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Top down, demand is now the key
issue, as it is being undermined by
affordability, the credit squeeze, and
negative sentiment
Bottom up, it is not about a potential
price correction, but rather the long-
term demand story (ie, oil prices)
We retain our Overweight (V) rating on
Aldar, Emaar, and Sorouh, but cut our
target prices to reflect purelymacro concerns
Our proprietary analysis of supply dynamics in Dubai
suggests that forecasts are overstated. Our findings differ
considerably from those of many in the market. We estimate
that no more than 95,000 units (10% CAGR) and 195,000
bedrooms will hit the market by 2010.
The central issue is no longer oversupply but demand, which is
being undermined by several factors. Price appreciation is
breaching affordability, as illustrated by the compression of
rental yields. This will be further amplified by upward pressure
on mortgage rates and declining loan-to-value (LTVs). The
situation has not been helped by the stock markets steep
decline, which highlights the fact that the region is not immune
to global trends. The fall-out from the markets decline is
wealth destruction and risk aversion. All this, combined with
the weeding out of speculatively driven demand and incessant
corporate scandals, is bound to lead to some price weakness.
While the global credit crunch is placing a strain on domesticliquidity, we believe that Aldar, Emaar, and Sorouh have
enough funds to finance their near-term investment needs.
Bottom up, it is not about a potential price correction but the
long-term demand story (volumes rather than prices). While
we remain strong believers in the domestic demand story, to
address macro concerns we apply probabilities to the
companies projects based on visibility and viability in the
event of a downturn. We also revise our beta for all three
companies to reflect increased market volatility. However,
we maintain our price assumptions, which are already at a
c20%-30% discount to current market prices. Our new target
prices for Aldar, Emaar, and Sorouh, imply 24%, 10%, and
35% discounts to NAV, respectively.
Global Emerging Markets
UAE Real Estate
UAE Real EstateSector UpdateSupply is no longer the key issue
Aldar Properties
Overweight (V), target price cut to
AED16.0 (from AED25.3)
Emaar PropertiesOverweight (V), target price cut to
AED13.9 (from AED21.0)
Sorouh Real Estate
Overweight (V), target price cut to
AED9.4 (from AED17.6)
14 October 2008
Majed Azzam *
Analyst
HSBC Bank Middle East Limited
+971 4 4236933 [email protected]
Ankur Khetawat *
Analyst
HSBC Bank Middle East Limited
+971 4 4236930 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations
Issuer of report: HSBC Bank Middle East Ltd
Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
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Financials & valuation: Aldar Properties Overweight (V)Financial statements
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Profit & loss summary (AEDm)
Revenue 1,227 6,439 10,280 13,215EBITDA 158 2,546 3,678 4,895Depreciation & amortisation 0 -39 -177 -313Operating profit/EBIT 158 2,507 3,502 4,582Net interest -62 -240 -872 -1,220PBT 1,941 4,791 5,630 6,363HSBC PBT 1,941 4,791 5,630 6,363Taxation 0 0 0 0Net profit 1,941 4,791 5,630 6,363HSBC net profit 1,941 4,791 5,630 6,363
Cash flow summary (AEDm)
Cash flow from operations 158 -3,193 4,450 5,657Capex 0 -19,844 -14,531 -16,354FCF enterprise 158 -22,797 -9,209 -9,476Cash flow from investment 0 -19,844 -14,531 -16,354Dividends -345 -557 -889 -1,126Change in net debt -2,966 9,137 10,970 11,822FCF equity 96 -23,037 -10,081 -10,696
Balance sheet summary (AEDm)
Tangible fixed assets 8,339 20,981 38,335 57,376Current assets 13,871 22,449 17,930 12,220Cash & others 7,616 9,798 7,828 5,006
Total assets 22,715 44,361 57,195 70,527Gross debt 4,390 15,710 24,710 33,710Net debt -3,226 5,911 16,882 28,704Shareholders funds 13,861 22,005 26,746 31,983Invested capital 10,195 27,061 42,772 59,830
Ratio, growth and per share analysis
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Y-o-y % change
Revenue 554.2 424.8 59.7 28.6EBITDA 1512.3 44.5 33.1EBIT 1487.7 39.6 30.9PBT 55.3 146.8 17.5 13.0
HSBC EPS 146.8 17.5 13.0
Ratios (%)
Revenue/IC (x) 0.2 0.3 0.3 0.3ROIC 2.4 13.5 10.0 8.9ROE 22.7 26.7 23.1 21.7ROA 14.4 15.0 12.8 11.9EBITDA margin 12.9 39.5 35.8 37.0Operating profit margin 12.9 38.9 34.1 34.7EBITDA/net interest (x) 2.6 10.6 4.2 4.0Net debt/equity -23.3 26.9 63.1 89.7Net debt/EBITDA (x) -20.4 2.3 4.6 5.9CF from operations/net debt 26.4 19.7
Per share data (AED)
EPS Rep (fully diluted) 0.53 1.31 1.54 1.74HSBC EPS 0.53 1.31 1.54 1.74DPS 0.20 0.20 0.26 0.38NAV 8.04 7.90 7.96 9.52NAV (adjusted) 18.64 21.10 23.00 25.10
Valuation data
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Premium/ (discount) to NAV 0.7 0.8 0.8 0.6Premium/ (discount) to NAV (adj) 0.3 0.3 0.2 0.2PE* 11.6 4.7 4.0 3.6FCF yield (%) 0.7 -173.5 -75.9 -80.6Dividend yield (%) 3.6 3.6 4.7 6.9
Note: * = B ased on HSBC EPS (fully diluted)
Issuer information
Share price (AED) 6.19 Target price (AED) 16.00 Potent'l tot rtn (%) 158.5
Reuters (Equity) ALDR.AD Bloomberg (Equity) ALDAR UHMarket cap (USDm) 4,216 Market cap (AEDm) 15,475Free float (%) Enterprise value (AEDm) 20,531Country Uni ted Arab Emirates Sector Real EstateAnalyst Majed Azzam Contact 971 04 507 7380
Price relative
2
4
68
10
12
14
16
2006 2007 2008 2009
2
4
68
10
12
14
16
Aldar Properties Rel to ABU DHABI SEC MKT GEN INDEX
Source: HSBC
Note: price at close of 13 Oct 2008
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Financials & valuation: Emaar Properties PJSC Overweight (V)Financial statements
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Profit & loss summary (AEDm)
Revenue 17,546 20,412 30,008 31,674EBITDA 5,169 6,615 9,748 9,901Depreciation & amortisation 0 -408 -923 -1,019Operating profit/EBIT 5,169 6,207 8,825 8,882Net interest 960 163 -170 -104PBT 6,530 6,830 10,311 11,241HSBC PBT 6,530 6,830 10,311 11,241Taxation -14 -36 -309 -562Net profit 6,555 6,758 9,804 10,296HSBC net profit 6,555 6,758 9,804 10,296
Cash flow summary (AEDm)
Cash flow from operations 3,461 1,177 6,391 8,654Capex -2,055 -2,155 -3,257 -2,578FCF enterprise 1,703 -944 3,304 6,180Cash flow from investment -3,167 -2,155 -3,257 -2,578Dividends -1,189 -1,218 -1,319 -1,961Change in net debt -66 4,008 -1,815 -4,115FCF equity 2,663 -780 3,134 6,076
Balance sheet summary (AEDm)
Tangible fixed assets 12,028 16,978 19,312 20,872Current assets 30,270 31,308 33,661 40,431Cash & others 6,799 3,344 5,159 9,275
Total assets 54,752 61,449 67,793 78,585Gross debt 8,396 8,948 8,948 8,948Net debt 1,597 5,605 3,789 -326Shareholders funds 35,884 41,280 49,765 58,100Invested capital 28,691 37,350 42,562 44,702
Ratio, growth and per share analysis
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Y-o-y % change
Revenue 25.3 16.3 47.0 5.6EBITDA -10.0 28.0 47.4 1.6EBIT -10.0 20.1 42.2 0.7PBT 2.1 4.6 51.0 9.0
HSBC EPS 1.7 3.1 45.1 5.0
Ratios (%)
Revenue/IC (x) 0.7 0.6 0.8 0.7ROIC 19.7 18.7 21.4 19.3ROE 19.9 17.5 21.5 19.1ROA 11.5 11.4 15.7 14.7EBITDA margin 29.5 32.4 32.5 31.3Operating profit margin 29.5 30.4 29.4 28.0EBITDA/net interest (x) 57.3 95.1Net debt/equity 4.4 13.4 7.5 -0.5Net debt/EBITDA (x) 0.3 0.8 0.4 0.0CF from operations/net debt 216.8 21.0 168.7
Per share data (AED)
EPS Rep (fully diluted) 1.08 1.11 1.61 1.69HSBC EPS 1.08 1.11 1.61 1.69DPS 0.20 0.20 0.32 0.34NAV 5.89 6.78 8.17 9.54NAV (adjusted) 13.60 14.69 16.67 16.83
Valuation data
Year to 12/2007a 12/2008e 12/2009e 12/2010e
Premium/ (discount) to NAV 1.0 0.8 0.7 0.6Premium/ (discount) to NAV (adj) 0.4 0.4 0.3 0.3PE* 5.3 5.1 3.5 3.4FCF yield (%) 10.3 -3.1 13.2 28.0Dividend yield (%) 3.5 3.5 5.6 5.9
Note: * = B ased on HSBC EPS (fully diluted)
Issuer information
Share price (AED) 5.90 Target price (AED) 13.90 Potent'l tot rtn (%) 135.5
Reuters (Equity) EMAR.DU Bloomberg (Equity) EMAAR UHMarket cap (USDm) 9,806 Market cap (AEDm) 35,990Free float (%) 68 Enterprise value (AEDm) 32,061Country Uni ted Arab Emirates Sector REAL ESTATEAnalyst Majed Azzam Contact 971 04 507 7380
Price relative
3
8
13
18
23
28
2006 2007 2008 2009
3
8
13
18
23
28
Emaar Properties PJSC Rel to ABU DHABI SEC MKT GEN INDEX
Source: HSBC
Note: price at close of 13 Oct 2008
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Financials & valuation: Sorouh Real Estate Overweight (V)Financial statements
Year to 12/2006a 12/2007e 12/2008e 12/2009e
Profit & loss summary (AEDm)
Revenue 630 2,321 3,556 6,066EBITDA -242 1,151 1,518 1,853Depreciation & amortisation 0 0 -1 -5Operating profit/EBIT -242 1,151 1,517 1,848Net interest 567 88 -19 -101PBT 976 1,257 1,541 1,746HSBC PBT 976 1,257 1,541 1,746Taxation 0 0 0 0Net profit 976 1,257 1,612 1,746HSBC net profit 976 1,257 1,612 1,746
Cash flow summary (AEDm)
Cash flow from operations -146 1,055 479 1,424Capex -769 -5 -1,181 -3,459FCF enterprise -980 1,146 -596 -1,934Cash flow from investment -1,736 -28 -1,197 -3,459Dividends -209 -308 -403Change in net debt 188 -317 2,438FCF equity -412 1,234 -615 -2,035
Balance sheet summary (AEDm)
Tangible fixed assets 1,026 1,279 2,457 5,911Current assets 2,544 5,362 15,568 15,610Cash & others 1,454 1,458 5,776 3,338
Total assets 4,351 7,221 18,767 22,264Gross debt 41 233 4,235 4,235Net debt -1,413 -1,225 -1,541 897Shareholders funds 3,470 4,463 5,742 7,085Invested capital 1,621 3,004 3,733 7,515
Ratio, growth and per share analysis
Year to 12/2006a 12/2007e 12/2008e 12/2009e
Y-o-y % change
Revenue 268.3 53.2 70.6EBITDA 31.9 22.0EBIT 31.8 21.8PBT 28.9 22.6 13.3
HSBC EPS 28.9 28.2 8.4
Ratios (%)
Revenue/IC (x) 0.8 1.0 1.1 1.1ROIC -29.9 49.8 45.0 32.9ROE 56.2 31.7 31.6 27.2ROA 19.2 20.5 12.3 9.0EBITDA margin -38.4 49.6 42.7 30.5Operating profit margin -38.4 49.6 42.6 30.5EBITDA/net interest (x) 0.4 81.3 18.3Net debt/equity -40.7 -27.4 -27.2 12.8Net debt/EBITDA (x) 5.8 -1.1 -1.0 0.5CF from operations/net debt 158.8
Per share data (AED)
EPS Rep (fully diluted) 0.39 0.50 0.64 0.70HSBC EPS 0.39 0.50 0.64 0.70DPS 0.10 0.12 0.16NAV 1.39 1.79 2.30 2.83NAV (adjusted) 10.14 11.07 15.07 16.13
Valuation data
Year to 12/2006a 12/2007e 12/2008e 12/2009e
Premium/ (discount) to NAV 4.0 2.9 2.3 1.8Premium/ (discount) to NAV (adj) 0.5 0.4 0.3 0.3PE* 13.1 10.4 8.1 7.4FCF yield (%) -3.7 10.9 -5.5 -18.3Dividend yield (%) 2.2 2.6 3.5
Note: * = B ased on HSBC EPS (fully diluted)
Issuer information
Share price (AED) 5.23 Target price (AED) 9.40 Potent'l tot rtn (%) 79.7
Reuters (Equity) SOR.AD Bloomberg (Equity) SOROUH UHMarket cap (USDm) 3,562 Market cap (AEDm) 13,075Free float (%) Enterprise value (AEDm) 11,616Country Uni ted Arab Emirates Sector REAL ESTATEAnalyst Majed Azzam Contact 971 04 507 7380
Price relative
0
2
46
8
10
12
14
2006 2007 2008 2009
0
2
46
8
10
12
14
Sorouh Real Estate Rel to ABU DHABI SEC MKT GEN INDEX
Source: HSBC
Note: price at close of 13 Oct 2008
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Top down: supply is less ofan issue
Dubai supply forecasts look overstated
Dubai unit supply forecast (units)
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
2005 2006 2007 2008 2009 2010
3.0
3.1
3.1
3.2
3.2
3.3
3.3
3.4
3.4
3.5
3.5
HSBC Supply est . Colliers Supply est .
Demand People per dwel ling
Source: HSBC Research, Colliers International, Better Homes
Our proprietary analysis of supply dynamics in
Dubai shows that forecasts have clearly been
overstated. Having analysed both sides of the
equation, ie, the number of units and the number
of bedrooms, our findings differ considerably
from those used by many in the market. We
estimate that no more than 95,000 units will hit
the market between 2008 and 2010, against the
widely quoted figure of 160,000 units. Also, we
estimate that only 190,000 additional bedrooms
will come on to the market by year-end 2010.
This is less than half the common estimate of
400,000 bedrooms, based on an assumed 2.5
people per dwelling.
but demand is beingundermined by several factors
1. Affordability: price growth picking upagain after brief moderation during
the summer
Price/sq m (y-axis) vs. GDP/capita in USD (x-axis)
London
TokyoNew York
Singapore
Hong Kong AmsterdamRome Paris
Moscow Barcelona
ShanghaiPrague
0
2,000
4,000
6,000
8,000
10,000
12,000
0 20,000 40,000 60,000 80,000
DubaiAbu Dhabi
Kiev
Cairo
Budapest
Warsaw
Source: Colliers International, Jones Lang LaSalle, CB Richard Ellis, Pricewaterhouse,
HSBC Research
After a brief period of moderation in price growth
over the summer, concerns about overheating
came to the forefront once again in September.
Average prices jumped 17% m-o-m in Dubai and
11% in Abu Dhabi, compared with an average of
2%-3% m-o-m during the summer months. The
main cause for concern, however, is that, while
prices remain on an upward spiral, rental rates in
Dubai seem to be stabilising, thereby compressing
rental yields. This shows that we have reached a
level where affordability is getting breached. As
the above chart shows, we are very quickly
approaching the regression line, which, in our
view, provides a reasonable basis for comparison
of affordability.
Investment summary
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Price growth seems to be picking up again (USD/sq m)
Dubai Jun-08 Aug-08 Price
Sep-08 Price
RentalYield
Apartments 5,238 5,395 3% 6,266 16% 5.2%Villas 4,558 4,604 1% 5,690 24% 4.0%Weighted average 5,136 5,274 3% 6,180 17%
Abu DhabiApartments 4,981 5,255 5% 5,848 11%Villas 3,550 3,617 2% 3,804 5%Weighted average 4,767 5,009 5% 5,542 11%
Source: HSBC Research, Better Homes
2. Global credit crunch restrictingdomestic liquidity; upward pressure on
mortgage rates
Credit squeeze clearly demonstrated by widening spreadbetween LIBOR and EIBOR
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
LIBOR 3M EIBOR 3M
Source: Reuters
Liquidity in the system is now coming under
strain. As highlighted in the above chart, this is
clearly demonstrated by the increasing spread
between EIBOR and LIBOR, with the domestic
cost of borrowing on an upswing. While the UAE
Central Bank recently announced a USD13.6bn
liquidity injection, the terms on which banks
could tap this facility were rather onerous, as the
CBU weighs inflationary pressure against growth.
Total UAE mortgage book in USDm
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2008e 2009e 2010e
Units to be delivered 2008-10 New launches 2008-10
On old units
10%
14%
18%
22%
26%
30%
Mort gage to GDP
Source: Central bank data, HSBC estimates
We estimate that the UAE mortgage book will
grow by roughly 330% to USD70bn, or 26% of
GDP, by the end of 2010. While our estimated
mortgage/GDP ratio is relatively low, given the
current liquidity strain, mortgage rates are likely
to come under upward pressure.
3. Heightened risk perception lower
mortgage LTVsFurthermore, given the heightened risk perception
surrounding the real estate sector, banks are likely to
lower mortgage LTVs. Early evidence suggests that
this has already begun: for instance, HSBC Home
Finance department recently reduced its mortgage
LTVs from 85% to 60% on apartments and 70% on
villas. Also, Tamweel and Amlak reduced their
LTVs from 90% to 75% and 65%, respectively.
Additionally, anecdotal evidence suggests that the
spread between mortgage providers property
valuations and the actual property prices has
widened significantly. This means that LTPs (loan to
price) are increasingly falling below the LTVs.
4. Negative sentiment and
tighter regulation
The recent stock markets decline has not helped,
as it highlighted the regions vulnerability to
global trends in equity, debt and property. The
fall-out from the decline is wealth destruction andrisk aversion, which add to liquidity constraints,
hitting demand for property. All this, in
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combination with the weeding-out of
speculatively driven demand and incessant
corporate scandals, is bound, in our opinion, to
lead to some weakness in property prices.
Conclusion: rental yields suggest
possible price falls of up to 22% in off-
plan units and 12% in ready units
Arguably, investors should hold on to their
property as long as rental yields cover most of the
mortgage payment. However, markets do notalways act rationally and a slight softening in
prices could lead to panic selling.
Bottom up: its not about apotential price correction butthe long-term demand story
Our economist, Simon Williams, and strategist,
John Lomax, are both strong believers in the
regions long-term domestic demand story. (please
refer to The revised case for GCC equity markets, 1
October 2008.) For most reasonable oil price
scenarios, few domestic demand plays look much
better than the Gulf. Based on current infrastructure
plans, the breakeven oil price required for fiscal
balance is highest in Saudi Arabia (USD55/bbl).
MEED (Middle East Economic Digest) projects that
about USD2.2trn will be spent on infrastructure
over what we have interpreted as the next five years.
At the same time, the secular growth story could be
enhanced by global de-bottlenecking. Slower global
growth and a reduction in infrastructure spending
ought to help on the Gulf supply side. This could
play out in terms of lower prices and better access to
input materials.
Aldar still our preferred pick, thoughEmaar is the most immune to any
property market downturn; while
Sorouh is the most susceptible despite
having the highest earnings visibility
Perceptions that the real estate sector in the UAE
and Dubai in particular is set for a correction
have hardened in recent weeks, as has scepticism
about project execution. In large part this trend
reflects a global repricing of risk, but in our view
real estate names have been oversold. Based on
our analysis, it seems that the market is only
factoring in those projects that are most certain
(ie, those already under development, which have
already achieved considerable sales). As a
potential price correction would have only a
limited impact on pre-sold projects, this leads us
to believe that the market is more concerned about
the long-term demand story.
To address purely macro concerns, we applyspecific probabilities to each companys projects
and land valuations, based on visibility and
viability in the event of any downturn. We also
revise our beta for Aldar from 1.3 to 1.4, for
Sorouh from 1.0 to 1.5, and for Emaar from 1.0 to
1.2 to reflect increased market volatility.
However, we maintain our price assumptions,
which are already at a c20%-30% discount to
current market levels and, as such, take into
account any potential price weakness.
Valuation breakdown
AED per share ____________ Aldar____________ ____________ Sorouh ___________ _____________ Emaar ____________Valuation Probability Current Valuation Probability Current Valuation Probability Current
Projects under development 10.7 80% 8.6 3.0 100% 3.0 6.6 90% 5.9Highly probable projects 4.6 70% 3.2 5.0 70% 3.5 6.5 60% 3.9
Future projects 2.4 50% 1.2 - - 3.4 50% 1.7Land 7.6 60% 3.0 7.3 40% 2.9 - -Investments - - - - 2.4 100% 2.4Total value 25.3 16.0 16.3 9.4 18.9 13.9
Source: HSBC estimates
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Dubai supply forecasts overstated
Dubai unit supply forecasts (units)
-
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
2005 2006 2007 2008 2009 2010
3.0
3.1
3.1
3.2
3.2
3.3
3.3
3.4
3.4
3.5
3.5
HSBC Supply est . Colliers Supply est .
Demand People per dwelling
Source: HSBC Research, Colliers International, Better Homes
Dubai bedroom supply forecasts (bedrooms)
-
50,000
100,00 0
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2007 pent up 2008 2009 2010
1.60
1.65
1.70
1.75
1.80
1.85
1.90
Number of BRs new est. Number of BRs prev est.
Number o f p eo ple Peop le per B Rs Source: HSBC Research, Better Homes
In light of recent market turmoil, some investors
have started to question Colliers Internationals
supply forecasts. We have therefore complementedthe work carried out by Colliers with our own
proprietary analysis of supply dynamics in Dubai,
analysing both sides of the equation number of
units and number of bedrooms. Our findings differ
considerably from those used by many in the
market. We estimate that no more than 95,000 units
will hit the market between 2008 and 2010, against
the widely quoted figure of 160,000 units. (For
methodology please refer to the appendix.) Also,
we estimate that only 190,000 additional bedroomswill come on to the market by year-end 2010. This
is less than half the common estimate of 400,000
bedrooms, based on an assumption of 2.5 people
per dwelling.
At first glance our numbers look low, but
considering that the total number of existing units
in Dubai is roughly 300,000, our estimates still
imply 30% growth by year-end 2010. Additionally,
the fact that studio and one-bedroom units account
for more than 50% of forthcoming supply indicates
to us that supply has been overestimated.
Top down
Our proprietary supply analysis implies that no more than 95,000
units (c10% CAGR) and 190,000 BRs are likely to hit the market
by 2010
Affordability, the credit squeeze and negative sentiment to put
pressure on demand, but we feel the stock prices already reflect this
Current rental yields suggest that prices of off-plan units could fall
by up to 22%, while prices of ready units could come down by 12%
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Villas account for roughly 20% of forthcoming supply (units)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2008 2009 2010
A par t ment s Vi llas
83%
81%76%
17%
19%
24%
Source: HSBC Research, Better Homes
Breakdown of appartment supply by number ofbedrooms (units)
-
5,000
10,000
15,000
20,000
25,000
30,000
2008 2009 2010
St udio 1 Bedroom 2 Bedroom 3 Bedroom 4 Bedroom
Source: HSBC Research, Better Homes
Breakdown of villa supply by number of bedrooms (units)
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2008 2009 2010
2 Bedroom 3 Bedroom 4 Bedroom 5 Bedroom 6 Bedroom
Source: HSBC Research, Better Homes
After brief slowing in the summer, pricegrowth seems to be picking up again
Prices appear to be rising once again
DubaiApartments Jun-08 Aug-08 Price
Sep-08 Price
RentalYield
Internat ional Cit y 2,680 2,782 4% 3,216 16%Dubai Land 3,726 3,694 -1% 3,967 7%Dubai Inv. Park 3,451 3,967 15% 3,779 -5% 9.5%Down Town Jebel Ali 4,067 3,879 -5% 4,028 4% -JLT 4,160 4,248 2% 4,970 17% 8.0%Greens 5,046 5,151 2% 6,559 27% 7.4%Business Bay 5,612 5,679 1% 6,438 13% -
Dubai Marina 5,788 6,066 5% 6,345 5% 6.2%The Palm Jumeirah 6,515 7,095 9% 7,819 10% 4.3%DIFC 8,617 8,866 3% 9,561 8% -Burj Dubai 10,301 10,341 0% 12,894 25% 3.2%Average 5,238 5,395 3% 6,266 16% 5.2%
VillasJumeirah Village 2,650 2,727 3% 3,477 28% -Dubai Inv. Park 3,290 3,348 2% 3,688 10% 5.8%Dubai Land 3,718 3,782 2% 5,386 42% -Emirates Living 4,825 4,970 3% 6,230 25% 5.3%Arabian Ranches 4,547 4,565 0% 6,078 33% 4.1%The Palm Jebel Ali 6,175 6,521 6% 6,435 -1% -The Palm Jumeirah 8,980 9,124 2% 11,474 26% 2.2%Average 4,558 4,604 1% 5,690 24% 4.0%
Total average 5,136 5,274 3% 6,180 17%
Abu DhabiApartments Jun-08 Aug-08 Price
Sep-08 Price
Rental
YieldAl Reef 2,715 3,026 11% 3,723 23%Al Ghadeer 4,838 5,263 9% 5,591 6%Al Raha Beach 6,069 6,180 2% 7,207 17%Al Reem Island 6,304 6,550 4% 6,614 1%Average 4,981 5,255 5% 5,848 11%
VillasHydra Village 2,439 2,351 -4% 2,510 7%Al Reef 2,668 2,926 10% 3,231 10%Al Raha Gardens 4,694 4,216 -10% 4,369 4%Al Ghadeer 4,398 4,975 13% 5,107 3%
Average 3,550 3,617 2% 3,804 5%
Total average 4,767 5,009 5% 5,542 11%
Source: HSBC Research, Better Homes
After a brief period of moderation in price growth
over the summer, which we welcomed as a positive
sign of the market side-stepping an overshoot,
September has again brought concerns about
overheating to the forefront. Prices jumped 17% m-
o-m on average in Dubai and 11% in Abu Dhabi,
compared with an average of 2%-3% m-o-m duringthe summer months. It is worth noting, however,
that these figures may be inflated, as they reflect
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asking prices and not actual transactional prices.
Unfortunately no data are available on the latter,
however, anecdotal evidence suggest that the
discount, if any, is only marginal.
In our opinion, the underlying issues are not being
addressed the failure to materialise of expected
supply (as previously mentioned we expect only
95,000 units to hit the market by year-end 2010
compared with the commonly quoted figure of
160,000 units), or continuous and unabatingspeculation (units are usually flipped before the
second payment is due). This latter problem
persists despite recent indications that the
government will introduce regulations to curb
speculatively driven demand. Speculation is further
encouraged by Islamic financing practices, where,
other than the initial down-payment (usually
between 5-10%), no payments are made until the
unit is delivered (although the amount involved is
limited by the buyers debt service ratio).
The greatest cause for concern, however, is that,
while prices remain on an upward spiral, rental
rates in Dubai seem to be stabilising, thereby
compressing rental yields. This shows that we
have reached a level where affordability is
beginning to be breached.
Price/sq m (y-axis) vs. GDP/capita in USD (x-axis)
London
Tokyo New York
Singapore
Hong Kong Amsterdam
RomeParis
MoscowBarcelona
ShanghaiPrague
0
2,000
4,000
6,000
8,000
10,000
12,000
0 20,000 40,000 60,000 80,000
Dubai
Abu Dhabi
Kiev
Cairo
BudapestWarsaw
Source: Colliers International, Jones Lang LaSalle, CB R ichard Ellis, Pricewaterhouse,
HSBC Research
As the above chart shows, we are very rapidly
approaching the regression line, which, in our
view, provides a reasonable comparison of
affordability. This comparison takes into account
the regions uneven income distribution and the
recycling of petrodollars overseas, which may be
mitigated by the lack of taxation and exclusion of
the labourer population from GDP figures (blue-
collar workers account for c40% of the population
but should be excluded as they are not part of our
target market). Also, contrary to market
perception, our analysis shows that the average
apartment size in Dubai is 110 sq m, which is in
line with the global average, and therefore makes
the comparison consistent.
Affordability now being hit
Contrary to past trends, as the table on the bottom
of the next page shows, in most instances rental
income no longer fully covers the mortgage
payment. This means that it is becoming more
costly for investors to finance multiple properties
through rent. It is also important to point out that,for most tenanted units, rental yields are actually
lower owing to the rental cap. As such, our
estimates, which are based on current achieved
rentals, overstate the average yields for new
prospective buyers.
Dubai future supply breakdown by affordability (units)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2 008 2009 2010
Affordable (USD1,000-2,500) Mid-end (USD2,500-6,000)
High-end (USD6,000-9,500) Vi l las (USD6,000-40,000)
44%29 %
18%
Source: HSBC Research, Better Homes
While prices in the UAE are becoming less
affordable, Dubai (unlike Abu Dhabi, which isstill at an early stage of development, with most
developers focused on the high end) offers a wide
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range of units catering to most income levels. Our
analysis shows that in Dubai there is a healthy
mix of accommodations, as developers are
starting to focus more on affordable housing. The
most notable development in this respect is
Nakheels International city and Discovery
Gardens. We estimate that roughly 30% (c30,000
units) of upcoming supply could be classified as
affordable housing (average unit price between
USD200,000 and USD350,000).
Global credit crunch putting strain on
domestic liquidity
Given the prevailing negative real interest rate
environment, bank deposit growth has not kept
pace with loan growth, while the global credit
crunch has placed wholesale funding under
pressure. However, the credit squeeze in the UAE,
unlike the US, is driven by strong credit demand
rather than equity erosion. Furthermore, since
discussion of currency revaluation has subsided,
banks have witnessed an outflow of speculative
money, which is putting additional strain on the
system. The situation has been further exacerbated
by heightened risk perception surrounding the
UAE and Dubai specifically over the past few
months, with CDS spreads widening to 470bp
which is in line with Romania (Baa31/BBB-
/BBB) and El Salvador (Baa3/BB+/BB+). Even
more peculiar are the CDS levels of Aa2/AA rated
Abu Dhabi and Qatar: they trade wider than
Poland, which is rated up to three notches lower.
While our estimated Dubai external debt/GDP
ratio of 65-70% may raise some concerns, our
Contrary to past trends, in most instances rental income no longer fully covers the mortgage payment
Apartment % ofTotal Av. Unitprice USD Av. PriceUSD/sq m Av. Apt.size/sq m Down-pmtUSD Monthlypmt USD Av. Monthlyrental USD Av. RentUSD/sq m pa Rentalyield
Dubai Investment Park 11% 238,158 3,779 63 23,816 1,727 1,878 358 9.5%Impz 3% 316,727 4,662 68 31,673 2,296 - - -Downtown Jebel Ali 3% 333,978 4,028 83 33,398 2,421 - - -Internat ional City 3% 343,869 3,216 107 34,387 2,493 - - -Jumeirah Village 6% 358,469 3,477 103 35,847 2,599 - - -Dubailand 13% 1,391,546 14,558 96 139,155 2,749 - - -Dubai Silicon Oasis 3% 476,310 3,345 142 47,631 3,453 - - -Jumeirah Lake Towers 12% 522,883 4,970 105 52,288 3,791 3,496 399 8.0%The Greens 1% 576,307 6,559 88 57,631 4,178 3,542 484 7.4%Emirates Living 3% 727,078 6,304 115 72,708 5,272 3,833 399 6.3%Dubai Marina 15% 762,622 6,345 120 76,262 5,529 3,965 396 6.2%DIFC 1% 1,014,375 9,561 106 101,438 7,355 - - -Culture Village 1% 1,128,325 6,377 177 112,832 8,181 - - -Business Bay 4% 1,323,853 6,438 206 132,385 9,598 - - -
Downtown Burj Dubai 16% 1,330,508 12,894 103 133,051 9,647 3,529 410 3.2%Palm Jumeirah 4% 1,508,397 7,819 193 150,840 10,936 5,467 340 4.3%Weighted average 705,171 6,266 113 70,517 5,113 - 388 5.2%
VillasDubai Marina 3% 841,941 6,884 122 84,194 6,104 - - -Jumeirah Village 8% 892,837 3,477 257 89,284 6,473 - - -Al Furjan 14% 1,504,725 4,439 339 150,472 10,910 - - -Dubai Investment Park 7% 1,630,622 3,688 442 163,062 11,823 7,902 214 5.8%Jumeirah Park 6% 1,630,629 4,990 327 163,063 11,823 - - -Jumeirah Golf Estates 1% 2,132,999 5,550 384 213,300 15,465 - - -Dubailand 31% 2,299,033 5,386 427 229,903 16,669 - - -Arabian Ranches 8% 2,710,654 6,078 446 271,065 19,653 9,371 252 4.1%Emirates Living 11% 3,082,441 6,230 495 308,244 22,349 13,545 329 5.3%Palm Jebel Ali 3% 3,405,558 6,435 529 340,556 24,691 - - -Palm Jumeirah 8% 7,756,279 11,474 676 775,628 56,236 14,038 249 2.2%
Weighted average 2,556,169 5,690 421 255,617 18,533 11,346 279 4.0%
Total weighted average 981,237 6,180
Note: for monthly mortgage payments we assume 10% down-payment, 7.5% mortgage rate, and a 20-year tenureSource: HSBC Research, Better Homes
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economist, Simon Williams, and head of credit
research, Chavan Bhogaita, believe market
sentiment is over-exaggerated (please refer to
Overdone, 25 September 2008).
Out of step (five-yr CDS)
0
100
200
300
400
500
0
100
200
300
400
500
Source: HSBC
That does not, however, negate the fact that
liquidity in the system is now coming under
strain. As highlighted in the following chart, this
is clearly demonstrated by the increasing spread
between EIBOR and LIBOR, with the domestic
cost of borrowing on an upswing. Although the
UAE Central Bank recently announced a
USD13.6bn liquidity injection, the terms on
which banks could tap this facility were rather
onerous, as the CBU weighs inflationary pressure
against growth.
Credit squeeze clearly demonstrated by widening spreadbetween LIBOR and EIBOR
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08
LIBOR 3M EIBOR 3M
Source: Reuters
Upward repricing of mortgage ratesand lower LTVs to put further
pressure on demand
Total UAE mortgage book in USDm
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2008e 2009e 2010e
Units to be delivered 2008-10 New launches 2008-10
On old units
10%
14%
18%
22%
26%
30%
Mort gage to GDP
Source: Central Bank data, HSBC estimates
We estimate that the UAE mortgage book will
grow by roughly 330% to USD70bn, or 26% of
GDP, by the end-2010. While our estimated
mortgage/GDP ratio is relatively low, given the
current liquidity strain, mortgage rates are likely
to come under upward pressure. Furthermore, in
light of heightened risk perception surrounding
the real estate sector, banks are likely to lower
mortgage LTVs. Early evidence suggests that this
has already begun. For instance, ADCB recently
revised its mortgage rates upward by 50bp, while
Tamweel plans to increase its rates to 8.4% from
c7.4%. Furthermore, HSBC Home Finance
department recently reduced its mortgage LTVs
from 85% to 60% on apartments and 70% on
villas. Tamweel and Amlak also reduced their
LTVs from 90% to 75% and 65%, respectively.
Additionally, anecdotal evidence suggests that the
spread between mortgage providers property
valuations and actual property prices has widened
significantly. This means that LTPs are
increasingly falling below LTVs, putting further
pressure on demand.
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Current rental yields suggest possibleprice falls of up to 22% in off-plan
units and 12% in ready units
The central issue is no longer supply dynamics. Our
analysis shows that the market in Dubai will remain
tight at least until 2010. Also, as we mentioned in
our previous reports, the government can manage
supply through its direct and indirect ownership in
Dubais largest developers. As the following chart
shows, we estimate that roughly 90% of upcoming
supply in Dubai is controlled by Nakheel, Dubai
Holding, and Emaar.
Three largest developers control 90% of upcomingsupply (units)
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2008 2009 2010
Nakheel Dub ai Ho ld ing Emaar Other
Source: HSBC Research, Better Homes
The main concern now is demand, which is being
undermined by several factors. Price appreciation is
breaching affordability, as illustrated by the
compression in rental yields. This will be further
amplified by upward pressure on mortgage rates anddeclining LTVs. The situation has not been helped
by the recent stock markets decline, which has
highlighted the fact that the region is not immune to
global trends, whether in equity, debt, or property.
The fall-out from the decline is wealth destruction
and risk aversion, which add to liquidity constraints.
All this, in combination with the weeding-out of
speculatively driven demand and incessant corporate
scandals, is bound, in our opinion, to lead to some
weakness in property prices.
But not all properties are created equal: we draw a
specific distinction between off-plan and ready
units, and break it down further by segment. In
our opinion, the off-plan market will be the
hardest hit and the first to be affected, given the
high level of speculation. On the other hand, we
believe that ready units will be supported by
demand, and any weakness will therefore be less
pronounced. The fall in prices should be limited to
the level where rental yields are at the mortgage
rate or at a slight discount, which will vary from
segment to segment. Ideally luxury developments
should command a premium or in other words a
lower yield. Villas should be the least affected
given their scarcity (we estimate that such units
account for roughly 20% of supply).
The table on the following page illustrates the
potential price change based on our estimate of a
fair discount of rental yields and the mortgage
rate, depending on the unit and segment. We haveused discounts of 100bp for affordable housing,
150bp for mid-range and 200bp for high-end; for
villas we add another 150bp to the discount
applied to apartments. Although overall we
estimate that average prices could decline 12% for
apartments and 8% for villas, the table on the
following page shows that in certain areas there is
still room for further price appreciation.
According to our calculation, Downtown Burj
Dubai and Palm Jumeirah are likely to be thehardest hit.
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As we stated above, we believe any price weakness
in off-plan units will be more severe. Ideally, the
discount to ready units should be equivalent at least
to the amount of rent payable until delivery . We
derive a weighted rental sum until year-end 2010 of
USD88,000 for apartments and USD233,000 forvillas, based on forecast deliveries. On this basis, we
estimate a potential price decline of around 22% for
apartments and 16% for villas. However, this is
assuming Islamic financing (ie, where no mortgage
payments other than the initial down-payment are
made until delivery), whereas conventional
financing should command a higher discount as both
rental and mortgage payments would have to be
made simultaneously.
In Abu Dhabi the market is tighter than Dubai and
prices are lower; however, most properties in Abu
Dhabi are off-plan, ie, in the segment most
vulnerable to a downturn. We therefore believe
that any price weakness in Dubai will be reflected
in Abu Dhabi, in terms of its severity.
We stress that our analysis is only an indication.
Arguably, investors should hold on to their
property as long as rental yields cover most of the
mortgage payment. However, markets do not
always act rationally, and a slight softening in
prices could lead to panic selling. Furthermore,
given the tightness in the market, we assume that
rental rates will remain stable and will not reflect
any downturn in property prices. If rentals do
decline, then the price weakness should be more
pronounced. It is also important to point out that
current rental yields are higher than our numbers
for ready units, which, in most instances, were
Dubai residential market potential price change
Apartments Change Av. Unit priceUSD
Av. Apt.size/sq m
Av. PriceUSD/sq m
Av. RentUSD/sq m
Rental yield Discount tomortgage rate
Dubai Investment Park 238,158 63 3,779 358 9.5%Dubai Investment Park adj. 46% 346,783 63 5,503 358 6.5% 1.0%Jumeirah Lake Towers 522,883 105 4,970 399 8.0%Jumeirah Lake Towers adj. 34% 699,234 105 6,646 399 6.0% 1.5%The Greens 576,307 88 6,559 484 7.4%The Greens adj. 23% 708,469 88 8,063 484 6.0% 1.5%Dubai Marina 762,622 120 6,345 396 6.2%Dubai Marina adj. 4% 792,929 120 6 ,597 396 6.0% 1.5%Emirates Living 727,078 115 6,304 399 6.3%Emirates L iv ing adj . 5% 766,532 115 6,646 399 6.0% 1.5%Downtown Burj Dubai 1,330,508 103 12,894 410 3.2%Downtown Burj Dubai ad j. -42% 770,065 103 7,463 410 5.5% 2.0%Palm Jumeirah 1,508,397 193 7,819 340 4.3%Palm Jumeirah adj . -21% 1,192,856 193 6,184 340 5.5% 2.0%Weighted average 835,311 113 7,422 388 5.2% Weighted average adj. -12% 736,727 113 6,546 388 5.9% 1.6%
VillasDubai Investment Park 1,630,622 442 3,688 214 5.8%Dubai Investment Park adj. 16% 1,896,466 442 4,290 214 5.0% 2.5%Emirates Living 3,082,441 495 6,230 329 5.3%Emirates L iv ing adj . 17% 3,612,052 495 7,301 329 4.5% 3.0%Arabian Ranches 2,710,654 446 6,078 252 4.1%Arabian Ranches adj . -8% 2,498,968 446 5,603 252 4.5% 3.0%Palm Jumeirah 7,756,279 676 11,474 249 2.2%Palm Jumeirah adj . -38% 4,813,171 676 7,120 249 3.5% 4.0%Weighted average 2,914,630 421 6,917 279 4.0% Weighted average adj. -8% 2,692,584 421 6,390 279 4.4% 3.1%
Off-plan apartments -22% 648,874
Off-plan vi llas -16% 2,459,161
Source: HSBC Research, Better Homes
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purchased at much lower prices. This will
increase the propensity to hold, and further limit
any downturn.
Our bottom-line view is that price softening in the
real estate market is not only healthy, but
necessary at this point for the sustainability of the
economic story.
Long-term demand story still intact
Our economist, Simon Williams, and strategist,
John Lomax, are both strong believers in the
regions long-term domestic demand story (please
refer to The revised case for GCC equity markets, 1
October 2008). John argues that, even if the current
financial crisis is resolved, US and global growth is
set to weaken. It therefore makes sense to focus on
areas with a particularly good domestic demand
story and for most reasonable oil price scenarios
there are few domestic demand plays that look
much better than the Gulf. Based on current
infrastructure plans, the breakeven oil price required
for fiscal balance is highest in Saudi Arabia
(USD55/bbl). MEED projects that about USD2.2trn
will be spent on infrastructure over what we have
interpreted as the next five years. At the same time,
the secular growth story could be enhanced by
global de-bottlenecking. Slower global growth and a
reduction in infrastructure spending ought to help
on the Gulf supply side, which could play out in
lower prices and better access to input materials
eg, steel prices could fall significantly. It could also
help, for example, on the contracting side, but there
are clearly other possible examples too. All this
ought to facilitate project implementation.
To some extent, the GCC (especially Dubai) is a
derived play on global growth partly in terms of
visitor flows and partly in terms of demand for
property (where negative wealth effects for
potential UK buyers, for example, will take a toll).
For the UAE, tourism flows are, indeed, likely to
be dampened, so hotels may have a tougher time,
although it is worth noting significant levels of
intra-Middle Eastern tourism. Nevertheless, the
corporate outlook actually has scope to be more
buoyant as the business sector seeks to
compensate for the downturn in demand
elsewhere by tapping into the Middle Eastern
growth story. New immigrants will still need
somewhere to live if they do not wish to buy,
expect a vibrant buy-to-let market to continue to
develop. In this context, rental yields remain
attractive relative to local (or indeed international)
returns on cash. This could be motivated either by
the high-net-worth sector or by some form of
local institution. Overall there is very little sign of
a slowdown in GCC macro growth at this juncture
and overall we expect the figures to hold up.
Furthermore, the oil price has remained high
despite current financial market trauma. We
recently favoured a play on cyclical weakness in
oil prices, but are increasingly drawn back to the
secular story of oil prices staying higher forlonger. This is important because although
regional growth in no way requires oil prices at
USD100/bbl, equities have tended to perform
badly at times when oil prices have been falling
as shown in the chart below. If we are right in
considering that oil prices are now more stable,
this should allow international investors to look at
the region through a more constructive lens.
GCC ex Saudi Index vs oil prices
0
200
400
600
800
1000
1200
0
20
40
60
80
100
120
140
160
MSCI GCC COUNTRIES X SAUDI ARABIA $
London Brent Crude OilIndex U$/BBL
0
200
400
600
800
1000
1200
0
20
40
60
80
100
120
140
160
MSCI GCC COUNTRIES X SAUDI ARABIA $
London Brent Crude OilIndex U$/BBL
Source: Thomson Financial Datastream
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Valuation
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10
percentage points above and below the hurdle rate
for UAE stocks of 9.5%. This translates to a
Neutral band of -0.5% to 19.5% around the
current share price. Our 12-month target prices of
AED16.0, AED13.9, and AED9.4 for Aldar,
Emaar, and Sorouh imply a potential total return
of 158%, 136%, and 80%, respectively, which are
above the Neutral band. Therefore, we reiterate
our Overweight (V) rating on all three stocks.
We retain our Overweight (V) rating
on Aldar, Emaar, and Sorouh but cut
our target prices to AED16.0,AED13.9, and AED9.4, respectively
We value real estate companies using a
combination of DCF analysis and land valuation.
Where the company has a final master plan, we
use DCF. Otherwise, we use land valuation only.
To address macro concerns, based on the analysis
described below, we applied specific probabilities
to each companys projects and land valuations.
As shown in the table below, we apply the lowest
probabilities to projects that have the lowest
visibility and are most vulnerable to any real
estate market downturn. We also revise our beta
for Aldar from 1.3 to 1.4, for Sorouh from 1.0 to
Bottom up
It is not a potential price correction, but rather the long-term
demand story, that will ultimately drive valuations, we believe
Adar still our preferred pick, although Emaar is the most immune
to any UAE property market downturn, while Sorouh is the most
susceptible despite having the highest earnings visibility
Our new target prices for Aldar, Emaar, and Sorouh, imply 24%,
10%, and 35% discount to 2008 NAV, respectively
Valuation: Emaar most immune and Sorouh most vulnerable to any market deterioration
AED per share ____________Aldar____________ ____________ Sorouh ____________ _____________Emaar ____________Valuation Probability Current Valuation Probability Current Valuation Probability Current
Projects under development 10.7 80% 8.6 3.0 100% 3.0 6.6 90% 5.9Highly probable projects 4.6 70% 3.2 5.0 70% 3.5 6.5 60% 3.9
Future projects 2.4 50% 1.2 - - 3.4 50% 1.7Land 7.6 60% 3.0 7.3 40% 2.9 - -Investments - - - 2.4 100% 2.4Total value 25.3 16.0 16.3 9.4 18.9 13.9
Source: HSBC estimates
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1.5, and for Emaar from 1.0 to 1.2 to reflect
increased market volatility. However, we maintain
our price assumptions, which are already at a
c20%-30% discount to current market price, and
therefore take into account any potential price
weakness. Also, given the companies high
earnings visibility, with future revenues reflecting
pre-sales, we reiterate our earnings forecasts.
Valuation: Emaar most immune and
Sorouh most vulnerable to anymarket deterioration, in our view
Perceptions that the real estate sector in the UAE
and Dubai in particular is set for a correction
have hardened in recent weeks, as has scepticism
about project execution. In large part the trend
reflects a global repricing of risk, but in our view,
real estate names have been oversold. Based on
our analysis, it seems that the market is only
factoring in those projects that are most certain
(ie, projects under development which havealready achieved considerable sales). Given that a
potential price correction would have only a
limited impact on pre-sold projects, this leads us
to believe that the market is more concerned about
the long-term demand story. To better understand
the market-implied valuation, we have broken the
companies projects down into four categories
according to their visibility. (1) Projects under
development: those launched with considerable
pre-sales. (2) Highly probable: projects that have
been master-planned /are to be launched soon /are
of a strategic nature. (3) Future projects: those still
at the concept phase. (4) Land: unserviced raw
land/not master-planned.
In terms of valuation, we believe that Sorouh is
the most susceptible to any real estate market
deterioration, given that roughly half of its value
comes from Sheih Al Sedira (SAS) land.
Although we currently value SAS veryconservatively at AED400 per sq m, its isolated
location and vast size mean that, in the event of a
slowdown, that land could be worth close to
nothing. Nonetheless, we believe Sorouhs other
developments, such as Shams and Lulu, which are
located just off the Abu Dhabi city coast, will
always have high intrinsic value.
Emaar, on the other hand, is the most immune to a
property market downturn, in our opinion. The
companys most valuable project, Downtown Burj
Dubai (AED7.5 per share), is centrally located
(between DIFC and Business Bay), and as suchshould always be in demand. The companys
growing investment property portfolio further
supports its valuation, while its overseas
operations, which are gaining significance,
provide a hedge against any downturn in the
UAE. Although our top-down analysis suggests
that Burj Dubai is at risk of a correction, the effect
on our valuation should be limited given our
conservative price assumptions (at a 30% discount
to current reported prices). Furthermore, Emaarhas already pre-sold roughly one-third of the
project. That said, however, the effect on future
projects would be more pronounced.
Aldars valuation is also more robust, as most of
its land bank is centrally located. In our opinion,
the huge pent-up demand in Abu Dhabi, as well as
the need for a new housing stock, should support
projects currently under development. Also,
CBREs land valuation, which represents a
substantial part of Aldars value, is fairly
conservative (AED1,300 per sq m compared with
current transactional prices of AED7,000 per sq
m), and as such already discounts a potential
downturn, in our view. Additionally, the
companys close relationship with the government
and the strategic nature of some of its projects,
(eg, Yas Island), should provide further comfort.
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Our new target prices for Aldar, Emaar,and Sorouh, imply 24%, 10%, and 35%
discounts to NAV, respectively
TPs implied discount to 2008e NAV (AED per share)
0
5
10
15
20
25
Emaar Aldar Sorouh
0%
5%
10%
15%
20 %
25%
30 %
35%
40 %
NAV TP Imp lied d isco unt t o NAV
Source: HSBC estimates
For Aldar and Sorouh, our NAV calculation
includes net land value (land valuation minus land
recognised on the companies books) and equity
(book value plus sukuk). In line with our DCF, we
use CBREs latest land value for Yas Island,excluding plot sales, which we now incorporate
into our model. For SAS, we use our own land
valuation. We base the value of Mina Zayed and
Lulu Island land on a profit-sharing scenario. For
Emaar, since the companys land is not
recognised on its books, we value it at fair value
using the residual method. We assume a
developer margin of 20% on revenues and worked
back to the value of land on the basis of prevailing
market prices and costs. We also marked the valueof associates and subsidiaries to market. We
revalued the companys investment property
portfolio (malls, offices and hotels), which is
recognised at cost. To value the investment
properties, we use a capitalisation rate of 7.4%
(WACC terminal growth rate), while to
calculate NOI (net operating income), we apply
margins of 75% for retail and office, and 30% for
hotels. On our estimates, investment properties
have a potential for revaluation of AED21bn, tobe released by 2010 (it includes land pertaining to
investment properties). This is in addition to the
AED13bn already recognised on the balance sheet
at cost. Please note that Emaar has not yet
reflected any fair-value gains.
Earnings visibility: Sorouh highest,
Aldar lowest
Given that the revenues to be recognised over the
coming two years reflect sales booked this year
and last, Sorouhs sales-based business model
(sell 80%, hold 20%) offers the highest earnings
visibility. As the following table shows, Sorouhhas already booked total sales of cAED27bn, of
which cAED22bn have yet to be recognised. By
contrast Aldars business model, which is geared
more towards investment properties (sell 60%,
hold 40%) and staggered land sales, offers the
lowest earnings visibility (AED6bn of revenues to
be recognised). Emaars more mature business
model, which is based on strong sales and
growing rental business (ie, a recurring income
stream), also offers high earnings visibility.
Pre-sales offer high earnings visibility
AEDbn Total sales Revenuesrecognised
Revenue to berecognised
Aldar 11.1 5.1 6.0Sorouh 26.5 4.6 21.9Emaar 36.2 25 11.2
Note:Total sales and revenues since 2006; for Emaar revenue to be recognised representsroughly 12,400 units in the UAESource: Company data, HSBC Research
Emaars overseas operations are gaining significance
Unitslaunched
Units sold %Sales
Emaar UAE 36,266 32,151 92%
Emaar InternationalEmaar MGF India 6,391 4,581 72%Emaar Egypt 1,757 1,178 67%Emaar Pakistan 1,331 884 66%KAEC, Saudi Arabia 1,017 764 75%Emaar Middle East, SaudiArabia
567 367 65%
Emaar Syria 455 318 70%Emaar Morocco 316 218 69%Emaar Turkey 208 141 68%Total international 12,042 8,451 70%
Total units 48,308 40,602 84%
Source: Company data
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Domestic credit squeeze has limitedimpact on Aldar, Sorouh and Emaar
Although the global credit crunch is placing a
strain on domestic liquidity, we do not expect
Aldar, Sorouh, and Emaar to face any financing
problems, at least in the near term. As such, we
expect project execution to remain on track.
Aldars decision to raise substantial financing last
year and earlier this year was timely and entailed
competitive terms. The company has secured
sufficient financing to fund its medium-term
investment needs. Currently, Aldar has an unused
AED13bn credit facility and is unlikely to face
any problems drawing that cash down, as roughly
AED9bn was issued by the government of Abu
Dhabi. We estimate that Sorouhs sales-based
business model will generate enough positive cash
flows to fund its cash needs over the next two
years. For Emaar, meanwhile, rental income from
upcoming investment properties and a stronger
contribution from overseas operations should help
reduce its cash requirements.
We believe Aldar, Sorouh, and Emaar will not face any financing problems, at least in the near term (H1 2008)
AEDbn Grossdebt
Cash Net debt Unusedfacility
0-1 Yr 1-3 Yrs 3 yrs > Net cash Flowfrom H208 to 09
PositionFY09e
Emaar 8.9 7.4 1.5 1.3 7.5 -2.2 3.915% 84% 0%
Aldar 15.1 16.1 -1 13 1 4.5 9.6 -8.3 6.87% 30% 64%
Sorouh 4.2 7.2 -3 0.1 0.1 4 0.4 7.52% 2% 95%
Total 28.2 30.7 -2.5 13 2.4 12.1 13.6 -10.1 18.2
Note: for Aldar, convertibles are not included in debt. Data as of 30 June 2008, except for Sorouh where it includes recently issued sukuk. Cash flows are HSBC esti matesSource: Company data, HSBC estimates
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Aldar valuation breakdown (AED per share) Sorouh valuation breakdown (AED per share) Emaar va
8.6
3.21.2
3.0
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Definite projects
(under dev.)
Highly probable
projects
Future projects Land
3.0
3.5
2.9
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Definite projects
(under dev.)
Hi ghly probabl e projects Land
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
D
Source: HSBC estimates Source: HSBC estimates Source: HSB
HSBC Real Estate Valuation Matrix
Projects under development Highly probable Future projects Land InvestmenLaunched with considerable
pre-sales
Master-planned/to be launched
soon/of a strategic nature
Projects still at the concept
phase
Unserviced raw land/no master
plan
Strategic
entities
Valuation visibility High LowPrice change impact Low HighSales volume Impact Low High
Aldar 8.6 3.2 1.2 3.0 - Sorouh 3.0 3.5 - 2.9 - Emaar 5.9 3.9 1.7 - 2.4
Aldar Al Raha Beach (East) Al Raha Beach (West) Motor World Mina Zayed (50%)Central Market Yas Island Yas Island (62%)Al Raha GardenYas Island
Sorouh Khalidiya Village Lulu Island SAS Land- 13m sq mAl Oyoun Village Al Mashthal SAS Land- 33m sq m
Saraya Shams Phase 2Shams Phase 1 & 2 Al Ghadeer Phase 2Al Ghadeer Phase 1 Gateway HotelGolf GardensAL Ain Comm CentreAl Nagfa Hotel
Emaar Burj Dubai Downtown Burj Dubai Downtown Al Usailly KAEC, SaEmirates Hills Al Mashraf Height Emaar International (40%) Emaar MGDubai Marina Bawadi Amlak FinaBawadi Umm Al Quain Marina Dubai BanUmm Al Quain Marina Emaar International (40%)Emaar International (30%)
Source: Company, HSBC Research
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Risks specific to Aldarand Sorouh
Unprecedented cost inflation: Given the
extraordinary amount of construction activity in
the region, supply bottlenecks are bound to
occur, created by factors ranging from salary
hikes to appreciation in raw material costs. This
would have a negative effect on Aldar and
Sorouhs margins and, hence, their valuations.
Execution risk: The sheer scale of
development at Aldar and Sorouh will stretch
management and operational capacity,
introducing the risk of delays and/or even
project cancellation.
Governance: Aldar and Sorouh are still
operating in an underdeveloped regulatory
environment, where minority interests can
be overlooked.
Concentration risk: since all of Aldar and
Sorouhs projects are in Abu Dhabi, their
exposure to any downturn in the property
market there is very high.
Emaar-specific risks
Unprecedented cost inflation: Given the
extraordinary amount of construction activity
in the region, supply bottlenecks are bound to
occur, created by factors ranging from salary
hikes to appreciation in raw material costs.
This would have a negative effect on Emaars
margins and, hence, its valuation.
Execution risk: The sheer scale of
development at Emaar will stretch
management and operational capacity,
introducing the risk of delays and/or even
project cancellation.
Governance: Emaar still operates in an
underdeveloped regulatory environment,
Real Estate Comparables
Bloomberg Company Region Rating Currency Closing Price MCap (USDm) PE 08 PE 08 P/NAV
EMAAR UH Emaar Propert ies PJSC United Arab Emirates Overweight (V) AED 5.9 9,866 5.1 3.5 0.4ALDAR UH Aldar Proper ties Uni ted Arab Emirates Overweight (V) AED 6.2 4,216 4.7 4.0 0.3SOROUH UH Sorouh Real Estate United Arab Emirates Overweight (V) AED 5.2 3,562 8.1 7.4 0.3DLFU IN DLF Ltd India Underweight (V) INR 308.9 19,115 6.70 6.66 0.69UT IN Uni tech Ltd India Underweight (V) INR 94.5 5,896 9.19 6.56 0.51IBREL IN Indiabulls Real Estate India Overweight (V) INR 118.2 1,648 7.11 6.90 0.563383 HK Agile China NR HKD 3.4 1,623 2.91 5.75 0.201109 HK CRL China NR HKD 8.1 4,883 19.47 12.13 0.44688 HK COLI China NR HKD 9.0 9,057 12.80 9.86 0.492007 HK C G China NR HKD 2.3 4 ,740 7.31 5.75 0.30
272 HK SOL China NR HKD 3.0 1,610 5.24 6.37 0.21TMGH EY TMG Egypt Overweight (V) EGP 4.3 2,755 6.59 2.99 NAOCDI EY SODIC Egypt Overweight EGP 74.3 683 13.08 8.83 NA101 HK Hang Lung Properties Ltd Hong Kong Overweight (V) HKD 15.1 12,224 12.23 10.70 NA83 HK Sino Land Company Ltd Hong Kong Overweight (V) HKD 7.1 7,879 10.34 4.80 NA410 HK Soho China Limited Hong Kong Overweight (V) HKD 2.2 2,524 11.38 1.43 NA1109 HK China Resources Land Hong Kong NR HKD 8.1 4,883 19.47 12.13 0.4612 HK Henderson Land Dev. Hong Kong NR HKD 31.1 8,559 11.42 10.64 0.4683 HK SINO Land Co Hong Kong NR HKD 8.1 5,033 6.74 8.79 0.3616 HK Sun Hung Kai Properties Hong Kong NR HKD 71.0 23,342 12.23 11.14 0.47GTC PW GlobeTrade Centre Poland Overweight (V) PLN 18.0 2,367 9.38 2.39 0.79ECH PW Echo Investment SA Poland Neutral (V) PLN 3.0 841 NA 5.28 0.77
Source: HSBC Research, Bloomberg NR = not rated
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where minority interests can be overlooked.
The shares-for-land-swap deal with Dubai
Holding, which weighed heavily on the stock,
was recently abandoned in favour of the
50/50 joint venture with Bawadi.
Oversupply: while there is a risk of
oversupply in Dubai, we believe the real
estate market will remain strong. However, an
oversupply would have negative implications
on future sales, since it could force Emaar toabandon some projects.
Currency risk: a currency revaluation would
lead to translation losses, since contributions
from foreign subsidiaries, as well as the value
of foreign investments, would decline.
However, part of the losses would be
recouped by foreign investors.
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Aldar financialsAldar income statement (AEDm)
Year to December 2006 2007 2008e 2009e 2010e 2011e 2012e
Sale of land - - 4,469.9 3,004.8 3,310.8 4,236.2 7,120.5Sale of properties - 1,187.3 1,847.1 7,095.6 9,467.9 6,073.4 3,621.8
Rental income 178.3 33.8 121.5 179.6 352.7 649.7 1,661.7Hotel revenue - - - - 84.0 345.5 2,812.4Revenue 187.5 1,226.8 6,438.5 10,280.0 13,215.3 11,304.7 15,216.5
Cost of land - - (1,316.7) (537.6) (537.6) (717.4) (1,420.5)Cost of properties - (648.3) (1,647.5) (5,288.8) (6,798.4) (4,357.5) (2,712.0)Direct rental expenses (156.5) (15.1) (27.6) (26.9) (52.9) (97.4) (249.3)Hotel direct costs - - - - (54.6) (224.5) (1,828.1) (156.7) (666.9) (2,991.8) (5,853.3) (7,443.5) (5,397.0) (6,209.8)% of sales 84% 54% 46% 57% 56% 48% 41%Gross profit 30.8 560.0 3,446.8 4,426.8 5,771.8 5,907.7 9,006.7Margin 16% 46% 54% 43% 44% 52% 59%Operating expenses:SGA expenses (264.3) (402.0) (1,029.5) (1,233.6) (1,585.8) (1,356.6) (1,826.0)Fair value gain on inv properties 1,414.4 1,821.2 2,480.4 3,000.0 3,000.0 3,500.0 3,000.0Other operat ing income - - 60.1 205.6 264.3 226.1 304.3Other income - - 30.1 102.8 132.2 113.0 152.2Other operating expenses - - - - - - -
Operating expenses 1,150.2 1,419.2 1,541.1 2,074.8 1,810.6 2,482.6 1,630.5
EBIT (incl revaluation gain) 1,181.0 1,979.2 4,987.9 6,501.6 7,582.4 8,390.3 10,637.2Margin 630% 161% 77% 63% 57% 74% 70%Net financing cost (6.0) (462.4) (239.7) (871.6) (1,219.7) (1,344.5) (1,346.5)Other fin. Income/charges 74.7 400.9 - - - - -Associate income - 23.7 43.1 - - - -Gain on disposal of subsidiary - - - - - - -Profit before taxes 1,249.7 1,941.3 4,791.2 5,630.0 6,362.7 7,045.8 9,290.7
Income taxes - - - - - - -Minority shareholders' interest - - - - - - -Net profit (loss) 1,249.7 1,941.3 4,791.2 5,630.0 6,362.7 7,045.8 9,290.7Margin 666% 158% 74% 55% 48% 62% 61%
Appropriation of net incomeDividend - - 858.8 1,272.5 1,292.3 1,858.1DPS - - 0.3 0.4 0.4 0.5Payout ratio 0% 0% 15% 20% 18% 20%Basic EPS 1.1 1.7 1.7 1.9 1.9 2.5Number of shares 1,725.0 2,786.5 3,358.1 3,358.1 3,661.9 3,661.9Fully diluted EPS 0.5 1.3 1.5 1.7 1.9 2.5Fully diluted shares 3,661.9 3,661.9 3,661.9 3,661.9 3,661.9 3,661.9
- - - - - - -EBITDA excl reval gains (233.4) 157.9 2,546.3 3,678.3 4,895.0 5,336.3 8,151.6Margin -124% 13% 40% 36% 37% 47% 54%EBIT excl reval gains (233.4) 157.9 2,585.1 3,855.1 5,207.6 5,782.2 8,666.0Margin -124% 13% 40% 38% 39% 51% 57%
Source: Company data, HSBC estimates
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Aldar balance sheet (AEDm)
Year to December 2006 2007 2008e 2009e 2010e 2011e 2012e
Current assetsCash and cash equivalents 895.0 7,615.8 9,798.4 7,828.2 5,006.0 1,399.5 (1,391.0)0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Trade & other receivables (current and noncurrent)
181.8 2,372.0 4,619.0 3,592.6 2,566.1 1,539.7 513.2
Receivable from project finance 2.0 3.0 3.0 3.0 3.0 3.0 3.0Development properties 854.3 3,879.9 8,029.1 6,506.2 4,645.1 3,392.3 7,942.7Development work in progress 0.0 0.0 0.0 0.0 0.0 0.0 0.0Short-term investment 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current assets 1933 13,871 22,449 17,930 12,220 6,334 7,068
Investments in associates 120.1 239.0 581.6 581.6 581.6 581.6 581.6Other financial assets 109.7 111.6 113.0 113.0 113.0 113.0 113.0Refundable costs 55.1 80.8 103.4 103.4 103.4 103.4 103.4Other non-current assets 0.0 9.4 58.2 58.2 58.2 58.2 58.2Long-term assets/non current 284.8 440.8 856.3 856.3 856.3 856.3 856.3
Intangible asset 38.1 64.6 73.9 73.9 73.9 73.9 73.9Hotels 0.0 0.0 1,259.6 3,811.0 6,432.9 8,769.2 9,023.4Property, plant and equipment 13.0 487.2 929.1 1,029.5 1,125.0 1,215.7 1,301.9Investment properties 2,839.7 7,851.8 18,792.5 33,494.8 49,818.4 60,475.2 69,790.2Permanent 2,890.8 8,403.6 21,055.1 38,409.2 57,450.2 70,534.0 80,189.5
Total assets 5,108.7 22,715.1 44,360.8 57,195.4 70,526.7 77,724.7 88,113.7
LIABILITIESTrade & other payables 548.6 3,149.3 4,047.6 3,148.1 2,248.6 3,675.6 6,183.4Borrowings-short term 618.3 756.9 0.0 0.0 0.0 0.0 0.0Notes payable 16.3 16.4 15.1 8.5 2.5 0.3 0.0
Current liabilities 1,183.2 3,922.6 4,062.7 3,156.6 2,251.2 3,676.0 6,183.4
Borrowing & long-term debt 16.8 3,633.1 15,709.8 24,709.8 33,709.8 33,709.8 33,709.80.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Obligation under finance lease/ retentions 120.2 312.5 591.9 591.9 591.9 591.9 591.9Other financial liabilities 0.0 293.7 279.4 279.4 279.4 279.4 279.4Advances from customers 513.9 682.7 1,697.4 1,697.4 1,697.4 1,697.4 1,697.4Provision for employee services 3.6 9.0 14.1 14.1 14.1 14.1 14.1Long-term liabilities/non current 654.5 4,930.9 18,292.7 27,292.7 36,292.7 36,292.7 36,292.7
Minority interest in subsidiaries 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Paid-up capital 1,725.0 2,223.1 2,786.4 3,358.0 3,358.0 3,661.7 3,661.7Statutory & other reserves 109.6 2,432.8 4,788.8 7,468.7 7,468.7 10,727.8 10,727.8Retained earnings 1,436.3 3,033.4 7,620.4 12,361.1 17,597.8 23,371.0 31,252.5Shareholder's equity 3,271.0 1,3861.6 22,005.5 26,746.2 31,982.9 37,756.1 45,637.6
Total liabilities and equity 5,108.7 2,2715.1 44,360.8 57,195.4 70,526.7 77,724.7 88,113.7
Source: Company data, HSBC estimates
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Aldar cash flow statement (AEDm)
Year to December 2006 2007 2008e 2009e 2010e 2011e 2012e
Operating activities:Net profit before minorities - - 4,941.4 5,630.0 6,362.7 7,045.8 9,290.7Depreciation & amortisation - - 38.8 176.8 312.6 446.0 514.4Change in work ing capital - - (5,499.2) 1,643.2 1,982.2 3,704.0 (1,016.5)Interest income & exp - - 239.7 871.6 1,219.7 1,344.5 1,346.5Interest recd - - 296.5 256.5 181.2 75.1 1.9Interest paid - - (890.7) (1,128.1) (1,400.9) (1,419.6) (1,348.4)Fair value gain on inves tment property - - (2,480.4) (3,000.0) (3,000.0) (3,500.0) (3,000.0)Provision for employee end-of-service benefits - - - - - - -
Net cash generated from operating activities - - (3,353.9) 4,449.9 5,657.4 7,695.8 5,788.6
Investment activities:Capex (excl hotel properties) - - (18,568.4) (11,852.3) (13,473.6) (7,306.8) (6,465.0)Additions to hotel properties - - (1,275.5) ( 2,678.6) (2,880.0) (2,723.0) (704.8)Additions to investment properties - - - - - - -Associates - - (43.1) - - - -Subsidiary - - - - - - -Additions to development WIP - - - - - - -Acquisition/sale of financial assets - - - - - - -Movement in >3-month bank deposits - - - - - - -
Net cash generated from investment activi ties - - (19,887.0) (14,530.9) (16,353.6) (10,029.8) (7,169.9)Financing activities:Dividends paid - - - (889.2) (1,126.0) (1,272.5) (1,409.2)Share issue - - 3,562.8 - - - -Bank borrowings raised - - - - - - -Net share issuance fee - - - - - - -Borrowings repaid - - 11,319.8 9,000.0 9,000.0 - -
Others - - - - - - --
- - - - - - -
Net cash generated from financing activities - - 14,882.6 8,110.8 7,874.0 (1,272.5) (1,409.2)Net addition (deduction) in cash - - (8,358.3) (1,970.2) (2,822.2) (3,606.5) (2,790.5)Cash at beginning of fiscal year - 6,799.4 6,799.4 (1,558.9) (3,529.1) (6,351.3) (9,957.8)Cash at end of f iscal year - 6,799.4 (1,558.9) (3,529.1) (6 ,351.3) (9,957.8) (12,748.3)
Source Company data, HSBC estimates
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Sorouh income statement (AEDm)
Year to December 2006 2007e 2008e 2009e 2010e 2011e 2012e
Land sale - 2,000.8 2,956.2 2,822.1 1,914.2 1,210.3 1,931.2Contract revenue - - - - - - -Sale of properties - - 533.0 3,163.4 12,901.8 4,938.8 5,922.9Rental income 630.2 320.2 67.0 80.6 227.2 540.2 717.3Hotel revenue - - - - - 808.6 1,126.0
- - - - - - -Revenue 630.2 2,321.0 3,556.2 6,066.1 15,043.3 7,498.0 9,697.3
Land development cost - (848.4) (1,137.8) (1,390.3) (695.6) (63.2) (94.8)Construction cost (incl landdevelopment)
- - (358.8) (2,256.7) (10,666.3) (2,946.4) (2,883.4)
Direct rental expenses (643.1) (152.9) (16.3) (16.1) (45.4) (108.0) (143.5)Hotel direct costs - - - - - (525.6) (731.9) (643.1) (1,001.3) (1,513.0) (3,663.2) (11,407.3) (3,643.3) (3,853.6)% of sales 102% 43% 43% 60% 76% 49% 40%Gross profit (12.9) 1,319.6 2,043.2 2,402.9 3,636.0 3,854.7 5,843.7Margin -2% 57% 57% 40% 24% 51% 60%Operating expenses:Selling and marketing expenses (63.7) (165.1) (322.2) (303.3) (752.2) (374.9) (484.9)General and administrative expenses (53.9) (99.8) (229.1) (252.0) (272.2) (291.2) (225.7)Other operating income - - - - - - -
Fair value gain on financial 650.5 - - - - - -Operating expenses 532.8 (264.9) (551.3) (555.3) (1,024.3) (666.1) (710.6)EBIT (incl revaluation gain) 519.9 1,054.7 1,492.0 1,847.6 2,611.7 3,188.6 5,133.2Margin 82% 45% 42% 30% 17% 43% 53%Net financing cost 558.3 70.0 (55.5) (101.3) (158.1) (146.7) (120.5)Other fin. income/charges 9.1 18.2 36.8 - - - -Gain/(loss) on financial assets (111.7) 96.0 24.7 - - - -Profit before taxes 975.5 1,257.4 1,541.2 1,746.3 2,453.6 3,041.9 5,012.7Income taxes - - - - - - -Minority Shareholders' interest - - (70.5) - - - -Net Profit (loss) 975.5 1,257.4 1,611.7 1,746.3 2,453.6 3,041.9 5,012.7Margin 155% 54% 45% 29% 16% 41% 52%Appropriation of net incomeDividend - 250.0 300.0 402.9 436.6 613.4 760.5
DPS - (0.10) 0.12 0.16 0.17 0.25 0.30Payout ratio - -26% 0.2 0.3 0.3 0.3 0.3Basic EPS 0.4 0.5 0.6 0.7 1.0 1.2 2.0Number of shares 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0Fully diluted EPS 0.4 0.5 0.6 0.7 1.0 1.2 2.0Fully diluted shares 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0
- - - - - - -EBITDA excl reval gains (130.5) 1,054.7 1,493.5 1,852.6 2,619.1 3,198.2 5,144.8Margin -21% 45% 42% 31% 17% 43% 53%EBIT excl reval gains (130.5) 1,054.7 1,495.0 1,857.6 2,626.5 3,207.8 5,156.4Margin -21% 45% 42% 31% 17% 43% 53%
Source: Company data, HSBC estimates
Sorouh financials
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Sorouh balance sheet (AEDm)
Year to December 2006 2007e 2008e 2009e 2010e 2011e 2012e
Current assetsCash and cash equivalents 1,453.7 1,457.7 5,776.2 3,338.0 4,099.3 4,219.3 5,187.2Assets held for sale 0.0 614.8 417.2 417.2 417.2 417.2 417.2Trade & other receivables 251.8 2,080.3 3,042.1 2,366.1 1,690.0 1,014.0 338.0
Development properties 414.5 1,082.1 6,247.0 9,403.4 4,237.5 6,457.1 7,689.7
Short-term investment 0.0 126.8 85.2 85.2 85.2 85.2 85.2Current assets 2,544 5,362 15,568 15,610 10,530 12,193 13,718
Investments in associates and LTinvestments
139.3 174.0 256.2 256.2 256.2 256.2 256.2
Other non-current assets 297.2 59.8 140.7 140.7 140.7 140.7 140.7Long-term assets/non current 436.5 233.9 396.9 396.9 396.9 396.9 396.9
Intangible asset 345.4 345.4 345.4 345.4 345.4 345.4 345.4Hotels 0.0 0.0 479.8 1,477.7 2,539.9 2,927.4 3,081.8Property, plant and equipment 6.2 18.0 36.0 61.0 83.6 103.9 122.3Investment properties 834.7 853.0 855.6 855.6 2,728.5 4,073.7 5,036.7Investment properties underdevelopment
184.7 408.4 1,085.5 3,516.6 3,493.7 3,491.4 5,246.9
Permanent 1,371.0 1,624.7 2,802.3 6,256.3 9,191.1 10,941.7 13,833.1
Total assets 4,351.2 7,220.7 18,767.3 22,263.6 20,117.6 23,531.8 27,947.7
LIABILITIESTrade & other payables 743.7 2,177.3 8,541.3 10,694.2 6,531.2 7,516.9 7,680.6
Borrowings short term 11.7 42.6 116.0 116.0 116.0 116.0 116.0Notes payable short term 71.5 208.5 178.5 178.5 178.5 178.5 178.5Current liabilities 827.0 2,428.4 8,835.8 10,988.8 6,825.8 7,811.4 7,975.1
Borrowing & long-term debt 29.3 190.2 4118.7 4118.7 4118.7 4118.7 4118.7Obligation under finance lease 23.8 0.0 0.0 0.0 0.0 0.0 0.0
Notes payable long term 0.0 135.9 135.9 135.9 135.9 135.9 135.9Provision for employee services 0.9 3.3 5.5 5.5 5.5 5.5 5.5Long-term liabilities/non current 54.0 329.3 4,260.0 4,260.0 4,260.0 4,260.0 4,260.0
Minority interest in subsidiaries 0.0 0.0 (70.5) (70.5) (70.5) (70.5) (70.5)Paid-up capital 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0 2,500.0Statutory & other reserves 92.3 218.0 216.7 216.7 216.7 216.7 216.7
Retained earnings 878.0 1,745.0 3,025.3 4,368.7 6,385.7 8,814.2 13,066.4Shareholders equity 3,470.2 4,463.0 5,671.5 7,014.9 9,031.9 11,460.4 15,712.6
Total liabilities and equity 4,351.2 7,220.7 18,767.3 22,263.6 20,117.6 23,531.8 27,947.7
Source: Company data, HSBC estimates
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Sorouh cash flow statement (AEDm)
Year to December 2006 2007e 2008e 2009e 2010e 2011e 2012e
Operating activities:Net profit before minorities 975.5 - 563.6 1,746.3 2,453.6 3,041.9 5,012.7Depreciation & amortisation 1.4 - 1.5 5.0 7.4 9.6 11.6Change in working capital 31.7 - (933.2) (327.5) 1,678.9 (557.9) (392.9)Interest income & exp (558.3) - 81.7 101.3 158.1 146.7 120.5Interest recd 547.9 - 55.9 174.0 117.2 128.6 154.7Interest paid - - (137.6) (275.3) (275.3) (275.3) (275.3)Fair value gain on investment property (650.5) - - - - - -Impairment of goodwill 242.9 - - - - - -Provision for employee end of service
benefits399.8 - - - - - -
Net cash generated from operatingactivities
1,102.2 - (368.1) 1,423.8 4,140.0 2,493.7 4,631.4
Investments activities:Capex (excl hotel properties) (7.6) (4.9) (21.4) (30.0) (30.0) (30.0) (30.0)Additions to hotels properties - - (479.8) (997.9) (1,062.2) (387.4) (154.4)Additions to investment properties (761.6) - (679.7) (2,431.1) (1,849.9) (1,342.9) (2,718.6)Associates (123.3) - - - - - -Subsidiary - - 0.1 - - - -Additions to development WIP (468.6) - - - - - -Acquisition/sale of financial assets (374.7) (23.3) (16.0) - - - -Movement in >3-month bank deposits - - - - - - -
Net cash generated from
investment activities(1,735.9) (28.1) (1,196.9) (3,459.0) (2,942.2) (1,760.3) (2,903.0)
Financing activities:Dividends paid - (209.0) (308.0) (402.9) (436.6) (613.4) (760.5)Share issue 2,105.0 - - - - - -
Bank borrowings raised - 49.5 1.9 - - - -Net share issuance fee (5.3) - - - - - -Borrowings repaid (12.3) - 4,000.0 - - - -Others - 7.5 - - - - -
-
- - - - - - -
Net cash generated from financingactivities
2,087.4 (152.0) 3,693.9 (402.9) (436.6) (613.4) (760.5)
Net addition (deduction) in cash 1,453.7 (180.1) 2,128.9 (2,438.1) 761.2 120.0 967.9Cash at beginning of fiscal year - 1,845.9 1,665.8 3,794.7 1,356.6 2,117.8 2,237.8Cash at end of fiscal year 1,845.9 1,665.8 3,794.7 1,356.6 2,117.8 2,237.8 3,205.7
Source: Company data, HSBC estimates
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Emaar income statement (AEDm)
Year to December 2005a 2006a 2007a 2008e 2009e 2010e 2011e 2012e
Sale of Land 4,082.7 8,154.5 1,357.5 753.5 - - - -Sale of Villas and Condominiums 4,153.1 5,240.7 16,188.5 17,088.3 27,263.0 27,640.9 29,020.4 40,600.9Sale of Commercial Units - 410.9 - 1,330.6 - - - -Rental Income 125.6 199.4 - 727.7 2,026.4 2,255.2 2,725.8 3,719.6Hotel Revenue - - - 511.5 718.6 1,778.1 1,864.8 1,955.8Revenue 8,361.4 14,005.5 17,546.1 20,411.6 30,008.0 31,674.2 33,611.0 46,276.3
Cost of Land (1,604.0) (3,527.7) (163.5) (50.7) - - - -Cost of Vil las & Condominiums (1,963.5) (3,368.3) (10,477.0) (11,214.2) (17,884.4) (18,737.6) (19,166.6) (25,143.4)Direct Rental Expenses (18.2) (12.8) - (86.7) (202.6) (225.5) (272.6) (372.0)Hotel Direct Costs - - - (241.6) (395.2) (977.9) (1,025.6) (1,075.7) (3,585.7) (7,039.4) (10,640.5) (12,015.3) (18,482.2) (19,941.1) (20,464.8) (26,591.1)% of sales 43% 50% 61% 59% 62% 63% 61% 57%Gross Profit 4,775.7 6,966.1 6,905.5 8,396.3 11,525.7 11,733.1 13,146.2 19,685.2Margin 57% 50% 39% 41% 38% 37% 39% 43%Operating Expenses:SGA Expenses (1,021.8) (1,400.4) (2,119.0) (2,470.1) (3,300.9) (3,484.2) (3,697.2) (5,090.4)Other Operating Income 247.6 383.5 382.2 530.0 600.2 633.5 672.2 925.5Other Income - - - 293.5 300.1 316.7 336.1 462.8Other Operating Expenses (66.0) (207.0) - (298.3) (300.1) (316.7) (336.1) (462.8)Operating Expenses (840.2) (1,224.0) (1,736.8) (1,944.8) (2,700.7) (2,850.7) (3,025.0) (4,164.9)
EBIT (incl Revaluation Gain) 3,935.5 5,742.1 5,168.7 6,451.5 8,825.0 8,882.4 10,121.2 15,520.4Margin 47% 41% 29% 32% 29% 28% 30% 34%Net Financing cost 326.1 274.4 148.0 163.1 (164.8) (100.1) 23.5 315.9Other fin. Income/charges 122.5 253.3 811.6 - - - - -Associate Income 99.1 128.1 402.0 719.7 1,656.3 2,462.7 2,959.1 3,542.5Gain on Disposal of Subsidiary 245.8 4.9 - - - - - -Profit before Taxes 4,729.1 6,402.8 6,530.2 7,334.4 10,316.5 11,245.1 13,103.8 19,378.7
Income Taxes - (47.1) (13.9) (40.9) (309.5) (562.3) (655.2) (968.9)Minority Shareholders' Interest 2.2 15.4 (38.8) 35.9 198.1 382.8 613.9 925.5
Net Profit (Loss) 4,731.2 6,371.1 6,477.6 7,257.6 9,809.0 10,300.1 11,834.7 17,484.2Margin 57% 45% 37% 36% 33% 33% 35% 38%
Source: Company Data, HSBC estimates
Emaar financials
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