 217,183 336,719 314,680 286,962 270,412 Cash Ending Balance 217,183 336,719 314,680 286,962 270,412 251,671 Key Fundamental ratios Liquidity Ratio Current Ratio(x) 4.79 5.51 5.10 4.79 4.61 4.41 Quick Ratio (x) 2.41 3.08 2.85 2.63 2.50 2.37 Efficency Ratios Receivables Days Turnover 68.6 70.0 69.3 69.7 69.5 69.6 Inventory Days Turnover 179.9 220.0 190.0 175.0 165.0 167.0 Payables Days Turnover 49.63 49.60 49.60 49.60 49.60 49.60 Cash Cycle 198.9 240.4 209.7 195.1 184.9 187.0 Asset Turnover 0.33 0.32 0.33 0.34 0.34 0.35 Profitability ROE 13.5% 15.2% 13.3% 13.9% 13.9% 13.8% ROA 12.3% 13.9% 12.1% 12.5% 12.6% 12.4% ROIC 36.3% 34.5% 36.4% 37.6% 37.8% 38.2% Gross Margins 42.0% 39.7% 41.6% 42.0% 42.0% 41.4% EBITDA Margins 47.1% 45.1% 46.9% 47.3% 47.4% 46.8% EBIT Margins 38.9% 45.7% 37.8% 38.2% 38.2% 37.4% Net Margins 37.3% 44.1% 36.5% 36.8% 36.9% 36.1% Leverage Ratios Debt/Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt/Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Debt/Assets 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Times interest Earned (TIE) 1067.5 747.7 726.9 827.9 813.4 834.0 Valuations Dividend Yield 5.9% 6.2% 6.2% 6.2% 6.2% 6.2% Book Valuer Per Share (BVPS) 26.5 27.2 27.3 27.6 27.9 28.3 Market Capitalization(in SAR Bn) 5.12 4.86 4.86 4.86 4.86 4.86 Enterprise value (in SAR Bn) 4.95 4.57 4.59 4.62 4.64 4.66 PE (x)** 16.6 13.68 15.6 14.8 14.5 14.5 PB (x) 2.24 2.08 2.07 2.05 2.02 1.99 EV/EBITDA (x) 12.7 12.6 11.5 11.0 10.8 10.7.Source: Company financial reports & Aljazira Capital *we have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18 th Dec 2014 10 ** (2014 PE after excluding the gain from asset sales is 17.7X)

City Cement Company Initiation KSA Cement A New Production Line to Drive Dispatches Growth Fuel allocation barriers lead to lower exploitation of the new expansion: City cement is expected to run the plant by 107% of the full capacity in 2014 as compared with 103% in 2013. The company announced completion of 90% of the new 2nd production line for further capacity of 1.9 mtpa of cement (5,500tpd of clinker). The trail production is expected to start in Dec-2014. Although the fuel is not allocated for the new project, Waste Heat Recovery System (WHR) and alternative fuels are expected to supply 30-40% of fuel needed to run a portion of the new capacity. Therefore, we estimate CITYC to achieve 64% and 70% of the full capacity for 2015, 2016 respectively. On the other hand, the cost efficiency may exert pressure on margins due to use of unsubsidized fuel for the new production line. Location to assist in achieving sales growth: the company is located in the central region, close to the capital city of Riyadh, which is one of the strongest demand centers in KSA. Heavy demand is anticipated due to the introduction of the mortgage law and the transport sector, particularly public transportation and metro, which will constitute a large proportion of the high-value construction contracts in coming years. Moreover, the heavy investment in the housing sector and population growth will keep cement demand strong. Some major projects in the central region are (1) King Abdullah Financial Center (2) Communications and Information Technology Complex (3) Riyadh Metro line (4) Railway Expansion Program (5) King Khaled International Airport Expansion. Given its proximity of such demand center, the company s transport cost are low. Financial growth - Based on our estimates, the company s revenue will increase at a CAGR of 14.9%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to expectations of demand recovery in the local market and increase in production capacity to 3.65 million tons. Moreover, the company was able to show net margin of 50.4% during 2013 and we expect it to post average net margins of 51.9% over the period of our forecast, which is due to expected increase in production efficiency. We expect improvement in sales and operating profit margin, which consequently will lead the company s net profitability to increase at a 2013-17 CAGR of 15.8%. Strong balance sheet leads to financial independence: Although the company currently is bearing the new expansion expenses; the company is a cash-rich company with cash and cash equivalents totaling SAR397.1mn as of September 31, 2014. The debtfree balance sheet provides the company with much needed financial independence and flexibility given the capital-intensive nature of the business. The upcoming capacity addition on the 2nd production line (worth SAR970mn) has been primarily funded by capital raised through the IPO. City cement also offers regular dividends to its shareholders (dividend payouts of ~87% in 2013). Dividend payments: We expect the company to maintain its growth potential and financial health in 2014 and the coming years over our forecast horizon. The financial strength of the company will be reflected in the company s decision to increase cash dividends to about SAR 1.25 in the year 2014 (from SAR1.0 in 2013) taking its dividend yield to about 5.5% at current price as compared to average market Div yield of 3.2%. Given the continued growth, the new production line, and the attractive dividend yield makes the stock attractive for investors Key financial data Recommendation 12-month price target; Current Price: Overweight SAR27 0 SAR22.45 Upside / (downside): 20.3% Price Chart 11000 10000 9000 8000 7000 6000 13-Oct 13-Nov 13-Dec 13-Jan 13-Feb 13-Mar 13-Apr 13-May 13-Jun 13-Ju 13-Aug 13-Sep 13-Oct 13-Nov 13-Dec 13-Jan 13-Feb 13-Mar 13-Apr 13-May 13-Jun 13-Jul 13-Aug 13-Sep 13-Oct 13-Nov TASI Key information Reuters code: 3003.SE Bloomberg code: CITYC:AB Country: Saudi Arabia Sector: Cement Primary Listing: KSA exchange M-Cap: SAR4,247.6mn 52 Weeks H/L (SAR): 32.50/18.60 City Cement Company: (CITYC) was founded in mid-2005 and listed on TASI in 2012 with a capital of SAR 1,892mn. The company started its commercial production in 2008, with cement capacity of 1.75 mtpa (5,500 tpd) and clinker capacity of 1.6 mtpa (5,000 tpd). The company produces two types of cement (1) ordinary Portland cement (2) sulfate resisting cement. Riyadh city is a major market for the company s sales. The company has almost a 3.5% stake in KSA Cement Product Industry. Shareholding pattern City Cement Public 68.50% Al Abdullatif Holding Group 25.20% Prince Mishal Al Saud 6.30% 33 31 29 27 25 23 21 19 17 15 All figures in SAR (mn) 2013 E2014 E2015 E2016 E2017 E2018 Sales 433 449 561 614 641 685 Growth (%) 3.6% 24.9% 9.5% 4.4% 7.0% Net Income 218 235 293 319 332 357 Growth (%) 7.4% 24.8% 9.0% 4.0% 7.6% EPS 1.15 1.24 1.55 1.69 1.75 1.89 Gross Margins 59% 58% 58% 58% 58% 58% EBIT Margins 55% 54% 54% 54% 54% 54% Net Margins 50% 52% 52% 52% 52% 52% ROE 10.9% 11.7% 14.2% 14.9% 14.9% 15.2% ROA 10.3% 11.1% 13.3% 14.0% 13.9% 14.2% PE (x) 19.88 18.11 14.51 13.31 12.80 11.90 PB (x) 2.17 2.12 2.07 1.99 1.90 1.81 EV/EBITDA (x) 20.08 21.85 19.82 17.57 16.60 14.84.Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18 th Dec 2014 Investment consideration By employing DCF valuation methodology, we arrived at a 12-month price target of SAR27.0/share for City Cement. This indicates the stock, at a current market price of SAR22.45/share (as of 18 th Dec 2014), is offering a potential upside of 20.3% and trading at prospective 2014 PE and PBV of 19.8x and 2.3x, respectively. We, therefore initiate our coverage on City Cement with Overweight recommendation. 11

City Cement Company Initiation KSA Cement Key risks to valuation We identified the following key risk associated with our valuation; Labor Shortage: The step by the government to standardize the labor market has result in shortage in labor availability, which if continued can result in lower than expected sales.. Valuation summary Our DCF based valuation methodology is based on 10-years explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions; Terminal value calculation based on Gordon Growth model Expected Terminal growth of 3% 5-years monthly raw beta of the sector 0.714 from Bloomberg; in order to reduce the impact of volatility. Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables: Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran s Equity Risk Premium; determinants, estimations & implications. KSA total market risk premium (annual 2014) is taken at 12.6% from Bloomberg. Hence, the equity risk premium is calculated at 9.77%. Capital Assets Pricing Model (CAPM) is 9.81%. We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables Cost of equity based on CAPM Contribution from equity and debt in City Cement s Capital structure is taken at 100.0% & 0.0%, respectively Weighted average cost of capital (WACC) is calculated at 9 81%. DCF based valuation methodology All figures in (SAR,mn; (unless specified) E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023 FCF (109) 280 314 339 356 380 399 421 444 461 Terminal Value 6,975 No of Year 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 Discount Factor 0.98 0.89 0.81 0.74 0.67 0.61 0.56 0.51 0.46 0.42 Present Value (107) 249 255 250 239 232 222 214 205 194 PV of Terminal Value 2,934 Sum of FCF 4,887 Net Debt (217.95) 5,105.07 Price Target 27.0 Source: Aljazira capital The table below highlights the sensitivity of City Cement DCF based 12-month price target with different terminal growth & WACC. Sensitivity Analysis Terminal growth WACC 7.8% 8.8% 9.8% 10.8% 11.8% 1% 26.5 24.8 23.2 21.8 20.5 2% 28.4 26.6 24.9 23.3 21.9 3% 30.9 28.9 27.0 25.3 23.7 4% 34.3 32.0 29.8 27.9 26.1 5% 39.1 36.4 33.9 31.6 29.5 12

City Cement Company Initiation KSA Cement Key financial data Amount in SAR mn, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018 Income Statement Sales 433.4 448.8 560.5 613.7 640.6 685.2 % Growth In sales 3.6% 24.9% 9.5% 4.4% 7.0% Cost of Sales (179.4) (189.1) (237.0) (260.0) (271.4) (290.3) Gross Income 254.0 259.8 323.5 353.6 369.2 394.8 Sales and Marketing Expenses (4.4) (4.6) (5.2) (5.5) (6.1) (6.6) General and Admin Expenses (11.9) (10.3) (12.8) (14.7) (15.5) (16.6) Income from Operations 237.7 244.9 305.4 333.4 347.5 371.6 % Growth in operating profits 3.05% 24.70% 9.16% 4.22% 6.94% Financing Expenses - - - - - - Other Income 0.2 (2.6) (3.1) (3.8) (4.6) (2.8) Income before Zakat 237.9 242.3 302.3 329.7 342.9 368.8 Zakat (19.5) (7.8) (9.7) (10.5) (11.0) (11.8) Net Income for the Period 218.4 234.6 292.6 319.1 331.9 357.0 % Growth In net income 7 4 24 8 9 0 4 0 7 6 EPS 1.15 1.24 1.55 1.69 1.75 1.89 Balance Sheet Accounts Receivables,net 30.5 31.4 39.3 43.2 45.3 48.6 Prepaid Expenses 21.8 16.3 21.2 25.7 24.8 27.1 Total Current Assets 737.0 388.6 462.5 549.6 644.9 770.0 Land 3.2 3.2 3.2 3.2 3.2 3.2 Property Plant and Equipment 1365.6 1722.8 1726.2 1729.7 1733.4 1737.2 Accrued Expenses 8.8 4.8 6.3 7.1 8.7 8.1 Total Non-Current Assets 1377.6 1727.6 1732.5 1736.8 1742.1 1745.3 Total Assets 2114.6 2116.2 2195.0 2286.4 2387.0 2515.3 Total Current Liabilites 107.5 111.2 134.2 143.4 148.8 157.0 Total Non-Current Liabilites 4.6 5.4 6.2 7.0 7.9 8.8 Total Liabilities 112.1 116.5 140.4 150.4 156.7 165.7 Total Shareholders Equity 2002.8 1999.7 2054.6 2136.0 2230.2 2349.6 Total Liabilities and Equity 2114.9 2116.2 2195.0 2286.4 2387.0 2515.3 Total Shareholders Equity 2,283,186 2,335,858 2,344,560 2,370,262 2,402,767 2,436,185 Total Liabilities and Equity 2,507,240 2,562,751 2,582,668 2,619,400 2,660,172 2,703,074 Cash Flow Statement Cash Flow from Operating Activities 319.2 305.9 384.0 423.2 453.2 476.0 Cash Flow from Investing Activities (492.3) (413.7) (108.4) (113.6) (120.6) (122.3) Cash Flow from Financing Activities (199.2) (241.5) (246.5) (247.4) (247.8) (248.7) Changes in Cash (372.3) (349.3) 29.0 62.2 84.8 105.1 Cash Opening Balance 939.5 567.2 218.0 247.0 309.2 394.0 Cash Ending Balance 567.2 218.0 247.0 309.2 394.0 499.1 Key Fundamental ratios Liquidity Ratio Current Ratio(x) 6.85 3.50 3.45 3.83 4.33 4.91 Quick Ratio (x) 5.76 2.39 2.29 2.64 3.12 3.66 Efficency Ratios Receivables Days Turnover 25.7 25.5 25.6 25.7 25.8 25.9 Inventory Days Turnover 99.2 100.0 101.0 102.0 103.0 104.0 Payables Days Turnover 126.1 120.0 119.0 118.0 117.0 116.0 Cash Cycle (1.2) 5.5 7.6 9.7 11.8 13.9 Asset Turnover 0.21 0.21 0.26 0.27 0.27 0.28 Profitability ROE 10.9% 11.7% 14.2% 14.9% 14.9% 15.2% ROA 10.3% 11.1% 13.3% 14.0% 13.9% 14.2% Gross Margins 58.6% 57.9% 57.7% 57.6% 57.6% 57.6% EBITDA Margins 66.4% 66.9% 71.9% 70.9% 70.8% 70.8% EBIT Margins 54.9% 54.0% 53.9% 53.7% 53.5% 53.8% Net Margins 50.4% 52.3% 52.2% 52.0% 51.8% 52.1% Leverage Ratios Debt/Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Debt/Capital 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Debt/Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Valuations Dividend Yield 4.4% 5.6% 5.6% 5.6% 5.6% 5.6% Book Valuer Per Share (BVPS) 10.6 10.6 10.9 11.3 11.8 12.4 Market Capitalization(in SAR Bn) 4.3 4.2 4.2 4.2 4.2 4.2 Enterprise value (in SAR Bn) 3.8 4.0 4.0 3.9 3.9 3.7 PE (x) 19.9 18.1 14.5 13.3 12.8 11.9 PB (x) 2.2 2.1 2.1 2.0 1.9 1.8 EV/EBITDA (x) 20.1 21.9 19.8 17.6 16.6 14.8 Source: Company financial reports & Aljazira Capital * We have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18 th Dec 2014. 13

Northern Region Cement Co. Initiation KSA Cement Improved capacity utilization to drive dispatches growth: the company has been steadily increasing its capacity utilization since the commencement of the 2nd production line in late 2012 to achieve dispatches improvement of 13%YoY in 10M-2014 as compared to 10M-2013. The company reached 80.5% in 2013 of the full cement capacity, and we estimate the company to achieve utilization off about 88%, 90% and 94% of the full cement capacity (9,687 tpd) in 2014, 2015 and 2016 respectively. Whereas, the performance of Jordan business (1.0mtpa of cement) is running with 90% of the capacity. On the other hand, we expect that the higher inventories (1.24MT) and spare capacity levels will translate into higher growth for Northern cement as it will serve as a cushion against any unexpected increase in demand, this will strengthen its position in the sector and improve its market share. Located in the low demand region, neighboring regions to support sales: The company s plant is located in the Northern region (50 km from the city of Turaif), where demand is comparatively low as compared to central, western and eastern region. However, The Plant is close to a number of regional markets, which are useful for any plans of opening export outlets near neighboring border lines. In addition, one of the major projects in the Northern region is (Waad El-Shammal) locating on 440 square km, with intentions to establish an industrial mining city (SAR 21bn) that is expected to be completed in late 2016. Moreover, infrastructure, housing and North-South Railway projects are the basic pillars of development in the region for the next years. On the other hand, in order to achieve healthy capacity utilization levels, the company has signed a partnership agreement with Arabian Cement with convention exchange of 700tpa of clinker, which has resulted in better capacity utilization. Financial growth - Based on our expectations, the company s revenue will increase at a CAGR of 4.2%, during 2013-17; where the growth in revenues is mainly based on increase in sales due to robust demand in the local market and improved capacity utilization. Moreover, Northern was able to show net margin of 29.8% during 2013 and we expect the company to post on average net margins of 28% over the period of our forecast due to higher finance expenses and decline in lower expected returns of associated companies. We expect improvement in the sales and operating profit margin will lead the company s net profitability to increase at 2013-17 CAGR of 2.5%. Foreign investment to determine a portion of the company s growth: The company has officially acquired 25.5% of AlKobaisah cement plant (1.82mtpa of clinker) in Iraq and the effect of its associate in 2013 was a positive outcome of SAR15.9mn, however, the company s share of its associates until Q3-2014 was about SAR0.7mn, which shows signs of adverse consequence In conjunction with the deteriorating situation in Iraq. Therefore, We believe that this provides a negative outlook for the company s investment value and its future potential growth, as there is not enough disclosure from the company about its associates located in unstable area of Iraq. On the other hand, the enhancement in its subsidiary s margins in (Northern plant Jordan) has improved dramatically due to the exchange contract with Arabian Cement, which could ensure the permanence of development as long as the contract is effective. Continuity of attractive DPS (SAR2.0 DPS) is under pressure: Although the operational cash flow for the earlier years was less than the paid dividends of SAR360mn (SAR 2 DPS), the company was able to distribute this attractive dividend due to the financial abundance (reserves and Murabaha loans). Therefore, we expect that the company s capability to keep their high dividend yield is doubtful over next years, unless they refinance their loans. Therefore, we expect the company to reduce dividend payments for 2015 to SAR1.5 DPS (DY of 7.1%) from SAR2.0 DPS (9.5%) for 2014. Key financial data Recommendation 12-month price target; Current Price: Overweight SAR26.8 SAR21.05 Upside / (downside): 27.3% Price Chart 11500 11000 10500 10000 9500 9000 8500 8000 7500 Nov-2013 Dec-2013 Jan-2014 Feb-2014 Mar-2014 Apr-2014 May-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Dec-2014 TASI-LHS Key information Reuters code: 3004.SE Bloomberg code: NORTHCEM:AB Country: Saudi Arabia Sector: Cement Primary Listing: KSA exchange M-Cap: SAR3,789.1mn 52 Weeks H/L (SAR): 29.10/17.25 Northern Region Cement: Company (NORTHCEM) was founded in late 2006 and listed on TASI in Jan 2013 with a capital of SAR1,800mn. The Company started its commercial production in 2008, with current cement capacity of 3.1 mtpa (9,687 tpd) and clinker capacity of 2.88 mtpa (9,000 tpd). The company produces two types of cement (1) Portland cement (2) Sulphates resisting. The company is engaged in the management, operation and maintenance of industrial cement plants. Northern region is a major market for the company s sales, as well as it expands its market sales by signing an agreement to exchange 700tpa of clinker with Arabian cement for 3 years period. Shareholding pattern Northern Cement-RHS Public 88.00% Pan Kingdom Investment Company - PKI 12.00% 29 27 25 23 21 19 Company Snapshot 2013 E2014 E2015 E2016 E2017 E2018 Sales 787,347 851,480 866,588 905,777 927,982 955,004 Growth (%) 8.1% 1.8% 4.5% 2.5% 2.9% Net Income 234,615 236,397 243,327 257,129 258,345 260,567 Growth (%) 0.8% 2.9% 5.7% 0.5% 0.9% EPS 1.30 1.31 1.35 1.43 1.44 1.45 Gross Margins 37% 37% 38% 38% 37% 36% EBIT Margins 32% 29% 29% 30% 29% 28% Net Margins 30% 28% 28% 28% 28% 27% ROE 10.6% 11.3% 12.3% 13.1% 12.9% 12.8% ROA 8.1% 7.7% 8.4% 9.3% 9.5% 9.6% PE (x) 17.76 16.03 15.57 14.74 14.67 14.54 PB (x) 1.88 1.81 1.92 1.93 1.90 1.87 EV/EBITDA (x) 29.11 23.85 24.56 23.78 23.57 23.21 Source: AlJazira Capital* We have taken respective December closing prices for 2013, while for years 2014 & onwards we used closing price of 18t h Dec 2014 Investment consideration By employing DCF valuation methodology, we arrived at a 12-month price target of SAR26.8/share for Northern Cement. This indicates the stock, at a current market price of SAR21.05/share (as of 18 th ), is offering a potential upside of 27.3% and trading at prospective 2014 PE and PBV of 16.03x and 1.81x, respectively. We, therefore initiate our coverage on Northern Cement with Overweight recommendation. 14

Northern Region Cement Co. Key risks to valuation We identified the following key risk associated with our valuation; h h Foreign investment concerns: The company is investing in the AlKobaisah cement plant with stake of 25.5%, which could be exposed to political and economic risks, as Iraq witnessed a long period of political instability, which led to economic deterioration. Valuation summary Our DCF based valuation methodology is based on 10-years explicit cash flows to reduce the sensitivity of our valuation to terminal value with the following key assumptions; Terminal value calculation based on Gordon Growth model Expected Terminal growth of 3% 5-years monthly raw beta of the sector 0.613 from Bloomberg; in order to reduce the impact of volatility. Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables: Risk free rate of 2.84%. The calculation of RFR is based on the summation of i) 10-year US government bond yield of 2.14%%; and ii) country default spread (CDS) of 0.7% for KSA, as per Damodaran s Equity Risk Premium; determinants, estimations & implications. KSA total market risk premium (annual 2014) is taken at 12.6% from Bloomberg. Hence, the equity risk premium is calculated at 9.77%. Capital Assets Pricing Model (CAPM) is 8.82%. We are using weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables Cost of equity based on CAPM Cost of Debt at 3.59% Contribution from equity and debt in Northern Cement s Capital structure is taken at 74.4% & 25.6%, respectively Weighted average cost of capital (WACC) is calculated at 7.48%. DCF based valuation methodology All figures in (SAR,000; (unless specified) E2014 E2015 E2016 E2017 E2018 E2019 E2020 E2021 E2022 E2023 FCF 198,226 248,399 301,452 300,917 303,261 317,341 324,891 338,248 342,579 345,491 Terminal Value 6,117,590 No of Year 0.17 1.17 2.17 3.17 4.17 5.17 6.17 7.17 8.17 9.17 Discount Factor 0.99 0.92 0.86 0.80 0.74 0.69 0.64 0.60 0.55 0.52 Present Value 195,857 228,350 257,835 239,464 224,534 218,608 208,232 201,706 190,071 178,346 PV of Terminal Value 3,157,961 Sum of FCF 5,300,963 Net Debt 470,257.66-4,830,705.35 Price Target 26.8 Source: Aljazira capital The table below highlights the sensitivity of Hail Cement DCF based 12-month price target with different terminal growth & WACC. Sensitivity Analysis Terminal growth WACC 5.5% 6.5% 7.5% 8.5% 9.5% 1% 25.6 23.8 22.1 20.6 19.2 2% 28.0 26.0 24.1 22.4 20.9 3% 31.2 28.9 26.8 24.9 23.2 4% 35.8 33.1 30.7 28.5 26.4 5% 42.7 39.5 36.5 33.9 31.4 15

Northern Region Cement Co. Key financial data Amount in SAR 000, unless otherwise specified 2013 E2014 E2015 E2016 E2017 E2018 Income Statement Sales 787,347 851,480 866,588 905,777 927,982 955,004 % Growth In sales 8.1% 1.8% 4.5% 2.5% 2.9% Cost of Sales (497,937) (534,210) (540,975) (564,307) (584,507) (608,151) Gross Income 289,410 317,270 325,613 341,470 343,475 346,853 Sales and Marketing Expenses (9,671) (12,219) (12,436) (12,998) (13,317) (13,704) General and Admin Expenses (37,405) (48,349) (49,207) (51,432) (52,693) (54,228) Income from Operations 242,334 256,702 263,970 277,039 277,465 278,921 % Growth in operating profits 5.9% 2.8% 5.0% 0.2% 0.5% Financing Expenses (13,387) (17,526) (17,701) (16,816) (15,975) (15,177) Share of associated companies 15,976 2,500 2,500 2,500 2,500 2,500 Other Income 4,355 4,613 4,744 4,979 4,986 5,012 Minority Interests share of net loss of consilodated subsidiary (214) (407) (311) (359) (335) (347) Income before Zakat and Tax 249,064 245,882 253,202 267,343 268,641 270,910 Zakat (12,000) (7,376) (7,596) (8,020) (8,059) (8,127) Income tax of the subsidiary (2,449) (2,109) (2,279) (2,194) (2,236) (2,215) Net Income for the Period 234,615 236,397 243,327 257,129 258,345 260,567 % Growth In net income 0.8% 2.9% 5.7% 0.5% 0.9% EPS 1.30 1.31 1.35 1.43 1.44 1.45 Balance Sheet Cash and Cash Equivalent 124,705 288,638 127,414 29,755 19,396 58,962 Accounts Receivable 74,804 74,650 75,975 79,411 81,357 83,726 Inventories 353,275 365,897 377,170 389,975 405,728 421,206 Total Current Assets 597,384 783,779 632,674 554,784 562,409 621,549 Fixed assets 1,602,177 1,638,865 1,631,275 1,580,354 1,528,523 1,475,765 Investments in associates 111,849 115,650 117,803 119,957 122,111 124,264 Intangible assets 506,157 506,157 506,157 506,157 506,157 506,157 Total Non-Current Assets 2,294,066 2,297,325 2,255,235 2,206,468 2,156,791 2,106,187 Total Assets 2,891,449 3,081,104 2,887,910 2,761,253 2,719,200 2,727,737 Total Current Liabilites 667,781 977,302 902,224 785,968 708,533 679,010 Total Non-Current Liabilites 6,776 8,674 10,582 12,593 14,859 17,237 Total Liabilities 674,558 985,976 912,806 798,561 723,393 696,247 Total Shareholders Equity 2,210,547 2,086,944 1,967,839 1,954,968 1,988,313 2,023,881 Total Liabilities and Equity 2,891,449 3,081,104 2,887,910 2,761,253 2,719,200 2,727,737 Cash Flow Statement Cash Flow from Operating Activities 155,523 307,316 322,216 339,938 340,092 343,138 Cash Flow from Investing Activities (126,363) (68,549) (32,073) (33,160) (33,842) (34,518) Cash Flow from Financing Activities (5,109) (74,834) (451,367) (404,436) (316,608) (269,053) Changes in Cash 24,051 163,934 (161,225) (97,659) (10,359) 39,566 Cash Opening Balance 100,653 124,705 288,638 127,414 29,755 19,396 Cash Ending Balance 124,705 288,638 127,414 29,755 19,396 58,962 Key Fundamental ratios Liquidity Ratio Current Ratio(x) 0.89 0.80 0.70 0.71 0.79 0.92 Quick Ratio (x) 0.37 0.43 0.28 0.21 0.22 0.30 Efficency Ratios Receivables Days Turnover 34.7 32.0 32.0 32.0 32.0 32.0 Inventory Days Turnover 259.0 250.0 254.5 252.2 253.4 252.8 Payables Days Turnover 18.78 18.80 18.79 18.79 18.79 18.79 Cash Cycle 274.86 263.20 267.69 265.45 266.57 266.01 Asset Turnover 0.28 0.29 0.29 0.32 0.34 0.35 Profitability ROE 10.6% 11.3% 12.3% 13.1% 12.9% 12.8% ROA 8.1% 7.7% 8.4% 9.3% 9.5% 9.6% ROIC 8.3% 7.9% 8.7% 9.6% 9.9% 9.9% Gross Margins 36.8% 37.3% 37.6% 37.7% 37.0% 36.3% EBITDA Margins 41.3% 38.7% 39.9% 40.5% 39.7% 38.9% EBIT Margins 31.6% 28.9% 29.2% 29.5% 28.9% 28.4% Net Margins 29.8% 27.8% 28.1% 28.4% 27.8% 27.3% Leverage Ratios Debt/Equity 26.8% 42.8% 41.6% 35.8% 31.3% 29.2% Debt/Capital 20.6% 29.1% 28.5% 25.5% 23.0% 21.8% Debt/Assets 20.6% 29.1% 28.5% 25.5% 23.0% 21.8% Times interest Earned (TIE) 18.1 14.6 14.9 16.5 17.4 18.4 Valuations Dividend Yield 8.6% 9.5% 7.1% 7.1% 5.9% 5.9% Book Valuer Per Share (BVPS) 12.3 11.6 11.0 10.9 11.1 11.3 Market Capitalization(in SAR Bn) 4.17 3.79 3.79 3.79 3.79 3.79 Enterprise value (in SAR Bn) 4.64 4.40 4.48 4.46 4.39 4.32 PE (x) 17.8 16.03 15.6 14.7 14.7 14.5 PB (x) 1.88 1.81 1.92 1.93 1.90 1.87 EV/EBITDA (x) 29.1 23.9 24.6 23.8 23.6 23.2 Source: Company financial reports & Aljazira Capital *we have taken respective Dec end prices for 2013, while for years 2014 & onwards we used closing price of 18 th. 16

RESEARCH DIVISION AGM - Head of Research Abdullah Alawi +966 11 2256250 a.alawi@aljaziracapital.com.sa Senior Analyst Talha Nazar +966 11 2256115 t.nazar@aljaziracapital.com.sa Senior Analyst Syed Taimure Akhtar +966 11 2256146 s.akhtar@aljaziracapital.com.sa Analyst Saleh Al-Quati +966 11 2256046 s.alquati@aljaziracapital.com.sa Analyst Sultan Al Kadi +966 11 2256374 s.alkadi@aljaziracapital.com.sa Analyst Jassim Al-Jubran +966 11 2256248 j.aljabran@aljaziracapital.com.sa BROKERAGE AND INVESTMENT CENTERS DIVISION General manager - brokerage services and sales Ala a Al-Yousef +966 11 2256000 a.yousef@aljaziracapital.com.sa AGM-Head of Sales And Investment Centers Central Region Sultan Ibrahim AL-Mutawa +966 11 2256364 s.almutawa@aljaziracapital.com.sa AGM-Head of international and institutional brokerage Luay Jawad Al-Motawa +966 11 2256277 lalmutawa@aljaziracapital.com.sa AGM-Head of Qassim & Eastern Province Abdullah Al-Rahit +966 16 3617547 aalrahit@aljaziracapital.com.sa AGM- Head of Western and Southern Region Investment Centers & ADC Brokerage Abdullah Q. Al-Misbani +966 12 6618400 a.almisbahi@aljaziracapital.com.sa AGM - Head of Institutional Brokerage Samer Al- Joauni +966 1 225 6352 s.aljoauni@aljaziracapital.com.sa RESEARCH DIVISION AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. RATING TERMINOLOGY 1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated Overweight will typically provide an upside potential of over 10% from the current price levels over next twelve months. 2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated Underweight would typically decline by over 10% from the current price levels over next twelve months. 3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated Neutral is expected to stagnate within +/- 10% range from the current price levels over next twelve months. 4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company. 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