The Qassim Cement Company - GulfBase.comJune 2010 Kuwait Financial Centre ―Markaz‖ 2 Company...

Kuwait Financial Centre “Markaz” R E S E A R C H

Yanbu Cement Company SSE Code: 3060 | Reuters Code: 3060.SE | Bloomberg Code: YNCCO AB|

Current Market Price: SAR 43.7 (As of June 28, 2010)

Initial Coverage: June 2010

The Yanbu Cement Company (Yanbu) underperformed the Tadawul (TASI),

losing 11% YTD compared to the latter’s 3.0% gain. The Yanbu stock

advanced 36% in 2009, while the index gained 27%.

Yanbu’s P/E declined 1.8% on YTD basis and currently trades at a P/E of

10.1x. The company’s PE expanded 57% in 2009. We place the fair value PE

at 10.0x, indicating fair value at this juncture.

Yanbu’s revenue dropped 13.7% YoY to USD 63.8 Mn in 1Q10 due to

declining sales volume and prices in the Kingdom, but gained 26% on a QoQ

basis. In 2009, the company’s revenues declined 13.7% YoY to USD 251.2

Mn due to a drop in sales volumes and cement prices on account of intense

competition. Separately, among the Saudi cement companies, Yanbu

witnessed the largest decline in its market share in 1Q10 primarily due to the

entry of new players and export ban.

The weak top-line performance led to a 13.8% YoY decline in the company’s

net income to USD 131.7 Mn in 2009. Net income declined 18.8% YoY to

USD 32.8 Mn in 1Q10 due to poor sales volumes and lower prices.

Yanbu’s strategic location provides a competitive advantage. The company is

situated in the Western region, which is rich in gypsum and limestone

(primary raw material for cement). The company is also likely to benefit from

its proximity to Makkah, Madinah and Jeddah, which are seeing increased

construction activity.

Yanbu is expanding and is currently in the process of commissioning its fifth

production line with the capacity to produce 10,000 tpd of clinker. This will

take annual production capacity to 6.8 Mtpa by 2011 and bolster top-line

growth. Furthermore, factors such as increased production capacity, lifting of

the export ban, and proximity to the Red Sea coast and Yanbu Port are

expected to benefit Yanbu in the long run.

We remain concerned about the entry of new players and intensifying

competition in the Western province, which could further erode Yanbu’s

market share.

We expect Yanbu’s revenues to grow 4.8% YoY due to increased sales

volume on account of higher government spending on infrastructure coupled

with increasing construction activities in the Kingdom. However, we remain

concerned about Yanbu’s revenue growth in the medium term, especially

until the export ban is lifted. We expect the company’s net income to grow

2% YoY to USD 131.7 Mn in 2010.

Sto

ck

V

ola

tility

Expected Return (June 2010)

Low Medium High

Low

Medium

High

USD Mn 2004 2005 2006 2007 2008 2009 2010F

Revenues 206 207 225 312 291 251 263

Net Income 114 121 136 176 150 129 132

P/E (LFY) 16.69 25.26 11.46 12.22 6.32 9.96 10.1

P/B (LFI) 3.54 5.90 2.82 3.47 1.50 1.99 1.71

M. Cap 1,899 3,051 1,563 2,149 942 1,278 1,210

Stock Returns 61% -49% 37% -56% 36% -11%(YTD)

2010 figures - P/E, P/B on 1Q-2010 ending results and M.Cap. as on 20 June 2010 Source: Reuters Knowledge, Tadawul Stock Exchange

June 2010

Markaz Research is

available on Bloomberg

Type ―MRKZ‖ <Go>

Thomson Financial

Reuters Knowledge

Zawya Investor

Noozz

M.R. Raghu CFA, FRM

Head of Research

+965 2224 8280

[email protected]

Layla Al-A mmar

Senior Analyst

[email protected]

+965 2224 8000 Ext: 1205

Kuwait Financial Centre

“Markaz”

P.O. Box 23444, Safat 13095,

Kuwait

Tel: +965 2224 8000

Fax: +965 2242 5828 www.markaz.com

R E S E A R C H June 2010

Kuwait Financial Centre ―Markaz‖

2

Company Overview

Yanbu Cement Company (Yanbu) was established in 1977 and is situated in

Ras Baridi (Western Saudi Arabia) and headquartered in Jeddah. Yanbu

entered the Kingdom’s cement market with an initial clinker production

capacity of 1.2 Million tons per annum (Mtpa). In line with its expansion

strategy, the company increased production capacity to 3.8 Mtpa in 2005

(Table 1). Yanbu produced 3.9 Mtpa of cement in 2009, or 10.4% of total

cement produced in the Kingdom. The company commenced the

commissioning of a fifth production line in July 2008 by signing a contract

with Sinoma International Engineering Company. The expansion phase, likely

to be completed by the first half of 2011, would take Yanbu’s total

production capacity to 6.8 Mtpa by 2Q11 making it one of the largest cement

producers in the Kingdom.

Table 1: Yanbu’s Expansion and Production Capacity Details

Year Addition (Tons

per day) Cum. Prod.

Capacity (Mtpa) Prod. Line Type of Kiln

1977 1,500 0.45 1 Long Dry process Kiln



1997 7,000 3.30 4 Short Dry Process Kiln

2005 1,500 3.75 4 Short Dry Process Kiln

2011 10,000 6.75 5 Details not available

Source: Company Website, Markaz Research

Yanbu is primarily engaged in the production and distribution of cement. Its

product portfolio comprises Ordinary Portland cement (OPC), Sulphar

Resistant cement (SRC) and Pozolanic cement. The company’s current

clinker capacity stands at 12,500 tons per day (tpd) with plans to increase

clinker capacity by 10,000 tpd by 2011. Yanbu Cement uses both long dry

process kiln and short dry process kiln in different production lines for

cement production. Part of the company’s operational efficiency is attributed

to its short dry process kiln that uses the digital process to control efficient

power and fuel consumption and makes minimum use of manpower.

Key shareholders

Suleiman Bin Abdulaziz Saleh Al Rajhi holds the single largest stake (24%)

other major shareholders are General Organization for Social Insurance

(12%), Public Investment Fund (10%) and Abdullah Bin Abdulaziz Saleh Al

Rajhi (6%).

Figure 1: Shareholding pattern (as of May 2010)

48%

6%

10%

12%

24% Suleiman Bin Abdulaziz Saleh AlRajhi General Organisation for SocialInsurance - Saudi Arabia Public Investment Fund

Abdullah Bin Abdulaziz Saleh AlRajhi Public

Source: Zawya, Markaz Research

Yanbu’s current clinker

production capacity stands

at 3.8 Mtpa

Short dry process kilns

enhance operational

efficiencies



3

Yanbu holds 60% stake in Yanbu Saudi Kuwaiti Paper Products Company

(YSKPPC). YSKPPC, which was established in 2005 with a paid-up capital of

USD 3.4 Mn, is a joint venture between Yanbu and Shuaiba Paper Products

Company (a subsidiary of Kuwait-based Al-Ahlia Investment Company). The

company manufactures 90 million multi-ply Kraft paper bags per annum.

YSKPPC is likely to complement Yanbu’s business by providing packaging

material to the latter. The paper bags can be used to pack various materials,

including cement, lime, gypsum and other construction materials (Table 2)

Table 2: Investments by YACCO

Investment Highlights

Competitive Advantage – Location

Saudi Arabia’s western region has rich mineral reserves, especially gypsum

and limestone, the primary raw materials used in the manufacture of

cement. Yanbu is situated in Ras Baridi along the shores of the Red Sea, 70

Km from the Yanbu Al Bahr Port. The company’s proximity to raw material

sources is likely to improve cost effectiveness.

Yanbu Cement’s proximity to Makkah, Madinah and Jeddah is also likely to

provide a competitive advantage. The Kingdom is witnessing major

construction activities in these regions. The construction of four economic

cities – King Abdullah Economic City in Jeddah, Knowledge Economic City in

Madinah, Prince AbdulAziz bin Mousaed Economic City in Hail, and Jazan

Economic City– would aid revenue growth. The four economic cities are

estimated to cost USD 901 Bn. Yanbu’s cement company is the closest to

Knowledge Economic City. This would enable the company to win orders and

pass on the benefit of lower transportation costs to its customers.

New product ion lines to enhance performance

Yanbu plans to enlarge its production capacity to 6.8 Mtpa. The company

initiated the expansion procedure in July 2008. It plans to add an additional

10,000 tpd of clinker production capacity, which would take total production

capacity to 22,500 tpd of clinker. The company is commissioning its fifth

production line in order to benefit from the growing demand for cement in

the Kingdom. The new production line is expected to start commercial

production in late 2011 and is estimated to cost around USD 453 2 Mn. We

expect Yanbu’s strategy to operate more efficient and larger plants to

increase the effectiveness of its production process and reduce operating

costs. This is likely to improve profitability, going forward.

1 Wall Street Journal

2 Zawya Projects

Company Country Stake Yanbu Saudi Kuwaiti Paper Products Company [YSKPPC]

Saudi Arabia 60.00%

Source: Zawya

YSKPPC is a joint venture

between Yanbu and Shuaiba

Paper Products Company

Yanbu is situated in the

Western province of

Kingdom, 70 Km from the

port of Yanbu Al Bahr



4

Exist ing mining and quarrying licenses to help Yanbu expand

product ion

Yanbu’s proximity to raw material sources along the Red Sea coast

complements the raw material quarry licenses it has for exploration of

cement. According to the Deputy Ministry for Mineral Resource, Yanbu

covers an area of around 64.5 Km2 (Table 3). The existing quarry license for

raw material exploration would further complement the company’s new

production line. Proximity to raw material sources also helps cut costs.

Table 3: Raw material quarry licenses

License No Minerals Location Area

M/10, 4/3/1398AH Limestone, Clay & Gypsum North Yanbu 50.00 Km2

M/6 , 29/2/1419AH Limestone, Gypsum Ras Baridi, North Yanbu 10.50 Km2

M/42, 2/7/1424AH Pozzolan for Cement Ras Qara, Tabuk 2.93 Km2

M/42, 2/7/1424AH Iron for Cement Jamum Province, Mecca Region

0.96 Km2

Source: Deputy Ministry for Mineral Resources, Markaz Research

Separately, the company also benefits from its proximity to the export port

Yanbu Al Bahar, Madinah, a new channel for exports to neighboring

countries such as Egypt, Sudan, Ethiopia and Eritrea.

Export ban, increasing competit ion worrisome

The Saudi government imposed a ban on cement exports in July 2008 to

curb construction activity and check the shortfall in supply. The export ban

deviated manufacturers’ focus toward the Western province, where

construction activities and cement demand were strong. Earlier, Yanbu and

Arabian Cement Company, major market players in the western province,

competed with each other. However, due to the export ban, Yanbu and

Arabian Cement lost 6.5% and 1.8% market share, respectively, to new

entrants and existing players. In fact, YNNCO lost the maximum market

share compared to other companies in the industry.

Figure 2: Market Share gain/loss during 2007 & 1Q10

-6%

-4%

-3%

-2%

-2%

-1%

-1%

-1%

4%

5%

5%

6%

-10% -5% 0% 5% 10%

Yanbu

Eastern

Saudi

Yamama

Southern

Arabian

Tabuk

Qassim

Western

Madina

Najran

Riyadh

New players fast

gaining market

presence

Source: Yamamah Cement, Markaz Research

Yanbu lost the highest

market share of 6.5%

during 2007 and Q1-10

Yanbu’s expansion phase is

scheduled to complete by

Q2-10

Yanbu’s has four minerals

licenses encapsulating an

area of around 64.5 Km2



5

Discussion Notes

Looking Back – 2009 Results

Yanbu’s revenues declined 13.7% YoY to USD 251.2 mn in 2009 primarily

due to the combined effect of declining sales volume and falling prices of

cement. The company’s sale volume declined 9.2% YoY to 3.9 Mt of clinker

in 2009, primarily due to the ban on export by the Saudi government. This

increased both supply and competition in the Kingdom’s Western province.

Furthermore, on the price front, the average realized selling price of cement

declined 5% to USD 64.3 per ton in 2009, whereas the average cost declined

6% to USD 29.6 per ton in 2009. Consequently, profit per ton declined 4%

to USD 34.7 per ton in 2009.

Figure 3: Revenues Vs Average cost price trend

-

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 1Q10

US

D m

n

0

5

10

15

20

25

30

35

US

D p

er

ton

ne

Revenues Average Cost Price (RHS)

`

Source: Reuters Knowledge, Markaz Research

The company’s operating margin contracted a marginal 20 basis points (bps)

YoY to 51.5% in 2009; primarily due to effective cost control. However, in

absolute terms, Yanbu’s operating profit declined 1.7% YoY to USD 131.5 Mn

in 2009 due to a decline in sales during the year.

Figure 4: Operating Performance - Product ion Trends 2004-2009

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2005 2006 2007 2008 2009

Th

ou

sa

nd

TP

A

-10%

-5%

0%

5%

10%

15%

20%

Cement Production Clinker Production Change in Avg Selling Prices (%)


Yanbu’s operating margin

contracted marginally by 20

basis points YoY to 51.5% in

2009

Yanbu announced that its

board has approved a cash

dividend of USD 93 Mn for

2009



6

Dividend Trend

Yanbu’s reported a dividend payout of 75% in 2008. In 1Q10, the company

announced that its board had recommended a cash dividend of USD 93 Mn

(or USD 0.8 per share) for 2009. The company’s dividend yield stood at

6.56% in 2009, down from 11.87% in 2008.

Figure 5: Net profit and Dividend Trend

-

20

40

60

80

100

120

140

160

180

200

2004 2005 2006 2007 2008 2009*

US

D M

n

0%

20%

40%

60%

80%

100%

120%

140%

Net Profit Dividend Paid Dividend Payout % (RHS)

Source: Reuters Knowledge, Markaz Research * 2009 data based on Yanbu Board’s recommendation on 2nd June 2010

Yanbu’s revenues declined 13.7% YoY in 1Q10 (Figure 6). The decline was

primarily ascribed to lower sales volume and cement prices. The export ban

increased supply within the Kingdom. This enhanced competition in the

market and adversely impacted the company’s revenue.

Figure 6: Total Revenue (Sales) Quarterly Growth Trend

-

10

20

30

40

50

60

70

80

90

100

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

US

D M

n

30%

35%

40%

45%

50%

55%

60%

65%

Total Revenue Operating margin (%) - RHS


Looking forward – 2010

Yanbu’s revenues are expected to grow 4.8% YoY to USD 263.2 Mn in 2010.

We expect a revival in demand for cement due to increased infrastructure

and construction-related activities to be the prime driver of the company’s

sales growth. Furthermore, Yanbu’s strategic location, encompassing

We expect YNCCO’s

operating margin to decline

by 153 bps YoY to 50% in

2010

Competition among cement

manufacturers in Saudi

Arabia is region-specific



7

Makkah, Madinah and Jeddah, is likely to contribute to top-line growth. On

the profitability front, we expect the company’s operating margin to expand

153 bps YoY to 50% in 2010 owing to cost rationalization initiatives. Yanbu’s

net income is estimated to increase 2% YoY to USD 263.2 Mn during the

same period.

Table 4: Broker estimates Vs Markaz est imates -2010f Broker Estimate Table (2010 f)

Annual (USD Mn) Beltone NCBC EFG Hermes Markaz

Date of Estimates Jan-10 June-10 June-10 June-10

ROA: 17% 14.8% - 15.9%

ROE: 20% 17.3% 26.8% 19.8%

Revenue: 294 230 1,428 263

EBITDA: - 146 746 161

EBIT: 136 117 558 132

Net Profit: 134 114 427 132

Growth 4% -12% 231% -15%

Source: Zawya, Reuters Knowledge, Markaz Research

Our call on 2010 net profit is a weighted product of three scenarios – the

Bull Case (with a 6% growth in earnings, and a 15% probability of

occurrence), Base Case (with a 4% rise in net earnings and a 60%

probability of occurrence), and Bear Case (with a decline of 5% and a 25%

probability of occurrence).

Figure 7: Net Income Trend

132

136

134

123

60

80

100

120

140

160

180

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F

P ro bable (2%) B ull (6%) B ase (4%) B ear ( -5%)

US

D m

n


We expect company’s net

income to decline by 2%

YoY to USD 263.2 Mn in

2010.



8

Valuation

Yanbu’s stock price declined 11% YTD, underperforming the TASI, which

rose 3.0%. However, in 2009, the company’s stock price advanced

significantly by 36%, while the index grew 27% (Figure 8). Yanbu’s current

PE stands at 9.9x; its PE multiple has declined marginally by 1.8% YTD at

10.1x since 2009. Furthermore, we place the fair value PE at 10.0x,

indicating fair value at this juncture. The company’s expansion strategy

coupled with its strategic location could provide a competitive advantage.

Furthermore, the lifting of the export ban in the near-to-medium term is

likely to act as an additional advantage by providing Yanbu an expanded

market space and share along with increased production capacity. However,

until then we remain concerned about the company’s revenue growth due to

its declining market share; cement prices are likely to remain under pressure

due to growing competition. We expect Yanbu’s net income to increase 2.0%

YoY to USD 131.7 Mn in 2010.

Yanbu’s turnover velocity declined to 29.5% in 2009 (from 32.7% in 2008)

due to weak trade values. Despite Yanbu having a volatility band wider than

that of the index (Figure 10) its current MVX level is lower than that of the

index, leading us to predict the stock will provide low return with medium

volatil ity going forward.

Source: Markaz Research, Reuters

Figure 8: Price & Volume Trend Figure 9: PE Trend & Fair Value

Source: Bloomberg Source: Bloomberg, Markaz Research

Figure 10: Markaz Volat ility Index (May 2010)

30

50

70

90

110

Ja

n-0

8Fe

b-0

8M

ar-0

8

Ma

y-0

8Ju

n-0

8Ju

l-08

Se

p-0

8O

ct-0

8D

ec-0

8Ja

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9M

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9A

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(re

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d)

-

500

1,000

1,500

2,000

2,500

3,000 Tra

de

d V

olu

me

(in '0

00

)

Volume Yanbu TASI

3

6

9

12

15

Ja

n-0

8

Fe

b-0

8

Ma

r-08

Ma

y-0

8

Ju

n-0

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g-0

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b-0

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b-1

0

Ma

r-10

Ma

y-1

0

Yanbu P E (T T M ) F air Value P E



9

Appendix 1: Industry Overview

The Saudi construction sector contributed around 7.2% to the Kingdom’s

GDP in 2009. Cement is one of the key raw materials in the construction

sector and there are 12 cement manufacturing companies (eight listed on

the Saudi Stock Exchange) across Saudi Arabia.

Table 5: Construct ion sector & GDP growth

All figures in USD Mn, unless otherwise stated 2004 2005 2006 2007 2008 2009

CAGR %

Gross Domestic Product (GDP) 192,286 202,964 209,373 213,597 222,629 223,974 3.1%

Construction 12,918 13,535 14,527 15,123 15,344 16,066 4.5%

GDP YoY Growth 5.3% 5.6% 3.2% 2.0% 4.2% 0.6%

Construction YoY Growth 6.5% 4.8% 7.3% 4.1% 1.5% 4.7%

Construction Contribution to GDP 6.7% 6.7% 6.9% 7.1% 6.9% 7.2%

Cement Production (Mn Tonnes) 25,474 26,032 27,053 30,290 32,888 37,847 8.2%

Cement production YoY Growth 5.7% 2.2% 3.9% 12.0% 8.6% 15.1%

Source: SAMA, Markaz Research

In 2009, the Kingdom’s cement production capacity was estimated to be

around 46.0 Mn tonnes and reach 53.0 Mn tons in 2010. According to the

Ministry of Commerce and Industry, demand for cement is projected to

increase by around 22%, while production capacity is expected to grow

15.2% in 2010. The cement industry is among the growing sectors in the

Kingdom as it benefits from the abundance of natural resources such as

natural gas and limestone. Until 1956, Saudi Arabia was completely

dependent on cement imports to cater to the demand. Thereafter, the

cement industry picked up with the entry of new cement producers, thereby

enhancing domestic production capacity and reducing dependence on imports.

Figure 11: Cement Industry in Saudi Arabia

* Excludes new entrant Western cement


Saudi cement sector’s total

production capacity is

expected to increase to 53.0

Mn tons in 2010

Qassim Cement Company is

a Tier I company with

11.2% market share

Tabuk Cement

C : 1.3 mm

P : 1.3 mm

Southern Cement

C : 5.8 mm

P : 5.2 mm

Arabian Cement

C : 4.8 mm

P : 3.0 mm

Yanbu Cement

C : 4.0 mm

P : 3.9 mm

Eastern Province Cement

C : 3.4 mm

P : 3.2 mm

Qassim Cement

C : 3.2 mm

P : 4.3 mm

Yamama Cement

C : 6.0 mm

P : 5.2 mm

Saudi Cement

C : 8.6 mm

P : 5.5 mm

Riyadh Cement

C : 1.9 mm

P : 1.7 mm

Najran Cement

C : 1.6 mm

P : 1.6 mm

Madina Cement

C : 2.9 mm

P : 1.6 mm

C: Clinker Capacity in 2009

P: Cement Production in 2009



10

The cement industry in Saudi Arabia is classified as Tier I, Tier II, and Tier

III. Tier I comprises companies with a high market share and contributes

63% to the Kingdom’s total cement production capacity, while Tier II and

Tier III include companies with medium and low market shares, accounting

for 17% and 20%, respectively, of the total cement production capacity. Tier

I cement companies include SACCO (14.63% market share), Yamama

Cement (13.67%), Southern Cement (13.61%), Qassim Cement (11.23%) and Yanbu (10.36%).

Tier II consists of Eastern Cement (8.5%) and Arabian Cement (8%), while,

Tier III comprises new entrants such as Riyadh Cement (4.5%), Najran

Cement (4.2%), Madina (4.2%), Western Cement (3.9%), and Tabuk

Cement (3.4%). New Tier III players, Al Jouf Cement and Al Safwa Cement, are also expected to commence production in 2010.

The Saudi cement industry, with 12 major players, is relatively concentrated;

the top five accounted for 61.6% of the total cement produced in 1Q10 and

63% in 2009. Competition increased with the entry of four new players in

2008—the combined market share of Riyad Cement, Madina Cement, Najran

Cement and Western Cement increased to 16.7% in 2009 from 11.4% in

2008. However, the market shares of Yanbu and Saudi Cement dipped 5% and 3%, respectively (Table 6).

Table 6: Shift in market share since 2007

Export ban restrict ing growth potent ial

Cement exports totaled 3.5 Mn tons in 2007 and continued to grow prior to

the government ban on exports in July 2008 to curb the rising price of

cement in the Kingdom. The ban coupled with a slowdown in construction

due to the global economic crisis created overcapacity in the cement industry

and restricted growth. However, the Saudi Ministry of Commerce and

Industry conditionally lifted the ban in October 2009 due to easing of

inflation and decrease in demand for cement. Saudi cement companies can

Companies 2007 2008 2009 1Q-2010 Inc/Dec in Mkt Share

Yanbu 15.3% 13.1% 10.4% 8.8% -6.5%

Eastern 11.5% 9.5% 8.5% 7.2% -4.3%

Southern 15.2% 14.9% 13.6% 12.2% -3.1%

Arabian 9.3% 8.3% 7.9% 7.5% -1.8%

Yamama 15.4% 13.3% 13.7% 13.8% -1.5%

Tabuk 4.5% 3.5% 3.4% 3.2% -1.3%

Qassim 11.4% 9.8% 11.2% 10.4% -1.0%

Saudi 17.4% 16.3% 14.6% 16.4% -1.0%

Western 1.4% 3.9% 4.1% 4.1%

Riyadh New Entrants 4.2% 4.4% 4.9% 4.9%

Madina 3.3% 4.2% 5.2% 5.2%

Najran 2.4% 4.2% 6.4% 6.4%

Source: Markaz Research

Cement sector’s total

production capacity

estimated to increase to

53.0 Mn tons in 2010

Saudi Ministry of Commerce

and Trade withdrew the

export ban in October 2009;

local market price of cement

remains fixed at USD 2.67

per bag



11

export cement provided they sell the same at USD 2.67 per bag (USD 53.4 per ton) in the local market and maintain a 10% reserve stock.

Following the export ban, cement inventory levels improved. Stocks, as a

percentage of sales, declined to 1.7% in 2009 from 2.2% in 2008. The

improvement in inventory levels was driven by the 22.9% YoY growth in

domestic sales in 2009 relative to the 15.1% YoY increase in production.

However, clinker stock grew 47% YoY in 2009, resulting in a combined 11.4 Mn tonnes of cement and clinker inventory at the end of 2009.

Overcapacity to intensify competit ion

The Saudi cement market continues to witness overcapacity. Expansion

plans of existing players and the advent of new companies are likely to

worsen the situation. Two new companies, Al Jouf Cement Co. and Al Safwa

Cement Co, are expected to commence production in 2010 and add 3 Mn

tonnes. Arabian Cement and Tabuk Cement also are likely to enhance their

production capacities by 2.5 Mn tonnes and 1.5 Mn tonnes, respectively.

Excess capacity could result in fierce competition and cement price cuts,

going forward. The average cement price in the Kingdom fell 6.34% YoY to

USD 63.59 per ton in 2009, followed by another 1.7% decline to USD 62.50

per ton in 1Q10. The decrease in cement sales price coupled with an

increase in the cost of production could have an adverse impact on the

sector’s profitability. The cost for production of cement increased 1.4% to USD 29.67 per ton in 1Q10 from USD 29.24 per ton in 2009.

Sector Outlook

In 2010, we expect construction activity to pick up in Saudi Arabia, with

projects worth USD 653.6 Bn3 either underway or announced as of February

2010. However, the conditional ban on exports and rising competition are

likely to exert pressure on cement prices through 2010. Nevertheless,

volume growth (led by an anticipated recovery in construction and real

estate activities), issuance of new licenses for the production of cement and

improved plant utilization rates are likely to drive profitability in the sector.

3 Source: MEED Projects, GIH Real Estate report March 2010.

Average price of cement

stood at USD 62.50 per ton

in 1Q10



12

Appendix 2: Key Statistics

` 2004 2005 2006 2007 2008 2009 2010e

Income Statement

Revenues 206 207 225 312 291 251 263

Gross Profit 87 81 84 131 135 115 124

Operating Profit 115 122 135 175 149 129

Net profit 114 121 136 176 150 129 132

Balance Sheet

Total Current Assets 167 157 170 278 247 193

Non-Current Assets 395 440 429 405 446 560

Total Assets 562 597 599 683 692 754

Current Liabilities 20 43 31 49 49 63

Long Term Loans 0 30 4 3 1 32

Non-Current Liabilities 5 7 10 12 14 16

Total Liabilities 25 80 44 64 65 110

Total Shareholder's Equity 537 517 555 619 627 643

Analytics

Gross Margin % 42% 39% 38% 42% 47% 46% 47%

Return on Equity (%) 21.2% 23.4% 24.6% 28.5% 23.9% 20.1% 19.8%

Return on Assets (%) 20.3% 20.2% 22.8% 25.9% 21.6% 17.1% 15.9%

Revenue Growth (%) 5.1% -6.9% 4.9% 54.5% 3.7% -14.7% 7.4%

Earnings Growth (%) 13.2% 6.1% 13.0% 29.3% -15.2% -13.8% 2.0%

Historical EV (USD Mn) 1,899 3,080 1,567 2,152 944 1,309

P/E 16.69 25.26 11.46 12.22 6.32 9.96

Price/Book 3.54 5.90 2.82 3.47 1.50 1.99

EPS (USD) 1.08 1.15 1.30 1.67 1.42 1.22

BVPS (USD) 5.11 4.93 5.29 5.89 5.97 6.13

DPS 1.07 1.07 1.20 1.33 1.07 0.00

Market Price (SR) 67.94 109.12 55.92 76.87 33.70 45.70

Assets Growth (%) 6% 0% 14% 1% 9%

Equity Growth (%) -4% 7% 11% 1% 3%

Annual Trading Volume (Mn) 94,672 131,136 98,670 34,565 26,926 26,620

Annual Trading Value (USD Mn) 2,005 4,373 3,434 701 505 327

Turnover Velocity N/A 177% 149% 38% 32.71% 29.46%

M Cap (USD Mn) 1,899 3,051 1,563 2,149 942 1,278

Source: Reuters Knowledge, Company Accounts, Markaz Research



13

Strategic Research

The New Regulations on Kuwait Investment Sector (Jun-10) Persistence in Performance (Jun-10) Kuwait Capital Market Law (Mar-10) What to expect in 2010 (Jan-10)

GCC Banks - Done with Prov isions? (Jan-10) What is left for 2009? (Sept-09) Kuwait Investment Sector (Jun-09) Missing The Rally (Jun-09) Shelter in a Storm (Mar-09) Diworsification: The GCC Oil Stranglehold (Jan-09) This Too Shall Pass ( Jan-09) Fishing in Troubled Waters(Dec-08) Down and Out: Saudi Stock Outlook (Oct-08) Mr. GCC Market-Manic Depressive (Sept-08) Global Investment Themes (June-08) To Yield or Not To Yield (May-08) The Golden Portfolio (Apr-08) Banking Sweet spots (Apr-08) The ―Vicious Square‖ Monetary Policy options for Kuwait (Feb-08) China and India: Too Much Too Fast (Oct-07) A Potential USD 140b Industry: Review of Asset Management Industry in Kuwait (Sep-07) A Gulf Emerging Portfolio: And Why Not? (Jun-07) To Leap or To Lag: Choices before GCC Regulators (Apr-07) Derivatives Market in GCC (Mar-07) Managing GCC Volatility (Feb-07) GCC for Fundamentalists (Dec-06) GCC Leverage Risk (Nov-06)

Periodic Research

Daily

Markaz Daily Morning Brief Markaz Kuwait Watch Daily Fixed Income Update Weekly

KSE Market Weekly Review International Market Update Real Estate Market Commentary Monthly

Mena Mergers & Acquisitions Option Market Activity GCC Quants Market Review GCC Corporate Earnings

Quarterly

GCC Equity Funds Thought Speaks Equity Research Statistics

Infrastructure GCC Power GCC Ports GCC Water GCC Airports GCC Roads & Railways GCC ICT Real Estate – Market Outlook

Dubai Real Estate - Trends and Outlook(Apr-10) Egypt Real Estate - Trends and Outlook(Feb-10) Kuwait Real Estate Outlook(Dec-09) Abu Dhabi Residential (Nov-09) Office Investment in KSA (Jul-09) Saudi Arabia – Residential Real Estate Outlook (Jun-09) Saudi Arabia (Sep-08) Abu Dhabi (July-08) Algeria (Mar-08) Jordan (Mar-08) Kuwait (Feb-08) Lebanon (Dec-07) Qatar (Sep-07) Saudi Arabia (Jul-07) U.S.A. (May-07) Syria (Apr-07)

Sector Research

Real Estate Strategic Research GCC Distressed Real Estate Opportunities (Sep-09) GCC Real Estate Financing (Sept-09) Real Estate Earnings -2009 (May-09) Supply Adjustments Are we done? (Apr-09) Dubai Real Estate Meltdown (Feb-09)

Markaz Research Offerings



14

Company Research

Markaz Research is available on: Bloomberg Type “MRKZ” <GO>,

Thomson Financial, Reuters Knowledge, Zawya Investor & Noozz.

To obtain a print copy, kindly contact:


Media and Communications Department

Tel: +965 2224 8000 Ext. 1814

Fax: +965 2249 8740

Postal Address: P.O. Box 23444, Safat, 13095, State of Kuwait

Email: [email protected]

markaz.com/research

Saudi Arabia

Yanbu C ement C o (Jun-09)

Saudi Telecom C o. (Jun-09)

Emaar Economic C ity (Jun-10)

Q assim Cement C ompany (Jun-10)

Sav ola Group (May -10)

A linma Bank (May -10)

Jarir Marketing (May -10)

Bank A l Bilad (May -10)

Bank A l Jazira (A pr-10)

Makkah C onstruction (A pr-10)

Saudi C ement C ompany (A pr-10)

Southern Prov ince Cement C o(Mar-10)

Saudi E lectricity C ompany (Feb-10)

Saudi A rabian Mining C o(Feb-10)

Yamama Saudi C ement (Feb-10)

Etihad Etisalat (Feb-10)

A l Marai C ompany (Dec-09)

A rab National Bank (O ct-09)

SAFCO (O ct-09)

A l Rajhi Bank (A ug-09)

Riyad Bank (Jul-09)

Sabic (Mar-09)

Samba F inancial Group (Feb-09)

Saudi Inv estment Bank (Jan-09)

Kingdom Holding C o (Dec-08)

Saudi Kayan Petro C o. (A ug-08)

Banque Saudi F ransi (Jun-08)

Kuwait (For Internal Use Only)

Agility (June-10) Gulf Bank of Kuwait (May -10) National Bank of Kuwait (Mar-10) Al Deera Holding (Aug-09) Kuwait Finance House (Apr-09) Kuwait Financial Centre (Dec-08) Commercial Bank of Kuwait (Oct-08) National Industries Group (Sept-08) Zain (Sept-08) Global Investment House (Sept-08) Kipco (Sept-08) The Investment Dar (Sept-08) Burgan Bank (Sept-08) Automated Systems Co (Aug-08) Al Safat Investment Co (July-08)

UAE Dubai Financial Market (Sept-09) ADCB (Jun-09) DP World (Jun-09) NBAD (Feb-09) Sorouh Real Estate (Feb-09) Aldar Properties (Feb-09) Gulf Cement Company (Jan-09) Abu Dhabi National Hotels (Dec-08) Dubai Investments (Dec-08) Arabtec Holding (Dec-08) Air Arabia ( Nov-08) Union Properties (Nov-08) Dubai Islamic bank (Oct-08) Union National Bank (Aug-08) Emaar Properties (July-08) Dana Gas (July-08) FGB (July-08) Etisalat (Jun-08)

Qatar Masraf Al-Rayan (Jun-10) Commercial Bank of Qatar (Mar-10) Qatar Telecom (Jun-09) Industries Qatar (Apr-09) Qatar National Bank (Feb-09) United Development Co. (Feb-09) Qatar Fuel Co. (Dec-08) Qatar Shipping Co (Dec-08) Barwa Real Estate Co. (Nov-08) Qatar Int’l Islamic bank (Nov-08) Qatar Insurance Co. (Nov-08) Qatar Gas Transport Co. (Oct-08) Doha Bank (Aug-08) QEWC (July-08) QISB (July-08)

Bahrain Gulf Finance House (Oct-08) Esterad Inv. Company (Aug-08) Bahrain Islamic Bank (Aug-08) Ithmaar Bank (July-08) Tameer (July-08) Batelco (July-08)

Oman Shell Oman Marketing (Apr-10) Galfar Engineering & Cont. (Nov-08) Oman Telecommunications (Sept-08) Bank Muscat(Sept-08) Oman cement (Sept-08) Raysut Cement Company (Aug-08) National Bank of Oman (Aug-08) OIB (July-08)

Jordan Arab Bank (Sept-08) Cairo Amman Bank (Oct-08) Morocco Maroc Telecom (Mar-10) Egypt Egypt Kuwait Holding (Mar-10) Commercial Int’l Bank (Oct-08) Orascom Telecom (Sep-08) Mobinil (Sep-08) Telecom Egypt (Aug-08) EFG-Hermes (Jun-08)

Markaz Company Research Coverage

MSCI Arabian Markets

Conventional MSCI Arabian Markets

Islamic Local Index

Saudi Arabia 58% 60% 76%

Kuwait 73% 80% 51%

Qatar 92% 90% 95%

UAE 79% 25% 58%

Bahrain 58% 74% 23%

Oman 63% 100% 50%

Egypt 60% 85% 40%

Jordan 39% 0% 32%

Morocco 50% 70% 24%

MENA 77% 88% 61%

Markaz Research Offerings



15

Analyst Certification Each research analyst(s), strategist(s) or research associate(s) responsible for the preparation and content of this research report hereby certifies that, with respect to each issuer or security that the research analyst, strategist or research associate covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities. Each research analyst(s) strategist(s) or research associate(s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst, strategist or research associate in this research report.

Important Disclosures Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Kuwait Financial Center S.A.K. ―Markaz‖ ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability, which includes revenues from other business units including Investment Banking. Investment ratings are determined by the ranges described herein at the time of initiation of coverage, a change in investment and/or risk rating,. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk.

Definitions - Return

Low Where the potential return is less than 10%

Medium Where the potential return is between 10% and 25% High Where the potential return is greater than 25%

Definitions – Volatility (Risk) High Where the Current MVX and band width of stock is more than the respective country benchmark Medium Where the current MVX is lower than benchmark and band width higher than or lower than benchmark

Low Where the current MVX is lower than the benchmark and the band width lower than the benchmark MVX refers to Markaz Volatility Index calculated by Markaz based on in-house proprietary model

Disclaimer This report has been prepared and issued by Kuwait Financial Centre S.A.K (Markaz), which is regulated by the Central Bank of Kuwait. The report is intended to be circulated for general information only and should not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable but no representation or warranty, expressed or implied, is made that such information and data is accurate or complete, and therefore should not be relied upon as such. Opinions, estimates and projections in this report constitute the current judgment of the author as of the date of this report. They do not necessarily reflect the opinion of Markaz and are subject to change without notice. This report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors are urged to seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and to understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Investors should be able and willing to accept a total or partial loss of their investment. Accordingly, investors may receive back less than originally invested. Past performance is historical and is not necessarily indicative of future performance. Kuwait Financial Centre S.A.K (Markaz) does and seeks to do business, including investment banking deals, with companies cove red in its research reports. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of Markaz, Markaz has not reviewed the linked site and takes no responsibility for the cont ent contained therein. Such address or hyperlink (including addresses or hyperlinks to Markaz’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or Markaz’s website shall be at your own risk.

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