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Strategy report
Saudi Arabia
70 December 2016
Research Department
ARC Research Team
Tel +966 11 2119370, research @alrajhi-capital.com
NTP 2020: Stage set, momentum to pick pace
Key themes
From the time the NTP has been announced, the
government has followed through with many steps
towards achieving the stated goals. However, post
this phase of foundation laying, we believe 2017 will
be a crucial year when the private sector
investments will take shape. This fits the broader
scheme of things over the medium to long term as
we progress towards Vision 2030 objectives, as the
Govt is expected to transition from the role of the
primary source of capital/ investments to that of a
regulator, providing a conducive environment for
private businesses to thrive.
National Transformation plan
Source: Al Rajhi Capital
The Kingdom has gone through a watershed year when measurable targets for
various ministries and sectors were set through the Kingdom’s transformative
NTP and Vision 2030 plans. Over the last year, the government has set the tone
for economic diversification and for reducing the dependence on oil revenues
by announcing a number of reforms, especially in the areas of increasing nonoil revenue, reducing current expenditure, announcing the intent to privatize
state owned enterprises including Aramco, easing FDI rules etc. After setting
the base and the tone, we believe 2017 will be a crucial year when private
sector investments have to take shape, as these will be key towards making
further progress. As per plan, 40% of total investments required to achieve the
NTP objectives are expected to be contributed by the private sector. As NTP
defines mainly objectives, we believe that the private sector will have a major
role to play both in terms of shaping up the detailed plans and by actively
participating in key sectors’ initiatives going forward, through both direct
investments and partnerships with government (table 2). As we have seen
globally, we believe that the Government’s role will gradually transition from
being the primary source of capital/ investments in the past to that of a
regulator/ facilitator/partner in the future by providing a conducive
environment for private participation and enterprises to thrive.
2016 – Setting the stage: 2016 witnessed the launch of NTP and Vision 2030
plans, with setting targets for almost all the sectors in the Kingdom, followed by
a series of announcements under these plans. Many initiatives across multiple
sectors have been swiftly announced (Figure 1) to get the plans rolling and we
expect to see more of them going forward. The announced initiatives – energy
and utility price reforms, public employees’ allowances cut, FDI relaxation,
raising non-oil revenue through higher visa fee and introduction of municipal
fee etc., and tapping the global capital markets for plugging fiscal deficit – have
given a solid foundation for the NTP. The recently announced OPEC production
cut will reduce the downside risks for oil prices, thereby enhancing the
Government’s fiscal flexibility and overall investor sentiment.
2017 – Private sector investments to drive momentum: After setting the
stage in 2016, we believe that 2017 will be an important year of implementation
with most of the key initiatives picking pace with investments from both the
public and private sectors. The Govt. plans to invest SAR270bn (60% of total
investment) as per NTP, while the rest 40% is expected to come through private
investments offering SAR 450bn worth of opportunities.
Significant potential for private sector participation: The potential
opportunities for private sector are immense and well spread out across many
sectors ranging from strategic divestments/ privatizations by government, to
infrastructure, mining, affordable housing, transport, capital markets and a host
of other sectors (refer table 2). Apart from financial incentives, we believe that
the Govt’s intent to create a stable and investor friendly environment and the
flexibility to formulate various projects/partnerships under NTP will give more
comfort to investors. Moreover, the underlying economy which is far more
diversified in terms of revenue (source: CDSI establishments survey) than
represented by Tadawul offers significant opportunities. For e.g., while
Petrochemicals and Banking account for 52% of Tadawul revenue, they account
for only 19% of the revenue (excluding oil revenue) of the underlying economy.
Refer charts 4&5 for details.
Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the
USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to
Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
Strategy report
Saudi Arabia
70 December 2016
NTP: Many initiatives already underway
Through these initiatives, the
government has demonstrated
clear intent to achieve the NTP
objectives in a time bound
manner
After the announcement of Vision 2030 (during April 2016) and later the NTP plan (during
June 2016), the government has announced a series of measures aimed at kick starting the
initiatives required to achieve the NTP objectives in a time bound manner. While the energy
and utility price reforms were announced as part of the 2016 budget (during December 2015),
initiatives such as on-going austerity measures (prioritization of public projects,
renegotiation of projects’ costs, cut in allowances of public sector employees etc.), increasing
non-oil revenue sources (increase in visa fee and introduction of municipal fee, white land tax
etc.), and tapping global markets for financing the deficit go a long way in underlining the
government’s intent to take the NTP to its logical conclusion by 2020.
In the table below, we have listed some of the initiatives already underway which support the
NTP objectives. A number of these initiatives have been on-going while some were
announced post the unveiling of Vision 2030 and NTP plans.
Figure 1 Initiatives already underway towards achieving NTP targets
Thrust area*
NTP Key Performance Indicators
SAR163.5bn
SAR530bn
7.7%
30.0%
NA
NA
SAR30bn
SAR70bn
24%
200%
SAR185bn
SAR300bn
64%
97%
SAR480bn
SAR456bn
Percentage variation in project opex
and capex
35.0%
10.0%
Value of water and electricity subsidy
decrease
0
SAR200bn
Percentage of water used in the
agricultural sector relative to total
available renewable water resources
416%
191%
12%
9%
0
1.2mn
10x
5x
8%
15%
1.5mn
2.5mn
6mn
15mn
Govt debt as % of GDP
Privatization of government assets
Direct Foreign Investment (DFI)
Percentage DFI to GDP compared to
international average
Investments
Initiatives already underway
2020
Increase in non-oil revenue
Economy
NTP Target
Baseline
Value of exports of non-oil commodities
Value of the mining sector's
contribution to GDP
Budgeted salaries and wages as total
value of the budget
Efficiency
Unemployment rate for Saudis
Employment
Housing
Religious tourism
No. of suitable jobs available to Saudis
in the private sector (for women and
men)
Housing unit cost multiples of gross
individual annual income
Percentage of real estate financing to
non-oil GDP
Number of formal pilgrims (domestic
and foreign)
Number of Umrah Pilgrims from abroad
Higher energy and utility charges, implementation of municipal fee,
white land tax, higher visa fee (business and other visas have
become pricier), increase in traffic violation fines. GCC wide VAT
is likely to be levied from 2018.
Issued USD17.5bn dollar bond , which was subscribed 4x, at better
than expected rate. This opens the door for further debt isssuances
in the future. Listing of local bonds on the Tadawul establishes a
secondary market which is likley to help in creating a market
determined yield curve .
Aramco IPO scheduled for 2018, according to various news
sources. Other government assets to be privatized include aviation
(various airports, cargo, ground and logistics services), hospitals,
SAGO etc. Overall, in the next few years, over 100 public
establishments are set to be privatized.
FDI limit in trading (retail and wholesale) and Engineering
consultancies raised to 100% from 75% in June 2016. According
to media reports, 100% FDI will be relaxed in some other sectors
Start of mining of other minerals expected to take off - Gold,
Phosphate, Uranium etc, efforts being led by Ma'aden. Ma'aden
management recently announced doubling of Gold production by
2020.
Some allowances of public sector employees have been cut,
targeting to bring the costs as % of budget to 40% by 2020 from
45% currently.
Setting up of National Project management office (PMO) and
PMOs in some government agencies underway , which will help in
better project execution, meeting operational timeliness and
implementation within budget.
First step taken in December 2015 raising the utility charges,
further steps may be taken as the target is to completely remove
water subsidies by 2020.
Water intensive agriculture has been prohibited from 2016.
Balanced Nitaqat has been rolled out and new initiatives are being
rolled out contantly (recent one being points system, according to
media).
100% saudization of mobile shops completed, nationalization in
other sectors under consideration esp. in Healthcare, Pharmacies,
Education according to media reports.
White land tax has been implemented which is likely to lead to
lower real estate prices and increased supply of built up units.
Ministry of housing to tie up with banks for financing of housing for
Saudis.
Expansion of Grand mosque and other infrstructure (Haramain rail,
new hotels/ accomodation etc) underway, to be completed in next
few years.
Source: Vision 2030, NTP, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
2
Strategy report
Saudi Arabia
70 December 2016
NTP: Significant potential for private sector
NTP offers immense potential
for private sector to play a key
role in various sectors of the
economy.
As highlighted earlier, private sector participation is key to achieve the NTP objectives. With
the government initiatives already laying a strong foundation, we believe there will be higher
private sector involvement going forward, especially in areas which require investments
(mining, infrastructure, transport, healthcare, housing etc.), technology transfer (localizing
industrial and SME supply chains), or which require public private partnerships (religious
tourism, power generation, water desalination and water treatment, ICT training etc.).
Further, direct foreign investments (FDI) and foreign portfolio investments (FPI) will find
the upcoming strategic divestments/ privatizations of major government owned assets, such
as Aramco IPO (likely scheduled for 2018) and privatization of other state run firms (e.g.
SAGO, Saudia etc.) attractive. Over the next few years, over 100 state run firms are set to be
privatized according to the NTP. Government’s announcement allowing 100% ownership
being permitted in trading business (retail and wholesale) and Engineering consultancies
post the NTP announcement, is also likely to attract meaningful FDI.
Moreover, capital market reforms such as planned dedicated equity market for SMEs,
secondary bond market, REIT regulation etc. will institutionalize the change and bring more
private sector capital. Going forward, as the economy becomes more diversified, publicprivate partnerships and eventually private sector will be the growth engine for the economy.
Currently private sector’s contribution to GDP is 40% and is likely to increase gradually to
65% based on Vision 2030.We have highlighted below some of the major opportunities for
private sector participation based on the NTP.
Figure 2 Key areas of opportunity for private sector
Sectors
Portfolio and strategic
investments
Housing and real
estate
NTP budget
(SARbn)
NA
59.2
Areas of opportunity
for private sector
Comments
- Strategic divestments/
privatizations by the
government
- Capital market infrastructure
(Investment banking, M&A,
advisory, proxy services etc)
- ARAMCO likely to be listed in 2018 going by media reports. A 5% divestment and target
EV of USD2trn would result in QFI investment of USD75bn, assuming 75% investment in
IPO will be by QFIs.
- Capital market reforms taken by Govt could put TASI in MSCI Emerging markets index
which could bring in around USD30bn as per some market estimates. We believe the Govt
which holds around 35% could offload some of its stake in its investments which are already
established and hence lucrative monetization opportunities
- Many govt owned assets such as aviation infrastructure (airports, cargo, logistics),
hospitals, SAGO etc. are likely to be privatized going forward.
- This will necessitate a strong capital market backbone, development of which will require
private investments in investment banking, M&A, advisory, proxy services etc.
- Affordable housing is a key focus area for govt due to significant latent demand. Along with
this, govt's subsidy program and govt's target to bring the cost of ownership down to 5-times
annual income vs. 10-times currently will aid strong growth in home ownership over the
coming years.
- White land tax is likely to aid the above plan by (a) discouraging undeveloped land as
- Affordable housing projects,
investments, thus reducing the real estate costs and making it affordable for masses, and (b)
and Cooperative Housing
increasing supply of developed properties.
- Partnerships with large land
- Govt's strong emphasis on affordable housing is backed by targets to increase real estate
owners to develop housing
financing to 15% of non-oil GDP from 8% currently, making more families gain housing
projects
financing, and cutting down average waiting times.
- Partnerships with foreign firms
- Publicly listed REITs which are income generating investments have started trading for the
to develop large scale projects
first time in the Kingdom. QFIs are permitted to invest in REITs.
- Private sector developers will be issued fast-track permits and provided necessary funding
(in collaboration with private banks and SAMA).
- Forging partnerships with private sector developers will be encouraged to utilize
government land and consequently develop affordable, large-scale residential projects.
Source: Company data, Al Rajhi Capital; Note: We have re-classified the NTP budget (originally under 26 ministries) into the above sectors based on our understanding
Disclosures Please refer to the important disclosures at the back of this report.
3
Strategy report
Saudi Arabia
70 December 2016
Figure 3 Key areas of opportunity for private sector (Contd…)
Sectors
NTP budget
(SARbn)
Areas of opportunity
for private sector
Comments
Healthcare
23
- Secondary and tertiary healthcare services, as Govt
may continue to remain active in primary healthcare
services
- The gap between supply and demand for healthcare is significant
and is likely to continue to remain so as demand continues to grows
much faster than supply. This provides opportunity for significant
healthcare investments.
- Around 12.5%of budget of Saudi Arabia goes for the healthcare
sector and as a result the potential size of opportunity is huge as the
Govt plans to hand over growth opportunities to private with only
regulatory role in the future (apart from primary healthcare centres).
- Insurance for expatriates has already been made mandatory.
Insurance for Saudi nationals could prove to be a massive boost to
the sector.
- Net margin of healthcare establishments stands at a healthy 25%,
making it an attrative for private investment.
Education
24.4
- Technical & Vocational Education, focus on digital
education
- Education and training for teachers
- Community clubs’ programs and special education
- Overall development of educational system with focus on teaching
resources, technical education and overall skill development
- Increasing private sector participation and increasing % of students
in non- Government higher education from 6% to 15%
10.8
- Investments in tourism infrastructure such as
hospitality, transport, and various other ancillary
services
- Number of effective partnerships with the private sector, expected to
increase to 17, vs. just 1 currently, suggesting wide ranging
opportunities likely in services management, tourism/ hospitality,
transport etc
- Total revenue from partnerships with the private sector expected to
reach SAR19bn by 2020, which is insignificant currently
Electricity & water
12.9
- Massive opportunities for private investment across
generation, transmission and distribution of electricity
- Potential partnerships in desalination plants and
water treatment facilities
Industrial
13.5
- Partnership to localize supply chains and technology
transfer
- Opportunities in renewable energy
Religious tourism &
culture
Infrastructure
Transport
Others
IT and
communications
- Percentage of power plant electricity generation through strategic
partners set to reach 100% from just 27% currently
- Desalinated water production to increase from 16% to 52%; Treated
water production to increase from 0% to 20%
- Localized content in total expendutre of public and private sectors
mandated to increase substantially
- Capacity introduced from renewable energy targeted at 3450 MW
42.7
- Developing value added manufacturing and
transformation products
- Investments in non-oil commodities
- Govt to develop industrial clusters, public facilities and community
infrastructure at Jubail and Yanbu
- Clear push from government to develop mining industry with a view
to ramp up exports
- Value of exports of non-oil commodities expected to double to
SAR330bn by 2020 from SAR180bn currently; mining/ GDP ratio
targeted at 97% by 2020 from 64% currently
5.6
- Opportunities in construction (Metro systems, Bus
transport systems), and ancillary services (ticketing,
shelters, security etc)
- Large infrastructure projects like Roads, Railways
and Ports
- A number of cities are likely to have comprehensive public
transportation plans
- Higher private sector contribution in developing and operating road
projects, railways projects envisaged
- Higher contribution of private sector in developing and operating
ports projects envisaged
61.4
- Opportunities specific to various sectors
- Boarder opportunities in digitalization and
enhancement of current services
- Private partnerships to enhance service levels and
broader services
- Training manpower and monitoring systems
14.9
- Launch and activate ICT training centers in
partnership with major
companies in the ICT sector
- Opportunities in e-commerce
- IT Training and education opportunities
- Opportunity in Saudi Postal corporation
- Delivery of agricultural services, Prevention of insects and diseases,
Strategic food reserve and agricultural markets
- Digitalization, automation and online systems for various services
- Building systems for VAT, other taxes, monitoring, evaluation etc.
- Vocational training in vairous areas (SMEs, labour force reskilling,
training for technical skills and other areas in IT)
- Potential in not just investment in IT infrastructure and software, but
also in allied sectors such as training, given low penetration levels of
IT
- Ecommerce has already generated significant interest and major
players such as Amazon have shown keen interest in the sector
- A boost in e-commerce will also boost drive growth for postal
services, as in the case of Saudi Postal corporation
Source: Company data, Al Rajhi Capital; Note: We have re-classified the NTP budget (originally under 26 ministries) into the above sectors based on our understanding
Disclosures Please refer to the important disclosures at the back of this report.
4
Strategy report
Saudi Arabia
70 December 2016
Hidden potential, underlying economy more diversified than Tadawul
The revenue of establishments (published by CDSI) is a proxy for revenue of broader
economy. Our analysis of revenue split of Tadawul by sectors (refer table below), as
compared to that of broader economy (excluding crude oil), reveals that even though all the
key sectors are represented in the Tadawul, it does not provide a clear picture of the broader
economy due to meaningful deviations in composition (by % of revenue of some sectors).
On the other hand, the underlying economy is well diversified, and unlike the revenue split of
Tadawul (which is largely skewed towards Petrochemicals, Banking and Telecom), the
underlying economy’s revenue (excluding crude oil) is well represented by Retail & wholesale,
Building & construction and Industrial sectors. This shows the involvement and potential for
private sector participation across various sectors of the economy in our view. Consumer
facing businesses are well represented in the broader economy and private investments
should find these businesses attractive given the demographic dividend and rising disposable
incomes with economic diversification.
Figure 4 Broader economy*: Revenue composition
Wholesale &
Retail
30%
Figure 5 Tadawul: Revenue composition
Wholesale &
Retail
Title:
6%
Source:
Petrochemical
13%
Banking
6%
Petrochemical
37%
Please fill in the values above to have them entered in your report
Telecom
6%
Agri & Food
8%
Energy &
Utilities
3%
Building &
Construction
10%
Energy &
Utilities
7%
Agri & Food
8%
Industrial
10%
Banking
15%
Telecom
12%
Petrochemical
Banking
Telecom
Agri & Food
Insurance
Hotel & Tourism
Industrial
Building &
Construction
Wholesale &
Retail
Energy &
Utilities
Real Estate
Cement
Petrochemical
Banking
Telecom
Transport
Agri & Food
Insurance
Hotel & Tourism
Industrial
Building &
Construction
Wholesale &
Retail
Source: CDSI, Bloomberg, Al Rajhi Capital; Note: *CDSI publication of establishments’
Energy &
Utilities
Real Estate
Cement
Transport
Source: CDSI, Bloomberg, Al Rajhi Capital
revenue a proxy for broader economy revenue
This comparison assumes significance as investors generally attribute the stock index to be
representative of the broader economy. For e.g. FDI limits in Retail and Wholesale sector
have been relaxed and the organized retail by some estimates is just 25% in the Kingdom’s
grocery segment, which stands at 60-80% in most of the developed economies. Hence, the
opportunity is huge and this is well represented by the 30% weightage that Retail and
wholesale commands in the actual economy (vs. only 6% in the Tadawul).
Also, sectors such as Building and Construction and Industrial (together accounting for 19%
of revenue of broader economy vs. 8% in the Tadawul) hold a lot of potential for private
participation as the Kingdom embarks on building infrastructure and also targets to increase
the revenue from non-oil commodities, esp. by mining and increasing production of other
commodities that the Kingdom is rich in such as Uranium and Gold.
Disclosures Please refer to the important disclosures at the back of this report.
5
Strategy report
Saudi Arabia
70 December 2016
Figure 6 Overview of revenue split of economy vs. Tadawul
(SAR bn)
Broader economy
revenue*
% of total
Tadawul
revenue
% of total
Retail
667
29.3
38
6.1
Petrochemical
280
12.3
232
36.9
Building & Construction
225
9.9
25
3.9
Industrial
Agri & Food
208
178
9.1
7.8
26
50
4.1
7.9
Telecommunications
137
6.0
72
11.5
Banking
124
5.4
90
14.4
Transport
112
4.9
12
Other services
74
3.2
Hotel & Tourism
70
3.1
10
1.6
Energy & Utilities
66
2.9
43
6.9
Real Estate
63
2.8
6
0.9
Cement
37
1.6
14
2.3
Media and Publishing
20
0.9
3
0.4
Insurance
18
0.8
1
0.2
-
-
5
0.8
2,279
100.0
628
100.0
Muti-Investment
Total
-
2.0
-
Source: Company data, Al Rajhi Capital; Note: 1) *CDSI publication of establishments’ revenue a proxy for broader economy
revenue; 2) Highlighted above are sectors with high difference in composition of revenue
Disclosures Please refer to the important disclosures at the back of this report.
6
Strategy report
Saudi Arabia
70 December 2016
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or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such
distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any
registration or licensing requirement within such jurisdiction.
Disclosures Please refer to the important disclosures at the back of this report.
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Strategy report
Saudi Arabia
70 December 2016
Disclaimer and additional disclosures for Equity Research
Disclaimer
This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared
for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or
manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement
not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to
public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be
reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the
data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free
from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the
information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment
products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account
the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document.
Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or
investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may
not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value
of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or
income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its
officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related
investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi
Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business
from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for
any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this
research document.
This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no
responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered,
duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to
or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such
distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any
registration or licensing requirement within such jurisdiction.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except
financial stocks and those few other companies not compliant with Islamic Shariah law:
"Overweight": Our target price is more than 10% above the current share price, and we expect the share price to reach the target on a 12
month time horizon.
"Neutral": We expect the share price to settle at a level between 10% below the current share price and 10% above the current share price
on a 12 month time horizon.
"Underweight": Our target price is more than 10% below the current share price, and we expect the share price to reach the target on a 12
month time horizon.
"Target price": We estimate target value per share for every stock we cover. This is normally based on widely accepted methods
appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis.
Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or
if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us
Al Rajhi Capital
Research Department
Head Office, King Fahad Road
P.O. Box 5561, Riyadh 11432
Kingdom of Saudi Arabia
Email: [email protected]
Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
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