In Riyadh, the socio-economic transformation of the country initiated by Crown Prince Mohammad Bin Salman Al Saud (MBS, born in 1985) can be observed in virtually every sector of the local economy. We are persuaded these changes offer attractive investment opportunities. It is now easy and quick to obtain an entry visa (on-line application). This is likely to facilitate the tourism expansion (not only religious pilgrimage). We had the chance to visit few outlets and restaurants: an Al Othaim supermarket, A Jarir bookstore (like French FNAC) and the Nakheel Mall (Riyadh flagship of Arabian Centres). Many women did not wear hijab. They are now allowed to drive. Restrictions imposed in restaurants for families and single men are no longer there. Undoubtedly, the changes are happening, and locals tell us we should expect more of those changes.

On the stock market side, Foreign investors are now able to invest directly in the local market. In 2019, Saudi stocks have been included in the MSCI Emerging Markets index and now weight 2.6% of the whole index (equivalent to Thailand of 4 x the weight of Turkey). MENAT (Middle East, North Africa and Turkey) now weight 4.7% of the global EM index, a figure that should rise to 5-5.5% with next May inclusion of Kuwait. Last but not least, the listing of Aramco last December. The oil producer is the largest market capitalisation in the world ($1,800bn). Free float is still small (1.5%) but is likely to increase in the years to come.

In Dubai, the local situation remains difficult. Property prices have been declining since 2017 and the local economy is affected by surrounding political uncertainty. Longer term, the state city could suffer from incremental Saudi competition. Nonetheless, the city remains rather exceptional (people diversity, projects size). Coming November, the Dubai World Expo will open there. Local officials expect 25M visitors. 80% of the infrastructure is scheduled to be transferred to District 2020 and be permanently re-used (residential, office and commercial property). This should further increase the current property oversupply.

Country Focus: Kingdom of Saudi Arabia (KSA)

A G20 member, Saudi Arabia generates a GDP of around $700bn. The country is a key member of the GCC (Gulf Cooperation Council) that includes the 6 Arab monarchies of the Persian Gulf. GCC generate a GDP of $1,600bn forecast to grow 2.5% pa in the next 5 years.

Saudi Arabia population counts 35M people (including 13M Foreign workers) and is very young: 45% are less than 25 and median age is 31. Its 2 main cities are densely populated: 6M in Riyadh, 3.5M in Jeddah.

On 25 April 2016, Crown Prince Mohammad Bin Salman announced Vision 2030, which intends to take the country through a vast reform program to diversify its economy away from oil, which still represents c43% of the country’s GDP and c70% of its revenues. Vision 2030 is a comprehensive LT plan to transform the economy, culture, and social institutions of the 

country. Ultimately, its targets are: 1) “a vibrant society,” 2) “a thriving economy,” and 3) “an ambitious nation”.

To develop “a vibrant society”, Vision 2030 is to invest substantially in cultural and entertainment facilities. We think that the socio-demographic changes that are likely to come with the development could generate significant business opportunities for discretionary consumer companies and change spending habits/patterns as well as the level of sophistication of Saudi consumers.

The “thriving economy” theme is about a long list of economic reforms and targets, with a strong emphasis on privatization – the goal is to expand the private sector from the current 40% of the economy to 60% by 2030. Other objectives under this theme include a sharp increase in non-oil fiscal revenues through tax reform, the creation of a business-friendly economic and legal environment, and an increase in foreign investment and Foreign talent. It also includes educational reforms to better prepare Saudis entering in the private sector (as part of the Saudization program) and the promotion of the SME segment, with the aim of increasing the contribution of these firms to the country’s GDP from 20% to 35% by 2030.

The “ambitious nation” theme focuses primarily on improving the governance of the country and transparency and, particularly, reducing corruption. Lowering waste and overspending in the fiscal budget is also part of this pillar.

Three and a half years into Vision 2030, we can fairly say that the kingdom has achieved notable successes with respect to governance reforms and improvements in public sector efficiency, and it has aggressively carried out many of the plan’s social and cultural reforms.

To cope with the local Saudi demographic situation (high unemployment particularly among the younger generation), the government has launched a “Saudization” program. We estimate that close to 2M expatriates left the country since the beginning of 2017. This has not been easy to absorb for local corporates, but it is largely over now. Going forward, active population is likely to increase by 70% in the next 10 years to reach 40M in 2030: +100% for male Saudis, +300% for female Saudis, +15% for Foreign workers. These socio-demographic change should be favourable to discretionary consumption, insurance and also e-commerce. The latter is still in its infancy with 2-3% penetration.

Stock Focus: Jarir Marketing (Sales of $2.2bn, market capitalisation of $5,3bn, listed in Riyadh)

The company was created in 1979 by the Abdulrahman Al Gil family and become a family name ever since. 5,200 employees strong, Jarir has a very highly regarded notoriety in KSA. It is present all over the country with 60 stores and an additional 10 stores in the rest of GCC (mainly Kuwait and Qatar). Total commercial space now reaches 2.5M sqm. Historically Jarir sells books and stationery but over the years it has diversified into electronics equipment, smartphones, PC and tablets. Sales has reached $650,000 per sales employee (vs. 572,000 for Best Buy or 420,000 for Office Depot in the USA). In 2019, average basket was $140, +8% vs. 2018. The company is the leader in KSA. Its market share is 21% for smartphones, 30% for tablets and PC. It entertains a special relationship with Apple. Its fidelity program has now reached 1.2M cards (20% of sales). Revenues have risen 12% pa since 2011, so have profits and dividends. In 2019, sales breakdown was as follows: 54% electronic equipment (including smartphones), 18% PC and peripherals and 28% others including books and services. ROE is a 58%. Net profit is usually 100% distributed in dividends. Over the next 3 years, Jarir is expected to open 5 stores pa (+25% in commercial space). It also aims at substantially increasing its online sales (now at 5% of total vs. 3.2% in 2018). Its internet site has been ranked nb2 after Souq.com by Alexa. Its physical stores will allow the company to execute a more efficient delivery than its competitors Souq.com and Noon.com. We estimate net profit could grow 9-10% pa in the next 3 years. Capex is expected to decline as a big chunk has been done already. Hence FCF should grow at a faster pace. The stock trades at a 2020 PER of 18x and its dividend yield reaches 5%.

Stock Focus: Arabian Centres (Sales of $600M, market capitalisation of $4bn, listed in Riyadh)

With 21 shopping centres (1,2M sqm), Arabian Centres Company (ACC) is the main developer and owner of shopping centres in Saudi Arabia (around 15% market share). 80% owned by the Fawaz Alhokair family (also owner of AlHokair Fashion Retail), ACC has been listed in May 2019 on the Tadawul Stock Exchange in Riyadh at a market capitalisation of $3.3bn. The company’s properties are mainly located in prime areas in Riyadh, Jeddah and Dammam. They are home of 4,100 shops and 1,100 brands (including many Foreign luxury brands and the whole Inditex portfolio). Food and Entertainment (cinemas) occupy a small portion of the GLA (15% vs. a typical 25% in Dubai). As far as cinemas are concerned, ACC got a licence only in 2018. We believe the company is ideally placed to benefit from the ongoing socio-demographic changes in the Saudi society. Today KSA accounts for roughly 2/3 of GCC retail sales (2 times the size of UAE) while in terms of commercial space, the Kingdom is only at 0.4 sqm per capita, 3 times less than Dubai or Abu Dhabi.

On the operational level, ACC has just published its FY03/20 3^rd quarter figures. Occupation rate is at 93.7% Same store sales growth reached 2.3% in 9M03/20. The figure was a bit 

disappointing but can be partly explained by the closure of 2 hypermarkets (to be replaced by cinemas). The company actually plans to open 19 cinemas in the next 24 months. In terms of future projects, ACC forecasts 6 new shopping centres and 2 extensions between now and 2023. Debt level (3.5X Net Debt/EBITDA) remains comfortable. However, a capital increase is a possibility given the company pipeline.

From a Governance point of view, ACC is rather transparent particularly on the subject of related party transactions. That is absolutely necessary given the fact that sister company AlHokair Fashion is their largest and quiet often their mall anchor tenant. ACC has a Related Party Transaction Policy, that requires quarterly review of related transactions to an Audit committee.

At today price, the stock offers a 32% discount to NAV and a dividend yield of 5% The company seems a very good vehicle to benefit from growth in Saudi discretionary consumption.