Emaar Economic City

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Emaar Economic City September 2013

Coverage Initiation |KSA | Real Estate Development Sector

• Emaar Economic City : Emaar Economic City or King Abdullah Economic City (KAEC) is one of the largest real estate development projects in Saudi Arabia. The city is located just 80km north of Jeddah and around 300Km from Medina. Covering an estimated area of 168mn sqm, roughly the size of Washington DC with a 35km shoreline.

• Industrial Valley to drive the economic growth: The industrial valley of KAEC is the cornerstone of the future economic development of the city and in macro view the Kingdom of Saudi Arabia. The industrial valley is being developed in 3 phases. Phase 1 planning is complete and construction is underway, with 17mn sqm earmarked for development. The industrial valley has so far been able to attract SAR9.1bn (SAR3.6bn binding) of investment by the local and the foreign companies, from wide source of industries like manufacturing, FMCG, Logistics, Industrial etc.

• State-of-the-art Seaport integrated in the Industrial valley: King Abdullah seaport ultimately will be one of the largest seaport in the red sea region. The seaport traffic in the Red sea region has increased by at least 15% annually. The defining feature of the port is that it is embedded within the industrial zone, which will provide efficiencies in manufacturing and warehousing. The seaport will have an ultimate handling capacity of 20mn TEU (Twenty-foot equivalent unit ).

• Revenues to peak in 2015: The company’s main source of revenue is its land sales from Industrial valley and residential and units sales. We believe in the next 4 years, the company is expected to see highest revenues in 2015, given that a multiple of residential project will be completed by the end of 2014. As revenue recognition is realized after 20% of the payment is made, we believe major chuck of residential units sales will be realized in 2015.

• Government Providing support: The government in order to diversify the economy has embarked on new projects that will help achieving a diversified profit pool. In order to achieve its target the government had lend SAR 5.0bn on soft terms to Emaar in 2011.

• Valuation: KAEC is strategically located in one of the strongest economies in the Middle East. It’s location within Saudi Arabia near the Red sea gives it’s a strategic importance which if utilized smartly can greatly enhance the value of the company we initiate our coverage on EEC with an “Overweight” stance with a 12-months price target of SAR13.07/share.

New recommendation ‘Overweight’

12-month price target; SAR13.07

Current Price: SAR 10.10

Upside / (downside): 29.4 %

Reuters code: 4220.SEBloomberg code: EMAAR:AB Country: KSASector: Real Estate DevelopmentPrimary Listing: TadawulM-Cap: SAR 10,200 mn 52 Weeks H/L (SAR): 12.45 / 7.5

All figures in SAR mn 2011 2012 2013F 2014F 2015F 2016F

Revenue 408 545 653 960 1,929 1,475 % Change in Revenues N/M * 34% 20% 47% 101% -24%Net income 83 189 160 360 1,058 878 % Change in Net income N/M * 129% -16% 125% 194% -17%ROE 1.1% 2.5% 2.1% 4.5% 11.6% 8.8%ROA 0.6% 1.4% 1.1% 2.4% 6.4% 5.5%PE 76.19 37.29 62.79 27.87 9.48 11.43 PB 0.85 0.93 1.30 1.24 1.10 1.00 EV/EBITDA 33.24 24.63 33.25 20.13 8.32 9.19

Source: Company reports, Aljazira, * Not Meaningful

Key information

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TASI - LHS Emaar (SAR) - RHS8000

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Price Chart

Analyst

Jassim Al-Jubran +966 2 6618602

Senior Analyst

Talha Nazar +966 2 6618603





ValuationsWe have used the Discounted Cash Flow valuation to attain company’s 12 month price target. Following are the key basic steps & assumptions we have assumed to value Emaar Economic City (EEC).

• 5-year forecasted cash flow

• Terminal value calculation based on Gordon Growth model

h Expected Terminal growth of 3%

• Using Capital Asset Pricing Model to calculate cost of equity. The calculation is based on the following variables

h Risk free rate of 2.7% based on 10 years US bond Yield of 2.0% + country risk premium of Saudi Arabia of 0.7%

h Equity Risk Premium of 10.45%

h Beta of 1.71 from Bloomberg

• 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

h Cost of equity based on CAPM

h Cost of Debt at 3%,

h Contribution from equity and debt in EEC Capital structure is taken at 59% & 41%, respectively

Using the above assumption, we arrived at DCF based value of SAR 13.07/share for the company.

2013 2014 2015 2016 2017FCFF 396 785 1,733 327 1,487Terminal Value (TV) 14,670Discounted FCF 376 656 1,278 212 852Discounted TV 8,406FCF 11,780Net Debt 670FCFE 11,11012months Price Target 13.07

Source: Aljazira Capital research.

DCF APPROACH

WACC

Gro

wth

11% 12% 13% 14% 15%1.00% 13.86 12.47 11.32 10.34 9.502.00% 15.08 13.46 12.12 11.00 10.053.0% 16.60 14.65 13.07 11.77 10.69

4.00% 18.53 16.12 14.22 12.70 11.445.00% 21.05 17.98 15.65 13.82 12.34


Sensitivity Analysis of DCF





Emaar-King Abdullah Economic City (KAEC)

Emaar Economic City or King Abdullah Economic City (KAEC) is one of the largest real estate development project embarked by the government in order to broaden the scope of the Kingdom’s economy. The city is located just 80km north of Jeddah and around 300Km from Medina. Covering an estimated area of 168mn sqm, roughly the size of Washington DC with a 35km shoreline, the city will feature a state of the art seaport with an estimated capacity of 20mn TEU (twenty-foot equivalent unit) annually. The city will feature a industrial valley covering 64.8mn sqm.

The main features of KAEC include

• An industrial zone covering an area of 64.8mn sqm. The area will be able to accommodate around 2,500 manufacturers and logistic companies in a special economic zone

• A seaport covering an area of 14.0sqkm, with an ultimate handling capacity of 20mn TEU. The port aims be one of the top 20 container handling facilities in the world.

• A fully integrated 48sqkm residential zones, providing housing for all income groups.• A 13.5sqkm central business district featuring high density living and commercial zone, featuring a financial island and

a central park.• A 27.0sqkm resorts area that will feature luxury villas, townhouses, seaside resorts & spa.• A educational district covering an area of 5.0sqkm.

• Haramain Railway Speed Rail project, will connect KAEC with Jeddah, Makkah and Madina.

MASTER PLAN OF ECC

Industrial Zone

Seaport

Residential, Commercial, and BusinessDistricts

Source: Emaar Economic City

Company Name Details

Etihad Etisalat (Mobily) SR600 million investment by Etihad Etisalat (Mobily) during the duration (8 year) of the contract to plan, deploy, maintain and operate the telecommunications network within KAEC

Ministry of Petroleum Direct gas pipeline from Yanbu will be provided by the Ministry of Petroleum

SABIC Sabic is looking to setup a steel factory in KAEC to produce 1mn tons of cold rolled steel and galvanised steel coils for use in the automotive, food and building materials industries as well as for household appliances.

SABB Saudi Birtish Bank (SABB) will be the first bank to open a branch in KAEC. The Branch wil be operational in October 2013.

Saudi Airlines The company has moved its data centre to KAEC


MAJOR DEALS

The rationale behind economic city is fueled by the surging local population which has resulted in higher housing demand. Saudi Arabia currently has an housing shortfall of 1.2mn units, translating into 200,000 annual housing requirement. Along with that a median age of 26.7 in male populations sets up the kingdom in a situation where it has to cater to young family starters.

KAEC sits perfectly in the kingdom’s long term plan to diversify it economy as it tries to decrease it reliance on its natural resources. KAEC with its huge industrial and residential zone will not only provide the Kingdom with an opportunity to increase housing facilities and provide job opportunities, but it will also provide an opportunity to diversify its revenue resources.





Industrial Valley

The industrial valley in KAEC is the cornerstone of the future economic development of the city and in macro view the Kingdom of Saudi Arabia. The industrial valley is being developed in 3 phases. Phase 1 planning is complete and construction is underway, with 17mn sqm earmarked for development. 90% of industrial land in phase 1a has been leased out. The tenants include 25 high profile companies like Sanofi, Pfizer, Almarai, Olayan, Johnson Controls, Panda, Abdul Latif Jameel etc.

In Phase 2 KAEC will put up 12.76m sqm of land for lease. The phase has been already mastered planned and sales in well under way for 3m sqm of land, out of which 90% is already sold.

According to the company more than 140 tenants have leased plots in the industrial valley to date.

The industrial valley has so far been able to attract 9.1bn (SAR3.6bn binding) of investment by local and foreign companies, from wide source of industries like manufacturing, FMCG, Logistics, Industrial etc. We believe this investment will also help the Kingdom in alleviating the Kingdoms jobless rate, creating atleast 20,000 jobs in the first phase.

The major attraction of the industrial Valley is its connection to the king Abdullah sea port and the 449.2 km Haramain railway speed rail project which will make the Industrial valley land one of the most sought out property for future industrial development.

Haramain Railway Speed Rail project

The Harmain High Speed rail project is a 449.2km railways project that will connect the cities of Makkah, Madina, KAEC and Jeddah . The project is being developed at a cost of SAR 42bn. The project is land mark project, which shows the government’s commitment to sustained economic growth. We believe the project will help KAEC in connecting to other regions of the kingdom, given that the government is looking to further expand its railway network, and the eventual plans of the connecting GCC through rail network will result in a wide market.As for now, the initial plans of connecting the holy cities with Jeddah and KAEC will not only help the pilgrim but it will also help in transporting cargo to these cities.

King Abdullah Seaport

King Abdullah seaport ultimately will be one of the biggest seaport in the Red Sea region. According to the company, the seaport traffic in the Red Sea region has increased by at least 15% annually. The current active seaport in Jeddah (Jeddah Islamic Port) is running above capacity which has resulted in long delays for the companies. Secondly due to over congestion in the Jeddah port the Kingdom is finding it difficult to capture new business. With King Abdullah Port in KAEC this can change as significant traffic from Jeddah port will be moved towards K.A seaport.

The defining feature of the port is that it is embedded within the industrial zone, which will provide efficiencies in manufacturing and warehousing.

King Abdullah Seaport is expected to be fully completed by the end of 2030. It will be completed in 4 phases. The first phase has already been completed and the port has become operational. On completion the port will have a 20.0mn TEUs,10,000mn cargo terminal.

KAEC

Source: www.skyscrapercity.com

We believe with a fully integrated seaport, the industrial zone will be able to attract investors towards the city. Given the inefficiencies of the Jeddah Islamic Port we believe that shipping companies will gradually switch towards the more up-to-date King Abdullah terminal in order to achieve better efficiencies. KAEC seaport is being developed by the Ports Development Company (PDC). PDC is a joint venture between Emaar, the Economic City (KAEC) and Saudi Bin Laden Group (SBG), commissioned to finance, develop, and operate KAEC seaport.

2010 2013 2014 2017 2022+ 2030+

• Construction work on Phase1 A&B of King Abdullah Seaport commences

• Phase 1 A to be completed by 4Q-2013

• 2.7mn TEUs, 770mn

• Phase 1 B Additional berth,700mn container berth

• Phase 1C, 4.0mn TEUs, 700mn additional cargo terminal

• Phase 1D 10.0mn TEUs, 5000mn cargo terminals.

• Completion• With full

capcity of 20.0mn TEUs, 10,000 cargo terminals

Specifications:• CONTAINER TERMINAL• Quay & Yard: 10,270 metres / 5.4mnsqm• Capacity: 20.0 million TEU p.a.

RORO TERMINAL & HUB• Quay & Yard: 1200 metres / 700,000sqm• Capacity: 2 million vehicles p.a.


EEC Timeline





Residential Real Estate

The 48 sqkm residential real estate area, will cater to population from all walks of life. Currently a total of 5000 housing units are under development by Emaar. Emaar is looking to sell or lease land or completely built housing units in the form of villas or apartments.

The residents of the city will be provided with multiple amenities like healthcare, education and leisure. Along with government schools, GEMS international academy already has a school running in the city.

Current projectsCustomer Segment Products Sales/Lease Saleable/leasable

areaPrice range

(SAR mn)Start Completion

High End

Beach Community Plot Sales 450,000 1-7.5 Q4-2013 Q2-2014s

Golf Community Unit Sales 59,000 1.7-5 Q3-2013 Q1-2015

Golf Course Plot Sales 93,000 0.6-2 Q3-2013 Q3-2014

Mid-End

TalahPH1.3 Unit Sales 64,000 1.5-2.5 Q4-2013 Q2-2016

TalahPH 2 Plot Sales 1,020,000 0.34-1.2 Q2-2014 Q4-2015

TalahPH 3 Plot Sales 342,000 0.340-1 Q4-2013 Q4-2014

Towhouses1 Unit Leases 94,000 0.1-0.2 pa Q1-2013 Q4-2014

Towhouses2 Plot sales 111,000 0.5-1.75 Q3-2013 Q3-2014

Towhouses3 Plot sales 112,000 0.5-1.75 Q1-2013 Q4-2013

AlWaha UnitLease&Sales 107,000 0.5-1.0, 60k to 120kpa Q3-2013 Q2-2013

Low EndAffordable housing 1 (1100 Units)

Unit leases and sales 127,000 150k-500k,15-

45kp.a Q3-2013 Q1-2016

Labour Housing Labor Housing (1000 workers) Unit leases 66,000 SR 20-35 per

person perday Q2-2013 Q2-2016

AreasGreen: Built AreaBlack: Plot Sales

Al Waha107k sqm

Labor Housing66k sqm

TH 3, 4223k sqm

TH 194k sqm

TG 3342k sqm

TG 1.364k sqm

TG 21,020k sqm

GC1b59k sqm

BC 2450k sqm

Affordable Housing127k sqm

GC1c93k sqm






Revenue Estimates

The company’s main source of revenue is its land sales from industrial valley and residential and units sales. We believe , the company is expected to see highest revenues in 2015, given that a multiple of residential project will be completed by the end of 2014. As revenue recognition is realized after 20% of the payment is made, we believe major chuck of residential units sales will be realized in 2015 . For 2013, the weak performance so far was due to lesser land available for sale during the quarter. We believe in the coming quarter as more land is developed for sales along with the launch of new vertical projects, revenue source will significantly improve.

Government shows solidarity with the project by lending SAR 5bn

The impact of the financial crisis was felt by KAEC as real estate prices in the Kingdom took a hit, and economy faltered with the weakness in the oil prices. However with the oil prices coming back near $100/bbl, the Kingdom has once again found its footing, and has also highlighted the vulnerability of the economy in respect to hydrocarbon revenues. The government in order to diversify the economy has embarked on new projects that will help the government in achieving a diversified profit pool. In order to achieve its target the government had lend SAR 5.0bn on soft terms to the project in 2011.

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In SAR mn 2011 2012 2013e 2014e 2015e 2016eINCOME STATEMENT Revenue 408 545 653 960 1,929 1,475 % Change in Revenues 348% 34% 20% 47% 101% -24%Cost of Revenue (96) (67) (163) (240) (482) (221)Gross Profit 312 478 490 720 1,447 1,254 % Change in Gross Profit NM 54% 2% 47% 101% -13%Expenses Selling and Marketing (17) (19) (20) (22) (23) (25)General and administration (150) (188) (194) (197) (206) (215)Depreciation (45) (47) (49) (50) (51) (51)Other costs,net 26 (6) (5) (5) (5) (5)Total expenses (187) (259) (268) (273) (285) (296)Profit from operations 125 219 221 447 1,162 958 Financial charges,net (61) (89) (109) (111) (113) (99)Commission income 20 56 46 27 30 36 Other income,net 5 8 5 6 7 6 Income before zakat and non-controlling interests 89 194 164 369 1,085 900 Zakat (6) (5) (4) (9) (27) (23)Net income before non-controlling interest 83 189 160 360 1,058 878 Net income 83 189 160 360 1,058 878 % Change in Net income NM 129% -16% 125% 194% -17%

BALANCE SHEET 2011 2012 2013 2014 2015 2016Assets Current assets Cash 1,711 3,242 4,606 4,746 5,132 5,203 Murabha term deposits with banks 3,170 859 - - - - Account receivables and other current assets 68 111 102 189 426 396 Development properties 1,046 603 540 1,212 2,590 2,112 Other investment 5 5 5 5 5 5 Loan to related parties 6 2 2 2 2 2 Total current assets 6,005 4,822 5,254 6,153 8,154 7,718 Non-current assets Investment properties 3,614 4,465 4,440 4,061 3,687 3,622 Property and equipment 3,542 3,689 3,836 3,868 3,860 3,851 Investment in associate 381 409 409 409 409 409 Loan to an associate 345 345 345 345 345 Assets classified as held for disposal 204 154 154 154 154 154 Total non-current assets 7,741 9,062 9,184 8,838 8,455 8,381 TOTAL ASSETS 13,746 13,884 14,438 14,991 16,609 16,099 Liabilities and Equities Current Liabilities Accounts payables and accruals 1,121 864 1,150 1,233 1,681 963 Current Portion of Long term Loan - - - - 770 770 Total Current Liabilities 1,121 864 1,150 1,233 2,450 1,733 Non Current Liabilities

Long-term loan 5,062 5,168 5,277 5,387 4,731 4,061 Differed contribution 149 245 245 245 245 245 Long-term provision 29 29 29 29 29 29 Employees' end of service benefits 5 9 10 11 12 13 Total current liabilities 5,245 5,451 5,560 5,672 5,017 4,347 Total Liabilities 6,366 6,315 6,710 6,905 7,467 6,080 Equity Share Capital 8,500 8,500 8,500 8,500 8,500 8,500 Accumulated losses (1,120) (930) (772) (414) 642 1,518 Total shareholders' equity attributable to Co.'s shareholders 7,380 7,570 7,728 8,086 9,142 10,018 Total Equity 7,380 7,570 7,728 8,086 9,142 10,018 TOTAL LIABILITIES AND EQUITY 13,746 13,884 14,438 14,991 16,609 16,099

CASH FLOW 2011 2012 2013 2014 2015 2016Cash Flow from Operation (64) (330) 593 867 1,775 369 Cash flow from Investing activities (3,565) 1,862 (89) (727) (1,390) 472 Cash Flow from Financing Activities 5,000 (0) 0 0 0 (770)Changes in Cash 1,371 1,531 504 140 386 71 Opening Balance 340 1,711 4,102 4,606 4,746 5,131 Ending Balance before deposits 1,711 3,242 4,606 4,746 5,131 5,203 Murabha term deposits with banks 3,170 859 - - - - Ending Balance 4,880 4,102 4,606 4,746 5,131 5,203

Source: Company reports & Aljazira Capital research, *NM: Not Meaningful

Key financial data





Key ratios2011 2012 2013F 2014F 2015F 2016F

Liquidity RatioCurrent Ratio 5.36 5.58 4.57 4.99 3.33 4.45 Quick Ratio 4.42 4.88 4.10 4.01 2.27 3.23

Efficiency Ratios Receivables Days Turnover 147 129 125 130 125 140 Inventory Days Turnover NM* NM* NM* NM* NM* NM* Payables Days Turnover NM* NM* NM* NM* NM* NM* Cash Cycle NM* NM* NM* NM* NM* NM* Asset Turnover 0.036 0.039 0.046 0.065 0.122 0.090

Profitability ROE 1.1% 2.5% 2.1% 4.5% 11.6% 8.8%ROA 0.6% 1.4% 1.1% 2.4% 6.4% 5.5%ROIC 1.6% 3.7% 3.0% 6.7% 19.2% 18.2%Gross Margins 76% 88% 75% 75% 75% 85%EBITDA Margins 48% 60% 49% 55% 65% 71%EBIT Margins 37% 52% 42% 50% 62% 68%Net Margins 20% 35% 24% 37% 55% 60%

Leverage Ratios Debt/Equity 69% 68% 68% 67% 60% 48%Debt/Capital 41% 41% 41% 40% 38% 33%Debt/Assets 37% 37% 37% 36% 33% 30%Times interest earned - TIE 2.46 3.19 2.51 4.33 10.59 10.06

Valuations Div Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%BVPS 8.68 8.91 9.09 9.51 10.76 11.79 MCAP 6,290 7,055 10,030 10,030 10,030 10,030 EV 6,471 8,121 10,700 10,671 10,399 9,657 PE* 76.2 37.3 62.8 27.9 9.5 11.4 PB 0.85 0.93 1.30 1.24 1.10 1.00 EV/EBITDA 33.24 24.63 33.25 20.13 8.32 9.19 EPS 0.10 0.22 0.19 0.42 1.24 1.03

Source: Company reports & Aljazira Capital research, *For 2011-12, we have considered closing price for respective year. As for 2013-16, we have considered closing price on 5th September 2013.

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Disclaimer

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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.

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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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AGM - Head of ResearchAbdullah Alawi+966 2 [email protected]

Senior Analyst Syed Taimure Akhtar +966 2 6618271 [email protected]

Senior Analyst

Talha Nazar +966 2 [email protected]

Analyst

Saleh Al-Quati+966 2 [email protected]

Analyst

Jassim Al-Jubran +966 2 [email protected]

General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 [email protected]

AGM-Head of international

and institutional brokerageLuay Jawad Al-Motawa +966 1 [email protected]

Regional Manager - West and South Regions

Abdullah Al-Misbahi+966 2 [email protected]

Sales And Investment Centers Central Region

Manger

Sultan Ibrahim AL-Mutawa +966 1 [email protected]

Area Manager - Qassim & Eastern Province

Abdullah Al-Rahit+966 6 [email protected]

Asset Management Brokerage Corporate Finance Custody Advisory

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Emaar Economic City

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