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Southern Province Cement -Equity Report -13-06-2017

Source: Shuaa Capital


Saudi domestic cement sales declined to 4.5mn tons in May 2017 (-20.2% YoY, -2.8% MoM). YTD, domestic sales
stood at 22.8mn tons, a 19% decline compared to the same period last year. Amid levy of export duties, cement
exports from the eastern province remained nil in May 2017 (May 2016: 77k mt). Within our stock coverage, all
the companies reported YoY decline in sales volumes, with Northern region reporting the sharpest decline (-42%
YoY), followed by Saudi Cement (-38% YoY). On MoM basis, within our coverage, only Yamama cement reported
an increase in sales (+.7%). On market share front, Yamama (+1.0%) saw an increase in market share, while share
of Southern Province declined by -0.5%.

Cement production also fell c.18% YoY in May but increased marginally by 0.7% MoM to 4.6 mn tons, while
clinker production increased to 4.1 mn tons (+16% MoM). Clinker inventory increased marginally (0.3% MoM) to
28.5mn tons and our estimated total sector inventories remain elevated at 7.9 sales months compared to
historical levels (5 years avg: 4.3). Within our coverage, on a MoM basis, Northern Region cement reported an
increase in clinker inventories of 34%, followed by Arabian and Yanbu, reporting an increase of c.8% and c.4%;

We continue to expect sharp contraction in the margins for all the KSA cement companies in the medium-term;
however, margin profile on a sequential basis in Q2 is likely to be supported by limited decline in inventories. We
remain sellers of the sector, and consider Northern region cement as the worst-positioned within our coverage –
May inventories stood at 10 months of ttm sales, 3M clinker operating rate stood at 57%.

Minister of Housing, Mr. Majed Al Hogail, stated that the government is looking to deliver 1 million residential units over the next five years. He added that the ministry is planning to deploy latest construction techniques, which are expected to save up to 30% of construction cost and reduce the time taken for construction. The use of new technology would help in cutting cost, boosting quality and faster execution resulting in reduction of the construction period to 6 months as compared to 2-3 years now. The Ministry of Housing has inked several contracts with China and some European countries for implementing the new technology, currently it is working on a 108-unit project in Riyadh, which it expects to be finished in 35 days using the new construction techniques.

The Kingdom started levying the white land tax on undeveloped plots at the end of March and the first phase covered undeveloped lands larger than 10,000 square meters. Mr. Mohammed Almudaiheem, a supervisor for the white land tax scheme at the housing ministry stated that KSA would implement the second phase by 2020 and the ministry of housing might also consider imposing tax on commercial areas in the near future.

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