Saudi Ceramic Continued success - Al Rajhi Capital

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Saudi Ceramic Construction & Materials –Industrial 1 August 2010 Page 3 Saudi ceramics market: dominated by imports 3 Opportunities foster optimism, few threats Ceramic products are essential parts of modern buildings. This explains the high correlation between demand for ceramics and construction markets. The demand for ceramic products is huge, and we expect it to grow further driven by the booming construction. Saudi ceramics are considered high quality but they have to develop innovative designs to compete with imported ceramics. 5 Saudi Ceramic: in expansion mode 5 Continuous and steady growth policy Saudi Ceramic’s business contains two divisions: ceramic tiles and bathroom products, and water heaters. All divisions have grown strongly recently. We expect further growth since the company is increasing production capacity. Desert Mines supplies Saudi Ceramic and sells clay to local ceramic companies. Saudi Ceramic sells its products through four main channels: showrooms, dealers, institutions and exports. 6 Ceramic tiles and bathroom goods segment: gradual and sustainable expansion strategy Saudi Ceramic is expanding production capacity of ceramic tiles. It currently has total production capacity of 34mn m 2 of ceramic tiles, and we expect this to reach 43mn and 52mn m 2 by the end of 2010 and 2011 respectively. 7 Water heaters segment: remarkable growth Saudi Ceramic currently has total production capacity of 1.5mn heaters per year. Water heater segment sales grew by 33% and 21% in 2008 and 2009 respectively. More than 50% of this segment’s production is exported. 8 Profitable business: fine record, returns set to last 8 Gross and net margins are competitive and sustainable Saudi Ceramic has a net margin of 20.8% compared to 30.9% and 6.3% for its regional peers Al Anwar Ceramic Tiles and Rak Ceramics respectively. We expect the company to focus on the ceramic tiles segment since it has a higher margin. 8 Respectable growth in recession period Revenues and EBITDA grew in 2009 by 12% and 9% respectively. Moreover, net income increased by 11% in that year. We expect that improving economic conditions will drive further growth in revenues and EBTIDA over the next two years. 10 Valuation: offers good long-term value 10 High economic profit; growth in dividend payout ratio Saudi Ceramic achieves a return on invested capital (ROIC) of 12.5-12.6%. We expect the company to maintain and improve its high returns, and so two-thirds of our estimated fair enterprise value for Saudi Ceramic comes from future economic profits. We estimate fair value per share at SAR166.3, and set this as our target price. Currently, Saudi Ceramic offers a dividend yield of 2.3%. The company increased the paid dividend to 30% of paid-up capital in 2009; however, we expect it to maintain the same dividend for at least three years. Our rating on Saudi Ceramic is Overweight. 13 Appendix: investments 14 Financial data Disclosures Please refer to the important disclosures at the back of this report. 2
Saudi Ceramic Construction & Materials –Industrial 1 August 2010 Corporate summary Share information Valuation Saudi Ceramic Company is one of the Market cap (SAR/US$) 3.502bn / 0.935bn oldest and leading ceramics producers 52-week range 109.5 - 140.8 in the Middle East. Saudi Ceramic Daily avg volume (US$) 3.700mn manufactures and markets ceramic Shares outstanding 25.00mn products. The company has two major Free float (est) 63.6% segments: ceramic tiles and bathroom products, which contribute 77% of Performance: 1M 3M 12M revenues, and water heaters which Absolute 7.8% -4.5% 2.1% contributes the remaining 23%. Relative to index 13.2% 5.1% -4% Incorporated in 1977 in Riyadh by a group of prominent businessmen. Major Shareholder: General Social Insurance 15.9% Saleh Abdulaziz Al Rajhi 14.3% Source: Bloomberg, Al Rajhi Capital Saudi ceramics market dominated by imports Period End 12/09A 12/10E 12/11E 12/12E Revenue (SARmn) 958 1,103 1,230 1,368 EBITDA (SARmn) 282 343 391 447 Net Profit (SARmn) 197 230 252 295 EPS (SAR) 7.89 9.20 10.09 11.78 DPS (SAR) 3.00 3.00 3.00 3.00 EPS Growth 10.8% 16.7% 9.6% 16.8% EV/EBITDA (x) 13.3 11.3 10.3 9.0 P/E (x) 16.7 14.3 13.1 11.2 P/B (x) 3.8 3.3 2.8 2.3 Dividend Yield 2.3% 2.3% 2.3% 2.3% Source: Company data, Al Rajhi Capital The Saudi ceramic market size is about SAR4bn 70% of the market sales are imports With a size of about SAR4bn, the Saudi ceramics market is one of the biggest in the MENA region. We expect the market to grow further, driven by the current boom in the building and construction industry. The ceramic products include ceramic wall and floor tiles, bathroom goods and water heaters. The main material used in manufacturing ceramics is clay. The tiles include many kinds such as porcelain and ceramic tiles. Ceramics are made mainly of clay, which is extracted locally, and heated in gas kilns and mixed with other exported chemicals. The porcelain is made of white clay which is imported from Ukraine and Turkey. The ceramic tiles market is dominated by imports which represent around 70% of the market. Saudi Ceramic has a 25% share, and the remaining 5% is divided between small private Saudi companies such as Alfanar, Future Ceramic in Dammam and Al-Jawdah Ceramic. Many of the local companies are suffering because of the lack of innovative designs that are an important feature of modern buildings. Imports, especially from Europe and US, are characterised by innovative designs, making them more attractive to people despite their high prices. Figure 1. Saudi ceramics market : market share of ceramic tiles 5% 25% 70% Source: Company data, Al Rajhi Capital Imports Saudi ceramics others Excess demand in bathroom products market The bathroom products market is very dominated by imports, with a share of around 90%. Saudi Ceramic company has more than 7% of the bathroom products market, and the other local companies represent 3 % of the market. This market is characterised by excess demand, which provides an opportunity for local companies to expand their capacity. Regarding the water heaters markets, Saudi Ceramic has a share of about 50%. The other local companies have less than 5% market share, and imports represent the remaining 45% of the market. Disclosures Please refer to the important disclosures at the back of this report. 3
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Saudi Ceramic Continued success - Al Rajhi Capital

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