Middle East Rating & Investors Service

Corporate
Analysis
August 2005
This analysis provides a discussion of the factors underpinning
the credit rating

Eastern Tobacco Company (EC)

National Scale Rating: Entity
Category Current Previous Contact Phone
Entity Rating AA AA Ghada Mostafa, CFA (202) 749 5616
gmostafa@merisratings.com
Rating Outlook Stable Stable

Operating Highlights
in EGP 000 2002 2003 2004 2005
Sales 2,313,736 2,609,472 2,954,079 3,401,859
Assets 2,402,703 2,554,486 3,008,309 3,514,638
Equity 992,443 1,110,202 1,221,615 1,6760,022
Net Adjusted Debt* (66,161) (32,987) 423,447 733,282
EBIT 506,916 497,348 490,944 737,586
EBIT Margin 21.9% 19.1% 16.6% 21.7%
EBIT/Net Interest Expense (322.1) (30.0) (32.9) 25.0
EBIT/Average assets 21.1% 20.1% 17.7% 22.6%
EBIT/Net Adjusted Debt (7.7) (15.1) 1.2 1.0
* Net Adjusted Debt: Adjusted Gross Debt (Bank and lease debts) after netting out deposits held at banks

Key Credit Strengths

• EC dominant position in the domestic market.
• Government support owing to its large contribution to the budget revenues which further strengthens EC's
position in the domestic market.
• High barriers to entry.
• High profitability margins that largely improved last year.
• Hidden reserves of over EGP one billion.
• Successful joint production agreement with the world’s second largest cigarette manufacturer (British
American Tobacco) places EC at a higher rank internationally.
• Effective management which enabled the company to counter severe challenges and continue with its
success story.
• Long term investment plan includes the implementation of new technology that would enable EC to realize
cost efficiencies and maximize productivity, once applied on a large scale at the new plant location starting
2007/8.
• Robust coverage ratios and sustainable financial flexibility.
Key Credit Challenges
• Exposure to currency fluctuations
• Dwindling export volumes
• Potential threat of stricter anti-smoking legislation and its enforcement in line with international trends.
Some Arab countries started to take ban actions against smoking.
• The recent dilution of government stake to 52.8%, albeit continuing to hold a controlling share, raises
concerns regarding the government's intentions in the medium term which arose out of conflict of interest
between socioeconomic and public health concerns.

MERIS Analysis 1
Key Rating Considerations

Company Profile, Industry and Business Fundamentals

Overview
On the Domestic front
EC remains in control of its dominant market stake as the sole producer of cigarettes,
backed by its vast experience in the tobacco industry that extends back over 80 years. It
enjoys government support, being a key source of budgetary revenues. Its continuous
research and development work has assisted the company in facing a set of challenges
over the past years and in diversifying and ameliorating its products and sources of
revenues.
The company presently dominates around 91% of the cigarette market in Egypt. It used to hold
a larger share before it started to manufacture foreign brands for the world's largest producers:
Philip Morris, British American Tobacco, as well as other foreign brands in mid 1980's.
International brands presently cover around 9% of the market mostly occupied by foreign
brands produced locally at EC facilities, and the remaining balance (less than 1%) represents
imports and smuggled cigarettes.
EC has a large distribution network linking south to north regions, covering more than 90% of
Egypt, in mostly populated zones. With its widely diversified range of tobacco products, EC was
able to match the tastes and preferences of various smokers with a set pricing structured to
match the purchasing power of the three income segments (low, middle and upper) in Egypt,
with the majority (around 92%) targeting the low-income bracket.
To diversify its revenues and remain in control of the market, EC has developed strong
relationships with international manufacturers of cigarettes that began in the 80's when EC
signed manufacturing agreements with the two largest global cigarettes producers: Philip Morris
and BAT. According to those agreements, both foreign companies are responsible for the
procurement of the raw tobacco, pricing, distribution and marketing of their foreign cigarettes in
Egypt. Production takes place at EC's existing facilities for a fee of around $5.25 on average per
1000 cigarettes. Fees are paid in Egyptian pound (EGP) equivalent at the prevailing rate at the
time of payment. These brands target the upper income segment with prices almost double
those of EC's brands to the medium and upper income segments; hence, they do not represent a
threat to EC's competitiveness.

In 2004, EC entered into a different agreement for up to five years with BAT where both
companies agreed to jointly produce at EC facilities new brands and blends. BAT will be
responsible for the distribution and marketing, yet the revenues and profits from this new line
will be equally shared. The outcome of this joint production project started in July 2004 and has
exceeded the planned sales volume for the first year by two fold the planned figure. This
represented 461 million cigarettes (EC 50% share), targeting middle and upper income class in
the domestic market with EGP 4 average price per pack. The plan was to double the production
volume in two-year's time.

Revenues Composition

100%

80% Real Estate project

60% Services
Net Exports of other products
40%
Manufacturing fees
20%
Tobacco Products
0%
2002 2003 2004 2005

MERIS Analysis 2
Other activities developed by EC since the beginning of this decade were real estate activities, in
addition to promoting and exporting other goods for other domestic manufacturers. The former
stems from the fact that the company is planning to relocate its plants to 6th of October city,
which leaves behind a major source of real estate reserves of not less than EGP one billion. As
for the latter activity, it widely expanded in FY 2004/05 to constitute around 2.5% of net
revenues, yet this activity has been developed in the light of barter agreements already signed
with some of COMESA suppliers of tobacco (as will be discussed later in Business and Industry
Risks section).

Due to socio-economic concerns that are clearly reflected in cigarette demand inelasticity and
the fact that EC remains a key source of revenues to the government (around 1.34% of tax
revenues), EC still enjoys government support which is demonstrated in many aspects:
• The presidential decree # 164/2002 amending law #11/91 that was issued in July 2002
and extended sales tax brackets into 8 layers to allow more flexibility to EC in setting fair
prices acceptable by the market and covering for the EGP devaluation and its adverse
impact on the company’s cost of sales.
• Manufacturing of cigarettes by foreign companies requires prior approval of the
government.
• High duty imposed on imports of cigarettes.
• Government's holding of majority stake in the company.
• Leniency in enforcing legislation which combats smoking in contrast with actions taken
in other Arab countries.
EC is a Key source of revenues to Government

5,000.00
In EGP Millions

4,500.00
4,000.00
3,500.00 Profit distribution
3,000.00 Real estate tax
2,500.00 Income tax
2,000.00 Customs
1,500.00
Sales tax & Health insurance fees
1,000.00
500.00
0.00
2000 2001 2002 2003 2004 2005

On the international front

Exports never exceeded 3.7% of EC net revenues. That level was last recorded in FY2001/02. EC
exports have been on the downward slope since 2002 and constituted 1.8% of revenues in
FY2004/05 when the company lost two of its key customers from Arab countries. According to
EC, this was attributable to actions taken against smoking. However, EC expansion efforts to
open new outlets in other countries remain intense, though not enough yet to compensate the
loss of its exports on quantity basis. It is possible for the company to gain new ground in other
countries, as a consequence of its recently started joint production project of cigarettes with
BAT.
The importance of safeguarding its export proceeds stems from EC’s incessant needs to mitigate,
even partially, the foreign currency risks attributable to the fact that it imports 100% of its
tobacco.
EC’s global presence originates from being a key customer to major suppliers of tobacco. EC
imports around 55000 tons of tobacco every year worth around $125 million, which places the
company in a good bargaining position.

MERIS Analysis 3
Business and Industry Risks:
The global market for cigarettes is foreseen to grow slightly starting from 2005 till 2007 due to
the expected increase in consumption in emerging markets1.

• Fluctuations of supply and prices of Tobacco

Tobacco agriculture is seasonal and is impacted by many natural as well as human factors,
such as the Master Settlement Agreement that was signed in November 1998, which caused the
industry to raise cigarette prices and impacted consumption. Natural factors, as well, could
affect prices, production and consumption of tobacco and its products.
Globally, "tobacco growers indicated intentions to harvest lowest acres since 1800s during the
upcoming 2005 season and 22% less than harvest in 2004”.2
EC, having a strong bargaining position, was able to purchase large volumes of tobacco in
FY2004/05 in anticipation of possible shortage in supply to streamline its cost of inventory and
production. EC normally deals with a wide range of key tobacco suppliers from Brazil, India,
China, Greece, Argentina, Zimbabwe, Malawi, Kenya, Indonesia, Italia, Bulgaria, Thailand,
Croatia, France, Vietnam, Macedonia, Lebanon, Uganda, Pakistan and COMESA countries. Raw
tobacco is purchased through tenders.
This gives an edge to the company to mitigate supply risk (any unforeseen shortage in tobacco
crop), and get the best offers in its negotiations, in terms of quality and cost.
Suppliers' facility extends up to 4 months, starting from shipment billing date.

• Foreign currency requirements and the impact of EGP on EC cost of production

EC relies on 100% imports of tobacco and 80% of other relevant raw materials in its
manufacturing process. In this respect, foreign exposure constitutes a critical risk factor in the
company’s production process. EC has taken a number of measures trying to mitigate and
combat foreign exchange risks.

1. In an effort to reduce its foreign currency requirements, cost of production and enhance
its revenues, EC, in 2000/01, signed barter agreements with some of its tobacco
suppliers in the COMESA region, according to which EC provides its tobacco suppliers
with domestically produced goods such as fertilizers, tires, etc. in exchange for tobacco
leaves. By doing so, the company partially alleviates the adverse impact of EGP
devaluation on its cost of production, reduces cost of imports by paying no customs due
to the free trade agreement signed by the government with the COMESA region,
promotes domestic products and earns from 4 to 7% commission on the value of
exchanged goods. In 2005, net proceeds from these transactions amounted to EGP 85.5
million, almost triple the net figure in 2002, this has been matched by an amount on the
purchasing side of EGP 82.5 million, resulting in an income of LE 3 million.
2. EC usually keeps a large stock of tobacco to hedge against foreign exchange movements
(EGP devaluation) and possible shortage in supply.
The company maintains a strategic stock that ranges from 9 months to 13 months, as
was the case in 2005. The stock coverage period increased in FY2005 as EC has also
capitalized on the appreciation of the EGP that took place over the past year. Also, to
benefit from the recent decrease in customs duties on packing materials, EC has
imported and locally purchased large imported quantities (60%) to match its
requirements for a period ranging from 9 up to 18 months, taking advantage from the
rather stabilized FX rate EGP to US$ during 2005.
3. In 1999, EC introduced the puffing technology into its operations at the Giza facility to
realize larger extraction of raw tobacco and reduce the quantity of raw tobacco used per
cigarette, which has resulted in around 3% cost savings so far. This technology changes
the mix of tobacco roots to leaves in a way to increase the production per weight of
tobacco and reduce cost of imports and so realize around a minimum of 8% cost savings
that is expected to be achieved in 2007/08 once EC moves to 6th of October city where
there will be more room.

1
Research and Markets’ world market for cigarettes forecast report Nov. 2004.
2
USDA Economic Research Service: Tobacco outlook – April 2005.
MERIS Analysis 4
 • Anti-smoking campaigns and legislation against tobacco
Legislation against the use of tobacco has been in place since 1981. Law # 52/1981
prohibits smoking in public places: cinemas, theatres, etc. Law # 137/81 prohibits
smoking in work places.
• In 1997, a ministerial decree # 289 was issued to set a ceiling to the quantity of tar
per cigarette.
• Manufacturers are required by law to print a health warning on each pack of
cigarettes.
• Tobacco advertising is banned.
• Sale of cigarettes to age below 18 is prohibited.
Despite the increasing health warnings campaigns, sales are still increasing at higher
rates than growth in population.
• EC privatization and threat of losing government support

By July 2005, the holding company for chemical industries (government partner) reduced its
stake by 13.5% to hold 52.8% of EC. There were discussions regarding the possibility of this
transaction few years ago. The holding company reduced its stake by 0.5% over FY 2004/05
and sold the 13% in July 2005 to the public3. There has been market talk regarding further
dilution of the government share. According to EC, this is not foreseen to take place this
year.

Relocation plan:
In three years' time, EC plans to consolidate its facilities at Giza and Talbeya and
relocate at the new complex at 6th of October city
The main target behind this plan was to protect the environment, in addition to, applying the
state of the art technologies, which requires a spacious area. At the same time, the reallocation
will give more room for the horizontal expansion and also to implement advanced cost saving
schemes.
As for the other facilities - Moharem Bek and el Rassafa - it is planned to relocate them to a new
region at "Borg El Arab" in Alex to specialize in the manufacturing of cigarettes and molasses for
export markets. (Please refer to the Appendix for details)

Financial Fundamentals

Revenues and Profitability

Figures in EGP 000s FYE 6/30 2002 2003 2004 2005
Net sales 2,313,736 2,609,472 2,954,079 3,401,859
Growth 7% 13% 13% 15%
EBITDA 691,353 682,594 656,763 881,868
EBITDA Growth -3% -1% -4% 34%
EBITDA Margin 30% 26% 22% 26%
EBIT 506,916 497,348 490,944 737,586
EBIT Growth -4% -2% -1% 50%
EBIT Margin 21.9% 19.1% 16.6% 21.68%
EBIT/Average assets 21% 20% 18% 23%
EC, over the period from FY 01/02 to FY 04/05, has effectively managed its risk exposures while
expanding its net revenues. EC has been facing many challenges over this period:

• Fluctuations in tobacco prices.

• Government’s previously imposed ceilings over cigarette prices, which were rather
released by amending law #11/91, effective as of August 2002.
• Foreign exchange rate movements and the devaluation of the Egyptian pound.
• The dwindling of its export channels.
• The threat of its privatization and loss of government support.
• Anti smoking campaigns and the threat of stricter legislation or enforcement of existing
laws that would possibly hinder industry expansion

3
Details in Appendix.
MERIS Analysis 5
EC’s sales have been on the rise despite all these challenges. Sales of cigarettes and tobacco
products constituted 91% of net revenues in FY2004/05 versus 93% in FYE03/04, which
reflects the impact of a 35% increase in other revenues related to manufacturing license fees of
foreign brands. This fee income started to resume its previous performance following two
consecutive years of decline attributable to the impact of EGP devaluation on foreign brand
prices. Revenues originating from barter deal agreements witnessed an increase of 74%. EC
cigarettes sales in quantity were slightly lower (3%) in FYE04/05 which was mostly attributable
to the introduction of new brands at higher prices targeting lower to medium income segment.
In light of the above, market reaction reflects the elasticity of cigarette demand (0.393)4 in Egypt.
EC succeeded in enhancing its profit margins which have been declining over the three years
prior to FY 04/05, not only through its new brand’s higher prices, but through successfully
rationalizing the increase in cost of sales by purchasing a larger quantity of tobacco that would
cover up to 13 months inventory (up from 9 month over FYE 02/03 and 03/04) at fair deal
prices and capitalizing on the appreciation of the Egyptian pound over the past year (8% on
average). The increase in FY 04/05 cost of sales was also alleviated by the reduction in customs
duties on the company’s imports of packaging materials as well (a reduction of 36% in fees as a
percentage of packs value). As such, EC managed to resume its margins of previous years.
It is also worthy to highlight the fact that EC was able to reduce its non cash cost by relying on
financial lease5 as another source of funding for its expansion and operational requirements,
and hence improve its asset leverage and utilization.

Sales Performance
Exports
100.0% 80% Domestic Sales
80.0% 60%
Others
60.0% 40%
40.0% 20% Exports Grow th

20.0% 0% Domestic Sales

0.0% -20% Grow th

2001 2002 2003 2004 2005

Profitability Margins

35%
30%
25%
EBITDA Margin
20%
EBIT Margin
15%
EBIT/Average assets
10%
5%
0%
2000 2001 2002 2003 2004 2005

Cash Flow Coverage

Figures in EGP 000s FYE 6/30 2002 2003 2004 2005
EBIT/Gross interest expense 109.20 2190.96 53.13 21.61
EBIT/Net interest expense -322.1 -30.0 -32.9 25.0
CFO 286,684 488,614 383,821 803,750
CFO/ CAPEX & Investment -7.2 1.7 2.1 2.8
FCF 190,395 90,587 87,034 423,350
RCF 20,163 -118,462 -94,046 205,195

EC coverage ratios, albeit showing some decline, still prove to be more than good. EC still has
room to use banks or leasing as sources of finance, and still be able to service its debts.

4
Economic Research Service: international food demand elasticities data base, August 2003.
5
See Appendix.
MERIS Analysis 6
Despite all the challenges it has been encountering over the past years, its CFO/Capex ratio has
been on the rise.
It is worthy to mention that most of EC capital expenditures represent its investments in the
new location of its plants which is expected to be completed in 2007/08.
The negative retained cash flow reveals the impact of aggressive dividends distribution pursued
by the company, even during years with the most EGP devaluation (Dividends payout reached
61% in FY 04/05, down from 64% in FY 03/04, down from 70% in FY02/03).

Credit Ratios
Figures in EGP 000s FYE 6/30 2002 2003 2004 2005
Gross Bank Debt 71,703 209,356 131,864 0.0
Adjusted Gross Debt 222,380 298,390 595,401 975,442
Deposits held with banks 288,538 331,374 171,954 242,160
Net Adjusted Debt -66,158 -32,984 423,447 733,282
EBIT/ Gross Bank Debt 7.1 2.4 3.7 No Bank Debt
EBIT/ Adjusted Gross Debt 2.3 1.7 0.8 0.8
EBIT/Net Adjusted Debt -7.7 -15.1 1.2 1.0
CFO/Gross Bank Debt 4.0 2.3 2.9 No Bank Debt
CFO/Gross Adjusted Debt 1.3 1.6 0.6 0.8
CFO/Net Adjusted Debt -4.3 -14.8 0.9 1.1
FCF/Gross Bank debt 2.7 0.4 0.7 No Bank Debt
FCF/Adjusted Gross Debt 0.9 0.3 0.1 0.4
FCF/Net Adjusted debt -2.9 -2.7 0.2 0.6
Bank Debt/Equity 0.1 0.2 0.1 0.0
Adjusted Debt/Equity 0.2 0.3 0.5 0.7

Leverage ratios reveal the company’s prudent use of bank debt while extending the use of sale
and lease back as a funding tool which started over the past four years and reached around
EGP 0.98 billion as of FYE 04/05, to be paid before year 2013. It is worthy to mention that by
December 2004 EC has successfully ended the first contracts signed in 2001. (Please see details
in Appendix)

Sources of Funding

Millions
1.4
1.2
1 Working Capital
0.8
Bank Debt
0.6
Lease liability
0.4
0.2 Equity
0
-0.2
2001 2002 2003 2004 2005

As noted from the above chart, EC managed to match its long term assets and funding with
minor reliance on bank debts, realizing a positively increasing working capital.
It is worthy to note that despite the aggressive dividends distribution, EC's adjusted debt/equity
ratio is still below one, and EBIT/net adjusted debt ratio stands at one.

EC enjoys extensive credit facilities offered by the four state owned banks in addition to a long
list of other joint venture and foreign banks. It developed strong relationships with all these
banks as a borrower and major depositor client. Total credit facilities amount to $250 million
and are all extended for short-term purposes: overdraft, opening and refinancing of letters of
credit and issuing letters of guarantees. EC’s utilization of these facilities stood at a very
minimal level owing to the fact that all of its domestic sales are conducted on cash basis.
Besides, the company enjoys supplier facilities of four months.

MERIS Analysis 7
Appendix
Background
Ownership structure:
Capital
Authorized Capital: EGP 500 million
Issued and paid-in capital: EGP 375 million
Par value: EGP 15 (increased from EGP 10 in 2003)
Number of shares: 25 million

Shareholding Structure

As of FYE AS of FYE Capital and Shareholding Structure

2002/03 2004/05 after the recent public subscription July 05
Shares Shares Shares Capital % share
Holding Company 16,566,680 16,446,680 13,196,680 EGP 197,950,200 52.8 %
for chemical
industries

Labor Union 1,265,025 1,273,075 1,273,075 EGP 19,096,195 5.1%

Employees 134,475 22,100 22,100 EGP 331,500 0.1%
Public 7,033,820 7,258,145 10,508,145 EGP 157,622,175 42.0%

Total 25,000,000 25,000,000 25,000,000 EGP 375,000,000 100%

History of capital increases:

In 1990s, three increases in capital took place. They were entirely financed from reserves: EGP
47.438 million in 1990, EGP 75 million in 1991 and EGP 75 million in 1992.
The last increase, which took place in the second half of 2002, was EGP 125 million funded from
the legal reserve.
Privatization
In 1995, the company was partially privatized through the sale of 15% owned by the Holding
Company for Mining and Refractors (HCMR) to the public, and the sale of another 5% to the
labor union.
In 1997, another 14% was offered for public subscription which reduced the share of HCMR to
66%.
The ministerial decree # 1499 issued in 2000, transferred Eastern to the ownership of HCCI.
In 2002, the increase in capital raised par value from EGP 10 per share to EGP 15 per share.
By July 2005, 13% was offered for public subscription @ EGP 200, while during FY 04/05, 0.5%
(120 thousand) of the Holding Company’s stake was also offered to the public and 0.4% of
employees stake (112 thousand shares) was offered to the public and some to the labor union.
Free float became 42%.
Management:
The organizational structure of the company reflects the substantial volume of diverse
operations it conducts on a daily basis. All of its senior management have been with the
company for many years and have vast experience in the tobacco business. The chart also
shows an integrated system where each sector has a defined role, and runs a number of
departments to support its planning. Due to the extensive distribution network directed by EC,
some sectors, such as Marketing, are run on decentralized basis. Heads of sectors meet almost
on a daily basis to discuss progress in all business affairs.
The board includes five members. It is headed by Mr. Mohamed Sadek Ragab, Chairman and
CEO who has been in EC for over 10 years
Operating facility:
EC operates seven facilities (Giza, Talbeya, Moharem Bek, Abu Tig, Tanta, Menouf, and Al
Rassafa), with at least 26 plants. Two of these facilities constitute 93% of EC production. Giza
and Talbeya plants account for 75% and 18% of total production of cigarettes respectively.
EC runs around 120 sales outlets and warehouses, which represent nearly 30% of its
distribution channels, out of which 10% are owned and 90% are rented.

MERIS Analysis 8
In fact, EC's distribution network extends to 400 sales outlets, 70% of which represent the
channels of its wholesale or retail clients and their transportation means.
Molasses production takes place in six plants: Giza, Moharem Bek, Abu Tig, Tanta, Menouf, and
Al Rassafa.
Other activities taking place in Giza, EC headquarters, are the manufacturing of carton
packets and spare parts, and printing.

Sales distribution channels:

Cigarettes
27% in Cairo,
19% in Alex,
28% East,
26% North, South & West
Cairo and Alex were the targets in 2003/04 in terms of cigarettes.

Molasses
Distribution is mostly in upper western Egypt 35%, followed by Alex 23%, then Cairo 18%.
The 2004 plan was to expand in all these regions.
Employees
Number of employees reached 12129 as of FYE 04/05 down from 12943 on June 30, 2000.
Five year Investment Plan
The company plans to relocate its plants to 6th of October industrial complex.
The company will consolidate Giza, which contains 21 plants, and Talibeya facilities by moving
them to the new complex.
Moharem Bek and el Rassafa will be relocated to a new region "Borg El Arab" in Alex to
specialize in the manufacturing of cigarettes and molasses for export markets.
Investment cost
Investment plan regarding the relocation of the company plant to 6th of October city:
Land allocated for this purpose: 353 feddans
The value of the land, EGP 172 million, was entirely paid. Up till present, the completed
infrastructure work amounted to EGP 342 million that were paid in full.

The relocation will be effected through four phases:

Preliminary phase: with a total cost of EGP 224mn.

First phase will take 21 months to complete with an estimated total cost of EGP 563 million out
of which EGP 100 million infrastructure works was paid for.
On February 21, 2004, the construction of four warehouses and administration building was
assigned to OCI for total investment cost of EGP 246 million.
Construction work is planned to be finished in 2005/06.

Second phase will extend up to 14 months, and require an investment of EGP 188 million.
Phase 2 is planned to begin in 2005/06 and expected to be completed in 2007.
Funding will be effected through financial sale and lease back contracts of EGP 250 million

Third phase will range up to 14 months ending in 2008, with an estimated investment cost of
EGP 244 million
That would make total estimated costs of EGP 1.219 billion.

Funding is planned to be through retained earnings and reserves and provisions which have
been accumulated over the past years for this purpose. In addition, the company intends to use
its resources from its plants in Talbeya and Manesterly, Jaen Maruchian and warehouses in
Zomor either by selling or renting them.
The land of Talbeya was estimated at EGP 100 million, and other warehouses at EGP 50 million.

MERIS Analysis 9
Sale and Lease back contracts:
First agreement
ƒ That was with Citi lease: it is a sale and lease back contract, signed on
November 18, 2001 and ending on November 18, 2004. Its face value was
EGP 100.196 million at a cost of 14.2%. Monthly payment was EGP 3.434
million.
ƒ Soglease Egypt: sale and lease back contract, signed in December 25, 2001
and ending on December 25, 2004. Its face value was EGP 49.679 million at a
cost of 14.2%. Monthly payment was EGP 1.703 million
Second agreement
ƒ That was signed on 1/1/2004 with Soglease with value of EGP 200.012
million, cost 12%, tenor of five years in addition to one year grace period and
monthly rent of EGP 5.013429 million.
ƒ Another contract was signed in June 2004 with the same company and same
terms of an amount of EGP 50 million, with monthly rent of EGP 1.25 million
Third agreement
ƒ First contract signed on 27/12/2004 with Corp lease for a total value of EGP
101.3 million, cost 11.4% , monthly rent of EGP 3.1 million, tenor five years
in addition to 3 grace years
ƒ Second contract signed on 28/12/2004 with Soglease for a total value of EGP
104 million, cost 11.4% with monthly rent of EGP 3.2 million, tenor five years
in addition to 3 grace years
ƒ Third contract signed on 29/12/2004 with Citi lease for a total value of EGP
100 million, cost 11.4%, with monthly rent of EGP 3.1 million, tenor five
years in addition to 3 grace years

Other expansionary projects include:

Construction of a new plant at Borg el Arab.
The relocation plan has not been set up yet. Land of 184 thousand m2 area was purchased. The
investment cost till the end of 20004/05 reached a total of EGP 35.5 million.

Production process of cigarettes:

Production cycle never exceeds two days (which includes preparation, blending, manufacturing
and packaging). In addition, it takes only one day for selling, distribution and collection of sales
proceeds.
The production process extends to three stages:
Preparation and blending phase where tobacco leaves are stripped, the stem is cut out and the
leaves are crushed. This is followed by a stage necessary to adjust the moisture content, add
various flavors, and then cut the tobacco and leave it to dry. In the manufacturing phase, the
processed tobacco is rolled into cigarettes, then comes the third phase which entails the
packaging of cigarettes.

The production of molasses and cigars is mostly manual and requires different treatment
processes.

Cigarettes prices and sales tax brackets

In FY 2004/5, Cleopatra brands declined to account for 92.3% of EC sales of cigarettes versus
96% in FY 03/04 and 97% in FY 02/03 :
King size soft packet was replaced by Golden king (new brand) which constituted 59% and sells
at EGP 2 instead of EGP 1.75 per packet, and
New Cleopatra full flavor constitutes 16% and sells at EGP 2.25 per packet (down from 2.5, and
Cleopatra Super Star (new brand) constitutes 12% and sells at EGP 2.5 per packet. Another new
brand was also introduced called New Cleopatra Lights.
The remaining 7.7% is divided between 1.5% Belmont which sells at EGP 2 per packet, and the
remaining 6.2% sells at a range of prices extending from EGP 2.5 per packet to EGP 3.5 per
packet.

Till 2002, EC had been unable to exercise control over the pricing of its brands which used to be
regulated by the government.
On 28/7/2002, a decree was issued to amend the sales tax structure which included only two
tax brackets which is imposed on EC. The amendment to tax law #11 of 1991 extended the price

MERIS Analysis 10
range and sales tax brackets from two to eight tranches. Due to this new tax application, EC is
able to increase prices within each range without having to transfer to the higher tax bracket.
Previously, it was subject to two tax rates, for prices below EGP 0.65, an EGP 0.82 tax was
excised on the cigarette pack and for prices above EGP 0.65, the applicable sales tax was EGP
1.28.

Post amendment, sales tax brackets extended as follows:

In EGP
Price per packet Sales tax per packet
Less than 0.65 0.83
0.65-0.73 0.87
0.73-0.84 1.00
0.84-0.95 1.15
0.95-1.06 1.28
1.06-3.00 1.45
3.00-4.25 1.65
above 4.25 1.75

Based on this amendment, EC changed its product mix to be currently priced @ a minimum of
EGP 2 per pack to a maximum of EGP 3.5 per pack. This is in addition to the new brand
introduced though the joint production project with BAT, which sells at EGP 4 per pack.
As such, the new brackets gave more space for EC to change the prices of some brands of its
cigarettes with minor changes in sales tax.
All international brands, locally manufactured at EC facilities and imported cigarettes are
subject to these tax brackets.

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MERIS Analysis 11