JULY2012

KSARetail Sector

Research DivisionCompany Reports

Please read Disclaimer on the back

All rights reserved, AlJAZIRA CAPITAL

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

RESEARCHDIVISION

AGM - Head of ResearchAbdullah Alawi+966 2 6618275a.alawi@aljaziracapital.com.sa

Senior Analyst Syed Taimure Akhtar +966 2 6618271 s.akhtar@aljaziracapital.com.sa

AnalystSaleh Al-Quati+966 2 6618253s.alquati@aljaziracapital.com.sa

BROKERAGE AND INVESTMENT CENTERS

DIVISION

General Manager - Brokerage DivisionAlaa Al-Yousef+966 1 2256000a.yousef@aljaziracapital.com.sa

AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 2256277lalmutawa@aljaziracapital.com.sa

Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 6618404a.almisbahi@aljaziracapital.com.sa

Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 3617547aalrahit@aljaziracapital.com.sa

JULY2012

1

KSA - An emerging landscape for retailers A major shift in retail market structure - SaudiArabiasretailsectoristhelargestin

GCC, representing42%of thecouncilsmarketsize, followedby theUAE (29%)andQatar(11%).TheretailmarketinsideKSAhasevolvedovertheperiodoftimebuttheindustrywitnessedkeydevelopmentsinthepast10years;whichtransformedKingdomslandscapefromsmallandunorganizedmarketstopalatialmallsandhypermarkets.

Youth domination in population lead to support KSA retail sector - According toSAMA12011annualreport2,thepopulationinSaudiArabiawasrecordedat27.1mnin2010,wheresignificantportion(around47%3)oftotalpopulationagedbetween15and39.AccordingtoIMF4,thecountryspopulationwillincreaseat2010-15CAGRof1.4%andreachat29.02mnin2015.Basedonourunderstanding,weexpecttheyouths(15-39ages)willcontinuetodominatethepopulationtill2015.

Relatively low space/capita in the region - Despite of aggressive expansions inretail business across the Kingdom in past 5 years, it is worthy tomention that theretailspace/capitaisstilllowerthantheotherregionalmarkets.BasedonthestudyofLaSalle,retailspace/capitaincitieslikeRiyadh&Jeddahstoodat0.2m2ascomparedtospace/capitaof1.6m2ofmallinDubai,UAE.Furthermore,basedontheincreaseincustomerawarenessandeducation,weexpecttheretailcentersneedtobedesignedinmoreprofessionalmanner,whichshouldbewellequippedwith the latestavailabletechnologiesandfacilities.Hence,webelievesuchchangeswillleadto(i)theincreaseentrybarrierforsmallplayersand(ii)theenvironmentwherethesurvivalwillbebasedonuniquebusinessstrategy.

Fragmented market dominated by private groups - The local sector is mainlydominatedbyfamilyownedbusinessgroups;whoarefocusingonacquiringexclusivityandfranchiseagreementswithwell-knowninternationalsuppliersandbrands.Inaddition,these private groups have well diversified business activities and good investmentsin real estateand land;which is also supporting toexpand retail activities inside theKingdom.Thetopfiveplayershold11.9%marketshare,whichislowerthandevelopedmarketsliketheUK,whereinthetopfiveplayershavea59%marketshare.Savola,AlOthaim,AlHokairandJarirMarketingarekeyplayersinKSAsretailsector.

KSA Retail Sector 2012Sector | KSA | Retail Sector July 2012

2011 GRDI country attractiveness

Source: A.T Kearney 2011 GRDI

Retail space/capita-Key regional cities

Source: Jones Lang LaSalle

Brazil

Uraguay

Chile

India

Kuwait

China

SaudiArabia

Peru

UAE

Turkey

55.0

65.0

75.0

85.0

95.0

105.0

55.0 60.0 65.0 70.0 75.0

Co

untr

y ri

sk (e

cono

mic

& p

olit

ical

)0=

hig

h 10

0= lo

w

GDRI score (Market potential)

0.0

0.5

1.0

1.5

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dubai Riyadh Jeddah AbuDhabi

Doha Muscat Beriut Cairo

Sq meters (mn)-LHS Sq meter/capita-RHS

1. SaudiArabianMonetaryAgency2. 47thannualreport,TheLatestEconomicDevelopment20113. JaririnvestorspresentationSep-20114. InternationalMonetaryFund

JULY2012

2

Sector outlook - AccordingtoEIUestimates,theretailvolumetricsaleshasapotentialtoincreaseat2010-14CAGRof3.8%ascomparedtohistorical4-year2006-10CAGRof3.5%.Apartfromconventionalretail,onlineretailisgrowingexponentiallyinKSA,withincreasinginternetpenetrationallowingpeopletoshopaspertheirconvenience.ItisworthytonoticethattheexpectedgrowthinKSAretailerisnotguaranteeingtheconventionalretailertogetmuchbenefit;buttheactualbeneficiarywillbethosewhoevolvethemselveswiththechangingcompetitiveenvironment.WeinitiatethecoverageonAbdullah al-Othaim Markets Co.andFawaz Abdulaziz al-Hokair Co.withOverweightandNeutralrecommendations,respectively

PE & PBV 2011 (Local retailers)

Source: Tadawul, Companies report & Aljazira Capitalal-Othaim Mouwasat

Extra

SASCOAldrees

al Hokair

Alkhaleej

Jarir

0.0

2.0

4.0

6.0

8.0

10.0

12.0

6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0

PBV

P/E

JULY2012

3

KSA retail sector - Volumetric growth

Source: EIU 2010; * where 2009 & 2010 are

based on EIU estimates

Segment-wise retail sales & growth trend in KSA

Source: Economist Intelligence Unit, February

2012

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

2007 2008 2009* 2010* 2011e 2012e 2013e 2014e

0%

3%

6%

9%

12%

15%

18%

21%

-

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011e Non- Food Retail Sales (SAR bn) Food Retail Sales (SAR bn)

Non-food growth (%, RHS) Food growth (%, RHS)

Saudi Arabias retail sector

Growing significantlySaudiArabiasretailsectoristhelargestinGCC,representing42%ofthecouncilsmarketsize,followedbytheUAE(29%)andQatar(11%).TheretailmarketinsideKSAhasevolvedovertheperiodoftimebuttheindustrywitnessedkeydevelopmentsinthepast10years;whichtransformedKingdomslandscapefromsmallandunorganizedmarketstopalatialmallsandhypermarkets.Atpresent,SaudiArabiaisthelargestretailmarketintheGCCwiththeestimatedmarketsizeofUSD69.0bn-USD70.6bnin2011andexpectedtoreachatUSD76bn-USD78bnin2012,accordingtoEIU&JonesLangLaSalle.Moreover,accordingtoEIUestimates,theretailvolumetricsaleshasapotentialtoincreaseat2010-14CAGRof3.8%ascomparedtohistorical4-year2006-10CAGRof3.5%.Apartfromconventionalretail, online retail is growing exponentially in KSA,with increasing internet penetrationallowingpeople toshopasper theirconvenience.Thenumberof internetusers inKSAgrew46%in9M2011vis--vistheworldaverageof7%.

Moreover,accordingtoEIU,growth in theKingdomsretailsectorwitnessed increase intotalvolumesataCAGRof6.3%during200711.Foodandnon-foodsegmentscontributealmostequallytoKSAsretailsales.However,demandforbothsegmentsweakenedduringtheeconomicslowdownduring200910.Thefoodsegmentsannualsalesgrowthreducedfrom14.9%over200708to7.5%during200910,whilethatforthenon-foodsegmentfellfrom17.8%to8.9%overthesameperiod.Ascrudepricesrecoveredin2011,demandforboththesegmentsregainedmomentum.However,duetorisingpopularityofmodernretail,thefoodsegmentgrewhigher(16.9%)comparedtothenon-foodsegment(10.9%)in2011.

JULY2012

4

Growth trend in KSAs retail sales volume

Source: Economist Intelligence Unit, February

2012

11.7%

12.8%

5.0%

3.1%2.6%

8.4%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2006 2007 2008 2009 2010 2011e

GrowthinretailvolumesandsaleswasdrivenbysurgingdisposableincomeduetohighGDP growth (10.7% CAGR over 200111), favorable demographics (2.9% populationgrowthoverthelastdecade)andincreasingreligioustourism.GiventheKingdomsculturalsetupandweather,increasingpurchasingpowerandpopulationgrowth,webelieveonlineretailcouldgrowataratehigherthanthatforotherdevelopingcountries.

According toA.TKearneys2011GlobalRetailDevelopment Index (GRDI) 5 ,KSA retailmarket isrankedasthe7thmostattractiveretailmarketaroundtheglobeintermsof(i)offeringinvestmentopportunitiesatpresentand(ii)futuregrowthprospectus.

5. GRDIisanindexthatanalyzes30developingcountrieson25macroeconomicandretail-specificvariablestoidentifyinvestmentopportunityinemergingmarket.Moreover,thisindexalsohelpstoidentifytheprofitablemarketstodayaswellasthosewhichofferthemostpotentialinfuture.

GRDIranking2011

Macro economic & industry specific variables weightage

Ranking Country RegionMarket

attractiveness (25%)

Country risk (25%)

Market saturation

(25%)

Time pressure

(25%)

GRDI score

1 Brazil LatinAmerica 100.0 79.4 42.9 63.9 71.62 Uraguay LatinAmerica 85.0 73.8 63.6 39.6 65.53 Chile LatinAmerica 84.3 100.0 30.3 44.3 64.74 India Aisa 28.9 59.9 63.1 100.0 63.05 Kuwait MENA 80.4 80.6 57.3 27.1 61.46 China Asia 49.5 76.5 31.0 87.7 61.2

7 SaudiArabia MENA 70.9 80.7 50.6 35.7 59.5

8 Peru LatinAmerica 39.8 61.5 72.0 59.5 58.29 UAE MENA 87.6 88.9 12.6 42.9 58.010 Turkey MENA 83.8 65.5 45.0 37.0 57.811 Lebonan MENA 56.3 43.0 57.5 53.8 52.712 Egypt MENA 22.1 49.5 85.5 52.7 52.513 Albania EasternEurope 19.9 48.3 79.6 60.5 52.114 Russia Aisa 76.2 49.1 30.9 51.0 51.815 Kazakhstan Asia 29.2 30.1 87.5 60.1 51.716 Indonesia Asia 38.2 53.0 54.5 58.8 51.117 Morocco MENA 22.6 72.9 52.8 54.8 50.818 Philippens Aisa 8.4 54.3 66.1 51.0 45.019 Tunisa MENA 37.5 75.2 63.0 21.3 49.320 Srilanka Asia 8.4 52.6 86.5 42.4 47.521 Malaysia Asia 53.9 64.0 18.0 52.7 47.222 Mexico LatinAmerica 74.6 67.5 16.3 23.8 45.623 V