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Global Research Sector - Cement August 2011

GCC Cement Sector Quarterly 2Q11


GCC cement sector 2Q11 profits rose by 8.8%; 1H11 profits down by 4.7% Gross & net margins at their historic lows in Oman & UAE Declining oil & coal prices to benefit the companies in 3Q11 Positive stance on Saudi Arabia

GCC Cement

GCC cement sector 2Q11 profits rose by 8.8%; 1H11 profits down by 4.7%
The pace of decline in GCC cement sector profitability appears to be slowing down with the consolidated cement sector profitability declining by 4.7%YoY to USD785.9mn in 1H11 compared to a decline of 12.0%YoY in 1H10. Saudi Arabia remains the only driver of GCC cement sector profitability with the net profit increasing by 13.5%YoY in 1H11. However, rest of the GCC countries continues to witness erosion in their profitability.

Realization prices extend their tumult


Cement prices in the GCC averaged around USD66.0/ton in 1H-2011, as compared to USD68.6/ton enjoyed in 1H-2010, a 3.8% decline due to demand weakness in the GCC, especially from the UAE. Cement prices in all the GCC countries witnessed a decrease except KSA and Qatar. Oman marked the largest decline in prices by 14.4%.This is due to depressed demand and the stiff competition in the local cement market.
Gross Margins & ROE 15.0% 12.0%
Return on Equity

Non-Core Income as % of Net Inc. & Net Margins 60.0%

KSA
GCC Oman Kuwait Qatar
Net Margin

48.0%
36.0% 24.0% 12.0%

KSA
Qatar GCC Oman Kuwait UAE 0% 25% 50% 75% 100% 125%

9.0% 6.0%

3.0%
0.0% 0% UAE 12% 24% 36% 48% 60%

0.0%

Faisal Hasan, CFA Head of Research fhasan@global.com.kw Tel: (965) 2295-1270 Hettish Karmani Senior Financial Analyst hkumar@global.com.kw Tel: (965) 2295-1281 Umar Faruqui Financial Analyst ufaruqui@global.com.kw Tel: (965) 2295-1438 Turki O. AlYaqout Financial Analyst tyaqout@global.com.kw Tel: (965) 2295-1295 Global Investment House www.globalinv.net

Gross Margin Source: Company Reports & Global Research

Non-Core Income as % of Net Income

Qatari government authorities estimate increase in cement demand


Estimates of the demand for 2012 provided by government authorities to the Companies in Qatar are higher than current demand of 3.5-4.0mtpa. Global Research estimates of average demand in Qatar during 2012-17 is estimated at 4.8mtpa. As a reason, Qatar National Cement Company has announced that it is going to increase it cement capacity by 0.93mtpa to 5.36mtpa. Company also announced another special mill for grinding slag, which is used in the production of blended cement.

Decline in oil prices post 2Q11 to benefit companies in 3Q11


Decline in oil prices post 2Q11 is expected to benefit the local cement companies. Companies in Oman and UAE are witnessing a huge decline in their gross margins due to increasing competition and increasing raw material prices. However, with decline in oil prices we expect the 3Q11 to benefit the company and expect them to report better margins.

Recommendation
Within GCC, we are POSITIVE on Saudi Arabian cement sector due to better demand supply situation as compared to other countries in GCC. Global Research outlook is Neutral for Qatar & Oman and Negative for UAE.

Global Research GCC


Global Research Cement Universe - 2011e
Yamama Cement Saudi Cement SCC KSA 3030.SE SACCO AB 57.50 2,346.0 -4.2% -3.2% 40.7% 54.9% 48.8% 47.3% 7.8% 23.5% 76.5% 21.8% 16.3% 8.4 268.5 16.7% 5.2% 5.3 10.8 11.4 2.4 Eastern Province EPCC KSA 3080.SE EACCO AB 46.80 1,073.0 -3.5% -2.7% 13.4% 47.1% 42.2% 41.3% 1.0% 9.2% 90.8% 16.0% 14.4% 7.3 287.1 18.1% 7.5% 4.6 10.7 11.8 2.2 Qassim Cement QCC KSA 3040.SE QACCO AB 65.00 1,560.0 -1.9% 1.3% 5.5% 58.5% 54.9% 53.2% 0.0% 8.7% 91.3% 28.5% 26.0% 2.9 403.0 31.5% 7.7% 5.5 9.8 10.8 3.0 Yanbu Cement YNCC KSA 3060.SE YNCCO AB 58.00 1,176.0 0.9% 12.6% 44.5% 51.2% 48.1% 45.0% 28.7% 41.3% 58.0% 16.8% 10.1% 11.6 395.9 10.0% 5.2% 7.4 15.7 14.0 2.3 Arabian Cement ACC KSA 3010.SE ARCCO AB 38.10 812.8 -14.4% -13.3% 11.7% 52.7% 47.7% 46.1% 25.7% 35.0% 65.0% 16.0% 10.1% 14.7 184.8 10.1% 2.6% 4.3 9.0 7.1 1.1 Oman Cement OCC Oman OCCO.OM OCOI OM 0.47 598.7 -15.9% -16.5% -25.6% 38.8% 32.8% 33.9% 3.9% 11.4% 88.6% 11.5% 10.1% 1.3 159.2 15.6% 9.6% 3.2 6.9 9.1 1.0 Raysut Cement RCC Oman RAYC.OM RCCI OM 1.03 535.1 -4.5% -2.0% -10.7% 45.0% 26.1% 21.8% 35.0% 51.0% 49.0% 16.8% 9.0% 2.7 142.0 26.1% 8.7% 3.3 9.8 11.4 1.9 Arkan Build. Material ARKAN UAE ARKAN.AD ARKAN UH 1.22 581.7 -3.9% -11.6% 5.2% 34.2% 7.7% 13.9% 34.2% 39.8% 60.2% 2.4% 1.5% 0.4 144.0 5.4% 10.5 32.8 55.4 1.3

GCC Cement Quarterly Report

Gulf Cement GCEM UAE GCEM.AD GCEM KK 0.96 230.3 -15.3% -40.2% -40.8% U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R U/R

Fujairah Cement FCI UAE FCEM.KW FCEM KK 0.76 73.5 -6.6% -13.6% -43.0% 7.8% 3.7% 1.0% 33.7% 45.6% 54.4% 0.5% 0.3% 1.4 56.0 7.8% 3.3% 1.8 11.4 53.3 0.3

RAK Cement RAKCC UAE RAKCC.AD RAKCC UH 0.73 96.2 -18.0% -30.5% 4.3% 4.0% -2.4% 1.4% 0.0% 3.5% 96.5% 0.4% 0.3% 0.4 72.4 3.6% 6.8% 1.5 11.0 130.1 0.5

Qatar Cement QNCC Qatar QANC.QA QNCD QD 108.00 1,443.0 -3.2% -5.8% 56.1% 45.0% 40.1% 42.1% 11.8% 16.5% 83.5% 20.9% 17.4% 15.4 284.4 25.9% 5.6% 4.9 9.1 11.4 2.3

Code/Symbol

Symbol Country Reuters Bloomberg Price (Local Currency)

YSCC KSA 3020.SE YACCO AB 58.25 2,097.0 -5.3% -1.5% 19.8% 55.4% 51.4% 51.4% 2.6% 9.8% 90.2% 21.8% 19.2% 7.3 308.3 19.1% 6.9% 5.3 10.4 11.1 2.4

Price Data Profitability Ratios Valuation Ratios

Market Capitalization (USDmn) 1-m Performance 3-m Performance 12-m Performance Gross Margins (%) Operating Margins (%) Net Margins (%) Debt as % of Assets Liabilities as % of Assets Equity as % of Assets Return on Equity (%) Return on Assets (%) Asset / Share (USD) EV/Ton (USD) Cash Return On Capital Invested (%) Dividend Yield (%) EV / Revenues (x) EV / EBITDA (x) P / E Ratio (x) P / BV Ratio (x)

Source: Global Research , U/R - Under Review Market Price, Market Capitalization & Enterprise Value as of 21 August 2011 FCEM Price has been taken from Kuwait Stock Exchange and converted to AED

August 2011

Global Research GCC

GCC Cement Quarterly Report

GCC Cement Sector Profitability


GCC cement sector witnessed a recovery in its top line by 6.3%YoY to USD2.31bn in 1H11 after a decline of 13.6%YoY in 1H10. The increase in sales revenue has come largely from Saudi Arabia, which is the regions largest cement market. Cement demand in Saudi Arabia has seen an upsurge on the back of implementation of massive construction projects. Sales revenue in Saudi Arabia has increased by 12.6%YoY in 1H11 compared to a 5.6%YoY increase in 1H10. On the other hand, UAE continued to witness a decline in its sales revenue albeit at a slower pace. UAE is still feeling the impact of the 2008-09 credit crises with major projects still on hold. Sales revenue in UAE declined by 2.9%YoY in 1H11 compared to a decline of a decline of 33.6%YoY in 1H10. Meanwhile, sales revenue in Oman and Kuwait increased modestly by 5.3%YoY and 3.9%YoY respectively.
GCC Cement Sector Consolidated Financials (USD 000) Sales Revenue Cost of Sales Gross Profit Opt. Expense Non-Core Income Operating Profit Financial Charges Net Profit Assets Equity Debt Liabilities

1H10 2,173,581 1,292,482 881,099 129,952 122,245 751,147 25,559 824,389 13,453,059 10,125,352 2,224,676 3,327,707 1H10 40.5% 1.0% 14.8% 34.6% 37.9% 1.1% 16.5% 24.7% 75.3% 8.1% 6.1%

1H11 2,310,623 1,397,090 913,534 135,764 59,464 777,770 28,438 785,916 14,159,777 10,277,992 2,222,065 3,881,786 1H11 39.5% 1.0% 7.6% 33.7% 34.0% 1.3% 15.7% 27.4% 72.6% 7.6% 5.6%

Chg (%) 6.3% 8.1% 3.7% 4.5% -51.4% 3.5% 11.3% -4.7% 5.3% 1.5% -0.1% 16.7% Chg -100.1bps -0.7bps -726.2bps -89.7bps -391.5bps 13.1bps -84.4bps 267.8bps -267.8bps -49.5bps -57.8bps

Financial Performance Ratio Analysis

Gross Margins (%) Operating Exp as % of Assets Non-Core Income as % of PAT Operating Margins (%) Net Margins (%) Financial Charges as % of Debt Debt as % of Assets Liabilities as % of Assets Equity as % of Assets Return on Equity (%) Return on Assets (%)

Source: Company Reports & Global Research

The pace of decline in GCC cement sector profitability appears to be slowing down with the consolidated cement sector profitability declining by 4.7%YoY to USD785.9mn in 1H11 compared to a decline of 12.0%YoY in 1H10. Saudi Arabia remains the only driver of GCC cement sector profitability with the net profit increasing by 13.5%YoY in 1H11. However, rest of the GCC countries continues to witness erosion in their profitability. UAE saw a decline of 56.1%YoY decline in its profitability in 1H11 while Oman has seen a decline in its profitability by 53.3%YoY in 1H11. UAE is suffering from excess capacity which is being reflected in profitability. The excess capacity in UAE is also having an impact of Omani cement sector with some cement being dumped in Oman. GCC cement sector gross margin declined by 100 basis points to 39.5% compared to the corresponding period last year. Oman cement sector has seen the largest drop in its margins to 38.2% in 1H11 from 52.5% in 1H10 largely on the back of fall in realization prices by 14.4%. Meanwhile, gross margins got further depressed in UAE to 7.1% in 1H11 compared to 11.9% in 1H10. GCC cement sector ROE also declined by approximately 100 basis points to 15.3%.

August 2011

Global Research - GCC

GCC Cement Quarterly Report

Cement Realization Price


Cement prices in the GCC averaged around USD66.0/ton in 1H-2011, as compared to USD68.6/ton enjoyed in 1H2010, a 3.8% decline due to demand weakness in the GCC, especially from the UAE. Cement prices in all the GCC countries witnessed a decrease except KSA and Qatar. Oman marked the largest decline in prices by 14.4% to USD65.3/ton in 1H-2011 as compared to USD76.2/ton during the same period a year ago. This is due to depressed demand and the stiff uprising competition in the local cement market. Kuwait, which witnessed the second largest decrease, reported an average realization prices of USD80.2/ton in 1H11 as compared to USD84.5/ton in 1H10. On a quarterly basis, cement prices in Kuwait increased 1% in 2Q2011, Kuwait continue to sell at highest average cement prices as compared to other GCC countries. With the KWD37bn development plan, cement prices should witness an increase as demand is expected to increase throughout the period. UAE realization prices decreased from USD53.1/ton in 1H10 to USD50.4/ton in 1H11. Excess supply from new local UAE companies dampen cement prices. In addition slow real estate activity and slow construction market have halted the cement market growth in UAE. As of yearend 2010, 49.5% of the project market is on hold. UAE continue to face pressure on its cement industry which is proved by declining sales, demand, profits and higher inventories. Qatar cement prices are expected to increase as demand is expected to reach 4.8mn tons per annum during the period 2010-2017. While the government continue to cap cement prices at USD68.7/ton.
Average Realization Prices 90.0 85.0 80.0 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% KSA UAE Oman
1H10
Source: Industry Reports & Global Research

(USD/Ton)

75.0
70.0

65.0
60.0

55.0
50.0 Kuwait
1H11

Qatar
Change

GCC Average

Oman, the country which started to feel a pinch of the crisis by posting lower margins for 1H11 and registering a huge 14.4% decrease in cement prices in 1H11, the largest decline among other GCC peers. Omani companies are pressured by UAE cement companies which supply cement at cost to Oman, thus hurting margins of Omani companies and igniting price wars among them. However, the largest cement producer in the GCC, KSA, witnessed an increase in cement prices by 8.2% in 1H11 to reach USD62.5/ton, the highest average realization price since 1H09. The reason KSA is enjoying a low realization prices for cement is due to the fact that KSA has abundant natural resources to help produce cement at low prices including limestone, oil and natural gas. In addition to the natural gas subsidies that cement companies th receive from Aramco. Also, on March 18 2011 King Abdulla bin Abdulaziz ordered to construct 500,000 housing units and build and expand hospitals and ordered to inject capital into specialized credit institutions to facilitate debt write-offs and increase mortgage lending. This will help shore up demand for cement as more housing units are in demand.

August 2011

Global Research - GCC

GCC Cement Quarterly Report

Correlation between Inputs & Outputs


Relationship b/w Coal Prices & Gross Margins 200.0 60.0%

160.0
120.0 80.0

48.0%
36.0% 24.0%

40.0
-

12.0%
0.0%

1Q07

3Q07

4Q07

3Q08

4Q08

2Q09

3Q09

2Q10

3Q10

Coal Prices (USD/ton) Source: Bloomberg & Global Research

GCC Gross Margins (%)

Relationship b/w Oil Prices & Gross Margins 150.0 60.0%

120.0 90.0
60.0

2Q11

2Q07

1Q08

2Q08

1Q09

4Q09

1Q10

4Q10

1Q11

48.0% 36.0%
24.0%

30.0
-

12.0%
0.0%

1Q07

3Q07

4Q07

3Q08

4Q08

2Q09

3Q09

2Q10

3Q10

Oil Price (USD)


Source: Bloomberg & Global Research

GCC Gross Margins (%)

Relationship b/w Operating Expense & Oil Price 60.0% 40.0% 20.0%

0.0% -20.0%
-40.0% -60.0%

1Q08

3Q08

1Q09

3Q09

1Q10

2Q10

3Q10

4Q10

2Q11

2Q07

1Q08

2Q08

1Q09

4Q09

1Q10

4Q10

1Q11

Q-o-Q Growth in Oil Price


Source: World Bank Pink Sheets & Global Research

Q-o-Q Growth in Operating Expense

August 2011

2Q11

2Q08

4Q08

2Q09

4Q09

1Q11

Global Research - GCC

GCC Cement Quarterly Report

Country Performance Saudi Arabia


Cement demand continued to grow strongly with an increase of 12.7%YoY in 2Q11 to 13.6mn tons reflecting the increasing pace of construction activity. This follows a 7.6%YoY growth in cement dispatches in 1Q11. We expect YoY growth trend to continue as start of new construction projects continue to translate into more cement demand. Cement demand outlook has improved with the announcement of the 21 Royal orders. However, on a QoQ basis we expect cement demand to cool off in 2H11 largely due to seasonal factors with the Haj and Ramadan season falling in this period. Most of the increase in total cement demand in 2Q11 has been accounted for by cement players in the Western and Central region indicating the strong cement demand in those regions where major urban centers of Jeddah, Madina, Makkah and Riyad are located. Yamama, Arabian, Yanbu and Riyad cement together accounted for 62.5% of total cement demand growth in 2Q11. Among the listed companies, Yamama Cement was the major beneficiary absorbing 22.4% of total volume growth in 2Q11. This came about as dispatches from Najran and Madina Cement, which are both present in the Central region, cooled off. Since 2008, Najran, Madina and Riyad cement have accounted for bulk of the volume growth. However, as they are operating at high capacity levels it has given space to players such as Yanbu and Yamama cement in the Central region to capitalize on excess demand. As we anticipated average realization prices showed a further increase by 7.3%YoY in 2Q11 to SAR245.9 per ton. This follows a 1.7%YoY rise in 1Q11. 2011 has seen an improvement in realization prices after a decline in 2010. Strong domestic demand is mitigating the impact of cement export ban and increase in domestic cement capacity. We believe the recently announced restrictions on cement export licenses will have a limited impact as cement exports accounted for only 4.6% of total cement dispatches in 1H11.
KSA Cement Price
70.0 68.0

KSA Projects Value


800.0

720.0

(USD/Ton)

(USD Bn)

66.0 64.0 62.0 60.0

640.0

560.0
480.0

400.0

1H10

2008

1H09

2009

1H09

1H10

2009

2010

1H11

1Q11

1Q10

9M09

1Q10

9M09

Source: Company Reports, MEED & Global Research

Saudi Arabia listed cement companies excluding Al-Jouf Cement posted a strong increase of 19.0%YoY in sales revenue to USD675.1mn in 2Q11 from USD567.2mn in 2Q10. Net profits also witnessed a significant increase of 17.2% to USD326.3mn in 2Q11 as compared to USD278.5mn during 2Q10. The increase in sales and profitability has been driven by increase in volumes sold and realization prices in the backdrop of improved demand. Meanwhile gross margins remained more or less flat at 52.7%. The clinker and cement stocks declined to 7.8mn tons at the end of 2Q11 from 9.03mn tons at the end of 1Q11. This was the second consecutive quarterly decline after two successive quarterly increases to 10.8mn tons at the end of 4Q10 and 10.4mn tons at the end of 3Q10. The decline came largely due to drawdown of stocks by Saudi Cement, Southern Province Cement and Najran Cement.

August 2011

9M10

9M10

2010

Global Research - GCC


Saudi Arabia Cement Sector
56.0% 55.0% 54.0%

GCC Cement Quarterly Report

3.5%
2.8% 2.1%

53.0%
52.0% 51.0% 1H10 Gross Margins (%) 51.0% 50.0% 1H11

1.4%
0.7%

0.0%
1H10 1H11

Non-Core Income as % of PAT 50.0% 49.0%

49.0%
48.0% 47.0% 46.0% 1H10 1H11

48.0%
47.0% 46.0% 45.0% 1H10 1H11

Operating Margins (%)


1.5% 20.0%

Net Margins (%)

1.2%
0.9% 0.6% 0.3% 0.0%

16.0%
12.0% 8.0% 4.0% 0.0%

1H10

1H11

1H10
Debt as % of Assets

1H11

Financial Charges as % of Debt

28.0%
27.0% 26.0% 25.0% 24.0%

76.0%
75.0% 74.0% 73.0% 72.0%

23.0%
1H10 Liabilities as % of Assets 13.0% 12.5% 12.0% 11.5% 1H11

71.0%
1H10 1H11

Equity as % of Assets
9.5% 9.2% 8.9% 8.6%

11.0%
10.5% 1H10 Return on Equity (%)
Source: Company Reports & Global Research * Combined Financials of Eight Listed Companies

8.3%
8.0% 1H11 1H10 Return on Assets (%) 1H11

August 2011

Global Research - GCC

GCC Cement Quarterly Report

Oman
Net income for Omani cement companies for 1H11 was USD38.7mn (OMR14.9mn) while the same during 1H10 was USD82.9mn (OMR31.9mn), decline of 53.3%. Reason for the decline in the bottom line was because of more than 37.2% increase in the cost and a huge increase in financial charges. Sales revenue of the sector in 1H11 witnessed an increase of 5.3% to USD177.3mn as compared to USD168.3mn during the corresponding period of last year. Reason for the higher sales during the current period is due to addition of Pioneer Cement numbers to the total this time which were not there in the comparable period. Out of the two, Raysut Cements topline grew by 20.7% while that of Oman Cement reported a drop of 13.9%. Both the companies combined were able to roll out 2.93mn tons of cement & clinker in 1H11 as compared to 2.23mn tons in 1H10, increase of 30.9%. Cement sales increased by 33.2% to 2.64mn tons while sales of clinker rose by 13.0% to 287.6ktons. Sales of Oman Cement went up by 2.7% while that of Raysut Cement went up by 50.5% (cement sales up by 59.5% & clinker sales up by 13.0%) mainly because of inclusion of Pioneer Cement sales. Cement price in Oman declined when compared to their average prices in the same period last year. In 1H11 average cement prices were USD65.3/ton (OMR25.1/ton) as compared to an average price of USD76.2/ton (OMR29.4/ton) during 1H10. Decline in prices mainly resulted because of dumping of low priced cement from UAE. Overall gross margins of the sector witnessed a decline as high cost product of Pioneer Cement depressed the overall margins. Gross margins went down to 38.2% in 1H11 as compared to 52.5% in 1H10. Non-core income portion contribution to the bottom line declined during 1H11. Its percentage contribution to the net income of the sector was 1.8% in 1H11 as compared to 26.7% in 1H10.
Oman Cement Price 85.0
81.0

Oman Projects Value 120.0


112.0

(USD/Ton)

(USD Bn)

77.0
73.0

104.0 96.0
88.0

69.0 65.0
9M09 9M10

80.0
9M09 9M10

1H10

2009

1H09

1H09

1H10

1Q10

Source: Company Reports, MEED & Global Research

Overall sector debt rose to USD226.2mn (23.8% of the assets) in 1H11 as compared to USD25.1mn (3.5% of assets) in 1H10. On the whole the country is witnessing an increase in cement demand thanks to the projects being carried out post the revolution. This can be ascertained by looking at the sales volume numbers of the listed companies. However, export of low priced cement from UAE is causing a huge trouble for the locals as the sectors net margins are at their historic low. During 1H11, the sector reported net margins of 21.9%.

August 2011

1Q11

1H11

1Q10

2010

2009

2010

Global Research - GCC


Oman Cement Sector
60.0% 52.0% 44.0% 30.0% 24.0% 18.0%

GCC Cement Quarterly Report

36.0%
28.0% 20.0% 1H10 Gross Margins (%) 40.0% 34.0% 1H11

12.0%
6.0% 0.0% 1H10 1H11

Non-Core Income as % of PAT 50.0% 44.0%

28.0%
22.0% 16.0% 10.0% 1H10 1H11

38.0%
32.0% 26.0% 20.0% 1H10 1H11

Operating Margins (%) 2.5%


2.0% 25.0%

Net Margins (%)

20.0%
15.0% 10.0% 5.0% 0.0% 1H10 1H11

1.5%
1.0% 0.5% 0.0%

1H10
Debt as % of Assets

1H11

Financial Charges as % of Debt

40.0%
34.0% 28.0% 22.0% 16.0%

100.0%
90.0% 80.0% 70.0% 60.0%

10.0%
1H10 1H11

50.0%
1H10 1H11

Liabilities as % of Assets
14.0% 12.0% 10.0% 8.0% 12.0% 10.0% 8.0% 6.0%

Equity as % of Assets

6.0%
4.0% 1H10 Return on Equity (%)
Source: Company Reports & Global Research * Combined Financials of Two Listed Omani Companies

4.0%
2.0% 1H11 1H10 Return on Assets (%) 1H11

August 2011

Global Research - GCC

GCC Cement Quarterly Report

United Arab Emirates


Consolidated net income of listed cement companies in UAE for 1H11 declined by 56.1% to USD19.4mn as compared to USD44.2mn in 1H10. Out of the total nine listed cement companies, six of them were in losses totaling AED34.0mn (USD124.8mn). While on a QoQ basis the 2Q11 results were higher by 86% when compared to that of 1Q11. Overall UAE cement sector consolidated revenues went down by 2.9% on a YoY basis to USD464.2mn while 2Q11 revenue was also down QoQ by 6.3% to USD224.5mn. Reason for the decline in the revenue was because of low demand in the country along with lesser export opportunities regionally as other countries are also reaching self sufficiency levels. Cement price in UAE further went down by 5.1% to USD50.4/ton (AED185.0/ton) in 1H11 as compared to an average price of USD53.1/ton (AED195/ton) in 1H10. Recently the players gathered to stop further decline in the prices which materialized during 1Q11, however, further decline in demand shook the companies which continued to shed off their produce below their cost. Gross margins of the sector continued to deteriorate and reached historic lows of 7.1% in 1H11. While 2Q11 margins were even much lower than that of 1Q11 at 6.4%. Debt levels of the sector declined to USD529.7mn in 1H11 as compared to USD576.1mn in 1H10. Debt as percentage of assets decreased to 14.5% earlier being 15.6% in 1H10.
UAE Cement Price
90.0

UAE Projects Value


1,100.0 1,000.0

82.0

(USD/Ton)

(USD Bn)

74.0
66.0

900.0

800.0 700.0 600.0


9M09 9M10

58.0
50.0

1H09

2009

1H10

1H09

1H10

2010

2009

1Q10

9M09

Source: Company Reports, MEED & Global Research

Unlike other countries, UAE witnessed an equity wipe out as well as the overall equity balance of the sector went down by 1.8% YoY to USD2.78bn as compared to USD2.83bn in 1H10. Equity as percentage of assets dropped to 76.3% in 1H11 as compared to 77.0% in 1H10. Major reasons for the drop in the equity of the sector are the losses reported by sector on their investment in equities and real estate market. The sector was operationally in losses of USD6.9mn, however, contribution from non-core income portion added handsomely to the bottom-line. The contribution touched 123.6% during 1H11 as compared to 71.5% in 1H10.

August 2011

9M10

1Q11

1H11

1Q10

2010

10

Global Research - GCC


UAE Cement Sector
15.0% 12.0% 9.0% 150.0% 120.0%

GCC Cement Quarterly Report

90.0%
60.0% 30.0%

6.0%
3.0% 0.0% 1H10 Gross Margins (%) 6.0% 4.0% 1H11

0.0%
1H10 1H11

Non-Core Income as % of PAT

15.0%
12.0% 9.0%

2.0%
0.0% -2.0% -4.0% 1H10 1H11

6.0%
3.0% 0.0%

1H10 Net Margins (%)


16.0%

1H11

Operating Margins (%)


2.5%

2.0%
1.5% 1.0% 0.5% 0.0%

15.5%
15.0% 14.5%

14.0%
13.5%

1H10

1H11

1H10 Debt as % of Assets 78.0% 77.0%

1H11

Financial Charges as % of Debt

25.0%
24.0% 23.0% 22.0% 21.0%

76.0%
75.0% 74.0% 73.0% 1H10 1H11 1H10 1H11

20.0%

Liabilities as % of Assets
2.0% 1.6% 1.2% 0.8%

Equity as % of Assets 2.0%


1.6% 1.2% 0.8%

0.4%
0.0% 1H10 Return on Equity (%)
Source: Company Reports & Global Research * Combined Financials of Nine Listed UAE Companies

0.4%
0.0% 1H11

1H10
Return on Assets (%)

1H11

August 2011

11

Global Research - GCC

GCC Cement Quarterly Report

Qatar
Qatar witnessed a drop in bottom line by 14.5% mainly because of 5.0% drop in the topline. Out of the two listed cement companies, Al Khalij Holding out performed with a bottom line growth of 2.4% while Qatar National Cement reported a drop of 16.6% during 1H11. Consolidated profits of the sector for 1H11 were USD67.7mn (QAR246.7mn) as compared to USD79.2mn (QAR288.4mn) in 1H10. The sector reported profit of USD31.9mn during 2Q11 which was down on a QoQ basis by 11.0%. Consolidated revenues of the sector declined by 5.0% to USD171.7mn during 1H11 as compared to USD180.8mn in 1H10. Reason for the decline in revenue was because of decline in cement sales volume as well as slight fall in cement prices. The decline was somehow arrested by Al Khalij Holding whose sales witnessed an increase of 44.9%. Cement price in Qatar have remained mostly constant since last couple of years. In 1H11, average cement prices in Qatar remained around same at USD68.7/ton. We believe cement prices to remain flat in Qatar because of lesser local players and government control over prices.
Qatar Cement Price
75.0

Qatar Projects Value


255.0

73.0

235.0

(USDTon)

(USD Bn)

71.0 69.0
67.0 65.0

215.0 195.0

175.0 155.0

1H09

1H10

2009

9M09

1Q10

9M10

9M09

1H10

1Q10

Source: Company Reports & Global Research

Non-core income segment continued to add to the bottom line but it was significantly lesser than the contribution in the same period last year. Contribution during 1H11 was USD11.8mn (17.5% of total income) as compared to USD18.1mn (22.8% of total income) in 1H10. Debt levels of the sector increased by 6.5% to USD312mn in 1H11 as compared to USD293.1mn in 1H10. However, the amount was significantly lesser than that of 1Q11 at USD472.6mn. Assets of the sector increased by 4.4% to USD1.48bn in 1H11 as compared to USD1.42bn in 1H10. With the companies under our coverage, Qatar National Cement Company announced that it is going to increase it cement capacity by 0.93mtpa to 5.36mtpa owing to expectation of increase in demand in the coming years. Estimates of the demand for 2012 provided by government authorities to the Company are higher than current demand of 3.5-4.0mtpa. Global Research estimates of average demand in Qatar during 2012-17 is estimated at 4.8mtpa. The Company has not yet given go head to any of the equipment supplier or contractor for the new mill but once assigned it would not take more than 15-18months to raise the capacity to desired levels. Company also announced another special mill for grinding slag, which is used in the production of blended cement. Earlier, company announced its second quarter results.

August 2011

1Q11

1H11

2009

1H09

2010

9M10

2010

12

Global Research - GCC


Qatar Cement Sector
43.0% 42.0% 41.0%

GCC Cement Quarterly Report

23.0%
21.0% 19.0%

40.0%
39.0% 38.0% 1H10 Gross Margins (%) 35.0% 34.0% 1H11

17.0%
15.0%

13.0%
1H10 1H11

Non-Core Income as % of PAT 45.0% 43.0%

33.0%
32.0% 31.0% 30.0% 1H10 1H11

41.0%
39.0% 37.0% 35.0% 1H10 1H11

Operating Margins (%)


1.0% 23.0%

Net Margins (%)

0.8%
0.6% 0.4% 0.2% 0.0%

22.0%
21.0% 20.0% 19.0% 18.0%

1H10

1H11

1H10
Debt as % of Assets (%)

1H11

Financial Charges as % of Debt (%)

28.0%
27.0% 26.0% 25.0% 24.0%

75.0%
73.0% 71.0% 69.0% 67.0%

23.0%
1H10 1H11

65.0%
1H10 1H11

Liabilities as % of Assets (%)


10.0% 8.0% 6.0% 4.0% 6.0% 5.0% 4.0% 3.0%

Equity as % of Assets (%)

2.0%
0.0% 1H10 Return on Equity (%)
Source: Company Reports & Global Research * Combined Financials of Two Listed Qatari Companies

2.0%
1.0% 1H11 1H10 Return on Assets (%) 1H11

August 2011

13

Global Research - GCC

GCC Cement Quarterly Report

APPENDIX
GCC Cement Sector Current & Future Capacity
(mtpa) 2007 2008 2009 2010 2011e 2012e 2013e

UAE Listed Companies Unlisted Companies Total UAE 17.5 6.1 23.5 17.5 11.8 29.3 17.5 14.3 31.8 17.5 16.3 33.8 17.5 16.3 33.8 22.0 16.3 38.3 22.0 16.3 38.3

KSA Listed Companies Unlisted Companies Total KSA 33.0 33.0 38.0 5.8 43.8 38.0 8.0 46.0 41.2 11.6 52.8 41.2 12.6 53.8 43.6 12.6 56.2 46.9 12.6 59.5

Kuwait Listed Companies Unlisted Companies Total Kuwait 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 5.4 5.4 5.4 5.4 5.4 5.4

Oman Listed Companies Unlisted Companies Total Oman 4.5 4.5 5.4 5.4 5.4 5.4 5.4 0.8 6.2 5.4 0.8 6.2 5.4 0.8 6.2 5.4 0.8 6.2

Qatar Listed Companies Unlisted Companies Total Qatar 2.8 0.3 3.1 2.8 0.3 3.1 5.9 0.3 6.2 5.9 0.3 6.2 5.9 0.3 6.2 5.9 0.3 6.2 5.9 0.3 6.2

Bahrain Listed Companies Unlisted Companies Total Bahrain 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5

GCC Listed Companies Unlisted Companies Total GCC 60.1 6.9 67.0 66.1 18.4 84.5 69.2 23.1 92.4 72.4 29.5 101.9 75.3 30.5 105.8 82.2 30.5 112.7 85.5 30.5 116.0

Listed Companies (% of Total) Un-Listed Companies (% of Total)


Source: Company Reports & Global Research

89.7% 10.3%

78.2% 21.8%

75.0% 25.0%

71.1% 28.9%

71.1% 28.9%

73.0% 27.0%

73.7% 26.3%

August 2011

14

132.5

108.0

120.0

107.5

120.0

70.0

82.5

95.0

60.0

72.0

84.0

96.0

210.0 1,000.0 2,400.0 3,800.0 4,500.0

240.0

270.0

360.0

300.0 1,700.0 3,100.0

330.0

August 2011
Mar-10 Apr-10 Apr-10 Mar-10 Mar-10

Mar-10

Apr-10

May-10 Jun-10
Jul-10 Aug-10 Aug-10 Jul-10 Jul-10 Jun-10

May-10 Jun-10 May-10

May-10

Apr-10

Global Research - GCC

Jun-10

Jul-10

Aug-10

Sep-10 Oct-10
Nov-10 Dec-10 Dec-10 Nov-10 Oct-10

Sep-10 Oct-10 Nov-10


Dec-10 Jan-11 Sep-10

Sep-10

Aug-10

Oct-10

Source: World Bank Pink Sheets & Bloomberg

Nov-10

Baltic Dry Index (x)

Crude Oil, Avg, Spot (USD/bbl)

Coal South Africa (USD/ton)

Factors Influencing Cement Prices

Raw Material Index (x)

Dec-10

Jan-11 Feb-11
Mar-11 Apr-11 Apr-11 Mar-11

Jan-11 Feb-11

Jan-11

Feb-11

Feb-11 Mar-11
Apr-11 May-11

Mar-11

Apr-11

May-11 Jun-11 Jun-11

May-11

May-11

Jun-11

Jun-11

3.0

3.4

3.8

5.0

4.2

4.6

110.0

102.0

113.0

125.0

101.0

128.0

140.0

104.0

116.0

70.0 65.0 77.0


Mar-10

78.0

86.0

94.0

89.0

80.0

92.0

Mar-10

Mar-10
Apr-10 May-10 Jun-10 Jul-10

Mar-10 Apr-10 May-10

Apr-10
May-10 Jun-10

Apr-10

May-10

Jun-10

Jun-10
Jul-10

Jul-10
Aug-10

Jul-10 Sep-10
Oct-10 Nov-10

Aug-10

Aug-10 Sep-10 Oct-10 Nov-10


Dec-10 Jan-11 Feb-11 Mar-11

Aug-10 Sep-10

Sep-10

Oct-10

Oct-10
Nov-10 Dec-10 Jan-11

Nov-10

Dec-10
Jan-11

Dec-10 Feb-11
Mar-11 Apr-11

Coal, Australia (USD/ton)

Crude Oil, Brent (USD/bbl)

Natural Gas, US (USD/mmbtu)

Crude Oil, WTI (USD/bbl)

Jan-11

Feb-11

Feb-11
Mar-11

Mar-11

Apr-11

Apr-11 May-11 Jun-11

Apr-11 May-11

May-11
Jun-11

May-11

GCC Cement Quarterly Report

Jun-11

Jun-11

15

Global Research - GCC

GCC Cement Quarterly Report

Country Ratios
(Unit / Country) Gross Margins (%) Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC Non-Core Income as % of PAT Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC ROE (%) Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC ROA (%) Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC Debt as % of Assets Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC Liabilities as % of Assets Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC Equity as % of Assets Saudi Arabia Oman UAE Kuwait Qatar Weighted Average of GCC 1H09 9M09 2009 1Q10 1H10 9M10 2010 1Q11 1H11

56.0% 44.9% 29.4% 25.2% 22.7% 41.0%

55.2% 45.4% 26.0% 19.5% 22.9% 38.9%

54.1% 45.6% 21.8% 26.3% 27.6% 39.2%

52.5% 52.6% 12.5% 33.2% 34.5% 40.2%

52.7% 52.5% 11.9% 29.8% 41.6% 40.5%

52.6% 50.5% 11.6% 30.5% 43.8% 40.4%

51.9% 49.5% 9.9% 28.2% 43.5% 39.4%

55.0% 40.7% 7.8% 33.0% 40.9% 40.5%

53.8% 38.2% 7.1% 26.8% 39.4% 39.5%

3.6% 9.4% 3.6% 54.0% 43.8% 11.8%

3.5% 8.3% 13.3% 52.0% 46.6% 12.7%

5.2% 15.1% -12.1% 18.2% 51.6% 9.6%

2.2% 13.6% 70.7% 41.5% 33.4% 16.4%

3.1% 26.7% 71.5% 47.2% 22.8% 14.8%

3.1% 25.2% 83.6% 44.4% 16.3% 15.7%

3.0% 2.9% 2.6% 25.4% 7.6% 1.8% 95.4% 163.6% 123.6% 49.6% -70.8% 17.8% 16.4% 15.3% 17.5% 15.4% 4.0% 7.6%

11.9% 13.0% 4.8% 9.5% 8.9% 9.4%

16.5% 17.6% 5.7% 12.1% 10.7% 12.4%

19.8% 21.8% 4.6% 11.8% 12.9% 14.2%

5.8% 6.2% 1.5% 4.7% 3.4% 4.2%

11.2% 13.2% 1.6% 9.5% 7.6% 8.1%

15.4% 16.6% 2.8% 11.5% 10.5% 11.1%

19.0% 17.9% 2.8% 14.5% 13.2% 13.5%

5.9% 3.7% 0.2% 2.0% 3.4% 3.6%

12.5% 6.2% 0.7% 4.7% 6.2% 7.6%

9.0% 11.5% 3.8% 6.4% 5.5% 7.0%

12.5% 15.7% 4.6% 8.5% 7.6% 9.5%

15.1% 19.1% 3.7% 7.4% 9.4% 10.9%

4.2% 5.0% 1.2% 3.2% 2.4% 3.1%

8.4% 11.6% 1.2% 6.1% 5.6% 6.1%

11.7% 14.6% 2.2% 7.9% 6.8% 8.3%

14.5% 12.6% 2.2% 9.9% 8.8% 10.1%

4.3% 2.3% 0.2% 1.3% 2.2% 2.6%

9.1% 4.1% 0.5% 3.2% 4.6% 5.6%

15.8% 2.1% 15.2% 28.2% 32.5% 18.0%

15.7% 1.7% 13.5% 22.8% 23.4% 15.8%

12.0% 2.5% 13.2% 25.8% 22.7% 14.1%

16.2% 3.7% 13.4% 20.9% 21.7% 15.8%

16.5% 3.5% 15.6% 22.5% 20.6% 16.5%

16.1% 3.2% 15.3% 19.0% 30.5% 17.2%

14.1% 20.8% 14.3% 23.6% 28.0% 17.1%

15.1% 23.5% 14.4% 25.6% 29.1% 18.0%

12.2% 23.8% 14.5% 25.9% 21.0% 15.7%

24.6% 11.6% 21.7% 32.4% 38.7% 25.5%

24.4% 10.7% 19.7% 30.4% 28.8% 23.3%

23.7% 12.3% 19.8% 37.4% 27.3% 23.6%

27.8% 19.1% 22.0% 33.4% 29.9% 26.5%

24.7% 12.4% 23.0% 35.3% 27.0% 24.7%

24.3% 12.0% 22.4% 31.1% 35.2% 25.1%

23.5% 29.6% 20.9% 31.8% 32.9% 25.1%

27.1% 37.7% 23.1% 33.1% 34.6% 28.2%

27.6% 34.6% 23.7% 33.1% 26.4% 27.4%

75.4% 88.4% 78.3% 67.6% 61.3% 74.5%

75.6% 89.3% 80.3% 69.6% 71.2% 76.7%

76.3% 87.7% 80.2% 62.6% 72.7% 76.4%

72.2% 80.9% 78.0% 66.6% 70.1% 73.5%

75.3% 87.6% 77.0% 64.7% 73.0% 75.3%

75.7% 88.0% 77.6% 68.9% 64.8% 74.9%

76.5% 70.4% 79.1% 68.2% 67.1% 74.9%

72.9% 62.3% 76.9% 66.9% 65.4% 71.8%

72.4% 65.4% 76.3% 66.9% 73.6% 72.6%

Source: Company Reports & Global Research

August 2011

16

Global Research - GCC

GCC Cement Quarterly Report

Disclaimer
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August 2011

17

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