GCC: What to expect in 2012

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

GCC: What to Expect in 2012 The Anomaly Continues

10 fingers may not be enough to count the stressful events in 2011:

Arab Spring, nuclear disaster in Japan, Wall Street protests, Death of Osama

Bin Laden and Col. Gadhafi, Greek mess, European banking crisis,

unemployment in the Western world, recessionary and deflationary fears, high volatility in stock markets, loss of AAA status to US treasuries, gold price

peaking, etc.

In spite of all this, the S&P 500 stayed put and did not budge down. However,

emerging markets and GCC cracked under pressure and ended up in the red. In spite of reasonably strong oil price and stable economies, GCC stock

markets decided to dance more to the tune of global events than regional ones, breaking the traditional correlation between oil price and stock market

performance. Stable earnings and attractive valuations did not encourage much of foreign investment interest who viewed the Arab Spring with

trepidation. Consequently, liquidity dried up in certain markets rather severely

mainly due to lack of bank lending, lack of market depth and lack of institutional investors.

Regardless of the stock market performance, governments in the region are

busy investing in infrastructure. If bank lending resumes its normal rate, we

will see bright spots returning once again. Governments can do well by introducing long pending capital market reforms (including introducing

derivatives market), improving corporate governance/transparency and opening up foreign investment limits to broad base ownership and help

elevate some markets to MSCI Emerging Market status.

For 2012, we have adopted a Neutral view of the markets due mainly to

lackluster market liquidity and activity which is overshadowing more positive indicators on the economy and earnings. We are Positive on Saudi Arabia and

Qatar due to positive economic growth prospects, earnings potential and market liquidity.

Table 1: Views for 2012

January 2012

Research Highlights: Reviewing 2011 and projecting

2012 with challenges faced in the previous year and what the

coming might bring

Markaz Research is

available on Bloomberg

Type “MRKZ” <Go>

M.R. Raghu CFA, FRM Head of Research

+965 2224 8280 [email protected]

Layla Al-Ammar Assistant Manager

+965 2224 8000 Ext: 1205 [email protected]

Kuwait Financial Centre

“Markaz”

P.O. Box 23444, Safat 13095,

Kuwait Tel: +965 2224 8000

Fax: +965 2242 5828

markaz.com

R E S E A R C H January 2012

Kuwait Financial Centre “Markaz”

2

A. Looking Back

The overall GCC markets as measured by the S&P GCC Composite index lost

8% in 2011 after gaining 13% in 2010; this is a significant outperformance of MSCI EM, which was down 21%, and the MSCI World Index, which lost

10%.

However, GCC markets were down for the year; the largest decline was in

Bahrain which lost 20% given the high degree of political unrest and resultant economic ramifications followed by Dubai with a loss of 17%. The

best performance was in Qatar, which managed to stay in the green with a 1% gain.

Previous Recommendations & Market performance

Saudi Arabia Kuwait

Abu Dhabi Dubai Qatar Oman Bahrain

August 2011 Neutral Neutral Positive Neutral Positive Neutral Neutral

2011 Return (%) -3.07 -16,

- 16* -11.7 -17.0 1.12 -15.7 -20.1

*Kuwait Weighted Index return

Source: Markaz Research, Stock Exchanges: Tadawul, Kuwait Price & Weighted Indices, ADX, DFM, DSM, MSM, BAX

Note: All indices use a market cap weighted methodology except Kuwait which also uses a Price index. Hence, we have shown both for Kuwait.

Throughout 2011 we were Neutral on Saudi Arabia. The view was mainly predicated on the slowing economic growth, and increasing inflation on

account of increased welfare spending. Additionally, muted earnings growth translated to lackluster market performance expectations.

Going into 2011, we were Positive on Kuwait due to positive regulatory

developments, a large-scale Development Plan going into effect and high

economic growth prospects. This view was subsequently downgraded to Neutral as market conditions worsened, exacerbated by ambiguities

regarding the new Capital Market Authority and its bylaws and regulations. Regional political unrest also played a part in turning market sentiment

negative in addition to poor corporate news.

We maintained a mixed view on the UAE throughout the year; Positive on

Abu Dhabi while Neutral on Dubai. Downside risk remained centered mainly on Dubai’s debt restructuring process with concerns arising that the

emirate might need further financial support in the coming year. We were positive on Abu Dhabi given healthy government fiscal status and steady

corporate earnings.

We were Positive on Qatar for the third consecutive year due to continued

high economic growth fueled by high capital and infrastructure spending by the government, positive regulatory developments across a number of

pivotal sectors, healthy corporate earnings growth and increasing market

liquidity.

Our view on Oman went from Positive to Neutral by the middle of 2011 on account of negative impact from political unrest and the resultant strain

on government finances and corporates.

The S&P GCC Composite index lost 8% in 2011 after gaining

13% in 2010

The largest decline was in

Bahrain which lost 20% given the high degree of political

unrest and resultant economic ramifications followed by Dubai

with a loss of 17%

http://www.markaz.com/DesktopModules/CRD/Attachments/GCCOutlook2H11-MarkazResearch-August11.pdf



3

We maintained a Neutral view on Bahrain (although it verged on Negative) due to economic forecasts which are holding up through the year and

neutral earnings growth. Negatives in our view were based on low market

liquidity and geopolitical risks which dented investor sentiment, particularly following Moody’s downgrade of the country’s sovereign credit rating to

Baa1 (from A3) with a Negative outlook in May.

B. What has been keeping GCC markets down? Liquidity

Value traded across the GCC region has been on a downward trend since

peaking at over USD 1.6 trillion in 2006, experiencing annual declines of

40% in 2007, 2009 and 2010 each. Liquidity hit a low of USD 296bn in 2010 and reached USD 335 bn in 2011, the first annual increase since 2006.

The decline in liquidity has been caused by several factors, most of which

stem from the global credit crisis in 2008 and its repercussions. Moreover,

the drying up of market liquidity has had many adverse effects on exchanges and the asset management industry as a whole.

1. Why has liquidity been low?

- Lack of bank lending

The relative halting of lending across the region has played a large part in the declining liquidity on the exchanges. According to the Institute of

International Finance, around 10% of bank lending goes towards the purchasing of securities while 26% and 10% goes towards Real Estate and

Investment Companies, which are currently in a state of distress or low

growth potential.

Consequently, loan growth across the GCC has decelerated sharply since 2009. The average annual growth in loans between 2004-2008 was 29%,

reaching a high of 38% in 2007. This rate has fallen to low single digits in

the past two years; coming in at a flat 1% in 2009 and 6% in 2010. Based on the trend in 9M11, we would expect growth to be at about 7% in 2011

before increasing slightly to 8.6% in 2012. Figure 1: GCC Loans

The relative halting of lending

across the region has played a large part in the declining

liquidity on the exchanges

Loan growth has slowed due to

a variety of reasons, chief among them being a

heightened risk aversion

among GCC banks



4

Loan growth has slowed due to a variety of reasons, chief among them being a heightened risk aversion among GCC banks as they work towards

restoring health to their balance sheets and moving away from so-called

“name lending”. There has been a tightening of credit in general, but more specifically, banks have been reluctant to lend for the purpose of

purchasing securities given current conditions. Moreover, there is a general de-leveraging occurring among retail investors and some investment firms

and, consequently, they are unable to procure loans for the purpose of

stock market investing as easily as they once were.

- Lack of Institutional Investors (domestic and foreign)

Sovereign wealth funds and other investment institutions have evinced little

interest in the local markets due to perception of high risk as well as due to fear of stoking liquidity in an already speculative market. Limits on foreign

ownership also prove to be a hindrance for attracting foreign capital in addition to a tenuous regulatory framework across the markets which also

serves as a deterrent to foreign participation.

Consequently, it comes as no surprise that the institutional ratio (AUM/GDP)

is anemic across the GCC; with Saudi Arabia and Kuwait ranking at the top with about 4% versus 14% and 25% for India and China, respectively.

If we consider Managed Accounts (estimated) as well, which aren’t reported

by most GCC countries, the institutional ratio for Kuwait jumps up to around

46% while Saudi increases to around 22%.

Table 2: Institutional Participation

Institutional Ratio

(AUM/GDP)

Institutional Ratio Considering Managed

Accounts

Saudi Arabia 4.0% 21.6%

Kuwait 4.1% 45.9%

UAE 0.2% 2.3%

Qatar 0.3% 1.2%

GCC 2.7% 15.3%

International Comparison

China 25%

India 14%

Source: Markaz Research, IMF Working Paper (WP 11/132)

- Damaged balance sheets for retail investors (triggered

margin calls) and a lack of confidence

Many retail investors, who make up the bulk of those who participate in the

stock market, are going through their own state of de-leveraging following the global credit crisis and resulting fall-out. For many of these investors, margin

calls have been triggered and balance sheets considerably damaged by the loss of wealth and high degree of indebtedness incurred during the last few

years.

Consequently, it is difficult for such investors to procure new loans for the

purposes of investing in the stock market; meanwhile, they are in the process of liquidating assets to pay off existing debt and/or waiting the market out in

order to liquidate.

Moreover, the financial crises and their results – not to mention recent

political and corporate events – have lowered investor confidence in many

The institutional ratio

(AUM/GDP) is anemic across the GCC; with Saudi Arabia and

Kuwait ranking at the top with

about 4% versus 14% and 25% for India and China,

respectively

Many retail investors, who make up the bulk of those who

participate in the stock market, are going through their own

state of de-leveraging following

the global credit crisis and resulting fall-out



5

markets. The persistent sovereign debt issues in Dubai and concerns surrounding the newly established Capital Market Authority in Kuwait are just

a few of the matters which have lowered investor sentiment in the GCC.

- Lack of Market Depth (High Market Concentration)

GCC markets have a distinct lack of depth and are very top heavy, which give

investors a lack of options.

The top 10 largest stocks in each country can represent as much as 95% of

the story (Bahrain); even in markets with a higher number of listings like Saudi Arabia and Kuwait, the Top 10 stocks still account for 30%-50% of

trading on the exchange.

Table 3: GCC Market Make-up –2011

Top 10 Largest Stocks

Number of

stocks % of Value Traded % of Mcap

Saudi Arabia 147 33% 62%

Kuwait 220 53% 56%

UAE 133 66% 53%

Qatar 46 73% 78%

Bahrain 50 95% 77%

Oman 136 68% 63%

GCC 732 29% 36%

Source: Gulfbase, Markaz Research

2. What are the effects?

The drying up of regional liquidity has had many effects on the GCC; these

range from stock specific, such as increasing Bid/Ask spreads, to broader

effects like a decline in correlation between stock markets and oil prices, worsening of the GCC’s external image as an investment destination and the

weakening of the regional brokerage industry.

- High Bid/Ask Spread

A high Bid/Ask spread on a stock is a general symptom of low liquidity as the

broker or trader would require higher compensation for handling the transaction. A Bid/Ask spread can also widen in times of market uncertainty

and increased volatility as market participants seek to profit from the high fluctuations.

- Low Correlation to Oil Price

It is well known that oil revenues, and by default oil prices, are what drive GCC economies, despite efforts by individual states to diversify their

economies. Hydrocarbon GDP continues to dominate the region and

consequently, periods of high oil prices – and consequently high economic growth – has fed into the stock market through increased liquidity and

petrodollars. However, this relationship seems to be breaking, with oil price no longer driving stock market performance.

From 2005 to date, crude oil and the S&P GCC Index have had a correlation of 39%, increasing to 44% if we only count the period between 2005-2008. If

we analyze the period following the start of the crisis, i.e. 2009 to date, the

It is well known that oil revenues, and by default oil

prices, are what drive GCC economies, despite efforts by

individual states to diversify

their economies

From 2005 to date, crude oil and the S&P GCC Index have

had a correlation of 39%, increasing to 44% if we only

count the period between

2005-2008



6

correlation drops to 22% as markets traded sideways while crude oil went on the rise. Correlation dipped into negative territory in 2011 as political unrest in

the region brought markets down while uncertainty and supply concerns from

Libya caused oil prices to surge. Figure 2: Oil Price and S&P GCC Composite Index

The political unrest might provide some reasoning behind the break in correlation in 2011; however, it does not explain the decline between 2009-

2011. We believe the decline to be a result of lower lending by banks in

general and for the purpose of investing in the stock market in particular.

Bank lending has always been the conduit through which petrodollars have made their way into the stock market. The oil revenues feed into the citizens’

coffers through wages and social allowances, which are then placed with

banks and are subsequently lent out. As mentioned previously, roughly 10% of loans portfolios are for the purpose of stock market investing. During the

period of highest correlation, i.e. 2005-2008, bank lending was growing at an average of 33% a year while in the subsequent period that average fell to just

5%.

The bank “link” in the chain seems to be where the trouble currently lies. As

mentioned above, lending has ground to a halt over the last few years as GCC banks have exercised greater prudence and heightened risk aversion in the

face of highly leveraged corporates and individual retail clients. Banks have been unwilling to lend as they have worked towards shoring up capital,

increasing provisions and coverage of non-performing loans in addition to

maintaining existing credit lines. On the other end of the spectrum, many retail investors are currently in a state of deleveraging and cannot procure the

means to fund their activities in the stock market.

We would expect this correlation to pick up once credit lines loosen and banks

begin lending, which may take another year or so to resume relatively normal patterns given the pace with which debt issues are currently being resolved.

- Poor External Image

The drying up of liquidity has also given the region a poor external image,

serving to deter foreign investors from participating in the stock market; this

The political unrest might provide some reasoning behind

the break in correlation in

2011; however, it does not explain the decline between

2009-2011

We would expect this correlation to pick up once

credit lines loosen and banks begin lending



7

is also compounded by the relatively low Foreign Investor Limits across the GCC, making it difficult for foreign investors to participate.

The poor image is compounded by slow regulatory progress on most fronts in

addition to the lack of sophisticated product offerings.

- Weakening Brokerage Industry

Brokerage firms have suffered tremendously on account of dwindling capital

market activity and volumes, which dent fee income and profitability for firms like Shuaa Capital and EFG-Hermes. According to Reuters, investment banking

fees fell 35% in 9M11 to $317mn1. Moreover, investment banks which initially placed a great deal of reliance on retail business have opted to switch their

focus to high net worth clients and institutions going forward given the weak

trading on the region’s exchanges. For example, Shuaa Capital, a Dubai-based investment bank which brought DP World to market, is in the process of

enacting a large-scale cost-cutting program to boost profits, mainly through eliminating its retail business and shifting towards institutional and wealth

management businesses.

3. What can bring liquidity back?

There are several factors which could aid in bringing liquidity back to regional

stock markets. Many of these factors deal with creating an environment which is attractive and conducive to investing, both by retail and institutional

investors.

- Derivatives Market

There are not many options when it comes to investing in the GCC region;

most funds and portfolios deal with plain “vanilla” products like mutual and sector-specific funds. Fixed Income is only now gaining popularity as an

investment opportunity, but even then, most investments are held to maturity

and little-to-no secondary trading is available on these products.

A few derivative instruments have been brought to market; Kuwait Financial Centre “Markaz” has operated the Forsa Fund since 2004, which issues Call

Options on Kuwaiti listed stocks. Trading in options has been on a declining

trend over time, coming in at KD 211,320 in November 2011, a 51% YoY decline. For the year 2011 (up to November), the value traded was at KD

5.25mn, a 62% decline from the same period in 2010. The monthly trading peaked at KD 5.96mn in June 2007.

Figure 3: Options Activity

1 Reuters, October 13th 2011

According to Reuters,

investment banking fees fell 35% in 9M11 to $317mn

There are not many options

when it comes to investing in

the GCC region; most funds and portfolios deal with plain

“vanilla” products like mutual and sector-specific funds



8

Abu Dhabi and Saudi Arabia both started ETF trading on their exchanges in early 2010, though these had had little liquidity. A total of SAR 25mn

($6.6mn) has been traded on the Tadawul ETF market from August to

December of 2011 (the only data available); however, the trading is showing an increasing trend month on month, reaching SAR 9mn in December.

Figure 4: Total ETF trading on Saudi Tadawul

Encouraging the development of a regional derivatives market would help support and raise liquidity levels by providing with additional options and

instruments, which in turn would allow for more diverse and sophisticated

product offerings.

- Institutional Investor Support

Given that the majority of investors in the region are retail investors, who are

currently in an illiquid or deleveraging state, an increase in institutional investor support would go a long way towards increasing liquidity in the

markets.

This support has generally been provided Sovereign Wealth Funds like Kuwait Investment Authority and Abu Dhabi Investment Authority, in addition to

other Government-owned entities (GOEs). According to our research, there

are around 60 GOEs in the GCC that hold roughly 30% of market cap spread over nearly 180 companies. Saudi Arabia has the highest penetration in its

local market, holding 35%, while Kuwait had the least at 13%.

Table 4: GOE Summary

USD mn

No of GOE's

No of co.

held

Market Universe

Amount held in local

market

Share Local Market Capitalization

Market Penetrati

on

A B C D E F D/F

Saudi Arabia

10 47 140 109,718 60% 314,556 35%

Qatar 8 18 45 27,626 15% 97,746 28%

UAE 10 29 110 28,255 15% 97,247 29%

Kuwait 10 42 194 11,717 6% 90,871 13%

Bahrain 9 20 44 3,518 2% 16,386 21%

Oman 14 23 127 2,735 1% 16,737 16%

61 179 660 183,568 100% 633,544 29%

Source: Zawya, Markaz Research, Figures represent data as of June 2010

Encouraging the development

of a regional derivatives market would help support and

raise liquidity levels

An increase in institutional investor support would go a

long way towards increasing liquidity in the markets

http://www.markaz.com/DesktopModules/CRD/Attachments/The%20GoldenPortfolio-MarkazResearch-Sep2010.pdf



9

- Regulatory Progress

There have been many regulatory developments in the region over the last few years, some as part of a natural maturing of markets while others have

been in response to events brought on by the crisis.

Regulatory progress and development is seen as a vital component to the

restoration of the GCC markets, bringing with it credibility and the attracting of foreign investor interest. The UAE has pushed through a robust Bankruptcy

Law which would provide a legal framework for distressed corporates to operate within. Qatar has been actively attempting to raise its Foreign

Investor Limits, mainly to satisfy MSCI requirements for upgrading to

Emerging Market status, but the move will make the market more attractive to foreigners in general. Furthermore, the Kuwait Capital Market Authority

was established with its regulations and bylaws governing the exchange and investment companies.

C. What to expect for 2012

To guide us into this, we have identified five such factors that we feel will directly impact market performance. Based on its importance, we provide

subjective weights to each of these factors (Figure 5). An explanatory description for all factors can be found in Appendix 1.

Figure 5: 5-Force Framework

Source: Markaz Research

Regulatory progress and development is seen as a vital

component to the restoration

of the GCC markets

We have identified five such

factors that we feel will directly impact market performance



10

1. Economic Parameters The overall economic scenario is Positive for all GCC nations except Bahrain

which continues to suffer the economic effects of political unrest.

i. Real GDP Growth Forecast

Real GDP across the GCC is expected to show a growth of about 6.7% in

2011 to moderate to a rate of 4% in 2012. Growth in 2011 was driven by spiking crude oil prices at the beginning of the year on account of political

turmoil coupled with increased government spending.

Figure 6: Real GDP growth (%)

Growth in Saudi Arabia is expected at 6.5% in 2011 due to high oil

revenues as the Kingdom ramped up production to compensate for lost Libyan production. This is expected to come down by about half in 2012 as

the situation stabilizes in Libya while oil demand on a whole is slated to

come down as the world economy slows. Kuwait GDP growth was up as well on account of higher oil revenues, estimated at a rate of 5.7% in 2011,

but is expected to come down by around 1% in 2012. Qatar, the world’s highest growth economy over the last few years, is expected to have grown

around 19% in 2011, but the rate is expected to drop to high single-digit growth in 2012.

ii. Inflation Both Saudi Arabia and Kuwait saw jumps in inflation during 2011 due to

government grants and subsidies. Saudi inflation is expected to remain in the 5% range in 2012 due to continued high rent and food prices which

make up a combined 46% of the CPI basket. Kuwait’s inflation is expected

to come down by half in 2012 to about 3.4% while Qatar inflation is expected to double.

Real GDP across the GCC is

expected to show a growth of about 6.7% in 2011 to

moderate to a rate of 4% in

2012

Both Saudi Arabia and Kuwait saw jumps in inflation during

2011 due to government grants and subsidies



11

Figure 7: GCC Inflation (Annual Change %)

iii. Fiscal Balance Fiscal Balances expanded throughout 2011, mainly due to high oil revenues

from the beginning of the year; however, they are expected to tighten in 2012 as government spending increases while a slowdown in global

economic conditions reduces oil prices and, subsequently, government

revenues.

Kuwait is expected to maintain the highest fiscal balance as a % of GDP at 13% for 2012, about half that of 2011, while Saudi Arabia, Qatar and the

UAE are expected to show balances of around 3% of GDP.

iv. Current Account Balance

According to the IIF, the consolidated current account balance of the GCC is estimated to top $285 bn in 2011 (from $150 bn in 2010) on account of a

positive commodities environment, epitomized by the oil spikes during the year and increased production out of Saudi Arabia. This is expected to come

down slightly to $213bn in 2012.

As a % of GDP, Kuwait continues to maintain the highest ratio, at 36% in

2011 to come down to about 30% in 2012 while Saudi Arabia would see its Current Account Balance fall from 24% of GDP in 2011 to 16% in 2012.

v. Broad money growth Money Supply (M2) growth was down sharply in 2010 across most GCC

countries except Qatar where growth came in at 23%, i.e. on par with its 2003-2009 average. There was a slight pickup in M2 growth in 2011, but

not significantly. Saudi, Oman and Kuwait registered 12%, 9% and 10% growth rates, respectively, while M2 growth in Qatar surged to 27%.

Notably, the UAE saw M2 growth decelerate to 4%.

Fiscal Balances expanded

throughout 2011, mainly due to high oil revenues from the

beginning of the year

The consolidated current

account balance of the GCC is expected to be $213 bn in 2012



12

Table 5: – Economic Parameters Summary Overall Scores - Economic

Saudi Arabia

Kuwait UAE Qatar Oman Bahrain

Economic Growth

Neutral Positive Neutral Positive Neutral Neutral

Inflation Neutral Positive Positive Neutral Positive Positive

Fiscal Balance

Positive Neutral Positive Positive Positive Neutral

Current Acc. Balance

Positive Positive Positive Positive Neutral Neutral

Broad Money Growth

Positive Positive Neutral Positive Positive Neutral

Assessment Positive Positive Positive Positive Positive Neutral

Source: Markaz research

2. Valuation Attraction

Normalizing earnings growth coupled with poor market performance

continues to stretch valuations. GCC corporate earnings came in at USD 41

bn in 9M11, an 11% YoY growth. We would expect full year growth at 30% due to a recovering UAE Real Estate Sector and high commodity earnings.

Going forward into 2012, we expect corporate earnings to top USD 64bn, a

19% annual growth (See Earnings Growth Potential below). Consequently, the GCC-wide PE should decline to 11x with all country valuations declining.

Dividend yields are expected to come up across the GCC as earnings return to health, except in Oman where the yield is expected to fall from 5.1% to

4.8% in 2011.

Table 6: Valuation Factors

P/E Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 16 20 11 12 12 12

2011e 12 19 12 10 10 14

2012F 10 16 10 9 10 13

P/B Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2011 1.8 1.4 1.0 1.9 1.6 0.9

Dividend Yield

Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2010 2.4 3.5 3.1 2.9 5.1 2.4

2011 3.1 4.7 3.9 3.2 4.8 3.5

Assessment Positive Positive Positive Positive Positive Positive


3. Earnings Growth Potential

In our August 2011 report, we expected to see an overall growth of 15% in

GCC corporate earnings in 2011, using an adjusted average of quarterly

numbers to arrive at a full year estimate.

GCC corporate earnings came

in at USD 41 bn in 9M11, an

11% YoY growth

Second and third quarter

earnings have been healthy for

GCC corporates despite the challenges brought on by

political unrest, the European crisis and local/regional

corporate and regulatory issues

http://www.markaz.com/DesktopModules/CRD/Attachments/GCCOutlook2H11-MarkazResearch-August11.pdf



13

However, second and third quarter earnings have been healthy for GCC corporates despite the challenges brought on by political unrest, the

European crisis and local/regional corporate and regulatory issues.

9M11 figures show a growth of 11% YoY to USD 41bn; by annualizing these

results, we expect a full year net profit of USD 54.3 bn, an annual growth of 29%. The reason for the high growth being that 4Q10 saw a significant loss

in the UAE from Aldar Properties, which we do not expect to be repeated in

the fourth quarter of 2011.

9M11 earnings growth has been strongest in Saudi Arabia, growing at 24% YoY to USD 19.7bn while Oman saw the weakest results at a decline of

26% YoY. Kuwait also showed negative earnings growth on a YoY basis, at

-21%; however, this was due to USD 2.3bn booked by Zain as extraordinary earnings in 2Q10 following the sale of its African assets to

Bharti Airtel. Additionally, Wataniya Telecom booked USD 965mn in extraordinary earnings in 1Q11 due to revaluation of its stake in Tunisiana.

Excluding these one-time gains would have brought the 9M11 growth for Kuwait to 7%.

We expect earnings growth to continue a steady growth in 2012, topping USD 64bn, which would bring it back to the levels reached in 2007 prior to

the on-set of the global crises with the UAE set to grow at 23% while Saudi Arabia and Kuwait are forecasted to show an earnings growth of around

19% each.

Figure: 8 – Consolidated GCC Earnings Trend (USD Mn)

Among sectors, banks are expected to show a growth of 21% in 2011

(versus our half-year forecast of 12%) due to a pickup in 2Q earning which boosted 9M figures (Figure 9). Telecoms have shown a 27% YoY decline in

earnings in 9M11, though this is due to extraordinary gains in 2Q10,

without which growth would have been flat due to muted revenue growth and FX losses among the firms. We expect the full year net profit to be

around USD7.8bn, a 21% annual decline.

The commodities sector received a boon in Q1 as crude prices spiked on

political turmoil in the region. Oil prices remained high through 2Q and consequently 9M11 earnings came in at USD 10.3bn, a 55% YoY increase.

Going into 2012, we are largely Positive on corporate earnings

given healthy commodity

earnings, steadily increasing bottom lines for banks (on

account of lowered provisions) in addition to a bottomed-out

Real Estate market in the UAE

We remain Neutral on Oman and Bahrain who have yet to

show signs of resuming healthy growth patterns



14

We expect the full year to show USD 13.7bn in earnings, a 50% annual gain.

The FY2012 earnings growth is predicated on a return to profit in the financial services sector, steady Commodities growth, and a freeing up of

bank earnings as Provisions continue decreasing across the GCC.

Telecoms, which are expected to show a full year decline of 25% in

earnings in 2011, are forecasted to grow by about 7% in 2012 as markets continue maturing and ARPUs continue to decline.

Figure 9: Consolidated GCC Earnings Trend (USD Mn)

We were Positive and then Neutral on most GCC markets in 2011, downgrading our view based mainly on the political challenges facing the

region and how that might affect government spending plans in stimulating the economy in addition to consumer and investor sentiment (Table: 7).

However, going into 2012, we are largely Positive on corporate earnings given healthy commodity earnings, steadily increasing bottom lines for

banks (on account of lowered provisions) in addition to a bottomed-out Real Estate market in the UAE. We remain Neutral on Oman and Bahrain who

have yet to show signs of resuming healthy growth patterns.

Table 7: Earnings Growth Potential

Earnings Growth


Overall GCC

2003 64% 105% 46% 73% 0% 123% 72%

2004 48% 21% 72% 65% 150% 95% 48%

2005 45% 107% 137% 72% 26% 6% 72%

2006 17% -26% 8% 25% 17% 21% 5%

2007 7% 74% 38% 22% 48% 34% 30%

2008 -46% -97% -7% 31% -15% -62% -42%

2009 26% 109% -26% 17% -10% 7% 4%

2010 35% 395% -52% -6% 45% 24% 10%

2011e 27% 23% 93% 14% -25% 0% 29%

2012f 19% 18% 23% 17% 6% 7% 19%

Assessment Positive Positive Positive Positive Neutral Neutral


The FY2012 earnings growth is predicated on a return to profit

in the financial services sector,

steady Commodities growth, and a freeing up of bank

earnings as Provisions continue decreasing across the GCC

We are largely Positive on

corporate earnings



15

4. Geopolitical Developments

We have used two of Economist Intelligence Unit’s ratings – Political risk and Economic Structure. Economic structure risk ratings for all GCC

countries have remained constant through 2009/2010.

Given the political turmoil at the beginning of 2011; Oman and Bahrain’s rating were downgraded in terms of Political Risks. Oman was brought to

BB while Bahrain down to B. However, Economic Structure Risk has

remained the same despite the upheaval.

Table 8: Risk Ratings

Political Risk Saudi Arabia Kuwait UAE Qatar Oman Bahrain

2002 C C C C B C

2003 D C C B B C

2004 D C C B B C

2005 D C C B B C

2006 B BBB BBB BBB BBB BB

2007 B BBB A BBB BBB BB

2008 B BBB A BBB BBB BB

2009 B BB BBB BBB BBB BB

2010 B BB BBB BBB BBB BB

2011 B BB BBB BBB BB B

Economic Structure Risk


2002 B B B B B B

2003 B B B B C B

2004 B B B B B B

2005 B B B B B B

2006 BBB BBB A A A BBB

2007 BBB BBB BBB A A BBB

2008 BBB BBB BBB A A BB

2009 BBB BBB BB A A BB

2010 BBB BBB B A BBB BB

2011 BBB BBB B A BBB BB

Assessment Positive Positive Positive Positive Neutral Neutral

Source: EIU, Markaz Research

5. Market Liquidity

Liquidity has been on a downward trend for the last four years, declining to

USD 296 bn in 2010 as opposed to a high of USD 1.6 tn back in 2006.

Value traded has picked up in 2011, expanding by 19% to USD354bn. Growth was driven by Saudi Arabia and Qatar; the former increased 44%

for the year while the latter expanded 22% to usurp the position of second

most liquid market in the GCC. Kuwait saw the highest annual decline, with value traded contracting 50% to USD21.7bn followed by the UAE where

liquidity was down 46%.

Given the political turmoil at the beginning of 2011; Oman

and Bahrain’s rating were

downgraded in terms of Political Risks



16

Figure 10: Value Traded Trends (USD Bn)

Given the positive growth in liquidity, we have a Positive view on the same

for Saudi Arabia and Qatar while maintaining a Negative view on Kuwait and UAE. We have upgraded Oman and Bahrain to a Neutral view due a

lessening of liquidity declines.

Table 9: Market Liquidity

Value Traded ($m)


CAGR (2001-2005)

136% 39% 214% 118% 45% 51%

Growth - 2005 133% 86% 663% 345% 85% 54%

Growth - 2006 46% -35% -9% -29% -25% 116%

Growth - 2007 -58% 103% 20% 48% 86% -39%

Growth - 2008 -23% 2% -3% 61% 70% 120%

Growth - 2009 -36% -43% -54% -47% -33% -77%

Growth - 2010 -40% -42% -58% -28% -43% -39%

Growth - 2011 44% -50% -46% 22% -24% -5%

Assessment Positive Negative Negative Positive Neutral Neutral

Source: Zawya, GulfBase

D. Country Views Saudi Arabia – Positive

We maintain a Positive outlook on Saudi Arabia for 2012 due to positive

economic activity (especially a projected decline in inflation and increase in government spending) in addition to healthy earnings growth. Positive

factors also arise in terms of attractive valuation and market liquidity which

has been picking up.

The 2012 budget is expected to show a surplus of just USD 3bn due to lower revenue and spending in the coming year. Revenues for 2011 came in

at USD 296bn as oil prices and production increased due to political unrest

in the region; these are expected to go down to USD 187bn in 2012 as the global slowdown affects key trading partners like China.

Spending is expected at USD184bn, 14% lower than expenditure in 2011, although spending on jobs, housing and other public service projects is

expected to continue.

Economic Structure Risk has

remained the same despite the upheaval.

Value traded has picked up in

2011, expanding by 19% to USD354bn



17

Housing property prices are expected to rise in 2012 as the kingdom

continues to grapple with residential real estate shortages for its growing

population. According to CB Richard Ellis, only 35% of locals own homes, with low and middle-income families making up around 80% of unmet

demand.

As for corporate earnings, these are expected to grow 19% in 2012 versus

a growth of 27% in 2010. We expect support to come from the Banking sector, which we expect will grow at 16% in 2012 in addition to a healthy

20% growth in commodities.

As previously mentioned, market liquidity is up in the Kingdom. Value

Traded came in at USD 291 bn for 2011, a 44% YoY growth.

Kuwait – Neutral

We remain Neutral on Kuwait due to poor market conditions, more muted economic growth and continued drying up of market liquidity.

The economy is expected to grow by 4.5% in 2012 following a growth of 5.7% in 2011, as oil prices soften and government spending pulls back.

Inflation, which is expected to have jumped to 6.2% in 2011, due to subsidies and grants, is forecasted to come back down to 3.4% in 2012,

which is on par with the long-term average.

Fiscal and Current Balances are expected to remain the highest in the Gulf,

at 13% and 29% of GDP, respectively, in 2012.

We expect overall earnings growth at 23% in 2011 followed by a slight moderation to 18% in 2012 due to muted growth in the banking and

Telecom sectors.

UAE – Abu Dhabi: Neutral, Dubai: Neutral

We have Neutral view on Abu Dhabi while maintaining the same on Dubai

(although with a slightly Negative bias). The view of Abu Dhabi is

predicated on weak market conditions and the possibility of additional aid being extended to Dubai.

The UAE economy grew at an estimated 3.3% in 2011 and is expected to

show a growth of 3.8% in 2012. Inflation is expected to remain at a

manageable 2.5% for the year. Lack of liquidity is a problem as value traded in the UAE continues to dry up.

The Dubai budget for 2012 makes it clear that conservatism and

cautiousness is the way moving forward; revenues are expected at USD 8.3bn for the coming year, the majority of which is expected to come from

fees and service charges. USD 3.4bn of the budget (40%) has been

allocated to salaries and wages while 35% will go to operating expenditures. Development projects spending is placed at USD 1.6bn while

USD 350mn is set aside for loans and interest payments.

The emirate still struggles with a debt overhand of about USD 15bn, mainly

related to Dubai World and Dubai Holding.

The Dubai real estate sector,

while bottoming out, will continue to battle oversupply

issues with residential prices expected to decline by about

15%

Qatar has been leading in

terms of liquidity strength,

taking the second place for the year at USD 22.7bn, a 22% growth



18

The Dubai real estate sector, while bottoming out, will continue to battle oversupply issues with residential prices expected to decline by about 15%

as supply continues to outstrip falling demand. According, Abu Dhabi suffers

from supply-demand imbalances, which would dampen prices there.

Corporate earnings are expected to rebound in 2011 after the Real Estate sector suffered a significant loss in 2010 (due to Aldar Properties) before

moderating to a growth of 23% in 2012 as banks are expected to show a

growth of 26% while telecoms grow at 6% versus a decline of 14%. The Real Estate sector is expected to have bottomed-out in 2011 and would

return to profitability in 2012.

Qatar – Positive

We remain Positive on Qatar owing to its high economic growth prospects,

healthy banking sector and heavy government support in addition to increasing liquidity.

The economy is expected to show another year of double-digit growth,

boosted to a forecasted 19% in 2011 (due to high commodity prices) before

falling back to a more sustainable 6% in 2012. The moderation of growth comes due to a self-imposed moratorium on the development of new

hydrocarbon projects until 2015 as LNG production has hit 77 million tonnes a year, a 10-yr CAGR of 15%. High government spending and investments

in the non-hydrocarbon sector is expected to boost growth to 9%.

Inflation remains well under control despite the growing economy,

remaining at a steady 4% through 2012.

We expect Qatar corporates to show earnings growth of 14% for 2011, driven by Commodities and Real Estate. Banks are expected to grow 10%

while Telecoms are flat due to ForEx losses which have squeezed earnings.

For 2012, we expect banks to grow at about 14% as lending continues

while provisions decline further. Likewise, we expect Telecoms to have a slightly better year, growing at around 10%. We expect some softness in

Commodities, growing at 30% versus an estimated 50% in 2011.

Qatar has been leading in terms of liquidity strength, taking the second

place for the year at USD 22.7bn, a 22% growth.

Oman – Neutral

We have maintained our view on Oman at Neutral due to moderate

earnings growth, lower liquidity and declining economic growth.

Real GDP is expected to have grown at 4.4% in 2011 to decline to 3.6% in 2012 as economic growth slows. Consequently, inflation is also expected to

decline through the years; it is forecasted at 3.8% in 2011 before declining

to 3.3% in 2012. Given healthy oil prices, the government balance is expected to remain quite healthy, at about 10% of GDP in 2011 before

falling to 6% in 2012.

We expect full year corporate earnings to show a decline of 25% to USD

1.4bn due to telecoms and financial services weakness. For 2012, we expect banking to pick up to a growth of around 13% from 7% in 2011e,

We remain Positive on Qatar

owing to its high economic

growth prospects, healthy banking sector and heavy

government support in addition to increasing liquidity

We have maintained our view on Oman at Neutral due to

moderate earnings growth, lower liquidity and declining

economic growth



19

while Telecoms, which were down 24% in 2011e, should see a moderate growth of about 5%.

Bahrain – Neutral

Our outlook on Bahrain is Neutral but verging on Negative due to weakened corporate earnings outlook in addition to negative investor sentiment and

market liquidity.

From a 24% annual growth in 2010 we expect FY 2011 corporate earnings

to be flat in 2011 due to financial services weakness before expanding by about 7% in 2012.

The Final Analysis

Our view on market attractiveness is summarized in the table below. As per

the five force framework assessment, we are positive on Saudi Arabia and Qatar while remaining Neutral on all other markets for the year (Table 10).

Table: 10 – Final Ranking

E. Global Outlook

World markets ended the year on a tenuous note, with most markets

logging a negative month, as many questions remain unaddressed going into the new year.

Emerging and Frontier Markets were the clear losers for the year; MSCI EM

and MSCI Frontier Markets lost the most, down 20% and 22% for the year

as natural disasters, political turmoil and worries of a global slowdown dented growth prospects. Fears of an imminent China slowdown has dented

investor sentiment, bringing the Shanghai index down 21.6% while Asia Pac suffered a knock-on effect of a slowing China and lost 18%. The largest

annual decline was in India, with a loss of nearly 25% for the year.

Our outlook on Bahrain is

Neutral but verging on

Negative

We are positive on Saudi Arabia and Qatar while

remaining Neutral on all other markets for the year



20

Figure 11: Returns 2011

The world seems poised for a new financial crisis in 2012 as bond rollovers

in the US, Asia and Europe worth an aggregate USD 6.5 trillion is expected to come due2.

Furthermore, any default on major periphery economies could trigger cross

defaults across the system in addition to exacerbating an already weakening

banking system.

Moreover, the financial crisis in the Euro Area looks set to get worse before it gets better; S&P has placed 15 Euro Area countries (including France and

Germany) on notice for a possible ratings downgrade, citing a high

probability for a regional recession in the coming year due to fiscal tightening and poor banking conditions. Moody’s has also announced that it

would review EU ratings in the first quarter of 2012.

Any downgrade in the more core countries would only worsen the situation and knock investor confidence further.

Most investment banks see slightly better performance in the US economy while BRIC is expected to expand at a healthy if lower rate.

2012 GDP Growth Forecast

GSAM IMF

Societe Generale

DBS bank

Bank Of America

UBS

US 2.2 1.8 1.4 2.5 1.9 2

UK 1 1.6 0.7 N/A 0.3 -0.01

Canada 2.2 1.9 2.1 N/A 2.1 2

Japan 1.9 2.3 2.4 2.1 2.3 2.5

Brazil 3.6 3.6 N/A N/A 3.4 3.8

China 8.2 9 8.1 8.5 8.6 8

India 7.2 7.5 7.1 6.5 6.8 7.3

Russia 3 4.1 3.2 N/A 3.6 3

Going into 2012, most analysts see no prospect of improvement in markets, most notably equities, which are expected to underperform other asset

2 Gulf News, December 2011

The world seems poised for a

new financial crisis in 2012 as bond rollovers in the US, Asia

and Europe worth an aggregate USD 6.5 trillion is

expected to come due

World markets ended the year

on a tenuous note, with most markets logging a negative

month



21

classes in the coming year, while Commodities are expected to have another positive year amid market uncertainty and high risk.

Oil prices are expected to remain at an average of $104/bbl, with the highest forecast at $125.75/bbl while the lowest is at $79.3/bbl3. For Gold,

which saw a return of 10% in 2011, prices are expected at an average of $1,762/oz in 2012, with the highest forecast at $2,040/oz while the lowest

is $1,200/oz.

2012 Outlooks

Current High Low Average

IPE Brent 113.06 125.75 79.30 104.00

Gold 1,617 2,040 1,200 1,762

Source: Various Outlooks

According to a recent survey by the CFA Institute, negative sentiment is expected to pervade markets for the coming 3-5 years. Expectations are

towards economic contraction or flat performance across most countries; a

notable exception is BRIC, which is expected to see expansion in the coming year.

3 Compiled Outlooks



22

Appendix 1: Key Events January (-2.6%4)

- Egyptian protests erupted over the last week of January; the Egyptian market shed close to 20%

before being closed, while S&P, Fitch and Moody all downgraded Egypt credit and placed it on

Negative outlook. Kuwait, Saudi and UAE markets, which all have close ties to Egypt, saw their stocks fall in the final week of the month.

- The 11 Arab bourses5 lost nearly USD 45 bn between 25th and 31st of January. - Saudi 5 Yr CDS–one of the world’s 10 safest debt issuing sovereigns – rocketed more than 46% on the

28th of Jan and ended at around 110bps, up from 75bps. Qatar saw its CDS rate shoot up by 15% the same day, ending at 102bps while Dubai CDS inched up to 453 bps before declining to 425 by month

end.

February (-6.5%)

- Political unrest spread from Egypt and Tunisia to Libya, Bahrain, Oman and portions of the Levant.

- CDS rates continued to rise; Saudi 5 Yr CDS rocketed more than 46% on the 28th of Jan and is up

81% for the year. Dubai 5 yr CDS was up 7% for the month. - Bahrain 5 Yr CDS rates are up 65% YTD as unrest continues. Moody’s has placed the Kingdom under

review for a possible downgrade on its A3 rating. S&P has already cut Bahrain’s Long term rating to A- and Short-term to A-2.

- The Zain/Etisalat deal continued to dominate headlines in Kuwait, crowding out most news in the country. The telecom firm rejected three bids for its Saudi unit; from Kingdom Holding, Batelco and a

consortium of investors, which brought down blue chips on the KSE. The February 28th due diligence

deadline passed without comment from Zain or Etisalat, which prompted a rapid sell-off as investors considered the deal to be scrapped.

March (6.06%)

- The Egyptian market reopened on the 23rd of March, primarily to avoid exclusion from MSCI indices for lack of trading, after being closed for nearly two months following political unrest earlier this year.

- S&P cut Bahrain’s rating by two notches to BBB (long-term foreign currency) with a Negative outlook. - The arrival of foreign troops into Bahrain in mid-March caused the CDS spread to jump 46 bps to a 20-

month high as the government instituted a 3 month State of Emergency.

- Kuwait Investment Authority announced a plan to inject over USD 3.5 bn into the local property market through a portfolio to be managed by Kuwait Finance House.

- The Kuwait Capital Market Authority regulations came into effect during the month. - Etisalat officially walked away from its proposed USD 12 bn offer for a 46% Zain stake, citing

everything from regional unrest to a divided Zain board and due diligence issues.

April (3.16%)

- According to the Institute of International Finance (IIF), the GCC will see a combined current account

surplus of over USD 290 bn this year, more than double that of 2010, as oil prices strengthen. - The Kuwait government resigned in April, lending uncertainty to the market in the face of the Kuwait

Development Plan implementation and pending approval for the second plan’s budget.

May (-1.72%)

- Bahrain’s sovereign credit rating was cut by Moody’s to Baa1 (from A3) with a Negative outlook due to

continued political unrest. According to the rating agency, these events are likely to have damaged

4 S&P GCC Composite Index monthly return 5 GCC markets (7), plus Egypt, Morocco, Jordan, Lebanon



23

economic growth significantly, especially in service sectors such as tourism, trade and financial services6.

- During the month, the Kuwait market was hit by speculation that the Zain deal to sell its stake in Zain

Saudi Arabia to Batelco and Kingdom Holding for USD 950 mn was hitting roadblocks. Batelco and Kingdom Holding stated that negotiations were ongoing and rumors of difficulties were

“unsubstantiated and speculative in nature.”

June (-1.99%)

- In response to the IEA measure of releasing 60 mn barrels of crude oil to compensate Libyan production, Kuwait Supreme Petroleum Council said that it expected oil prices to settle in the USD 90

– USD 100 per barrel range for the rest of 2011, which could put a dent in GCC growth for the year.

Despite the IEA move, Saudi Arabia pumped an average of 9.5 mn barrels a day in June. - MSCI upgrading of the UAE and Qatar to Emerging Market status was put on hold until the end of

2011 pending further review. Increased Foreign Ownership Limits (FOL) are seen as a vital component to inclusion, which is more of an issue in Qatar versus the UAE. Qatar is currently in talks with various

firms to consider raising the FOLs.

July (-2.82%)

- The US Debt issue escalated to a crisis as the country approached the $14.3 trillion debt ceiling. An

eleventh hour deal was finally struck which advocated a $2.1 trillion, 10-yr deficit-reduction plan, about half the aimed for $4 trillion.

- Liquidity in GCC markets was down significantly, value traded declined by 22% to USD 20.8bn while

volume was down 31% to 7bn. - Saudi Arabia continued to compensate for lost crude oil production from Libya; pumping an average of

9.85 mn bbls/day in July versus 9.5 mn in June. July production represented a high not seen since the early 80’s following the Iranian revolution.

- The Kuwait market hit a 7-year low in the middle of the month, dipping below 6,000 points on a compendium on poor news. The Central Bank governor announced that the economy suffered from

precarious imbalances which needed to be addressed urgently.

- The newly established Kuwait Capital Market Authority extended the deadline for Fund compliance with investment limits, under Article 347, to March 2012 from the previous September 2011 deadline

citing adverse market conditions and a need to review the article.

August (-5.12%)

- S&P made a historic and unprecedented move of downgrading the US rating from, “AAA” to “AA+”

with negative outlook citing political deadlock in handling the national debt as the main cause. - Although oil prices declined by 2% in August, due to flagging U.S demand and progress in Libya, Gold

saw its highest monthly gain in 21 months, up 13% in August with to closed at 1,826 $/Oz.

- Inflation was a concern briefly for GCC states during 2010 and early 2011 as governments enacted large-scale spending and welfare programs. However, Inflation started to ease and should decline

further in 2012. Worries about food inflation should abate given the global economic slowdown, bringing down commodity prices.

September (0.36%)

- World markets saw steeper declines as the Eurozone debt crisis intensified, with a Greek default seeming imminent. Investors remained concerned that the crisis could have severe global implications

on an already weakening economic recovery. - Markets became hypersensitive to European cues; the S&P500 shed 13% in 3Q11, the worst decline

since the last quarter of 2008. More than USD 10 trillion was wiped from world markets during the

third quarter of the year while VIX shot up 160%.

6 GCC Fixed Income Update – 29 May 2011, Markaz



24

- The US Federal Reserve announced “Operation Twist”; the latest move to stimulate the economy by keeping interest rates down and encouraging businesses to borrow and spend. The USD 400bn plan

has the Fed selling short-term Treasuries in exchange for longer-term bonds, with the intent of

lowering yields on longer-term bonds. - Liquidity was up for the month due to strong trading in Saudi Arabia and Kuwait, where value traded

was up 30% and 69%, respectively. GCC value traded increased 25% to USD 22 bn while volume was up 40% to 11.5 bn.

- Renewed political tension arose in Bahrain. The country is enacting a high level of fiscal stimulus,

including $1bn over two years to raise government wages, in addition to infrastructure and housing expenditures. The first $1bn of a $10bn GCC-funded support package was received by the country and

will be put to use in social welfare spending to attempt to quell political unrest.

October (1.84%)

- October will be seen as a historic month with ‘Occupy Wall Street’ protests spreading to as many as 80

countries around the world. Protests were more intense in the troubled European countries as people were against the government’s austerity measures.

- The ECB cut interest rates by 25bps to 1.25% to support the euro zone. Spain’s credit rating was downgraded by all the three rating agencies because of anemic growth and debt problems. France

was warned by Moody's that it may place its rating on negative outlook in the next three months if

costs for bank bail outs and other euro zone members stretch its budget too much. - Markets witnessed a sharp pull back rally; the S&P 500 gained 10.8% in October, recording its best

performance in almost 20 years. Last time the S&P 500 was up more than 10.8% was in December

1991 (11.27%). - Emirates NBD (ENBD) took over the ailing Dubai Bank on orders from the government. Dubai Bank will

become a fully-owned Islamic banking subsidiary of ENBD. Management indicated that there would not be any impact to ENBD’s bottom line or to the NPL ratio due to deal structuring and support

provided by the government.

November (-1.82%)

- US unemployment edged down to 8.6% in November while Euro-area unemployment moved up to

10.3% in October. - In the E.U coordinated monetary easing measures by major central banks in response to signs that a

new bank funding problem is emerging led to short rally at the end of the month, but most markets

still ended in negative territory. - The UAE set up a $2.7bn fund to pay down debt for some low-income citizens; moreover, the country

with be doubling wages for state employees beginning January 2012. - Towards the end of the month, the Kuwait government resigned for the seventh time since 2006 amid

renewed conflict with opposition members of Parliament.

- Qatar successfully sold a $5bn, three tranche bond (5-yr, 10-yr, and 30-yr maturities) with orders amounting to $9.5bn. The bond is expected to be used in financing Qatar’s development and

infrastructure spending over the coming years.

7 bespokeinvest.com



25

Appendix 2: Markaz 5-Force Framework 1. Economic parameters

Even though this is a very broad parameter to evaluate, we have taken in five criterions with weightings to evaluate the attractiveness of the

economy. These five parameters are mostly forward looking and the

estimates are arrived at by taking into consideration forecast data from International Institute of Finance (IIF) in corroboration with the IMF.

a. Forecasted Real GDP Growth b. Forecasted Inflation

c. Forecasted Fiscal balance as % of GDP d. Forecasted Current account balance as % of GDP

e. Historical broad money growth trend (M2)

2. Valuation attraction

We have considered the levels of valuation on an historical basis (TTM) to arrive at ascertaining the attractiveness of the markets. The valuation

parameters used are:

a. Price to Earnings b. Price to Book

c. Dividend Yield

3. Earnings growth potential Earnings growth potential provides the forecasted earnings expectation for

the year. We have arrived at these forecasts using a bottom up approach of

aggregating earnings data for companies listed in GCC stock markets.

4. Geopolitical Developments Due to the changing nature of the geo political scenario in the region we

have used two different equally weighted parameters provided by EIU to

arrive at a score for geo political risk. a. Political risk

b. Economic structure risk

5. Market liquidity

Due to the change in liquidity levels in the markets post the credit crisis, we have included this parameter to evaluate attractiveness in terms of liquidity.

We have used value traded to ascertain the same.

All the parameters are scored on a scale of 0-5, wherein 0 would mean the

lowest score implying negative assessment and 5 would mean the highest

implying positive assessment.

We have taken in 5 criterions

with weightings to evaluate the

attractiveness of the economy.


Appendix-3 Economic Factors

Real GDP Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Real GDP Growth (2000-2009 Avg) % GDP 3.5 5.4 6.1 13.2 5.3 5.8

Real GDP Growth (2010 e) % GDP 3.4 2.3 2.4 16.0 4.7 4.0

2011 f 6.5 5.7 3.3 18.7 4.4 1.5

2012f 3.6 4.5 3.8 6.0 3.6 3.6

Source: IMF

Inflation Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Inflation (2000-2009 Avg) annual change 3.1 3.9 5.5 6.3 4.3 2.1

Inflation (2010 e) annual change 5.5 4.1 2.0 1.0 4.4 2.6

2011 f 5.4 6.2 2.5 2.3 3.8 1.0

2012f 5.3 3.4 2.5 4.1 3.3 1.8

Source: IMF

Fiscal Balance % of GDP Saudi Arabia Kuwait UAE Qatar Oman Bahrain

(2000-2009 Avg) 11 27 12 9 8 3

2010 e 7 21 -1 11 7 -7

2011 f 11 22 5 5 10 0

2012f 3 13 3 3 6 -1

Source: IMF, IIF

Current Account Balance % of GDP


(2000-2009 Avg) 9 27 11 9 7 2

2010 e 9 29 9 17 12 3

2011 f 24 36 14 22 19 10

2012f 16 29 12 17 13 12

Source: IMF, IIF

Broad Money Growth Saudi Arabia Kuwait UAE Qatar Oman Bahrain

Average (1998-2002)-% change 8 5 12 16 7 10

Average (2003-2009)-% Change 15 15 24 24 17 16

2010 9 3 6 23 11 11

9M11 YoY 12 9 4 27 10 4

Source: Central Banks


Appendix-4 Index Movers

SABIC Code: 2010.SE | Country: Saudi Arabia | Current MP: SAR 93.08 | YTD Performance: -9.6%

Mcap: USD74.4Bn | Ann. St. Dev: 23% | YTD Turnover Velocity: 35%

Background

Saudi Basic Industrial Corporation (SABIC) was established in 1976 by royal decree to exploit the country's

natural gas supply to produce value-added commodities such as chemicals, polymers and fertilisers. Now, SABIC is one of the world’s five largest petrochemicals manufacturers. SABIC has 6 main strategic business

units which include: Basic Chemicals, Performance Chemicals, Innovative Plastics, Polymers, Fertilizers, and Metals. According to Zawya, SABIC is the most profitable petrochemical company in the world and it is

worthy to note that the government of KSA owns over 75% of SABIC which will ensure cheap feedstock and continuous support in the foreseeable future.

SABIC holds equity stakes in major Saudi Arabian companies. Some of them are Saudi Arabian Fertilizers Co. (42.99%), Saudi Kayan Petrochemical Co. (35%), and Yanbu National Petrochemicals Co. (51.95%).

Analysis: SABIC reported a good set of Q3 numbers with revenues increasing 29% YoY to USD 13.1bn.

3Q11 bottom-line grew 54% YoY (+1% QoQ) to USD 2.2bn. Finance costs decreased 19% over the quarter

and total operating expenses decreased 1.1%. Over the first nine months of 2011, revenues increased 29% YoY to USD 38.1bn and net income grew 52% YoY to 6.4bn. Growth in net income is due to increase in

production and sales volumes, improved product prices and lower financing charges.

Production from Saudi Kayan Petrochemicals, of which SABIC owns 35%, started in October 2011 and is expected to further boost SABIC output when it is consolidated at the end of the year. Saudi Kayan’s Jubail

Petrochemicals Complex is expected to be fully operational in Q1 2013 with annual capacity of nearly

6mtpa9.

The company announced interim dividend of SAR 2/share, which amounts to nearly 40% of 1H11 earnings. The company is expected to increase its dividend in 2H11, implying an attractive dividend yield of close to

5%. The stock is trading at 10x earnings and is down 10% YTD versus 5.3% fall in Tadawul index indicating

that market participants are pricing in slackening demand and lower prices. The stock has generated positive returns over 2Y (+18%), 3Y (+62%) and 5Y (+5%) periods. We rate the stock as carrying Medium risk

given that it carries a standard deviation of 23% and a max drawdown of 17% over the year.

Our Expectation

We expect SABIC to end 2011 with USD 8.5bn in earnings, on the back of expected contribution from Saudi Kayan. Brokers expect SABIC’s FY12 net income to be between USD 7.95bn and 8.64bn but we expect USD

8.5bn in earnings given lower demand from Asia. The key risk will be softening of commodity prices.

8 As of 28th November 2011 9 Million Tonnes per annum

Sto

ck

Vo

lati

lity

Expected Return (2012)

Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -58% -11% -37% -21% -13% -12%

2007 89% -23% -2% 5% 2%

2008 -69% -29% -14% -13%

2009

60% 43% 23%

2010

27% 7%

2011

-10%



28

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Total Revenue 23,024 33,659 40,221 27,498 40,530 50,298 58,648

Cost of Sales 13,628 20,870 28,016 19,865 27,583 32,660 40,086

Total Operating Expense 14,786 22,712 30,462 22,483 30,424 35,931 44,591

Net Income 5,412 7,207 5,875 2,420 5,742 8,496 8,616

Balance Sheet

Cash 10,550 12,235 13,609 15,254 13,508 15,683 16,953

Total Assets 44,429 67,670 72,478 79,173 84,699 91,559 98,060

Total Current Liabilities 6,652 8,983 7,089 8,580 11,816 14,522 17,412

Total Liabilities 24,991 43,359 45,026 50,301 52,486 55,583 58,306

Long Term Loans 8,964 20,119 23,568 26,813 25,029 30,010 43,485

Total Shareholder's Equity 19,438 24,311 27,452 28,872 32,213 35,976 39,754

Analytics

Return on Equity (%) 27.84 29.64 21.40 8.38 17.82 23.62 21.67

Return on Assets (%) 12.18 10.65 8.11 3.06 6.78 9.28 8.79

Revenue Growth (%) 10.32 46.19 19.50 -31.63 47.39 24.10 16.60

Earnings Growth (%) 5.92 33.15 -18.48 -58.81 137.26 47.97 7.04

Assets Growth (%) 21.64 52.31 7.11 9.24 6.98 8.10 7.10

Equity Growth (%) 16.91 25.07 12.92 5.17 11.57 11.68 10.50

Historical EV (USD Mn) 68,579 135,751 51,135 77,550 95,321 88,725

P/E 12.97 18.36 7.02 27.32 14.59 9.74

Price/Book 3.61 5.44 1.50 2.29 2.60 2.07

EPS (USD) 1.80 2.40 1.96 0.81 1.91 2.83

BVPS (USD) 6.48 8.10 9.15 9.62 10.74 11.99

DPS (USD) 0.89 0.22 0.80 0.40 0.93

Market Price (SAR) 88 165 52 83 105 93

Annual Trading Volume (mn) 1,416 703 1,660 2,443 1,054 1,403

Annual Trading Value (USD mn) 61,183 20,909 46,579 38,180 26,198 37,120

Turnover Velocity 51% 21% 55% 71% 35% 35%

M Cap (USD mn) 70,165 127,867 41,177 65,991 83,800 74,398

Source: Reuters Knowledge, Company Accounts, Markaz Research

Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return -2.00% 0.46% 0.82% 0.50% 0.41%

Highest Monthly Return 5.94% 12.87% 12.87% 36.55% 36.55%

Lowest Monthly Return -10.46% -10.46% -15.24% -32.07% -32.07%

Largest Losing Streak (# of Months) 4 4 4 4 5

% of Negative Months 67% 50% 83% 44% 47%

Maximum Drawdown* -17% -17% -17% -17% -78%

Standard Deviation 18.72% 23.34% 22.80% 44.97% 42.30%

%Change in MVX -25% -28% -48% -84% -56%

*Largest decline from a previous high Source: Reuters, Markaz Research



29

Al Rajhi Bank Code: 1120.SE | Country: Saudi Arabia | Current MP: SAR 67.2510 | YTD Performance: -17.5% Mcap: USD26.9Bn | Ann. St. Dev: 14% | YTD Turnover Velocity: 15%

Background

Al Rajhi Bank is the largest lender in the Kingdom with a financing book worth USD 37.3 bn as of 3Q11. Al

Rajhi offers a wide range of commercial banking and investment services complying with Islamic law. Ownership is stable with AlRajhi family owning 39.9%. Apart from 466 branches in the Kingdom, the bank

operates 19 branches in Malaysia, 2 in Jordan and 1 in Kuwait. Strong retail presence, access to low cost funds and cost efficiency are the main reasons for Al Rajhi’s high RoE and NIMs.

Analysis: 3Q results showed a flat performance for Islamic Banking Activities with financing income

declining 3.6% YoY while being almost flat over the quarter. 9M11 Income from Islamic Banking was at USD

1.8bn, down 2.5% YoY. Other income (Investment, Fees & Commissions, ForEx) had a better showing, growing 28% YoY to USD 710mn in 9M11. In 3Q11, fee income grew 84% YoY and 22% QoQ to USD

177mn. While provisioning costs grew 18% QoQ to USD 109mn, YTD provisions were down 19% to USD 295mn as banks have begun easing up on the hyper-prudential provisioning of the last three years.

Financing activities were up 16% YoY at September 2011 while Deposits surged 20% in the same period. The bank maintains a healthy Tier 1 ratio of 14.9% and Total Capital ratio of 19.1% at the end of third

quarter. Consequently, 3Q11 net income came in at USD 516mn, an 18% increase YoY (+5% QoQ) while for 9M11 net income was at USD 1,461mn, a 7% increase. Based on these results, we would expect full year

net income to amount to USD 1,833mn which would amount to a 2% annual growth.

The bank announced a half year dividend of SAR 1.25/share, which would amount to over half of 1H11’s

bottom line. The bank is a good dividend play; 2010 Dividend yield was at 4.6% and is expected to hold at the same level for 2011.

The stock is trading at 15x earnings and 3.3x tangible book value while exhibiting Medium volatility with

standard deviation of about 14% (ann.). The stock’s MVX value (Markaz Volatility Index) has increased 36%

during the last one year. The stock has generated negative returns over 2Y (-4%) and 5Y (-16%) periods but is up 15% over the last 3 years.

Our Expectation

We expect 2012 to be a profitable year for Saudi banks in general as provisions continue declining, thereby

freeing up the bottom line. Spreads may become squeezed as interest rates remain low while high yield deposits begin increasing (a trend witnessed among Saudi banks recently), but Al Rajhi should be able to

sustain a wide margin, thereby boosting top line growth. Brokers expect FY12 net income to be between USD 2.1bn and USD 2.4bn. We expect a net profit of USD 2.2bn backed by stronger profit from Islamic

banking, lower provisioning and healthy financing growth.

10 As of 26th November 2011

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -47% -15% -30% -19% -13% -13%

2007 35% -20% -6% -1% -5%

2008 -52% -22% -11% -13%

2009

27% 22% 7%

2010

16% -2%

2011

-17%



30

Financial Analysis

Income Statement 2006 2007 2008 2009 2010 2011E 2012E

(USD mn)

Profit from Islamic Banking 2,047 2,289 2,513 2,647 2,491 2,273 2,812

Operating Income 711 427 555 574 680 847 850

Operating Expenses 521 648 753 794 795 856 1,074

Provisions 67 118 327 470 509 381 282

Net Profit 1,947 1,720 1,741 1,805 1,806 1,833 2,243

Balance Sheet

Cash 2,888 3,762 3,832 6,952 8,260

Loans 24,066 28,162 37,983 30,280 32,417 38,285 43,683

Deposits 20,243 24,732 31,991 33,173 38,627 46,044 53,042

Total Assets 28,406 33,719 44,111 46,097 49,907 59,618 68,024

Total Liabilities 22,958 27,346 36,812 38,337 41,721


Key Ratios Financing Growth (%) 11.5% 17.0% 34.9% -20.3% 7.1% 18.1% 14.1%

Deposits Growth (%) 5.0% 22.2% 29.4% 3.7% 16.4% 19.2% 15.2%

Loan/Deposits (%) 118.9% 113.9% 118.7% 91.3% 83.9% 83.1% 82.4%

Return on Assets (%) 6.9% 5.1% 3.9% 3.9% 3.6% 3.1% 3.3%

Return on Equity (%) 35.7% 27.0% 23.8% 23.3% 22.1% 21.0% 24.0%

Earnings Growth (%) 29.6% -11.7% 1.2% 3.7% 0.1% 1.5% 22.3%

Revenue Growth (%) 25.3% -1.5% 13.0% 5.0% -1.5% -1.6% 17.4%

Cost-to-Income (%) 18.9% 23.8% 24.5% 24.7% 25.1% 27.4% 29.3%

P/E 16.05 24.53 12.87 15.80 18.40 15.12 Price/Book 5.74 6.62 3.07 3.67 4.06 3.17 BVPS (USD) 4.04 4.72 4.87 5.17 5.46 5.83 Market Price (SAR) 86.85 117.23 56.00 71.25 83.00 69.30 EPS (USD) 1.44 1.27 1.16 1.20 1.20 1.22 Annual Trading Volume (mn) 341 484.6 566.1 466.6 305.0 232.5 Annual Trading Value (USD mn) 37,679 14,483 12,848 8,139 6,374 4,713 Turnover Velocity 84% 39% 40% 32% 21% 15% M Cap (USD mn) 31,270 42,208 22,403 28,504 33,204 27,723 Source: Reuters Knowledge, Company Accounts, Markaz Research

Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats

Average Monthly Return -1.91% -0.99% -0.20% 0.00% -0.47%

Highest Monthly Return -0.72% 6.75% 13.25% 37.20% 37.20%






%Change in MVX -26% 36% -43% -84% -69%




31

Qatar National Bank Code: QNBK.QA | Country: Qatar | Current MP: QAR 142.411 | YTD Performance: 12.4% Mcap: USD24.88Bn | Ann. St. Dev: 24% | YTD Turnover Velocity: 7%

Background

Qatar National Bank (QNB) was established in 1964 and is the largest lender with loans of USD 46.1bn as of September 2011. Currently QNB employs over 1,300 personnel, serving 65 local branches and 9

international branches. QNB’s market share is close to 40% of Qatar’s banking sector assets. Its business units include; full range retail banking, treasury, Wealth management, and corporate finance. The bank is

50% owned by the government of Qatar.

In October 2011, the group announced that it has entered into negotiation with DenizBank in Turkey with

the aim of acquiring a controlling stake.

Analysis: 3Q11 net profit increased 31% YoY and 5% QoQ to USD 522mn. The strong numbers were as a result of 63% YoY growth (+10.5% QoQ) in net interest income to USD 531mn partly offset by provisions,

which more than doubled when compared to 3Q10. Loan loss provisions increased 20% sequentially to USD 69mn. Loan book increased 11.7% over the quarter to USD 46.1bn while deposits declined 0.5% to USD

53.6bn. Loans-to-deposit ratio is at 86%, giving the bank additional room to increase lending activity.

Results for the first nine months were impressive: loans jumped 36% while deposits surged 56%. During the

period, the bank also took control of PT Bank Kesawan Tbk (Indonesia) by way of a 69.6% stake in for a cash consideration of USD 108mn. 9M11 Net interest income was up 64% to USD 1,480mn as Interest

Income increased 31% to USD2.1bn while Interest expense was down 13%. Net interest margins saw a small decline from 2.89% in Sep-10 to 2.73% in Sep-11. Profit from Islamic Banking was not reported due

to a Qatar Central Bank directive requiring all commercial banks to divest themselves of any Islamic

operations. Provisions doubled during the period, coming in at USD 175mn. Consequently, net profit came in at USD 1,487mn, a 30% growth. NPL ratio stood at 1.1% with coverage of 124%.

The bank had a 25% Rights Issue in April of 2011, raising QAR 12.7 bn (USD 3.48bn) through 127mn

shares. The bank’s capital ratio has increased to 20.9% from 15.3% in 2010, giving it a high buffer against

shocks. In September, QNB announced plans to develop a Euro Medium Term Note (EMTN) for USD 7.5bn to fund the Bank’s normal operations.

The stock is trading at 13x and is up 12% for the year, bucking the market which is up by only 1%. The

stock has generated positive returns over 2Y (+78%), 3Y (+120%) and 5Y (+148%) periods. According to our Risk Metrics, the stock is of Low risk with an MVX value decline of 43% over the last year and only one

month of negative returns.

Our Expectation

We expect QNB to report a net profit of USD 1,886mn in FY11 and USD 2,279mn in FY12, implying a growth of 21% in both 2011 and 2012. Brokers estimate FY12 net income to be between USD 2,119mn and USD

2,806mn.

11 As of 25th September 2011

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -19% -2% -2% 0% 11% 11%

2007 18% 8% 8% 20% 18%

2008 -2% 3% 20% 18%

2009

9% 33% 26%

2010

62% 35%

2011

12%



32

Financials

Income Statement 2006 2007 2008 2009 2010 2011E 2012E

(USD mn)

Net Interest Income 463 530 778 1,023 1,558 2,090 2,505

Operating Income 741 952 1,397 1,553 2,088 2,610 3,083

Net Profit 548 688 1,002 1,149 1,566 1,886 2,279

Balance Sheet

(USD mn)

Cash 681 3,005 1,721 2,712 9,308

Loans 12,687 18,132 27,461 29,857 36,145 46,953 53,949

Deposits 15,312 21,782 28,613 34,547 45,415 54,498 62,673

Total Assets 19,669 31,387 41,711 49,219 61,310 75,411 90,493



Key Ratios

Loans Growth (%) 47% 43% 51% 9% 21.1% 29.9% 14.9%

Deposits Growth (%) 52.0% 42.3% 31.4% 20.7% 31.5% 20.0% 15.0%

Loan/Deposits (%) 82.9% 83.2% 96.0% 86.4% 79.6% 86.2% 86.1%

Return on Assets (%) 3.3% 2.7% 2.7% 2.5% 2.8% 2.8% 2.7%

Return on Equity (%) 23.3% 22.5% 23.9% 23.0% 25.9% 24.7% 27.1%

Earnings Growth (%) 30.0% 25.5% 45.6% 14.7% 36.2% 20.5% 20.8%

Revenue Growth (%) 23.5% 28.4% 46.8% 11.1% 34.5% 25.0% 18.1%

Cost-to-Income(%) 28.9% 25.9% 20.5% 19.6% 17.0% 14.8% 13.8%

P/E 15.12 9.95 11.03 8.76 10.88 12.91

Price/Book 5.53 2.09 2.46 1.86 1.84 3.18

Market Price (QAR) 119.29 74.16 104.54 93.78 113.88 150.30

EPS (USD) 2.17 2.04 2.60 2.94 2.87 3.20

Assets Growth (%) 43% 60% 33% 18% 25% 23%

Equity Growth (%) -3% 64% 20% 19% 23% 15%

Annual Trading Volume (mn) 22.9 38.6 46.8 18.0 1.8 53

Annual Trading Value (USD mn) 493 948 1,615 492 979 1,660


M Cap (USD mn) 8,548 9,670 11,246 12,256 19,876 26,259


Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return 1.79% 2.45% 2.43% 2.21% 1.83%


Lowest Monthly Return 0.07% -17.41% -17.41% -34.39% -34.39%



Maximum Drawdown* 0% -17% -17% -17% -17%


%Change in MVX -62% -43% -69% -91% -61%




33

Emirates Telecom (Etisalat) Code: ETEL.AD | Country: UAE | Current MP: AED 9.712 | YTD Performance: -13.1% Mcap: USD21Bn | Ann. St. Dev: 14% | YTD Turnover Velocity: 3.78%

Background Emirates Telecom (Etisalat) is one of two mobile operators mandated to operate in the UAE. The company is

over 60% owned by the government. Etisalat has a large regional/international presence, spanning 18

countries across two continents and serving 135mn subscribers. Etisalat’s 30-year monopoly was broken in 2005, when the Emirates Integrated Telecommunications Company (Du) won the license to become the

second fixed-line and mobile operator in the country.

Analysis: Etisalat's 9M11 net profit declined 8.4% YoY despite a 3.3% increase in revenue. Revenues from

UAE segment declined 0.8% during the nine month period. Strong competition from Du is denting Etisalat’s revenue and squeezing margins. During 9M11, Etisalat’s UAE operations accounted for 75% of revenues,

compared to 78% in 9M10. Etisalat’s active mobile market share slid to 54.8% at the end of October 2011, versus 56.4% at the end of July 2011 and 59.8% at the end of December 201013. Du and Etisalat will be

sharing the fixed line network by as early as the end of 2011, which will further increase Du’s

competitiveness in the segment.

Etisalat’s 3Q11 revenues grew 10% YoY and 1% QoQ to USD 2.2bn. Net income for the quarter came in at USD 469mn (-1% YoY, +8% QoQ). The company suffered foreign exchange loss of USD 32mn in this

quarter and there was also a 33% YoY increase in ‘other operating expenses’ line item which dented margins. Based on these results, we expect 2011 full year net income to be USD 1.9bn, which would amount

to a 6% annual decrease. The firm’s attempted acquisition of a considerable stake in Kuwait’s Zain fell

through during the year, but we would expect the firm to be on the lookout for attractive acquisition targets in order to boost revenues through inorganic growth.

The stock is trading at 11x earnings and is down about 13% YTD versus 11% decline on the Abu Dhabi

Exchange. The stock has not shown large movements on either side over the medium / long term - 2Y (-

3%), 3Y (+1%) and 5Y (-7%). The stock is of Low risk with an annualized standard deviation of 14% and a 70% decline in MVX from last year. The stock has a dividend payout of over 60% while the dividend yield

was at 5.5% in 2010 and is expected to hold steady over the coming years. Large government ownership (60%) and high institutional holding has resulted in low turnover velocity (3.8%) for the stock.

Our Expectation

Brokers expect FY12 net income to be between USD 1.8bn and USD 2.1bn. We expect a net profit of USD

2.05bn backed by a slight pickup in revenue and reduction in financing costs.

12 As of 24th November 2011 13 Du Investor Presentations

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -24% 7% -17% -6% -4% -5%

2007 50% -13% 1% 2% -1%

2008 -49% -17% -10% -11%

2009

34% 20% 8%

2010

7% -4%

2011

-13%



34

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Net Revenue 4,434 5,809 7,992 8,392 8,691 8,259 8,509

Operating Profit 1,523 1,799 1,655 2,214 1,566 1,625 1,736

Net profit 1,581 1,829 2,178 2,336 2,022 1,891 2,048

Balance Sheet

Total Current Assets 3,801 3,512 4,752 5,332 5,257 5,265 5,760

Total Assets 12,496 14,276 17,126 19,429 20,580 21,229 22,322

Non-Current Liabilities 1,670 2,064 2,021 2,199 3,379 3,738 3,841



Analytics

Return on Equity (%) 30.3% 27.9% 25.5% 23.6% 19.2% 17.1% 17.2%

Return on Assets (%) 12.7% 12.8% 12.7% 12.0% 9.8% 8.9% 9.2%

Revenue Growth (%) 26.6% 31.0% 37.6% 5.0% 3.6% -5.0% 3.0%

Earnings Growth (%) 36.5% 15.7% 19.0% 7.3% -13.4% -6.5% 8.3%

Historical EV (USD Mn) 19,655 28,358 15,311 21,354 23,135 P/E 11.15 13.89 6.28 8.47 9.60 11.72

Price/Book 3.40 4.20 1.71 2.06 2.00 2.00 EPS (USD) 0.20 0.25 0.29 0.30 0.31 0.24 BVPS (USD) 0.66 0.83 1.08 1.25 1.46 1.40 Market Price (SR) 8.25 12.78 6.78 9.49 10.75 10.30 Assets Growth (%) 89% 14% 20% 13% 6% 3% Equity Growth (%) 22% 25% 31% 16% 6% 5%

Annual Trading Volume (mn) 389 542 615 279 259 298 Annual Trading Value (USD mn) 1,089 1,751 2,368 720 768 856 Turnover Velocity 5% 8% 11.25% 4.11% 3.53% 3.78% M Cap (USD mn) 17,754 27,503 14,591 20,423 23,135 22,174 Source: Reuters Knowledge, Company Accounts, Markaz Research

Risk Metrics

6M 1Y 2Y 3Y 5Y


Ave. Return 0.00% -0.28% -0.12% -0.23% 0.19%

Highest Return 6.80% 6.80% 8.33% 17.65% 22.95%

Lowest Return -6.82% -6.82% -12.82% -24.69% -24.69%



Max. Drawdown* -7% -10% -12% -38% -55%

St. Dev. 14.95% 14.43% 18.20% 27.46% 27.54%

%Change in MVX -54% -70% -70% -91% -45%




35

Industries Qatar (IQCD) Code: IQCD.QA | Country: Qatar | Current MP: QAR 132.214 | YTD Performance: -3.3% Mcap: USD20Bn | Ann. St. Dev: 25% | YTD Turnover Velocity: 13%

Background

Industries Qatar (IQCD) was established in 2003, the main objective of the company is to act as a holding company, for different industrial corporations, including Qatar Steel Company (QATAR STEEL), which

manufactures steel billets and reinforcing bars; Qatar Petrochemical Company Limited (QAPCO), which

manufactures and markets ethylene, polyethylene, hexane and other petrochemical products; Qatofin Company Limited (QATOFIN), which is a producer of linear low-density polyethylene; Qatar Fertilizer

Company (QAFCO), which manufactures and markets ammonia and urea; Qatar Fuel Additives Company Limited (QAFAC), which is engaged in the production and export of methyl tertiary-butyl-ether and

methanol, and Fereej Real Estate Company, which is engaged in real estate investment, property

management and rental activities15. The company is 70% owned by Qatar Petroleum.

Analysis: IQCD’s 3Q11 revenue of USD 1.2bn was a 44% increase YoY and 5% increase over the quarter. Net Income of USD 569mn was up 46% YoY but flat on a QoQ basis.

In August 2011, Qatar Steel Company put on hold two planned steel plants, in the industrial city of Mesaieed, worth USD 2.2b due to problems securing natural gas for the projects.

2011 was a good year for industrial/petrochemical firms as crude oil prices and those of other commodities

saw a rally, specifically in the first quarter amid the political unrest in the region. Industries Qatar benefited from the same, with 9M11 revenues growing 46% to USD 3.4bn while net profit was up 54% to USD 1.7bn.

Like all regional industrial firms, IQCD has a distinct advantage in the cost arena, with cheap feedstock, in

this case Natural Gas, providing the company with a comfortable buffer in case of any decline in prices. IQCD’s steel business will benefit from large public spending in Qatar and Saudi Arabia. Moreover, the

company’s diversified businesses and broad range of products confines exposure to a single commodity. We expect IQCD to deliver USD 2.2bn in FY11 earnings, implying a 45% growth over FY10.

The stock is trading at 9x earnings and is down 3% YTD versus the Qatar index which has shed about 1%. The stock has generated positive returns over 2Y (+17%), 3Y (+67%) and 5Y (+97%) periods. As earnings

have come back, the company is expected to post a higher dividend yield of around 6% in 2011 versus around 4% in 2010. The stock, in our view, is also Medium risk with an annualized standard deviation of

25% for the last year and a max drawdown of 16% over the last year.

Our Expectation

Broker estimates for FY12 net income are in the range of USD 2.3bn to USD 2.6bn but we expect the company to do USD 3.1bn in earnings in 2012 on the back of increased revenues.

14 As of 29th November 2011 15 Excerpt from Reuters

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -44% 1% -10% -4% 0% 0%

2007 82% 14% 14% 16% 12%

2008 -28% -10% 0% -1%

2009

14% 17% 10%

2010

21% 8%

2011

-3%



36

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Total Revenue 2,135 2,560 4,046 2,705 3,384 4,403 5,513

Cost of Sales 1,123 1,206 2,034 1,575 1,757 1,940 2,194


Net Income 993 1,368 1,997 1,361 1,530 2,223 3,090

Balance Sheet

Cash 1,270 1,694 2,592 1,644 1,452 1,841 2,132

Total Assets 4,084 5,528 7,534 7,529 8,757 10,167 11,713

Total Current Liabilities 460 1,056 1,389 563 934 883 931


Long Term Loans 538 647 925 1,610 1,679 1,474 1,556


Analytics

Return on Equity (%) 32.69 36.46 39.88 26.02 25.64 30.82 35.98

Return on Assets (%) 24.32 24.74 26.51 18.08 17.47 21.87 26.38

Revenue Growth (%) 18.24 19.90 58.09 -33.14 25.10 30.10 25.20

Earnings Growth (%) 12.62 37.69 46.00 -31.85 12.44 45.29 39.00

Assets Growth (%) 23.10 35.36 36.28 -0.07 16.32 16.10 15.20

Equity Growth (%) 18.37 23.44 33.48 4.46 14.13 20.86 19.05


P/E 10.61 14.04 7.61 12.67 13.61 9.37

Price/Book 3.82 5.63 3.04 3.30 3.49 2.77

EPS (USD) 1.99 2.74 3.63 2.48 2.78 4.04

BVPS (USD) 5.53 6.82 9.10 9.51 10.85 13.12

DPS (USD) 1.25 1.00 2.20 1.37 1.51

Market Price (QAR) 77 140 101 114 138 132

Annual Trading Volume (mn) 62 88 124 117 74 73



M Cap (USD mn) 11,579 21,173 15,196 17,238 20,849 19,970


Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return -1.51% 1.32% 0.52% 0.46% 1.57%







%Change in MVX 7% 24% -41% -78% -18%




37

Saudi Telecom Code: 7010.SE | Country: Saudi Arabia | Current MP: SAR33.416 | YTD Performance: -21.6% Mcap: USD17.8Bn | Ann. St. Dev: 16% | YTD Turnover Velocity: 16%

Background Saudi Telecom (STC), formed in 1998, has global presence in 10 countries spanning three continents with a

total of 139m mobile and fixed line customers (2010 year end). STC was the only operator in Saudi Arabia

until the monopoly was broken by mobile operator Etihad Etisalat in 2005. Saudi Telecom accounts for about 46% of the local mobile market of around 54 million subscribers, representing a penetration rate of 195%17.

Major shareholders include the Public Investment Fund (70%), General Organization for Social Insurance (6.9%).

Analysis: STC’s 3Q11 earnings, at USD 422mn (-52% YoY and -30% QoQ) was affected mainly by a USD

211mn foreign exchange loss and USD 36mn one-time cost. Revenues grew 6% YoY and 1% sequentially to

USD 3.8bn. Mobile broadband revenue increased 151% YoY led by higher usage and higher customer additions.

9M11 results were negative for the operator. 9M11 revenues were up 7% YoY to USD 11bn. About 34% of

the Group’s revenue comes from International markets which have taken on increasing importance for the operator given intensifying local competition from Zain Saudi and Mobily. Consequently, in April 2011, STC

increased its stake in PT Axis Telekom Indonesia (formerly NTS – Axis) to 80.1% from 51% leading to its full consolidation into STC’s financials, thereby boosting revenue. Net Income in 9M11 was down 25% to USD

1,443mn, due mainly to the aforementioned FX losses and one-time costs.

STC is trading at about 9x and with a YTD decline of 22% is severely underperforming the broad index loss

of 5.3%. The stock has generated negative returns over 2Y (-24%), 3Y (-32%) and 5Y (-61%) periods. However, the stock is trading at a lower valuation than other Blue Chips, and makes a good value play. Risk

– as measured by the MVX – has been declining for the stock from the second quarter following market swings in 1Q11. MVX-STC fell by half in 3Q and is down 63% over the last one year. STC, like most regional

telecoms, constitutes a good dividend play for investors. The operator’s dividend yield averages between

6%-8% p.a., about 2% higher than its nearest competitor ‘Mobily’. The yield registered 8.5% in 2010 and is expected to come down to about 6% in 2011 before increasing to about 7% in 2012. Top line growth has

been slowing over the years; down to 7% and 2%, respectively, in 2009 and 2010, but has been showing some resumption recently, fueled mainly by Broadband and Value Added Services. Despite solid revenue

growth, volatility in “other” income, foreign exchange losses and increasing Finance Costs have dented

bottom line figures, with net income expected to decline about 25% in 2011 after a decline of 13% in 2010.

Our Expectation We expect STC to report FY11 net income of USD 2.02bn and FY12 net income of USD 2.24mn. Broker

estimates for FY12 net income range between USD 2.04bn and USD 2.34bn.

16 As of 06th December 2011 17 Communications and Information Technology Commission – Saudi Arabia, 1H11 report

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -40% -22% -29% -25% -21% -21%

2007 1% -23% -19% -15% -17%

2008 -41% -27% -20% -21%

2009

-10% -7% -12%

2010

-3% -13%

2011

-22%



38

Financial Metrics

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Wireless Revenue 6,494 6,795 7,546 8,157 8,577 8,394 9,131

Fixed Line 2,626 2,509 5,266 5,554 5,405 5,620 5,159

Gross Revenue 9,120 9,304 12,812 13,711 13,982 14,014 14,291

Net profit 3,413 3,207 2,942 2,897 2,518 2,017 2,236

Balance Sheet

Cash 786 2,057 2,177 2,082 1,594

Total Assets 12,453 18,579 26,936 29,589 29,891 30,489 32,014

Total Current Liabilities 2,571 4,649 6,183 7,922 7,193

Long Term Loans - 3,515 7,582 6,132 5,869


Analytics

Return on Equity (%) 37.01 33.10 28.95 25.53 20.72 15.67 16.53

Return on Assets (%) 27.41 17.26 10.92 9.79 8.42 6.62 6.98

Revenue Growth (%) 3.81 2.01 37.71 7.01 1.98 0.23 1.97

Earnings Growth (%) 2.83 -6.05 -8.26 -1.52 -13.10 -19.87 10.82

Assets Growth (%) 3% 49% 45% 10% 1% 2% 5%

Equity Growth (%) 4% 5% 5% 12% 7% 6% 5%

Historical EV (USD Mn) 34,559 41,445 31,356 29,655 28,592

P/E 10.00 11.69 7.98 8.02 8.92 8.83

Price/Book 3.75 3.92 2.34 2.07 1.87 1.38

EPS (USD) 1.73 1.62 1.49 1.47 1.27 1.01

BVPS (USD) 4.61 4.84 5.08 5.67 6.07 6.44

DPS 1.73 1.62 1.49 1.47 1.27

Market Price (SR) 64.79 71.11 44.57 44.10 42.60 33.40




M Cap (USD mn) 34,559 37,930 23,774 23,523 22,723 17,816


Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return -2.01% -0.98% -1.45% -1.37% -1.40%







%Change in MVX -78% -63% -81% -91% -82%




39

National Bank of Kuwait Code: NBKK.KW | Country: Kuwait | Current MP: KWD 1.1418 | YTD Performance: -12.9% Mcap: USD16Bn | Ann. St. Dev: 23% | YTD Turnover Velocity: 12%

Background

National Bank of Kuwait (NBK), established in 1952, is the state’s largest lender with loans amounting to USD 28.7bn at the end of September 2011. Apart from operating 70 branches in Kuwait, the bank’s

international network now comprises more than 175 branches, subsidiaries and representative offices in 17

countries, of which 10 are in the Middle East.

NBK offers a wide array of products including, retail banking, corporate banking, wealth management, structured and trade Finance. Moreover, NBK has a dedicated investment center – NBK Capital, which offers

portfolio management, fund management and brokerage services.

Analysis: The Bank reported a mixed set of numbers in 3Q with net income coming in at USD 286mn, an

increase of 20% over 2Q11 but a decline of 0.5% over 3Q10. The bank booked increased provisions this quarter which dragged earnings. NPL ratio improved slightly from 1.61% in 2Q11 (and 3Q10) to 1.59% in

3Q11.

In 9M11, net interest income was up 6% to USD 1,029mn as interest expense declined by 14% while

interest income was flat at USD 1,325mn. Provisions were up nearly 5x to USD 126mn from just USD 26mn in the same period of the previous year, but only amounting to 0.45% of loans. Fee and commissions

growth was also muted, at just 3% over 9M10. Net profit was flat at USD 896mn. Loans grew at 2% for the period to USD 28.7bn while deposits showed 4% growth to USD 23.4bn. Based on these results, we expect

2011 full year net income to be USD 1,071mn, a 2% annual decline.

In 2Q11, Fitch Ratings has assigned National Bank of Kuwait (International) plc, a subsidiary of NBK, a long-

term Issuer Default Rating (IDR) of 'AA-', short-term IDR of 'F1+' and support rating of '1' , with a stable outlook.

The stock is down 13% YTD and trading at 14x, which is significantly cheaper than its peers in the market

which are trading in the 26x-35x range. The stock has generated positive returns over 2Y (+34%) and 3Y

(+5%) but is down 3% over the last 5 years. We find the stock to be of High risk; with an annualized standard deviation of 23% and a max drawdown of 19% over the last year.

Our Expectation

Brokers expect FY12 net income to be between USD 1.25bn and USD 1.44bn. We expect a net profit of USD

1.24bn backed by lower provisioning and healthier top line growth.


Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 13% 11% -8% -5% 4% 1%

2007 9% -17% -10% 2% -1%

2008 -37% -19% 0% -4%

2009

4% 25% 11%

2010

51% 15%

2011

-13%



40

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Interest Income 1,732 2,204 2,480 1,981 1,746 1,701 1,912

Net Interest Income 948 1,027 1,329 1,365 1,300 1,313 1,458

Loan Loss Provision 112 86 293 136 43 168 99

Net Income 917 991 925 961 1,093 1,071 1,242

Balance Sheet

Cash 3,064 6,442 5,068 5,877 4,246 4,398 4,556

Loans/Advances 15,615 21,449 25,199 28,321 28,453 29,050 30,096

Deposits 15,863 20,709 20,090 23,913 23,134 23,492 24,561

Total Assets 28,615 41,807 43,379 46,763 46,733 48,338 50,079



Analytics

Loans Growth (%) 28.13 37.37 17.48 12.39 0.46 2.10 3.60

Deposits Growth (%) 10.67 30.55 -2.99 19.03 -3.26 1.55 4.55

Loan/Deposits (%) 98.43 103.57 125.43 118.44 122.99 123.66 122.53

Return on Equity (%) 23.90 16.23 16.39 14.53 13.60 11.10 12.25

Return on Assets (%) 3.21 2.37 2.13 2.05 2.34 2.22 2.48

Revenue Growth (%) 44.42 27.22 12.52 -20.12 -11.86 -2.60 12.45

Earnings Growth (%) 23.15 8.03 -6.67 3.88 13.75 -1.99 15.96

Assets Growth (%) 27.38 46.10 3.76 7.80 -0.06 3.44 3.60

Equity Growth (%) 37.72 59.08 -7.61 17.19 21.50 20.10 5.10

Cost-to-Income (%) 25.02 26.65 31.25 38.20 33.53 29.64 29.03

P/E 13.44 14.68 10.41 10.86 16.36 14.25

Price/Book 3.42 2.56 1.69 1.69 2.33 1.68

EPS (USD) 0.33 0.33 0.29 0.29 0.29 0.27

BVPS (USD) 1.28 1.87 1.79 1.87 2.04 2.46

DPS (USD) 0.18 0.22 0.14 0.11 0.14

Market Price (KWD) 1210 1321 832 869 1309 1140

Annual Trading Volume (mn) 302 837 1,203 1,569 810 496



M Cap (USD mn) 14,709 18,523 11,558 11,612 18,425 16,008


Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return -1.05% -1.36% 0.55% -0.08% 0.11%







%Change in MVX -33% -24% -9% -60% -6%




41

Saudi Electricity Company Code: 5110.SE | Country: Saudi Arabia | Current MP: SAR 13.519 | YTD Performance: -2.9% Mcap: USD14.9Bn | Ann. St. Dev: 11% | YTD Turnover Velocity: 19%

Background

Saudi Electricity Company (SEC) is the sole power generator in Saudi Arabia. The firm operates through several subsidiaries in the power generation and distribution segment and is 74.3% owned by the

government and 6.9% owned by Saudi Aramco.

At the end of 2010, SEC owned 729 power generation units installed in 71 power stations with actual

capacity of 40,697 MW. The company has an USD 80bn investment plan to increase its power generation capacity by 30,000 MW by 2018.

Analysis: SEC made a net profit of USD 580mn for 3Q11, compared with USD 618mn in the same period a year earlier. The decline in earnings is due to increase in depreciation expenses as well as purchased

energy. On a quarterly basis net income is up 63%. Total revenue increased 5.4% YoY and 19% over the quarter to USD 2.65bn.

9M11 Electricity sales revenue was up 10% to USD 5.85bn due to increase in tariff for industrial, commercial and government customers. Operating expenses were up 10%. Net profit was up 5% to USD 730mn,

comprised of USD 578mn in 3Q11, USD 356mn in 2Q11 and a net loss of USD 206mn in 1Q11. The second and third quarters of the year are the most profitable for the firm due to higher seasonal demand during the

summer months in addition to the Hajj season. Based on the results, we would expect full year net income to amount to USD 868mn which is a 43% annual increase.

The stock is trading at 17x earnings and is down 3% for the year. The stock has generated positive returns over 2Y (+26%), 3Y (+46%) and 5Y (+2%) periods. The company has a high dividend yield of 5.2%. We

see the stock as being Low risk given an annualized standard deviation of 11% and a max drawdown of 8% in the one year period; moreover, the stock’s MVX value has declined 60% in the last year.

Our Expectation Brokers expect FY12 net income to be between USD 895mn and USD 911mn. We expect a net profit of USD

896mn backed by stable revenue growth.

19 As of 05th December 2011

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -54% -28% -32% -21% -14% -12%

2007 13% -16% -5% 1% 1%

2008 -38% -13% -2% -2%

2009

22% 23% 14%

2010

24% 10%

2011

-3%



42

Financials All Figures in USD Mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Electricity Sales 4,875 5,189 5,506 5,876 6,898 7,305 7,681

Gross Revenues 5,254 5,594 5,943 6,359 7,428 7,856 8,266

Total Operating Expenses 4,946 5,259 5,739 6,150 6,946 7,082 7,450

Operating Profit 308 335 204 209 481 774 816

Net profit 377 414 294 305 608 868 896

Balance Sheet

Total Current Assets 5,604 7,247 6,668 5,944 7,075

Total Assets 33,916 36,359 38,762 44,415 50,890 55,165 60,902

Non-Current Liabilities 7,675 9,309 9,890 12,422 14,867


Analytics

ROE % 3.0% 3.2% 2.3% 2.3% 4.5% 6.2% 6.2%

ROA % 1.1% 1.1% 0.8% 0.7% 1.2% 1.6% 1.5%

Asset Growth (%) 8% 7% 7% 15% 15% 8% 10%

Equity Growth (%) 2% 2% 1% 1% 4% 4% 4%

Revenue Growth % 5.0% 6.5% 6.2% 7.0% 16.8% 5.9% 5.2%

Net Profit Growth % -4.7% 9.8% -28.9% 3.5% 99.5% 42.9% 3.2%

Hist EV (USD Mn) 20,828 21,394 15,498 18,216 23,425

P/E (LFY) 38.24 39.86 34.26 41.67 25.55 16.61

P/B (LFI) 1.15 1.28 0.79 0.96 1.16 1.07

EPS (USD) 0.09 0.10 0.07 0.07 0.15 0.22

Book Value per share (USD) 3.02 3.07 3.11 3.13 3.24 3.37

DPS 0.03 0.03 0.03 0.19 0.19

Market Price (SAR) 13.00 14.75 9.25 11.25 14.05 13.50

Market Cap. (USD Mn) 14,442 16,386 10,276 12,498 15,608 14,944

Traded Volume (Mn) 7,922 2,205 1,527 564 1,023 840

Traded Value (USD Mn) 54,569 7,878 5,545 1,517 3,590 2,832

Turnover Velocity % 234% 51% 42% 13% 26% 19%


Risk Metrics

6M 1Y 2Y 3Y 5Y


Average Monthly Return -0.65% -0.73% 1.31% 0.84% -0.39%







%Change in MVX -63% -60% -62% -83% -79%




43

Zain Group Code: ZAIN.KW | Country: Kuwait | Current MP: KWD 0.9120 | YTD Performance: -40.8% Mcap: USD14.2Bn | Ann. St. Dev: 19% | YTD Turnover Velocity: 11%

Background

Zain Group was established in 1985 and was the first telecommunication company in the GCC. Zain started its robust expansion in the MENA region, with operations in 6 ME countries and 13 African counties including

Sudan. In 2010, Zain sold the majority of its African assets to focus on regional expansion. In 2010, Zain booked a one-time gain of USD 2.7bn from sale of African assets to India’s Bharti Airtel for USD 10.7bn.

Kuwait Investment Authority (KIA) holds 24.61% of the firm while Al Khair National for Stocks & Real Estate

Co. holds 12.67%.

Analysis: 3Q11 revenues were USD 1.2bn, down 2.6% YoY and 1.9% QoQ. Net income dropped 2.3% YoY but increased 11.7% sequentially to USD 284mn.

Like most telecoms in the region, 9M11 results disappointed. Revenues were down 2% due to intensifying

competition. Net income showed a decline of 78% due to the booking of USD 2.7bn in extraordinary income

in 2Q10. Excluding this gain, net income fell by 10% in 9M11. Zain’s FX losses totaled USD 100mn in the first nine months of 2011. ARPUs continue to decline given the competition from Wataniya and Viva. The

company added 6.1mn customers over the year and total active customer base as at September 2011 is 41.4mn. Based on these results, we expect Zain to end 2011 with a total net income of USD 1,099mn, which

would be a 23% decline over adjusted FY 2010 net income.

Zain has been prominent in the news over the last couple of years due to high level strategic divestments,

including the aforementioned African asset sale, in addition to a proposed sale of 46% of the company to UAE telecom operator Etisalat for a proposed USD12bn. After months of negotiation and due diligence,

Etisalat walked away from the deal at the beginning of the year citing regulatory issues and poor market conditions. In September, Kingdom Holding Batelco Consortium scrapped their joint USD 950mn bid to buy

25% in Zain KSA as terms for the deal could not be met. Recently the Kharafi Group has reportedly said that it will stick with its holding as the firm embarks on expansion plans.

Given the news and speculation on the company, it’s not a shock that the stock has been battered by investors, losing 41% for the year and trading at 13x earnings. The stock has generated negative returns

over 2Y (-12%), 3Y (-20%) and 5Y (-17%) periods. Moreover, according to our risk metrics, the stock is highly volatile, with an annualized standard deviation of 19% and a max drawdown of 38% over the last

year.

Our Expectation

Brokers expect Zain’s FY12 net income to be between USD 1.12bn to USD 1.55bn. We expect a net profit of USD 1.11bn for FY12.


Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 8% 37% -7% -1% 8% -3%

2007 73% -14% -4% 7% -5%

2008 -57% -28% -8% -18%

2009

21% 35% 2%

2010

49% -7%

2011

-42%



44

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Total Revenue 4,701 6,077 7,257 4,576 4,897 4,657 4,750

Cost of Revenue 995 1,381 2,069 1,179 1,286 1,260 1,293


Net Income 1,069 1,161 1,167 707 3,851 1,099 1,111

Balance Sheet

Cash 1,347 537 1,333 968 2,334 2,466 1,263

Total Assets 12,648 15,822 19,983 20,639 13,441 13,623 14,031

Total Current Liabilities 3,780 3,732 4,352 5,349 2,602 2,878 2,079


Long Term Loans 3,337 5,549 6,053 5,855 343 1,231 1,455


Analytics

Return on Equity (%) 21.78 20.26 14.51 8.49 40.15 11.56 11.26

Return on Assets (%) 8.45 7.34 5.84 3.42 28.65 8.07 7.92

Revenue Growth (%) 123.89 29.28 19.43 -36.95 7.02 -4.90 2.00

Earnings Growth (%) - unadj 62.16 8.63 0.49 -39.44 445.00 -71.46 1.14

Assets Growth (%) 69.77 25.10 26.30 3.28 -34.88 1.35 3.00

Equity Growth (%) 14.23 16.80 40.30 3.48 15.26 -0.88 3.87


P/E 14.27 21.90 9.33 17.00 19.00 13.38

Price/Book 3.04 4.49 1.46 1.71 2.22 1.33

EPS (USD) 0.29 0.33 0.33 0.22 0.29 0.28

BVPS (USD) 1.36 1.59 2.09 2.16 2.48 2.45

DPS (USD) 0.11 0.33 0.18 0.62 0.72

Market Price (KWD) 1142 1971 840 1020 1520 900

Annual Trading Volume (mn) 584 2,936 1,664 2,754 1,093 472



M Cap (USD mn) 12,731 26,473 13,004 15,205 21,294 14,158


Risk Metrics

6M 1Y 2Y 3Y 5Y

Monthly return stats Average Monthly Return -5.39% -2.89% -0.77% -0.38% 0.62%







%Change in MVX -45% -23% -48% -73% -1%




45

Saudi Arabian Fertilizers Co. (SAFCO) Code: 2020.SE | Country: Saudi Arabia | Current MP: SAR 181.521 | YTD Performance: 10.5% Mcap: USD12.1Bn | Ann. St. Dev: 20% | YTD Turnover Velocity: 23%

Background

Saudi Arabia Fertilizers Co. (SAFCO) is engaged in the production and sale of fertilizer products in Saudi Arabia, Asia, Europe, and North America. It produces ammonia, urea, melamine and sulfuric acid. The

ammonia and urea plants are located in Dammam, with an annual production capacity of 2.3 mn ton and 2.6 mn ton, respectively. SAFCO is also engaged in establishing, acquiring and operating chemical and non-

chemical factories as part of its expansion strategy. The company is 42.9% owned by SABIC and 16.7%

owned by General Organization for Social Insurance (GOSI).

The Company has stakes in other companies, namely: National Chemicals Fertilizers Company (50%), Arabian Industrial Fibers Company (3.7%) and Yanbu National Petrochemicals Company (1.69%).

Analysis: SAFCO reported a healthy YoY revenue and net income growth in 3Q11 on the back of increase in product prices internationally. Revenues grew 55% YoY and 22% QoQ to USD 368mn while net income

doubled over the year (+53% QoQ) to USD 323mn. 3Q total operating expense was USD 85mn (-11% YoY, -15% QoQ).

9M11 revenue growth was also strong, up 43% to USD 946mn. Operating expenses were up 26% while

Income from associated companies increased 30%. Net income grew 28% to USD 756mn. If we exclude the

one-off gain booked in 2Q10 from a land sale in Dammam net income growth would have amounted to 49%. We expect SAFCO to report USD 1,007mn in earnings for the full year 2011.

The stock is trading at 12x earnings and is up 10.5% for the year. The stock has generated positive returns

over 2Y (+44%), 3Y (+93%) and 5Y (+98%) periods. The company recently announced that it will pay SAR

7/share as dividend for second half in addition to SAR 6/share paid for period ending June 2011. SAFCO will continue to maintain a dividend yield of around 7%, making it a good yield play. We classify the stock as

Low risk with a losing streak of just 2 months over the last year and only four negative months in total.

Our Expectation Broker estimates for FY12 earnings range from USD 873mn to USD 996mn but we expect USD 1,053mn in

FY12 earnings due to stable prices and continued demand from Asia.

21 As of 03rd December 2011

Sto

ck

Vo

lati

lity


Low Medium High

Low

Medium

High

Year 2006 2007 2008 2009 2010 2011

2006 -57% -14% -25% -13% -6% -3%

2007 73% -1% 10% 15% 14%

2008 -43% -12% 0% 3%

2009

35% 33% 25%

2010

32% 21%

2011

11%



46

Financials

USD mn 2006 2007 2008 2009 2010 2011E 2012E

Income Statement

Total Revenue 488 828 1,396 731 1,011 1,244 1,345

Cost of Sales 198 218 239 275 293 307 326

Total Operating Expense 225 258 263 289 311 327 347

Net Income 307 589 1,141 481 863 1,007 1,053

Balance Sheet

Cash 158 420 1,045 791 602 812 833

Total Assets 1,795 2,156 2,627 2,349 2,235 2,282 2,444

Total Current Liabilities 157 216 197 275 168 159 158

Total Liabilities 531 552 484 478 332 312 318

Long Term Debt 284 220 157 94 43 40 47


Analytics

Return on Equity (%) 24.29 36.73 53.27 25.72 45.34 51.11 49.51

Return on Assets (%) 17.11 27.33 43.45 20.49 38.61 44.13 43.07

Revenue Growth (%) 0.40 69.54 68.64 -47.65 38.27 23.10 8.10

Earnings Growth (%) 4.65 91.89 93.72 -57.84 79.27 16.70 4.55

Assets Growth (%) 8.40 20.12 21.87 -10.58 -4.87 2.10 7.10

Equity Growth (%) -1.02 26.90 33.58 -12.69 1.70 3.53 7.92


P/E 19.78 17.75 4.95 17.46 13.58 11.71

Price/Book 4.81 6.55 2.79 4.31 5.58 6.13

EPS (USD) 1.23 2.37 4.83 1.85 3.13 4.03

BVPS (USD) 5.06 6.42 8.57 7.48 7.61 7.88

DPS (USD) 0.64 1.07 3.47 3.20 3.20

Market Price (SAR) 91 158 90 121 159 181




M Cap (USD mn) 6,080 10,243 5,980 8,066 10,617 12,083


Risk Metrics

6M 1Y 2Y 3Y 5Y


Average Monthly Return -0.35% 2.12% 1.76% 0.62% 1.46%







%Change in MVX -13% 139% 14% -85% -63%




47

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. Markaz has no obligation to update,

modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated

herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn.

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 covered in its research reports. As a result, investors should be aware that the firm may

have a conflict of interest that could affect the objectivity of this report.



GCC: What to expect in 2012

Documents

gcc stock markets

stock market performance

emerging markets

overall gcc markets

certain markets

lack of market depth

lackluster market liquidity

introducing derivatives