Cement Research

Global Research Equities
Cement Sector
May 2002
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Table of Contents
Investment Summary ............................................................................................................................. 1
Global Cement Industry ........................................................................................................................... 3
Arabian Cement Industry ......................................................................................................................... 6
Kuwait Cement Industry........................................................................................................................... 13
- Economic Link ................................................................................................................................... 13
- Industry Structure .............................................................................................................................. 15
- Demand & Supply.............................................................................................................................. 18
- Porter’s Five Forces .......................................................................................................................... 20
Comparative Analysis of the three Cement Companies........................................................ 25
Valuation Matrix .......................................................................................................................................... 29
Recommendations ........................................................................................................................................ 31
Kuwait Cement Company ....................................................................................................................... 32
Kuwait Portland Cement Company ................................................................................................... 39
Hilal Cement Company ............................................................................................................................ 46
Appendix ........................................................................................................................................................ 53
Manufacturing Process ............................................................................................................................ 53

Global Research - Kuwait Global Investment House
Cement Sector
Reuters Code :
KCEM.KW
PCEM.KW May 2002
HCCK.KW
Listing:
Kuwait Cement Company (KCC) HOLD
Kuwait Portland Cement Company (KPCC) BUY
Hilal Cement Company (HCC) BUY
Current Price :
KCC 365 fils
KPCC 910 fils
HCC 580 fils
Investment Summary
● After gloom for the last couple of years, the prospects of the cement sector in
Kuwait is looking up, and we are very optimistic that the cement companies should
be able to improve their turnover and profitability in current year.
● The fundamentals of the three listed local cement companies looks to be positive
especially with most of the companies having completed their capital expenditure
programs and poised for growth & higher positive free cash flows.
● The cement sector has also benefited from the relatively high oil prices, which has led
to higher cash flows for the government treasury. Led by the improved fiscal situation
the government has announced various construction and infrastructure related
investment packages, which has helped in increasing the demand for cement.
● The size of the cement industry in Kuwait currently is estimated at nearly 2.5 million
tpa (valued at approx. KD 36 mn). There are three listed companies, Kuwait Cement
Company (KCC), Kuwait Portland Cement Company (KPCC) and the Hilal Cement
Company (HCC) who account for nearly 90-92% of the total market share.
● Kuwait Cement Company, which now manufactures its own cement, meets about
48 percent of the Kuwait’s cement demand. Kuwait Portland Company produces
about 28-30 per cent of the total cement required, and Hilal Cement Company
accounts for another 14 per cent of the total demand. The remaining market share is
held by the small traders, etc.
● We recommend a positive outlook for the cement sector in Kuwait mainly in view
of the expected improvement in the profitability and the current valuations of these
companies. With improved liquidity of the stocks we believe, the Kuwait Portland
Cement (KPCC) and the Hilal Cement Company (HCC) stocks should be able to
register higher growth. On the other hand announcement by KIA to sell its stake in
Kuwait Cement Company (KCC) has generated substantial interest in the
company’sstock.
● Our top pick in the sector is KPCC, which we expect would outperform the sector.
We also believe the HCC stock is fairly attractive and with improvement in its
liquidity should provide the investors with positive returns. We recommend the
investors to hold on to their holding in the KCC stock till a clear signal is available
from KIA regarding the selling of its stake in the company.
May - 2002 Cement Sector 1

Recomendation Summary:
Cement Cos. Mkt. Price ROE P/BV P/E DCF per Recommend
FY01 Cap. (%) (x) (x) share (fils)
(KD Mn) (fils)
Kuwait Cement Co. 136.9 365 11.44 1.8 24.9 224 Hold
Kuwait Portland Cement Co. 64.5 910 21.49 1.5 12.7 1,109 Buy
Hilal Cement Co. 19.1 580 19.37 2.9 10.1 646 Buy
EPS & BV are the expected year end 2002 values. Share Prices are of 8th May 2002.
Chart : KCC stock price movement

Index
Values Price in KD
160.00 0.600
140.00
0.500
120.00
0.400
100.00
80.00 0.300
60.00
0.200
40.00
0.100
20.00
0.00 0.000
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr-
95 95 95 95 96 96 96 96 97 97 97 97 97 97 97 97 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01 01 02 02
General Industrial KCC
Chart : KPCC Price movement
Price in KD Index Values

1.200 160.00
140.00
1.000
120.00
0.800
100.00
0.600 80.00
60.00
0.400
40.00
0.200
20.00
0.000 0.00
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr-
95 95 95 95 96 96 96 96 97 97 97 97 97 97 97 97 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01 01 02 02
KPCC General Industrial
Chart : HCC stock price movement

Price in KD Index Values
0.800 120.00
0.700
100.00
0.600
80.00
0.500
0.400 60.00
0.300
40.00
0.200
20.00
0.100
0.000 0.00
30/12/98 28/2/99 28/4/99 30/6/99 31/8/99 31/10/99 29/12/99 29/2/00 30/4/00 28/6/00 30/8/00 31/10/00 26/12/00 28/2/01 30/4/01 30/6/01 29/8/01 31/10/01 31/12/01 20/2/02 30/4/02
HCC General Industrial
2 Cement Sector May - 2002

Cement Industry - Global Cement Markets

With the economic prospects looking more positive for the years 2002 and 2003 there
is a likely-hood that the construction sector would continue the growth it has observed
since the last quarter of the year 2000. Even while there was a slowdown in the global A global slowdown in
2001 has not led to
economy in 2001, the global construction activity has not shown significant signs of significant slowdown in
slowdown. But with the recent economic recovery being observed in various parts of the construction activity.
the world and particularly in USA which has led to the talk of implementing a tighter
monetary policy has led to the investors being apprehensive of the future of the
construction sector given its close linkage with the prevailing interest rate. The fact that
there has not been any significant slowdown in the construction activity despite the
slowdown in the global economy raises the fear that the with the current economic
recovery the potential upside for the global cement market could be restrictive.
Table 01 : World Cement Demand Growth (in mn tonnes)
Volume 1996 1997 1998 1999 2000 2001E 2002E

2000 (%) (%) (%) (%) (%) (%) (%)
Western Europe 197 -0.9 2.1 3.7 4.3 2.8 0.0 -0.2
Eastern Europe 85 -8.9 0.1 3.3 5.0 7.7 -0.7 1.3
North America 118 5.8 6.2 10.5 5.2 0.2 2.9 -0.4
Latin America 115 -0.7 7.3 4.5 -1.5 1.4 -2.5 -1.6
Middle East & South Asia 233 5.3 4.8 3.8 6.4 5.5 0.7 3.7
China & Hong Kong 567 11.8 2.7 1.3 3.0 0.6 6.7 3.0
Japan 70 3.4 -4.5 -8.9 -1.1 -1.1 -0.7 -1.5
Asia Pacific 154 7.7 2.6 -25.2 -3.5 8.0 1.5 5.2
Oceania 9 1.3 0.0 -1.3 5.3 3.5 -9.6 4.1
Africa 82 7.0 2.7 6.1 6.8 2.3 4.9 2.6
The World 1,629 5.9 2.7 -1.0 2.9 2.6 2.7 2.0
Source : ICR and Deutsche Bank Estimates
The world cement demand growth is depicted in table 01. Overall for the last couple of
months US market has been resilient, while in Europe due to the economic downturn
the infrastructure works have not really picked up. At the same time with strong
population growth and prevailing high oil prices, the Middle East & South Asia have
seen good growth and their economies seem to be relatively insulated from the
happenings in the world economy.
Most of the international research houses project a fairly positive outlook for the
construction and cement industry for the year 2002. The global cement demand is
expected to grow at a slightly lower rate of 2.0% in 2002 compared to last year’s Global cement demand is
expected to grow at 2.0%
estimated 2.7%. Taking into account the inter-regional import-export flows, nearly 111 in 2002.
million tons of cement were consumed in countries other than where they originated.
Cement plants are the most saturated in North America, which takes in 28 million tons of
cement produced around the world per year. Most of the global players are pursuing large

scale modernization programmes to extend their capacities. Greatest number of idle

plants lie in the former Soviet Bloc countries. Continental isolation of this region limits
its export capacity and also its contribution is not substantial to the world commerce.
Asia Pacific region has the second-lowest capacity utilization rates (66%). It is
partially sustained by a substantial flow of exports which was virtually non-existent
several years ago. The bulk of these exports were created by multinationals those since
1998 have integrated their Asian acquisitions into their trading networks. The other
regions have satisfactory capacity utilization rates. African countries import a
substantial proportion of their cement requirements as they lack limestone in most parts
of the region.
As per the recent Deutsche Bank research dated April 2002, between now and 2005, it
is projected that the production capacity of the world would increase at a modest 5.5%,
Between now & 2005, the while the world demand is projected to grow at twice that rate, resulting in an advance
cement production
capacity is expected to
of 13.5% over the period. The overall capacity utilization rate is also expected to gain
increase by 5.5% while six percentage points to reach 80% between now and 2005. Capacity utilization rates
the world demand is
expected to grow by twice
should increase everywhere except in North America. But the trading activity is
that amount. estimated to decrease by 6% over the period, from 111 million tons to 104 million tons.
Table 02 : Estimated capacity utilization rates by region in 2000 (million tons)
Company Consumption Production Utilization No. of

Capacity rate (%) Kilns
Western Europe 197 241 81 2
Eastern Europe 87 201 46 -5
North America 123 108 88 28
Latin America 114 168 72 -6
Middle East and South Asia 228 303 78 -8
China And Hong Kong 565 715 79 3
Japan 70 96 78 -4
Asia Pacific 154 267 66 - 23
Oceania 9 12 70 0
Africa 85 87 81 14
Total 1,632 2,197 74
Source : ICR and Deutsche Bank Estimates
Brief projections for the main cement markets by Deutsche Bank includes:
North America: The Canadian and the American markets, despite a slight recent
decline, should continue to operate at full capacity. The nearly 26% increase in the
Demand has been production capacity in the region should be absorbed by persistently brisk growth in
growing at 2.1% annually
in North America. demand (2.1% annually) and a 20% reduction in the imports. With nearly 22 million
tons to be imported per year, the region should continue to consume a significant
portion of the world’s surplus production and therefore, it is expected that cement
prices would remain at their current levels.

Western Europe and Japan: The utilization rate of the European and the Japanese
producers are expected to remain high because of the withdrawal of capacity there.
Because of their policy of regularly closing down excess capacity, the decline in
cement demand, of roughly 0.5% to 1.0% per year, should have no meaningful impact Profitability of Western
European & Japanese
on the profitability levels. Therefore, it is expected that the profitability of European producers expected to
and Japanese producers should remain high and they should continue to generate remain high.
substantial surplus free cash flow.
Middle East, the Indian sub-continent and Africa: The main markets in which
capacity expansion programmes are currently taking place include the Egypt,
Bangladesh, India and Iran. The utilization rates in these countries are expected to
remain high because of the steady increase in local demands. Egypt, which is the
second largest importer (5.2 million tons) in the world is expected to achieve a balance
between supply and demand in 2003-04. At the same time the overall growth in
demand in Africa should open other outlets for exporters.
Asia Pacific: Sharp increase in the capacity utilization rates in Asia Pacific is
expected to provide a strong boost to the local players’ profitability levels, while the
production capacity is to remain unchanged between now and 2005. As per the recent
Deutsche Bank research dated April 2002, since the financial crisis, all plans to extend Demand slowly picking
up in the Asia pacific
capacity have been cancelled and the debt levels of the local players have been left with region.
no room for further development investment. In the meantime, demand has picked up
again, suggesting that manufacturers could be back to full production capacity by the
year 2005. Achieving the above would mean the manufacturers have to maintain the
exports to other regions. Better coverage of fixed costs would enable the cement
companies to improve their operating margins, as long as , the local prices hold firm.
A similar scenario is also projected for Eastern Europe and Latin America.

Cement Industry – Arab & GCC Cement Markets

The demand for cement in the Middle East and North Africa (MENA) region is
expected to grow at about 3.5% for the year 2002. Markets like Iran, Kuwait, Syria and
Demand for Cement in Turkey are expected to register higher growth rates in the year 2002 compared to 2001.
Kuwait estimated at
2.7mtpa for the year Markets such as Oman, Saudi Arabia, Yemen, Morocco, Tunisia would have either
2002. almost the same market demand or see slower growth rates. The statistics of the
Middle East Cement market is provided in table 03. It could be seen from the table 03
that the per capita demand of Cement in Kuwait is one of the highest in the region next
only to UAE and Qatar. But this has to be measured in a relative sense as the
population of Kuwait is very small and is not a actual reflection of the future demand
of cement in Kuwait. In absolute sense, the demand of cement in Kuwait is relatively
low compared to the other countries in the region. On a per capita basis it ranks lower
than UAE and Qatar in the region.
Table 03 : MENA Region : Cement Demand (Million Tonnes)

% Growth % Growth Demand Per
Countries 2000 2001E 2002F 20001E 20002E Capita (kg)
Egypt 26.7 27.3 27.9 2.3 2.2 407
Algeria 8.0 8.4 8.8 5.0 5.0 287
Libya 3.2 3.3 3.4 3.1 3.0 533
Morocco 7.5 8.1 8.5 7.7 5.0 268
Tunisia 4.8 4.8 4.9 1.9 1.5 500
Iran 21.0 20.0 20.6 -4.8 3.0 287
Iraq 4.3 1.8 1.8 -57.6 0.0 195
Jordan 2.0 2.1 2.1 6.7 0.0 317
Kuwait 2.5 2.5 2.7 0.0 7.0 1,111
Lebanon 2.9 3.0 3.1 3.8 3.7 906
Oman 1.5 1.6 1.7 6.7 4.0 625
Qatar 1.2 1.2 1.2 0.0 2.0 1,917
Syria 5.1 5.3 5.5 3.0 4.0 333
Saudi Arabia 15.4 17.7 18.9 15.1 6.8 777
UAE 6.1 6.1 6.1 0.0 0.0 2,542
Bahrain 0.5 0.5 0.5 0.0 0.0 842
Yemen 3.0 3.1 3.1 3.3 1.0 178
Turkey 31.0 25.6 26.5 -17.5 3.5 486
MENA total 146.7 142.4 147.3
% change,
year-on-year (2.9%) 3.5%
Source : ICR , Deutsche Bank and Global Investment House estimates
As we can observe from table 03, Egypt tops the list of actual consumption of cement
with nearly 27 million tonnes in the year 2000, followed by Iran with 21 million tonnes
and Saudi Arabia with 15.4million tonnes. The number of existing cement companies
are 114 and they are distributed throughout the Arab countries. Iran and Egypt rank
first and second in terms of number of cement companies with 35 & 14 companies

respectively. The number of cement companies in the GCC region amounts to 31 with
the Kingdom of Saudi Arabia in the lead with 8 companies. Countries in the region
which figure among the largest exporters include Saudi Arabia, UAE, Iran, Tunisia &
Jordan, while the importers include Egypt, Kuwait, Algeria, Sudan & Yemen.
An analysis of the cement producing GCC countries shows that UAE and Saudi Arabia
are among the two largest producers of quality cement. The dynamics of the GCC
cement markets has been discussed separately in the next few paragraphs:
The United Arab Emirates (U.A.E)
U.A.E is one of the major producers of oil and gas in the region. The country has seen
substantial development activities and structural changes in its economy in the past
decade. It has led to increase in cement demand from 5.3 million tons in 1995 to 6.1
million tons in 2001. At approx. 2,542 kilograms demand of cement consumption per Increase in cement prices
twice in 2001 should lead
capita, U.A.E has one of the highest per capita consumption in the region. The cement to higher profitability for
production capacities in U.A.E have increased at a higher rate than the demand. It has the local companies.
lead to substantial surplus capacity in the economy as shown in the table provided
below. Cement prices in the UAE local markets rose twice in the year 2001. The initial
increase was of 15% which was followed up six months later with another increase of
30 %.
Table 04: Cement Production and Consumption in the U.A.E. (million tons)
Description Particulars 1995 1996 1997 1998 1999 2000

(est.)
Production Capacity Clinker 4.62 4.77 4.77 4.77 6.30 6.30
Cement 9.28 9.43 9.43 9.43 11.10 11.10
Actual Production Clinker 3.90 4.10 4.50 4.20 4.90 5.80
Cement 6.20 5.90 6.00 6.20 6.90 6.80
Consumption Domestic 5.30 5.30 5.10 5.50 6.10 6.10
Exports 1.00 0.70 0.90 0.70 0.80 0.70
Clinker Import 1.82 1.85 1.20 1.80 2.00 1.00
It can be seen from the table 04 above, that the overall production capacity has
increased to 11.1 million tons yet, there has not been a commensurate increase in
demand for cement. It has led to the stock pile of clinker produced by the cement
companies while some of the other cement manufacturing companies have resorted to
importing clinker at cheaper prices. Currently, there are seven cement manufacturing
companies in the U.A.E and another three companies have cement grinding mills but UAE currently has seven
two of them are not in production. During 1999, the three companies in Ras Al cement manufacturing
plants and three grinding
Khaimah namely, Union Cement, Gulf Cement and Ras Al Khaimah Cement Company mills with total capacity
having nearly 3.6 million ton production capacity produced approx. 37 % of the total of 10.67 mtpa.
cement produced in the U.A.E.

Table 05 : Cement Capacities in the U.A.E.

Name of the Company Location Cement
Production
Capacity
Union Cement Company Ras Al Khaimah 1.20
Gulf Cement Company Ras Al Khaimah 1.30
Ras Al Khaimah Cement Company Ras Al Khaimah 1.10
The Umm Al Quwain Cement Company Near Ras Al Khaimah 0.50
Ajman Cement Company 15 km from Umm Al Quwain 0.75
Cement Company
Sharjah Cement Company Sharjah 1.30
National Cement Company Dubai 1.50
Jebel Ali Cement Mill Jebel Ali Cement Mill 0.20
The Al Ain Cement Factory Al Ain- Abu Dhabi 1.22
The Fujairah Cement Industries Fujairah 1.60
Total 10.67
Table 05, provides data on the individual production capacities of all these 10 companies.
Of these 10 companies, 2 cement companies namely, Ajman Cement Company and Jebel
Ali Cement Mill are not operational at present. Also, the Umm Al Quwain Cement
Company is only into the grinding of cement and not into clinker production. The U.A.E
also has Ras Al Khaimah Co. for White Cement & Construction Materials which
Total cement production manufactures only 450,000 metric tons of white cement. With the projected expansion in
capacity to reach nearly
12mtpa by 2003. the production capacity of Sharjah Cement Company, the total cement production
capacity in the U.A.E is expected to reach nearly 12 million tons by 2003, to make it the
second largest cement producer in the Gulf region after Saudi Arabia. Since the local
production is more than the local demand, the U.A.E exports a large amount of its
cement capacity to the nearby Gulf countries. African countries are gradually turning out
to be major customers as well. Exports are supported by the good container handling
facility and the low freight and other port handling charges in the U.A.E particularly at
places like Dubai, Ras Al Khaimah, Sharjah, Fujairah, etc.
The U.A.E cement manufacturing companies are facing under utilisation of their
designed production capacities. Surplus cement available had put substantial pricing
pressure on the profitability of these cement companies, but the cement companies
have been able to get together and have increased the prices of cement last year which
should help them improve their profitability next year.
Saudi Arabia
Saudi Arabia cement Saudi Cement sector is one of the oldest (46 year old) sectors in the Arabian Peninsula.
companies have 20.39
mtpa production capacity. Currently, the Kingdom has eight cement (grey) companies operating through ten
cement plants and one white cement company. Grey cement companies produced
20.73 million tons of clinker in the year 2001 against their annual production capacity
of 20.39 million tons. It is obvious from table 06, that each of the three cement majors

viz. Saudi Cement, Southern Cement and Yanbu Cement have a capacity of more than
10,000 tons per day of clinker production and they constitute more than 50% of total
productioncapcity.
Investments in the Kingdom’s eight cement companies total over US$4 billion.
Table 06 : Saudi Cement Sector Profile

Company Date of Region No. of No. of Capacity Capacity per Fuel
Incorporation Sites Kilns (tons per day) annum*
(million tons)
Arabian Cement 05/01/1955 Western 1 5 8400 2.54 Crude Oil
Saudi Cement 23/11/1955 Eastern 2 10 13825 4.15 Gas
Yamama Cement 24/08/1961 Central 1 6 9167 2.75 Crude Oil
Yanbu Cement 14/03/1977 Western 1 4 11000 3.30 Crude Oil
Qassim cement 02/08/1978 Central 1 2 4700 1.41 Crude Oil
Southern Cement 21/01/1978 Southern 2 3 10800 3.24 Crude Oil
Eastern Cement 07/03/1983 Eastern 1 2 7000 2.10 Gas
Tabuk Cement 02/08/1994 Northern 1 1 3000 0.90 Crude Oil
10 33 67892 20.39
* Assuming 300 days of Production
Source : CCFI Database
Saudi Cement and Eastern Cement are situated in the Eastern Region with plants
located in three different sites (Hufuf, AinDar & Khafji). These three plants use gas as
their fuel and have a production capacity of 6.4 million tons of clinker i.e., 31% of the
total sector capacity. Arabian Cement and Yanbu Cement located in the Western and
North East Region at Rabiah and Yanbu respectively. They have a combined
production capacity of 5.7 million tons of clinker i.e., 29% of the total sector capacity.
Central region has two cement companies – Yamama Cement and Qassim Cement with
a combined production capacity of around 4 million tons of clinker ie., nearly 20% of
the total capacity in Saudi Arabia. Southern Cement located in two different sites
(Bisha and Jazan) in the Southern Region contributes nearly16% to the total capacity of
the sector. Tabuk Cement, the smallest and the latest entry to the cement sector is
located in the northern region.
The bleak demand conditions during the late 1990’s unleashed severe competition among
the major Saudi players in the sector that led to frequent price wars. As per the public
information available, due to these price wars, the companies incurred a loss of SR2
million per month. Due to this high volatility in prices there was instability in the market
place both for the producers and consumers. In order to avert such a scenario, Saudi
Cement Co. (the biggest cement producer in Saudi Arabia) initiated a "Gentleman
Agreement" with Eastern and Yamama cement that defined quotas and price levels.
Following this agreement all the companies in the Kingdom concluded similar
agreements, which eased the competition and stabilized the prices. There is also an
initiative to form a joint export house to facilitate and coordinate the export of cement.

As per the CCFI cement report , all cement companies in Saudi Arabia have almost the
same unique profiles such as :
● Cost structure for all cement companies are more or less similar as shown in figure
01
● Unlike the other sectors in Saudi Arabia, private sector contribution is very high –
Companies like Arabian Cement, Saudi Cement and Tabuk Cement have 100%
private sector participation.
● There are no major investment planned in expansion as well as in downstream
industries.
● No presence in the local distribution system (continue to rely on dealer networks)
&
● High dividend payout.
Figure 01: Cement Cost Structure of Companies in Saudi Arabia
Source : CCFI Database
Year 2001, saw higher local consumption due to buoyant construction activities, which
helped cement companies to reduce their clinker inventory levels by 0.4 million to
End of year 2001 saw around 9 million tons. But not all the companies were able to reduce their inventory
Saudi Clinker inventory
level decline to 9 million levels, only Southern Cement, Arabian Cement, Yanbu Cement and Eastern Cement
tons. reduced their inventories. On the other hand, inventory levels increased significantly
for companies like Saudi Cement & Yamama Cement due to higher production.
Overall the current clinker inventory level is at a very high level for the sector, which
is at around 44% of the annual production capacity. Particularly, companies like
Yamama Cement and Eastern Cement inventories are more than two-third of their
rated capacity (table – 07)

Table 07: Clinker Stock Vs. Production Capacity of Saudi Cement

Companies (‘000 tons)
Cement Companies Clinker Stock Production % of Clinker
Capacity Capacity
Arabian Cement 888 2,540 35.0%
Eastern Cement 1,468 2,100 70.8%
Qassim Cement 183 1,410 13.0%
Saudi Cement 797 4,147 19.2%
Southern Cement 1,594 3,240 49.2%
Tabuk Cement 363 900 40.3%
Yamama Cement 2,037 2,750 74.1%
Yanbu Cement 1,694 3,300 51.3%
Total 9,042 20,387 44.4%
Source: CCFI Cement Sector report, 2002
The export performance of the cement companies in Saudi Arabia has been
commendable in the last four years, not only in absolute term, but also in terms of
composition of total sales. Despite strong competition from UAE, Far East and Iran,
Saudi exports increased from 0.25 tons in 1994 to 4.82 tons in year 2001 and from
15.6% of total sales in 1999 to 21.4% in 2001. Most of these cement and clinker
exports were done to the GCC countries like Bahrain, Kuwait, Qatar and UAE.
Table 08: Total Export of Cement & Clinker for Saudi Cement
Companies
Million tons 2000 2001* % Change
Arabian Cement 0.410 0.269 -34.4%
Eastern Cement 0.321 0.823 156.4%
Qassim Cement 0 0 -
Saudi Cement 2.391 1.741 -27.2%
Southern Cement 0.881 1.092 24.0%
Tabuk Cement 0.051 0 -100.0%
Yamama Cement 0.033 0 -100.0%
Yanbu Cement 0.840 0.893 6.3%
Total 4.927 4.818 -2.2%
Source : CCFI Cement Sector report, 2002. * estimated
Oman
Oman has two cement companies namely Oman Cement Company and the Raysut
Cement Company. Prices of cement in Oman had fallen substantially in 1998 and 1999 Oman’s cement demand
estimated at 1.6 mtpa.
following large imports from the U.A.E. But in the year 2001, the prices of cement
increased as a result of the decision taken by the two cement companies in Oman to try
and stop the imports from the UAE. Cement market in North Oman is larger than that
of the South, the former representing almost 80 percent of the total demand in the
country. Current local cement demand is estimated at around 1.6mtpa, as compared to

an installed capacity of 2mtpa of Oman cement Company (producing around 1.25mtpa)

and Raysut Cement Company with a capacity of around 0.75mtpa.
After a sharp decline, demand for cement and cement products in Oman rose in 2001
due to the increase in governmental expenditure and slight recovery in the construction
industry. Raysut Cement Company at Salala reported an increase in its sales via its
own export terminal at Qabous Port in Muscat. This terminal was commissioned in
June 2000 with a handling capacity of around 2,500 tpa and it meets the needs of the
company’s customers in the North.
Qatar
Originally founded in 1965, Qatar National Cement Company (QNCC) is the only
cement manufacturing (monopoly) company in Qatar. QNCC’s capital was increased
in 1984 with a government share of 43% and the remainder being contributed by the
national private sector. The company utilises abundant local raw materials, such as
limestone, clay and gypsum and has its production plant in Umm Bab. Currently,
QNCC produces ordinary portland cement and sulphate resistant cement from three
kilns and calcined lime and hydrated lime from two newer kilns. These products are
extensively used in the local market for construction, steel production and water
treatment. QNCC also exports its products. QNCC currently has a cement production
capacity of 1.19mtpa and clinker production capacity of 0.915mtpa. It is currently
expanding its output through the installation of a new plant, with a production capacity
of 670,000 tons/annum.
Qatar’s cement demand is Qatar is on the threshold of becoming a gas-driven economy, with liquefied natural gas
estimated at 1.2mtpa
(LNG) and condensates set to overtake oil as the biggest export earner by 2003. The
construction sector in Qatar continues to depend on big-ticket gas and petrochemicals
projects. A major new area of development is the expansion of power generation
capacity with work on the state's first independent power project set to start this year.
Qatar consumed nearly 1.2 million tons of cement last year and the demand for cement
this year is expected to remain almost the same as in the previous year unless any
major construction activities take place.
Bahrain
The cement industry in Bahrain is relatively small with a total consumption of only
0.5mtpa. Most of its requirements are met through imports though it has a couple of
grinding facilities. The demand for cement is not expected to change much in the next
couple of years unless the government kick starts substantial investments into the
constructionsector.

Cement Industry – Kuwait

Economic Link of the Industry:
Cement is the preferred building material in any country which is used both directly
and indirectly as building material (in manufacturing non-reinforced blocks, reinforced
systems, etc.). It is used extensively in household and industrial construction. Cement
sector is a significant sector of the national economy due to its unique linkages with the
construction sector and the real estate development (to a lesser extent). Since the
statistics are not adequate to study the impact of cement sector on the domestic
economy, we have used the construction sector as the surrogate for the cement sector to
understand the impact of cement sector on the economy.
Broadly, the construction sector can be categorized into demand for household
construction (homes, offices, etc.) and infrastructure creation (ports, roads, power
plants, etc.). The real driver of cement demand is creation of infrastructure, which
mainly is a function of the state of the economy of the country hence cement demand in
emerging economies is much higher than developed countries where its demand has
reached a plateau.
The real estate and the construction sectors are considered a major component of the
development and economic activity of a nation and spending in this sector induces
growth in other sectors of the economy. To drive this point home, three indicators are
of prime importance, viz. value added by construction & real estate in GDP, public
expenditure on construction activities and the share of construction and real estate
sector in the domestic cash credit facilities utilized.
In spite of its importance, the contribution of the construction sector in Kuwait’s GDP
(at purchaser’s prices) constitute mere 2.0% for the fiscal year 2000, though as a Construction sector
percentage of non-oil GDP it was 7.5%. The ratio has stayed in the range of 2.5-3.2% contributed 7.5% of the
non oil GDP in the year
between 1995 to 2000. The construction sector value has stayed in the range of 2000.
KD229-243mn. While GDP declined by 15.25% in 1998 to KD7.7bn, the construction
sector activity had held its own but it subsequently declined to KD 0.23 bn (-3.4%)
while the GDP grew by 17.0% in 1999 which was mainly on account of the reduction
in the government expenditure because of low oil prices while actually the oil prices
increased during the year leading to increase in GDP (mining & quarrying including
crude petroleum & natural gas increased by 41.5% while the petroleum refineries
recorded a growth of 28 % in the year 2000 compared to 1999). Even though the
construction sector returned to positive growth during the year 2000 contributing 5% of
private sector growth, its contribution to the GDP actually declined to nearly 2%. The
growth in this sector augurs well for the cement sector as this sector has seen nearly
five consecutive years of negative growth between 1995 and 2000.

Table 09: Construction, real estate expenditure (Change)

Amount in KD Million 1993 1994 1995 1996 1997 1998 1999 2000
Construction 218 238 244 241 236 237 229 233
As % of GDP 3.0% 3.2% 3.1% 2.6% 2.6% 3.1% 2.5% 2.0%
Real Estate & Business Services 613 634 655 655 690 687 712 737
As % of GDP 8.5% 8.6% 8.3% 7.0% 7.6% 8.9% 7.9% 6.3%
GDP at purchaser’s value 7,231 7,380 7,925 9,303 9,107 7,718 9,033 11,590
In the year 2000, the construction sector returned a positive growth of 1.6% and it is
expected that with the current oil prices and proposed government’s expenditure this
rebound is expected to be followed by stronger growth in the coming years. Over the
last two fiscal years the government has announced several projects and has made large
increases in their spending, but its impact on the economic activity would be realized
only with a lag due to the trickle down effect.
Public expenditure on construction, a major factor that propels the growth rates of
economic activity in the construction sector, shows a marginal decline of 6% from
KD383.5mn in 1995 to KD360.5mn in fiscal year 1996. Further from this slight
decline, the construction activity in public expenditure went up significantly by 9% to
KD393.7mn in 1997 and another 5% to KD414mn in 1998 over the respective
previous years. The draft budget for construction activities in the Kuwaiti
government’s expenditure plan for the fiscal year 2000-2001 was up by another 16% to
KD400 mn (8.63% of the total approved public expenditure budget) as compared to the
previous year. In the current proposed budget government’s expenditure plan on the
projects & maintenance for the fiscal 2002/03 has been further increased to KD670mn.
The significance of construction expenditure in the entire public expenditure budget is
evident in the fact that in all the years, construction activities have accounted for about
9-10% of the total public expenditure. Although outlays are high, the market witnesses
a large lag in completion of projects which does affect the overall real estate
development market & sentiment.
Table 10: Development expenditure (Change)

Amount in KD Million 93-94 94-95 95-96 96-97 97-98 98-99 99-00*
Public works 115.5 153.4 132.2 113.1 83.9 73.2 70.0
As % of Total Development Expenditure 33.9% 40.0% 36.7% 28.7% 20.3% 19.4% 20.3%
Electricity & Water 166.6 167.0 179.8 221.0 261.6 238.7 203.1
Communications 14.6 17.1 11.3 13.9 19.2 19.0 6.4
Other 43.7 46.0 37.2 45.7 49.4 45.7 65.5
Development Expenditure 340.4 383.5 360.5 393.7 414.1 376.6 345.0
As % of total Public Expenditure 8.0% 9.1% 8.7% 10.1% 10.4% 9.3% 8.0%
Total Public Expenditure 4,240.8 4,193.2 4,126.5 3,888.6 3,977.8 4,040.2 4,295.0

The draft budget for 2002/03 expects government expenditure to increase by KD 156
million, or 3% to KD 5.4 billion. Capital spending is expected to receive a substantial
boost in the current financial year. Given the fact that a part of last year’s budget
allocation was not even spent, this hike may represent a more substantial increase in
actual capital spending in this fiscal year.
Over the years, the development of bank credit in the Central Bank of Kuwait monetary
statistics reveals that the local banks in Kuwait have aggressively increased their
exposure to the construction & real estate sector, which is another indicator of the
expansion of activities in this sector. While the total credit to the private sector
increased by approx. 16.6% last year (2001), the credit offtake by the construction
industry has actually come down by approx. 14.7% to KD376.6mn after having
recorded an increase of approx. 21.4% for the whole of the year 2000. The main reason
behind it could the extra liquidity which existed in the market last year as a result of the
UNCC payments and the higher oil prices. We believe the upcoming projects would in
the medium term lead to higher construction activity and hence higher credit offtake.
While the share of the construction sector in the ‘local banks balances of cash portion
utilized from domestic credit facilities by sector’ has stayed in the range of 6-8.5% over
the period 1996 to 2001, the share of the real estate sector has grown from 8% in 1995
to 19% in 2001. Over the year 2001, the credit to the real estate sector registered a
growth of 26%.
In terms of fresh distributions concluded with residents of Kuwait, it is evident that the
growth in loans extended to construction, real estate and personal facilities (includes
loans for purchase of houses) continues unabated. The Cabinet’s decision to inject
additional funding into the Credit and Savings Bank through the Kuwait Development
Fund during the last quarter of the year 2001 should lead to more construction of
houses/villas and hence leading to increased demand for construction activities and
thereforecement.
Industry Structure:
Owing to the small size of the cement industry in Kuwait which currently stands at
nearly 2.5 million tpa (valued at approx. KD 36 mn ), there are only a few players in
the industry. Cement being a bulky item is a freight sensitive commodity, due to which
international trade is very limited and happens only between the neighbouring
countries. This is amply borne by the fact that world export of cement accounts for not
more than 0.20% of the total world production. Inspite of the above facts, Kuwait did Cement industry valued at
approx. KD36mn based
not have a cement factory till now due to its small market size which makes it on its current price.
uneconomical for anybody to setup a cement factory, unless he has exports/supply
contracts tied up with the neighbouring countries. Therefore, Kuwait uptill now had
companies which were mainly involved in just importing and marketing cement in
Kuwait. But recently Kuwait Cement Company has set up its own approx. 1.8 mn
tonne plant which has changed the structure of the cement industry in Kuwait. Now
Kuwait has one cement manufacturing company and two cement packaging & trading

companies. This has not only changed the industry structure but also the logistics of the
working of this industry. Kuwait also has several small time traders like Saheen
Al-Ghanim who import cement for mostly its own consumption and market the excess
capacity in the local markets.
Figure 02: Current estimated market share of the Local Cement Companies
Kuwait Cement Co. which Kuwait Cement Company, which now manufactures its own cement, meets about 48
has set up its own
production facility meets percent of the Kuwait’s cement demand. Kuwait Portland Company produces about
about 48% of the total 28-30 per cent of the total cement required, and Hilal Cement Company accounts for
demand.
another 14 per cent of the total demand. The remaining market share is held by the
small traders, etc.
Cement is a high volume and low value commodity which involves huge transportation
cost. Cement and its raw materials, namely coal and limestone are all bulky items that
make transportation difficult and uneconomical. Given this, cement plants are usually
located close to both, sources of raw materials and markets or one of them. In fact
transportation of cement to the markets also constitutes a major cost component.
Given the cost structure, the key indicator of sector profitability is cement prices.
Cement is a cyclical and Cement industry is normally characterised by the boom – and – bust syndrome, being a
capital intensive industry.
cyclical industry. It can be categorised as a capital intensive and cyclical industry.
Usually setting up of a greenfield cement plant of 1 mtpa would entail an outlay of
US$120 mn and would require a gestation period of 36-48 months.
Even though Kuwait has seen almost a continuous growth in cement demand for the
last 14 years, still its price (cement) has varied substantially (shows the demand
inelasticity for cement). In the last couple of years cement demand has remained
almost constant while its prices declined by nearly 42% between end of 1998 and end
of 2001.

Unlike other industries, the balance between supply and demand does not have a direct Balance between supply
and demand does not
and immediate impact on cement selling prices. Prices are primarily determined by the have a direct and
specific competitive conditions in each market as Cement markets are usually very immediate impact on
cement selling prices, but
much local in nature. Cement companies in Kuwait in the last 2 years were affected to depend to a large extent
a large extent due to the dumping of cement from Saudi Arabia. There arre some other on the specific
competitive conditions.
players like Saheen Alghanim in the local market who import cement from the nearby
countries and used to sell them at a very low margin in Kuwait but it was only an
extension of their construction activities and did not affect the local prices to a very
large extent. But the dumping of cement from the Kingdom led to substantial decline in
the prices as we would see in the table 11 below:
Table 11: Cement Price in Kuwait for the last 8 years (only OPC)
Year Avg. Price (KD/ 50 kg bag)
1994 1.250
1995 1.150
1996 0.950
1997 1.000
1998 1.100
1999 0.950
2000 0.680
2001 0.630
2002 0.800
* Prices mentioned are that of the year end retail market.
As a result of the dumping by Saudi Arabian cement manufacturers, the year 2001
proved to be one of the worst years for the cement companies in Kuwait as it was Cement companies
profitability suffered in
accompanied both by a decrease in the quantity sold by the local cement companies as the last couple of years
well as the decline in its prices. The profitability of the cement companies have because of the decline in
the prices of cement.
declined substantially as we would discuss later. But with the current news of increase
in the prices of cement the future looks bright for the local cement companies
depending on the sustainability of these prices. On March 03, 2002 the local cement
companies raised their prices by KD 2.7 or approximately 23% from a level of KD11.8
per ton to KD14.5 for bulk cement (we have not considered the increase on February
14 as it would have minimal affect if any on the performance of the cement companies
because of the subsequent decrease in the prices on March3, 2002). For the cement
bags the prices of cement were increased from 630 fils to 800 fils per cement bag (50
kg). This augurs very well for the cement companies profitability in the near future.
Considering the fact that prices in the UAE increased twice last year and similar
increases were affected in Saudi Arabia and Oman as well, it was very much expected
that similar increases would happen in Kuwait as well. We believe that the cement
companies would be able to maintain these prices for sometime until any further
structural change happens in the cement industry or the demand decreases substantially
which is very unlikely.

Demand & Supply
Demand for cement is price inelastic due to lack of substitutes, also they form a very
Demand for cement has low part of the total cost. Small imbalances in demand-supply result in
grown at a CAGR of 7.5%
since 1987. disproportionate change in cement prices. Given the commodity nature of the product
it is difficult for any single player to control the prices of cement in Kuwait. Current
price per ton is KD14.5, down considerably from KD20 in 1998. This makes the total
value of cement about KD36mn, considerably below KD46 million (approx.) in 1998.
As we would see in the table below, the demand for cement has increased at a CAGR
of 7.5% since 1987, while the prices of cement have undergone significant
fluctuations.
Table 12: Cement consumption in Kuwait
Year Demand (million tons) Year Demand (million tons)

1987 0.91 1995 1.36
1988 0.98 1998 2.33
1989 1.11 1999 2.50
1992 0.52 2000 2.50
1994 1.31 2001 (est.) 2.50
Source : Statistical Bulletin, Ministry of Commerce & "Global’s" Estimates.
The difficulty and expenses involved in its transport limits exchange and the scope for
price based adjustments and restoration between supply and demand. The assets
themselves also prevent supply from responding quickly to changes in demand, as they
have a long life span, and it is difficult and time-consuming to obtain permits for new
openings. But there is no constraint on supply due the presence of surplus capacity in
the region. In and of itself, the overall balance between production capacity and
demand means nothing at least in the short to medium term for Kuwait. For this reason,
the cement industry is well insulated against heavy swings in either supply or demand.
Per capita consumption of Per capita consumption of cement in Kuwait is about 1,111 kg compared to 2,542 kg in
cement in Kuwait is about
1,111 kg compared to the UAE and 1,917 kg in Qatar. These statistics are to be interpreted alongwith per
2,542 kg in the UAE and capita GDP and stage of economic development. Given the emphasis on real estate and
1,917 kg in Qatar
construction sector, cement demand is expected to rise in Kuwait. We have further
analyzed the real estate sector to see what future the real estate and construction sector
holds so as to analyse the potential of demand for the cement industry.
Real estate development is one of the largest industries in Kuwait bearing significant
influence on domestic economic activities, well being of the population, employment
and investment opportunities. As we have discussed earlier the real estate &
construction sector is considered a major component of the development and economic
activity of a nation and spending in this sector induces growth in other sectors of the
economy.
Real Estate sales which suffered in 2000 and the early 2001, revived as a result of the

resumption in the disbursement of new loans in January 2001 after it received a capital
injection from the government. Savings and Credit Bank (SCB) resumed its housing
loan disbursement activities in January 2001. The housing segment in the country
largely deals with "housing for Kuwaiti nationals" This helped the real estate sales
recover by March-April. To avoid further similar disruptions, SCB would be raising SCB would be raising
funds by issuing bonds to the extent of KD500mn to Kuwait Fund for Arab Economic funds by issuing bonds to
the extent of KD500mn to
Development (KFAED). The bonds which would be issued by SCB would have a tenor Kuwait Fund for Arab
of 20 years and are to be issued over a period of 5 years, carrying a subsidized interest Economic Development
(KFAED)
rate of 2%. This would be the first time that KFAED would be venturing into providing
funding inside Kuwait. The total value of loans sanctioned by SCB fell to KD160
million in 2000 from KD287 million in 1999 but it improved to KD199mn in the first
ten months of the year 2001. All this would help improve the construction market and
hence the cement consumption as well.
Resumption of the disbursement of loans by SCB helped in the recovery of the real
estate sales. Real Estate Sales (units sold) in 2001 were up by 11% compared to that in
the previous year though the value of sales remained almost the same (which shows Resumption of the
disbursement of loans by
that prices still remain depressed). Most of the activity in the real estate market as usual SCB helped in the
has been in the residential property sales, which was 91% of the total units sales and recovery of the real estate
sales
78% of the total value of sales in 2001. But it was the apartment and commercial
segment which recorded the maximum gain in terms of percentage growth. The unit
sales and value of sales of the Apartments and Commercial segment grew by 29% and
51% respectively, while the value of residential sales was down.
Table 13: Real Estate Sales

Residential Property Apartments & Commercial
Units Value (Mn. KD) Units Value (Mn. KD)
1996 7,248 588 1,304 220
1997 8,504 716 1,160 252
1998 7,844 804 828 228
1999 4,760 572 288 132
2000 4,813 545 396 93
2001 5,272 495 510 140
Jan-02 622 52 50 12
Feb-02 341 30 65 12
Source : Ministry of Justice
Similarly, the number of building permits granted in 2001 also grew by nearly 20%
over the previous year compared to a 22.5% decline in the year 2000. Residential
construction benefited from this, as did other providers of consumer credit. The credit Number of building
permits granted in 2001
to the real estate and the construction grew by approx. 19% for the year 2001 compared grew by nearly 20% over
to the same period last year. As per the recently released data by the Public Authority the previous year
for Civil Information (PACI), there were a total of 119.5 thousand residential homes in
December 2001. The number of apartments reached 173.4 thousand in December 2001.
There has been an increase in the number of pending applications at Public Authority

for Housing Care (PAHC). As of November 2001, the number of pending applications
at PAHC had increased to 54,000. Between Januray and November 2001, PAHC
distributed 1,677 vacant residential plots in South Jahra, West Jleeb Al-Shuyoukh &
South Doha and 3,020 government homes in Umm Al-Hayman, Jaber Al-Ali & East
Suaibikhat.
We believe that the demand for housing in the country is bound to increase, and at an
accelerated pace, in the years to come, an estimate well justified by the current "baby
boom" profile of the Kuwaiti population. While the size of the backlog of housing
applications with PAHC ensures the present demand potential of the real estate sector,
the population profile reflects high demand for the future in the housing sector of
Kuwait. This would add substantially to existing construction activities of various large
infrastructure projects announced by the government therefore leading to the further
increase in demand. Demand for cement in Kuwait is expected to rise by approx. 8% in
2002 after having remained steady for some time, due to the increase in the spending
on the housing sector and slight recovery in the construction industry which could
infact further improve the prices of cement.
Porter’s Five Forces
The various elements of the industry structure which we have considered while
evaluating the drivers and constraints of the cement industry includes the following
five considerations which have been discussed below. The model known as the
Porter’s "Five Forces" compares the different aspects of the competitive forces of the
industry and its various comparative strengths. But before we start analyzing these
factors we will discuss some of the peculiarities of this sector. Unlike other industries,
the balance between supply and demand does not have a direct and immediate impact
on cement selling prices. Prices are primarily determined by the specific competitive
conditions in each market.
Cement markets are usually very much local in nature. The difficulty and expenses
difficulty and expenses involved in its transport limits exchange and the scope for price based adjustments and
involved in its transport
limits exchange and the restoration between supply and demand. The assets themselves also prevent supply
scope for price based from responding quickly to changes in demand, as they have a long life span, and it is
adjustments and
restoration between difficult and time-consuming to obtain permits for new openings. In and of itself, the
supply and demand overall balance between production capacity and demand means nothing. For this
reason, the cement industry is well insulated against heavy swing in either supply or
demand.
The Asian crisis is a good example of the above statement: 40 million tons of surplus
capacity were suddenly available in just a few months and had no impact whatsoever
on prices elsewhere. "Global" has tried to look at the various competitive aspects of the
Kuwait Cement industry in general and sometimes have taken a view on the whole
region which is based on the Porter’s model.

Threat of New Entrants (Entry Barriers)

● Economies of Scale: Kuwait currently has only one cement plant which has an
economic size, but looking at the current demand of cement in Kuwait, we can
safely assume that the factory will not be operating at 100% capacity in the absence
of export markets. But the factory would have to overcome some operational
problems as the main raw material for cement production i.e, limestone has to be
imported, since Kuwait does not have limestone mines. Most of the plants in the
UAE, Saudi Arabia and Oman (only one plant belonging to Oman Cement
Company) have capacities more than 1mtpa, but none of these manufacturers has
the power to control the market. Therefore they usually collude with each other to
maintain the prices in the region and their profitability.
● ProprietaryProduct: Cement being a commodity, there are no proprietary products

in it. But there are plants in the region which manufacture specialty cement
products.
● Brand Identity: The brand names of all the three cement companies in Kuwait are Threat of new entrants is
restricted to some extent
well known in the industry circles and some of them also have good retail identity. because of the capital
But extending these brand identities beyond the borders of Kuwait has not intensive nature of the
industry and access to
happened. Any new player trying to enter the market has to make some marketing distribution channels.
efforts but in a commodity product like cement brand identity does not make much
difference.
● Capital Requirement: Cement is a capital intensive industry as it requires almost

US$110-120mn to set up a greenfield cement factory with the construction period
being almost 2-3 years. But to enter into markets like Kuwait, one need not
necessarily set up a cement factory. Anybody can set up a storage space and start
importing and marketing cement in Kuwait. Yet it is not easy to do it since there is
no available space in the port area, which makes it necessary to import cement by
land in trucks. It gives the cement companies in Kuwait certain strength to face
outside competition because of the strategic location of their storage facilities near
the ports, though they still can get competition from independent traders who
already have available storage spaces/silos.
● Access to Distribution: Distribution channels are the most important strategic assets
of cement companies. Cement being a commodity, its distribution set up and
marketing network helps the cement companies to acquire a brand image ("top of
the mind recall") among its customers. This is the key for all the cement players
and access to any market in the region for the cement manufacturers would depend
directly on their distribution network in those countries. All the three cement
companies in Kuwait have the advantage over their external counterparts in having
already distribution channel in place.
● Absolute Cost Advantages: Most of the Kuwaiti companies have acquired sufficient
experience in the marketing of cement and some other building materials like wood

and steel related products, but they lack experience in the manufacturing part.
Kuwaiti companies have to develop their expertise in manufacturing which would
help them go up the proprietary learning curve and help them achieve cost
advantage over their competitors.
● GovernmentPolicy: Government policies have not been very favourable towards

the local cement companies in Kuwait and they have not done enough to stop the
dumping of cement products by cement companies from Saudi Arabia. On the
positive side, this has helped the cement companies to formulate their future
strategies which is based on the competitive forces.
Bargaining Power of Suppliers:
● Differentiation of Inputs: It is advantageous in Kuwait to have suppliers who can

supply the cement (raw material) to the local marketing companies at a cheaper
price. All the three local cement companies in Kuwait have their logistics worked
out and they have substantial experience in importing cement from manufacturers
all over the world (from wherever they get it the cheapest after accounting for the
transportationcosts).
● Switching Costs of Suppliers and Firms in the Industry: It is not a concern for the
local cement companies as cement is a freely available commodity and the excess
Suppliers do not have capacity in the region helps the local cement companies to negotiate and acquire
much bargaining power
because of the excess
quality cement from a number of manufacturers in the region. In many instances,
capacity present in the the local cement companies have acquired cement from the cement manufacturers
region, though cartel
formations does
in the gulf region, therefore we can conclude that there are no switching costs of
sometimes leads to suppliers and firms in the industry. It is also true because of the fact that two
bargaining power. cement companies HCC & KPCC have very low operating leverage though it is a
different story for KCC because of their high fixed costs.
● Presence of Substitute Inputs: There are no substitute inputs for the local cement
companies (HCC & KPCC) as they buy cement and sell it here in Kuwait. Only
substitute inputs could be thought of in terms of having clinkers which can be
crushed and mixed to have cement which can then be sold in Kuwait. It would
require the companies to have separate grinding capacities which may not be very
beneficial cost-wise in the present conditions. KCC does not have substitutes
available for limestones, bauxite, etc.
● Cost Relative to Total Purchases in the Industry: Considering the fact that there is a
lot of surplus capacity in the region available for purchase by the local companies,
this factor does not assume much importance. The same reasoning applies to bulk
purchases from the suppliers as well though it gives the buyers some bargaining
power with the suppliers.
● Threat of Forward Integration relative to the threat of Backward Integration by the

Firms in the Industry: One of the local cement companies Kuwait Cement

company has set up its own cement manufacturing plant (backward integration),
though "Global" believes that this plant might face various logistics problems. As
explained earlier foreign (regional) cement companies can set up their own
distribution network in Kuwait, but they may face a problem in terms of renting a
storage space at the Ports in Kuwait.
Bargaining Power of Buyers:
● BuyerConcentration: There is a concentration of buyers in Kuwait as it is mostly

the construction companies which make bulk purchases and bulk purchases account
for almost 60-70% of cement sales in Kuwait while the rest are accounted for by
the retail customers. But the buyers do not have much leverage in dictating the
pricing as Kuwaiti market is mostly an oligopolistic market and pricing is fixed by
the three local cement companies. This comparative advantage was recently
somewhat diluted as a result of the dumping by the Saudi Arabian manufacturers.
● Buyer Information: There is a complete transparency in the pricing market for

cement in Kuwait and most of the bulk buyers have also the complete information
on the prices of cement in the region. But it does not affect the pricing of cement to
a very large extent due to the lack of storage facilities and transportation costs
involved.
● Ability to Backward Integrate: Even though quite a few of the construction

companies in Kuwait have the ability and the resources to integrate backwards
because of their large sizes yet they would not venture into it because most of these
companies have close associations/ stakes in the three local companies (either
directly or indirectly).
● Brand Identity: All the three cement companies in Kuwait are very well recognized
in the local market. But now there is a need for these brands to make a regional
identity for themselves so as to expand their operations beyond the boundaries of
Kuwait which would improve their growth and add stability to their operations.
● Product Differences: There are no differences in the product quality among the
cement sold by the local players (at least they are not perceived to be so). Since
cement is a commodity, they are sold more as standardized products like OPC
(ordinary portland cement), SRC (sulphur resistant cement), etc. worldwide and
there are no difference in terms of ordinary constructions. But for specialised
constructions like bridges, jetties, etc. cement companies such as Lafarge sell their
own specialty cement products.

Threat from substitute goods: Cement does not have any substitutes that may
replace it in various construction works.
Intensity of Rivalry:
● Industry Growth: The demand for cement in Kuwait has recorded phenomenal
growth rate in the last 13 years. Since 1987, the industry has recorded an
compounded annual growth rate (CAGR) of approx. 7.5% till the year 2001. The
future looks bright for the Kuwait’s cement industry especially with the oil prices
in the medium run not being projected to go its low levels of early 1999. The
cement industry is mainly being dependent on the construction industry, which in
Kuwait to a large extent directly or indirectly depends on governmental
expenditure on housing and infrastructure projects. With the oil prices being
projected in the range of US$18-20 in the medium run, we expect the government
expenditure to be increased/maintained at the current levels.
● Product Differences/ Brand Identity: As mentioned earlier there is no perceived

difference in the products of any of the three local players in the Kuwait Cement
Industry. Therefore as far as the products are concerned the three local cement
players are in the same level.
The dumping of cement by ● Intermittent Over Capacity: The dumping of cement by the Saudi Arabian cement
the Saudi Arabian cement
manufacturers has
manufacturers has changed the demand-supply equation in Kuwait. It has affected
changed the the prices of cement sold by the local cement producers/marketing companies, but
demand-supply equation
in Kuwait.
we believe this seems to have been brought under control as result of the agreement
between with Saudi cement companies.
● Informational Complexity: There is a complete transparency in the prices of the

cement industry because of its oligopolistic nature. Because of the nature of the
industry, any undercutting in prices of cement by any one of the players would
severely affect the profitability of the industry in Kuwait.
● Concentration and Balance: Even though there is no concentration of demand with

any one single player in the industry, Kuwait Cement Company is the leader of the
industry having nearly 47-49% share of the total market.
● Exit Barriers: There are no exit barriers for the cement industry in Kuwait barring
that for Kuwait Cement Company which has made substantial investments in its
newmanufacturingcapacity.

Comparative Analysis of the three Cement Companies

In this section we have tried to analyse the various areas of the cement companies
operations in order to identify their strength and weaknesses as measured from their past
results. Based on our analysis, Kuwait Portland Cement Company (KPCC) posses the
strongest financials closely followed by Hilal Cement Company (HCC) and Kuwait
Cement Company among the three listed companies in Kuwaiti cement companies.
Profitability Analysis
All the three cement companies operations have suffered in the past as a result of the
decline in the cement prices. The year 2001 could be attributed as the worst year since
it saw cement prices decline to its lowest level in several years. Most of the companies With much of the capital
expenditure having been
have tried to cut their cost or expanded their trading (including other building products/ completed free cash flow
financial investments) activities to maintain their absolute profitability. Companies of all the three cement
companies are likely to
have also resorted to financial engineering to maintain their profitability by the way of grow.
capitalizing their interest expenses and not recording their depreciation from the new
constructions. We believe that with the current increase in the cement prices, the profit
margins of the cement companies would substantially increase. But the increase in the
net profits would be restricted to a certain extent due to the booking of the interest
expense and higher depreciation expense. Despite all these expenses the free cash flow
of all the three cement companies are likely to grow in leaps and bounds. (For the
analysis purpose we have taken only the cost of materials for calculating the gross
profits and have taken out the depreciation as well as the manpower cost from the cost
of goods sold. The manpower cost has been consolidated as salary and has been
deducted from gross profit to calculate the operating profit)
A simple look at the profitability ratios shows that in 2001, Kuwait Cement Company KCC increased its gross
profit margins in 2001.
(KCC) was the clear winner as it was the only company which was able to increase its
gross profit margins. But the other two cement companies saw their gross profit
margins decline mainly because of their trading in other low margin building products
though it has helped them achieve more stability in their bottom line.
Table 14: Gross Profit Margin (%)

1998A 1999A 2000A 2001A 2002 F 2003 F
Kuwait Cement Company 29.07 29.34 20.53 23.66 32.0 32.0
Kuwait Portland Cement Company 34.35 33.44 26.93 23.38 29.3 35.8
Hilal Cement Company 31.1 35.5 22.0 18.6 29.8 35.1
The operating profit margins of Kuwait Cement Company (KCC) has been low
Net profit margins of the
compared to those of Kuwait Portland Cement Company (KPCC) and Hilal Cement cement companies have
Company (HCC). For the year 2001, the operating profit margins of KPCC and HCC been higher than their
operating profit margins
stood at 9.79% and 9.43% respectively compared to 5.48% recorded by KCC. But the in 2001 because of the
net profit margin of all the three companies has been higher than their operating profit investment income and
UNCC payments.
margins. This has been mostly as a result of the high investment income (not

necessarily cash received) and UNCC payment (in case of KPCC). Therefore, to a
certain extent, KCC and KPCC were insulated from the change in the cement prices as
a result of the income from their huge investment potfolio’s. The net profit margin of
KPCC was the highest among the industry players as we can see in the table 15 below:
Table 15: Net Profit Margin (%)

1998A 1999A 2000A 2001A 2002 F 2003 F
Kuwait Cement Company -53.77 13.27 18.33 63.14 26.08 28.46
But net profit does not mean much to our analysis as it is pretty misleading and gives the
impression that the KCC and KPCC have been making a lot of cash where as much of
the increase in the investment portfolio were only increase in the value of the portfolio
(calculated as per IAS 39). Therefore, we have tried to focus on the actual cash part of the
investment income due to which we see the net profit margins of KCC and KPCC being
much lower than their 2001 incomes and it is also reflected in our projections where we
have included investment income and net profits based on their historical adjusted net
profit margins. (Adjusted for unrealized investment income and UNCC payments).
KPCC scores when we compare the return to the shareholders and we believe this is
the most important aspect of our analysis as it reflects how much the companies have
been earning on the funds provided by their shareholders. KPCC returned 21.49%
while HCC earned a 19.37% return on its equity. At the same time KCC’s return on
equity was 11.1%. But these returns to some extent do not present right picture for
KCC and KPCC which have recorded in their pro forma statement substantial
investment income which might not have been the actual cash return.
The return on equity of KCC has been low as a result of its very large equity base
which was raised to set up the new cement manufacturing plant. Therefore the
operating leverage of KCC is also very large as well as its financial leverage.
Table 16: ROAE (%)of the Cement Companies in Kuwait

1998A 1999A 2000A 2001A 2002 F 2003 F
Kuwait Cement Company -21.05 3.53 4.52 11.10 6.03 7.94
Liquidity Analysis
All the cement companies All the three cement companies have very comfortable liquidity positions, but what
have comfortable liquidity
position. separates them from each other is how they have been able to manage their cash. It is
the rotation of cash as determined by its cash cycle which actually determines how well
the companies have been able to manage their cash.

Table 17: Current Ratio
1998A 1999A 2000A 2001A 2002 F 2003 F

A close analysis of the three cement companies shows that KCC has very high
inventory and receivables levels due to which they have an operating cash cycle of 299
days. KPCC also has a very high receivables level though they have been able to
contain their inventory levels due to which their operating cash cycle is 191 days. HCC
has been able to control both its receivables and inventories due to which its operating
cycle is only 132 days. It also indicates that HCC and KPCC have been able to convert
their inventory to cash faster than KCC.
Figure 03: Length of Operating Cycle

350
300
250
200
150
100
50
0
1998 1999 2000 2001
Kuwait Cement Company Kuwait Portland Cement Company Hilal Cement Company
But KCC has been able to manage its current payables in a better way which has
helped it to manage its cash better than KPCC. The payables outstanding days stood at
199 days for KCC in 2001 due to which its cash cycle was reduced from 141 days in
the year 2000 to 99 days for the year 2001. But KPCC’s payables were outstanding for
only 15 days due to which its cash cycle was of 176 days, which means the company’s
cash was rolled over only twice. The faster cash is moved in the company, more cash is
available leading to lesser borrowings and hence low interest cost. The cash cycle of
HCC though increased from 49 days in the year 2000 to 69 days in 2001 was still the
best in the cement industry and helped it in managing its interest cost in a better way.

Figure 04: Length of Cash Cycle

250
200
150
100
50
0
1998 1999 2000 2001
Kuwait Cement Company Kuwait Portland Cement Company Hilal Cement Company
Ratio’s Used for Valuation
Again KPCC is the company which has been able to reward its shareholders the most.
KPCC paid 70 fils/share Not only was its earnings per share the highest, it has also been paying consistently
as dividend compared to
25fils/ share by HCC and high dividends justifying the high price it has been trading at. The earnings per share of
12fils/ share paid by KCC KPCC in 2001 stood at 104 fils, while the earnings per share before extraordinary
respectively.
items was 89 fils. It paid a dividend of 70fils in 2001 compared to 60fils in the year
2000. We believe the company will continue to pay higher dividends and therefore its
prices would remain at a higher level. The book value per share of KPCC was also
high at 601 fils in the year 2001.
HCC has also been pretty consistent in rewarding its shareholders. It earned an
earnings per share of 32.7 fils in the year 2001 and paid a dividend of 25 fils compared
to 30 fils a year earlier. We believe with the current increase in the cement prices, the
company would again increase its dividend pay out in the forthcoming year. Its book
value per share has been increasing at a CAGR of 68% since 1997 and stood at 170fils
in the year 2001.
KCC, on the other hand, had seen cash flows and earnings reduction as a result of its
ongoing project in the last couple of years of setting up the new cement plant which
has now been commissioned. It has not paid any dividends in the last couple of years
and had an earnings per share of 22.7 fils earned last year. For the year 2001 the
company has announced dividend of 12fils per share. Its book value stood at 217fils as
ofDecember’2001.

Valuation Matrix
In this section, we have discussed the various valuation methods used by us to evaluate We have used the DCF
and peer group
the attractiveness of the stocks of the three companies. We believe the cement sector is comparison methods for
going to perform very well in the current year and therefore help all the three cement valuing the cement
companies
companies in improving their turnover as well as their profitability. We have valued the
three companies based on the discounted cash flow method as well as the peer group
comparison methods of P/E and P/BV.
Based on our evaluation of the cement sector in Kuwait, we would recommend our
sector view to be positive. On the basis of the different valuation methods mentioned
above we have derived our recommendations for the individual cement companies
which we have been mentioned in the recommendation summary page.
Valuation Based on DCF
As mentioned earlier we have adopted the discounted free cash flow (DCF) model for our
calculating the intrinsic value of the Companies shares. In essence, the value of the
companies is a function of the cash flows generated by it, the expected growth in the cash
flows and the riskiness associated with the cash flows. Free cash flow is equivalent to the
after-tax operating earnings of the company, plus non-cash charges (except provisions
made), less investment in operating working capital, property, plant and equipment, and
other assets. One must remember that it does not include any financing related cash flow
such as interest expense or dividends. As a result, we arrive at the operating free cash
flow and use it to value the operations of the entity. It reflects the cash flow generated by
a company’s operations and available to all the company’s capital providers, both debt
and equity. It reflects the enterprise value of the company. But since in case of both KCC
and KPCC, their income from the investment portfolio is very high and the size of the
investment portfolios are also very high compared to the total asset size, we have added
their investments to the total firm value which would give a true indication of their firm
value since we have not included their investment incomes in our free cash flows. The
free cash flows of three cement companies are shown below in the table 18.
Table 18: Free Cash flows of the cement companies

2000A 2001A 2002F 2003F
Kuwait Cement Company (17,108,974) (8,716,780) 1,486,495 4,335,208
Kuwait Portland Cement Company 4,385,703* 3,104,000* 4,047,805 3,446,025
Hilal Cement Company 838,156 568,966 2,321,536 2,805,963
* Not comparable as it includes investment income, therefore actual free cash flow should be less.
Valuation based on Comparing Peer Group P/E & P/BV
While we prefer to value companies based on their comparative earnings it becomes

difficult to base our valuation only on earnings when the companies have huge
investment portfolios. Therefore, we have tried to value the companies based both on

their earnings as well as their book value. Based on earnings projections, all three
cement companies are expected to have growth in their adjusted earnings (after
adjusting for cash investment income & UNCC payments) in the next couple of years.
Table 19: Earnings Projections and P/E

Earnings (fils) P/E (x)
2001A* 2002F 2003F 2001A 2002F 2003F
Kuwait Portland Cement Company 104 71 101 7.9 16.3 11.5
*2001 earnings are unadjusted earnings
- 2001 P/E are based on year end prices & eps. For the forecasts it includes projected earnings & expected price.
We believe that based on the growth in the turnover and profitability that the cement
companies are going to achieve in the next couple of years, the cement sector needs to
be revalued. As projected in our earlier cement report in April, 2002 the cement
company prices have achieved new highs. Even though the cement companies stock
prices have heated up we believe some companies still have some values left in them.
As discussed throughout the year, the 2002 earnings for KPCC and KCC have been
forecasted to be lower than their 2001 earnings since we have tried to take
normalised/adjusted earnings (taking out the impact of UNCC payments and non-cash
investment incomes due to revaluation of investments).
Similarly we have compared the price to book values (P/BV) of the cement companies.
The P/BV are important while valuing the cement companies in Kuwait especially
KCC and KPCC which have substantial amount of investments. KPCC as of
December’2001 had almost 86% of its total assets in various investments (most of it
being in MTC), while KCC had almost 47% of its total assets in investments and both
of them having been showing a substantial part of their income to have come from
investments. Since all the companies are expected to increase their profitability in their
next couple of years we believe the book value per share of the cement companies
should also record increase. The expected P/BV based on our projected prices and the
forecast book value per share are given below:
Table 20: Book Value Projections and P/BV

Book Value per share (fils) P/E (x)
2001A 2002F 2003F 2001A 2002F 2003F
* 2001 P/BV are based on year end prices & BVPS. For the forecasts it includes projected BVPS & Expected
Price.

RecommendationSummary
Cement Cos. Reuters Price Mkt. Cap. ROE P/BV P/E DCF per Recommendation
FY01 Code (fils) (KD Mn) (%) (x) (x) share (fils)
Kuwait Cement Co. KCEM.KW 365 136.9 11.44 1.8 24.9 224 Hold
Kuwait Portland Cement Co. PCEM.KW 910 64.5 21.49 1.5 12.7 1,109 Buy
Hilal Cement Co. HCCK.KW 580 19.1 19.37 2.9 10.1 646 Buy
Kuwait Cement Company (KCC)
KCC is on the verge of starting production in its new cement plant which would help it
achieve stable cash flows. Also, the declaration of a 12% dividend has helped improve
the sentiments for the stock. After the announcement by KIA to sale its stake in KCC,
the stock has been very volatile and we would recommend the existing investors to
hold their stocks until the picture becomes clearer.
Kuwait Portland Cement Company (KPCC)
KPCC is our favorite pick among the cement sector players in Kuwait. It has rewarded
the shareholders handsomely in the past with good dividends as well as opportunities
for capital gains. The KPCC stock price has shown a consistent growth. Additionally,
the management of KPCC has been aggressive in looking for new opportunities for
expansion as evidenced by their taking stake in a cement plant in Iran. Its investment in
MTC alongwith its positive cash flows makes it our best pick among the cement sector
players in Kuwait and hence we recommend a buy.
Hilal Cement Company (HCC)
HCC operates on a lean structure and has been strategically expanding its business to
have a stable income base and to remain insulated from cyclical nature of the cement
business. The company has been consistently rewarding its shareholders with dividends
and has been recording positive free cash flows. Additionally, we believe HCC’s stock
is undervalued and its has potential for further growth provided liquidity of the stock
improves.

Kuwait Cement Company (KCC)

Company Background
Kuwait Cement Company (KCC), established in 1968 was the first of the three listed
cement companies to be established in Kuwait. It is one of the major production bases
KCC is the first of the for cement, and is regarded as an important foundation for industrial projects and the
listed cement companies
to be established in progress of the building industry in Kuwait. After 30 months of continuous work the
Kuwait. company was able establish the first cement factory in Kuwait which is expected to
start commercial production in the second quarter of 2002. This would help KCC
stabilise its operations though the initial depreciation and interest payments are going
to weigh heavy on its bottomline. The number of employees in the company increased
by nearly 20.7%, from 396 employees in the year 2000 to 478 employees in the year
2001.
KCC’s management comprises of a 10 member Board of Directors with Mr Rashed

Abdulaziz Abdulmohsen Al-Rashed as the Chairman and Mr. Sulaiman Khalid Saleh
Al-Ghunaim as the Vice Chairman. The other members of the Board include Mr. Basil
Saad Abdulaziz Al-Rashed, Mr. Jaber Yusuf Salman Al- Sabah, Mr. Khaled Abdullah
Mohamed Al-Rabea, Mr. Khaled Abdullah Mohamed Al-Mishari, Mr. Saleh Abdullah
Othman Al-Kooh, Mr. Dharar Khaled Fahed Al-Rabah, Mr. Abdullah Mohamed
Abdullah Al-Saad and Mr. Faisal Abdullah Al-Khalaf. The day to day management of
the Company is handled by the General Manager with the help of an able team of
executives. He is responsible for implementing the policy of the Board of Directors.
Equity History
The capital of the company which on establishment was KD2.5mn was subsequently
KCC’s capital currently increased to KD37.7mn. Shareholders who hold more than 5% stake in the company
stands at KD37.7mn.
includes KIA who hold 32.2% stake in the company and large business houses of
Kuwait like National Industries Group who hold 22.38% and Al-Rashed Trading &
Industry Co. who hold another 7.46%. The rest nearly 37.96% is held by various
shareholders including companies and individuals.
The liquidity of KCC’s stock has improved dramatically since the year 2001 and in
particular since the announcement was made by KIA regarding the selling of its stake
in KCC. One of the reasons for good liquidity is also the availability of floating stock
in the stock market because of its large equity base and renewed interest among the
investors after the completion of work in its new cement factory. In the year 2001,
when the stock market of Kuwait performed very well saw the KCC’s stock registering
Trading in the stock has 6,081 transactions with the shares turnover increasing to 47.6% as shown in the table
improved since 2001.
21. The market capitalization of the company increased to KD93.49mn in 2001
compared to KD59.57mn in the year 1999. The first three months of the current
financial year has seen increased activity in the stock and has already seen 1,141
transactions with the market cap. increasing to KD98.02mn.

Table 21: Liquidity of the KCC stock

1999 2000 2001 2002
(Jan-March)
Volume of share traded (’000) 8,400 17,020 178,540 36,170
Shares turnover (%) 3.93 7.97 47.6 9.59
Value traded (’000 KD) 1,864 2,818 43,503 9,450
No. of transactions 341 390 6,081 1,141
Market Capitalisation (’000KD) 70,123 59,567 93,497 98,021
Business Description
KCC markets various kinds of cement in Kuwait including ordinary portland cement
(OPC), sulphate resistant portland cement (SRC) and white portland cement. Uptill
very recently the company used to import clinkers and produce cement from it, but now The company has
with its new 1.8 million ton (5,500 tons/ day) cement plant, it would be able to produce currently set up a
1.8million ton cement
its own clinker and therefore, having a fully integrated cement factory. It has also plant.
constructed in its new project two units of raw material grinding mills, two clinker
silos, heat exchanger and the covered conveyor. It has also prepared new storage
facilities to store its raw material. KCC would be importing one of the important raw
materials for cement production which is limestone which raises doubts about the
feasibility of a cement factory in Kuwait in depressed price conditions. But as the
prices of cement in the Gulf region increase the cement factory of KCC would be able
to make handsome profit. As far as energy is concerned KCC has tied up with KPC to
supply fuel oil.
The new cement factory is currently undergoing trial production and is expected to start
its commercial production in the second quarter of 2002. The company has a wholly
owned subsidiary in the form of Shuwaikh Cement Company which helps KCC market
its products locally. We believe it can also help KCC market its extra production
capacity abroad when it starts its production. KCC also has a substantial investment
portfolio which adds stability to the overall company even though in times of depressed
stock markets it would substantially affect the company’s profitability.
Past Performance
The financial performance of the company not only reflects the cyclical movement of
the cement prices but it also is a reflection of the movement of the capital markets. The
large investment portfolio of nearly KD55mn which KCC has determines to a large KCC has been able to
extent the future profitability of the company. The company has consistently recorded improve its profits despite
decline in its turnover.
gross profit margins which are in line with the cement operations of other cement
companies but its net profits to a large extent have been affected by the performance of
its investments. The company has seen its turnover decline at a negative CAGR of 14%
between 1995 and the year 2001 while its net profits during the same time period
recorded a positive CAGR of 6%. The company recorded a turnover of KD13.5mn in
the year 2001 and profits of KD8.5mn. But since in our analysis we have tried to focus

on adjusted earnings and also on free cashflows we have tried to ignore the increase in
the investment portfolio of KD8.06mn which is a non-cash item and has accounted for
only the actual cash dividends received of KD0.88mn. It does not affect our valuation
of the company as we have added the book value of the investments (assuming that
they are all liquid) to the total total firm value reached through the discounting of the
free cash flows of the company.
Strong profit margins but weak cash flows
The company has been recording both strong gross and net profit margins. The
Gross profit margins company’s gross profit margins have increased from 20.53% in the year 2000 to
improved to 23.66% in 23.66% in the year 2001, while the net profit margins during the same period increased
2001 from 20.53% a year
earlier. from 18.3% to 63.14% during the same time period. But the operating profit margins
of the company are lower than the other industry players because of its high manpower
cost. The other profitability indicators like return on assets and return on equity have
also registered growth as a result of its slowly improving profitability as can be seen in
the fig. 06 iven below:
Figure 05: Profitability indicators of KCC
15.00%
10.00%
5.00%
0.00%
1998 1999 2000 2001
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
ROAA ROAE
Because of its current huge capital expenditure which the company incurred to set up
the cement factory, the company has been recording negative cash flows since the last
three years. As a result of these negative cash flows the company has not been able to
declare any dividends, but since now the company has already set up its cement factory
and the investment results have also been good as a result of the improved local stock
market performance, the company has announced a dividend of 12%. It has helped in
improving the investor’s sentiment towards the stock.
Earnings Outlook
As explained earlier we have tried to include in our projections only the normalized

earnings and focus on actual free cash flow. KCC last year (2001) recorded a negative The free cash flows of the
company are expected to
free cashflow of KD8.7mn compared to KD17.1mn negative cash flow in the year improve by KD1.3mn in
2000. But as per our projections since the company would start its commercial 2002.
production this year and most of capex are already over, it should be able to record
positive free cash flows starting the year 2002. As per our assumptions the free cash
would increase to KD1.3mn in 2002 and then stabilize at around an average of
KD4mn.
For our financial projection we have assumed that KCC would be able to increase its
markets share from the current estimated 48% to nearly 52%. We have further assumed
the cost of raw materials at about 67% of the total sales. General Administrative
expenses and the staff cost has been assumed to grow at a rate of 2% year-on-year
respectively. The future expenses have been built in line with the company’s past track
record. We have also assumed that the company would keep on increasing its dividend
payments and this would help in keeping the investors attracted towards the stock. As
per our projections, the adjusted EPS of the company should increase from an
estimated 14.6fils in the year 2002 to 17.6 fils in the year 2005 based on normalised
earnings (non-cash investments have not been considered). Similarly the book value
per share is also expected to increase from nearly 207.4fils in the year 2002 to 220.9fils
in 2005.
Table 22: Earnings Quality & Valuation Ratios

2002F 2003F 2004F 2005F
Net Profit (KD mn) 5.49 7.72 6.47 6.61
GPM (%) 33.00 33.00 33.00 33.00
NPM (%) 27.22 28.40 28.22 28.84
ROAA (%) 4.78 6.70 5.61 5.82
ROAE (%) 7.11 9.73 7.94 8.02
EPS (fils) 14.65 20.59 17.24 17.62
Book Value (fils) 207.41 216.00 218.24 220.86
Valuation: Disinvestment by KIA to affect the short run movement of the stock
It would be inappropriate at this point to value the company based on its discounted
cash flows as the company has just completed its major capital expenditure and should
start making positive free cash starting from the current year. It has already committed
itself to the investors by announcing a 12% dividend which improved the sentiments
among the investors who did not had any dividends from the company for the last KCC has announced a
12% dividend for the year
several years. There also have been announcement regarding the selling of stake by 2001.
KIA in Kuwait Cement as per the government’s privatization plan. It has further led to
increased interest among the investors for the stock. Under these volatile conditions
and based on the fact that the company has a huge investment portfolio invested in the
local markets which has been seeing substantial gains, we believe the investors should
hold on to their stocks. Also, the increased cement prices should help the company
record better operating profitability in the current year. The price of KCC based on an

average of DCF, P/E and P/BV has been valued at 294fils. Based on this value and the
impending privatization process we presently recommend a hold on the stock.
Table 23: Valuation Summary (in fils)

Price Based on Price based on Price Based on Avg. Price
DCF P/E P/BV
May 8, 2002 223 233 425 294
KCC stock gained 45% in The stock gained nearly 45% in the first four months of the current financial year
the first four months of
the current financial year. backed by the news that KIA would sell its stake in the company. This would continue
to affect the share prices of the company in the short run, though in the next couple of
years its share price would be determined depending on its success in the operations of
the new cement factory.
Table 24: Operating Statement (Figures in KD)
2000 2001 2002(F) 2003(F) 2004(F) 2005(F)

Sales Revenue 17,393,237 13,529,244 20,196,250 27,207,404 22,923,875 22,923,875
Cost of Production -13,821,893 -10,328,404 -13,531,488 -18,228,960 -15,358,996 -15,358,996
Gross Profit 3,571,344 3,200,840 6,664,763 8,978,443 7,564,879 7,564,879
General & selling expenses -263,683 -474,428 -483,917 -493,595 -503,467 -513,536
Less: Staff Costs -1,846,333 -1,871,687 -1,909,121 -1,947,303 -1,986,249 -2,025,974
Less : Other operating expenses -112,647 -113,773 -114,911 -116,060 -117,221
Operating Income 1,461,328 742,078 4,157,952 6,422,634 4,959,102 4,908,147
Add: Other Income 74,670 83,391 85,059 86,760 88,495 90,265
- Other Income - Interest 18,595 11,198
Investment Income/ (Loss) 1,758,760 8,944,578 4,314,605 4,312,195 4,312,403 4,358,657
Net income from investment
properties 128,749 128,428 128,428 128,428 128,428 128,428
Less: Interest -287,508 -1,241,425 -1,159,940 -997,440 -834,940
Less: Depreciation -322,311 -779,791 -1,763,557 -1,781,193 -1,799,005 -1,816,995
Gain/(Loss): Company’s share
in affiliated cos. 127,590 132,116 137,401 142,897 148,613 154,557
Profit Before Tax 3,247,381 8,974,490 5,818,462 8,151,781 6,840,596 6,988,120
Net Profit attributable to
shareholders 3,188,928 8,542,941 5,497,683 7,727,802 6,469,130 6,610,746

Table 25: Balance Sheet (Figures in KD)
2000 2001 2002 (F) 2003 (F) 2004 (F) 2005 (F)
Bank & cash equivalents 696,880 633,890 707,093 415,458 309,574 616,709
Accounts receivable 3,877,807 3,962,452 4,017,488 5,770,276 4,699,394 4,699,394
Inventories 3,252,458 5,922,280 5,141,965 6,927,005 5,836,419 5,836,419
Investment Portfolios 23,372,536 50,748,970 50,508,246 50,659,579 51,195,033 50,649,047
Quoted Securities 17,802,810
Investment Funds 949,323
Other current assets 415,266 248,224 222,159 299,281 252,163 252,163
Total Current Assets 50,367,080 61,515,816 60,596,950 64,071,598 62,292,582 62,053,731
Long-term investments (unquoted) 529,125 529,125 529,125 529,125 529,125 529,125
Gross fixed assets 32,331,844 77,604,273 78,380,316 79,164,119 79,955,760 80,755,318
Less: accumulated depreciation 26,851,502 27,409,010 29,172,567 30,953,760 32,752,764 34,569,759
Net fixed assets 5,480,342 50,195,263 49,207,749 48,210,359 47,202,996 46,185,559
Capital work-in-progress 36,303,619
Investment properties 1,668,616 1,594,522 1,594,522 1,594,522 1,594,522 1,594,522
Investment in affiliated companies 1,888,459 2,020,575 2,157,976 2,300,872 2,449,485 2,604,042
Total Assets 94,568,625 115,855,301 114,086,321 116,706,477 114,068,709 112,966,978
Accounts payable 3,422,456 7,857,187 5,412,595 7,291,584 6,143,598 6,143,598
Other current liabilities 1,194,382 1,698,557 1,623,779 2,187,475 1,843,080 1,843,080
Payable to Banks 2,322,072 4,950,618 4,950,618 4,950,618 4,950,618 4,950,618
Short term loan 2,000,000 2,156,250 2,000,000 1,000,000
KFAS payment 100,137 158,899 104,732 146,732 123,131 125,786
Proposed dividend 4,508,446 4,502,766 4,502,766 5,628,457 5,628,457
Total Current Liabilities 9,039,047 21,329,957 18,594,489 20,079,175 18,688,884 18,691,539
Employee Indemnity Provision 991,896 851,763 885,834 921,267 958,118 996,442
Term Loan 11,982,142 16,843,750 16,781,250 14,656,250 12,531,250 10,406,250
Paid-up equity capital 37,692,180 37,699,728 37,699,728 37,699,728 37,699,728 37,699,728
Statutory reserve 16,587,340 17,492,337 18,074,183 18,889,361 19,573,421 20,272,233
Voluntary reserve 6,478,116 7,375,565 7,957,411 8,772,589 9,456,649 10,155,461
General reserve 7,864,584 9,184,584 9,184,584 9,184,584 9,184,584 9,184,584
Retained earnings 4,350,387 5,269,984 5,101,209 6,695,889 6,168,443 5,753,108
Profit from sale of Treasury shares 59,928 59,928 59,928 59,928 59,928 59,928
Treasury shares -417,067 -252,295 -252,295 -252,295 -252,295 -252,295
Total Shareholder's Equity 72,555,540 76,829,831 77,824,749 81,049,785 81,890,458 82,872,747
Total Liabilities 94,568,625 115,855,301 114,086,321 116,706,477 114,068,709 112,966,978

Table 26: Ratio Analysis
Ending Date: 2000 2001 2002 2003 2004 2005

LIQUIDITY RATIO's
- Current Ratio 5.57 2.88 3.26 3.19 3.33 3.32
- Quick Ratio 5.17 2.59 2.97 2.83 3.01 2.99
- Cash Flow from Operations Ratio 0.19 0.04 0.22 0.31 0.26 0.26
- Inventory stock (days) 117 162 149 121 152 139
- Receivables outstanding (days) 108 137 91 79 100 91
- Length of operating cycle 226 299 240 200 251 230
- Payables outstanding (days) 85 199 179 127 160 146
- Length of cash cycle 141 99 61 73 92 84
PROFITABILITY ANALYSIS
- Total Assets Turnover ratio (times) 0.2 0.13 0.18 0.24 0.2 0.2
- Total Net Fixed Asset Turnover (times) 0.56 0.29 0.41 0.56 0.48 0.49
- Equity Turnover (times) 0.25 0.18 0.26 0.34 0.28 0.28
- Gross Profit Margin (%) 20.53 23.66 33 33 33 33
- Operating Margin (%) 8.4 5.48 20.59 23.61 21.63 21.41
- Net Profit Margin (%) 18.33 63.14 27.22 28.4 28.22 28.84
- Return on assets (%) 3.71 8.12 4.78 6.7 5.61 5.82
- Return on Equity (%) 4.52 11.44 7.11 9.73 7.94 8.02
- Return on Common Capital (%) 8.52 22.66 14.58 20.5 17.16 17.54
ACTIVITY RATIOS
- Inventory Turnover Ratio 3 2 2 3 2 3
- Debtor turnover Ratio 3 3 4 5 4 4
- Creditors Turnover Ratio 4 2 2 3 2 3
RATIOS USED FOR VALUATION
- EPS (fils) 8.49 22.77 14.65 20.59 17.24 17.62
- Book Value Per Share (fils) 193.23 204.75 207.41 216 218.24 220.86

Kuwait Portland Cement Company (KPCC)

Company Background
Kuwait Portland Cement Co. KSC (Closed) (KPCC) incorporated in 1976 was the
second cement company to start operations in Kuwait. It was listed on the Kuwait
Stock exchange in 1995. It is a construction material storage and marketing company KPCC alongwith a
partner has acquired a
whose main activity has been trading in cement and other construction materials in cement manufacturing
Kuwait especially structural steels. It has recently acquired a small cement plant in Iran.
manufacturing plant in Iran. With its recent acquisition of the manufacturing plant
(60% owned by KPCC and its partner) in Iran, KPCC has tried to diversify its income
base from its original income base of Kuwait and strategically placed itself in the value
chain.
KPCC’s management comprises of a 8 member Board of Directors with Mr. Abdel Ali
Behman as the Chairman, Mr. Khalid Abdulla Al-Sager as the Deputy Chairman and
Mr. Adel Yacoub Al-Ghanim as the Managing Director. The other members of the
Board include Mr. Ahmed Mahmood Eisa Al-Asfour, Al Sheikh Ahmed Salem Al Ali
Al Sabah, Mr. Barrak Abdulmohsen Al-Babtain, Mr. Khaled Abdulla Tifony and Mr.
Adnan Naser Al-Qatami. The day to day management of the Company is handled by
Mr. Adel Yacoub Al-Ghanim with the help of an able team of executives who have
substantial experience in the operation of cement and various other logistics involved
in the import and sale of cement in Kuwait.
Equity History
KPCC had 70.8 mn shares outstanding as of December end 2001. Shareholders who
hold more than 5% stake in the company include large business houses of Kuwait like KPCC had 70.8mn shares
outstanding as of
Moh’d Abdul Mohsen Al-Kharafi & Sons Co. who hold 10.9% stake, while the December end 2001
individual shareholders include Mr. Barrak Abdul Mohsen Al-Babtain who holds 8.2%
and Issa Abdulla Al-Othman who holds another 5% stake. The Second Group Fund
holds another15.11% stake in the company while the rest nearly 61.4% is held by
various shareholders including companies & individuals.
KPCC’s stock is fairly liquid and has been a consistent performer in the market in the
last few years. But the number of transactions and shares turnover have declined since
2001. The shares turnover in the year 2001, when the stock market of Kuwait
performed very well saw the KPCC’s stock registering 3,799 transactions but the
shares turnover decreased to 6.51% as shown in the table27. The market capitalization
of the company increased to KD58.67mn in 2001 compared to KD53.66mn in the year
1999. The first three months of the current financial year has seen increased activity in
the stock and has already seen 109 transactions with the market cap. increasing to
KD66.5mn.

Table 27: Liquidity of the KPCC stock
1999 2000 2001 2002 (Jan-March)

Volume of share traded (’000) 4,595 11,770 4,615 1,755
Shares turnover (%) 6.42 16.45 6.51 2.45
Value traded (’000 KD) 3,680 8,867 3,696 1,472
No. of transactions 344 109 379 109
Market Capitalisation(’000KD) 55,094 53,663 58,671 66,542
The major products marketed by KPCC includes the selling of different kinds of
cement products-67% of the total sales (Ordinary Portland Cement-55% & Sulphur
Resistant Cement-12%) and various steel items-33% of the total sales. The company
had recognized the need of expanding its product portfolio earlier and had expanded
into supplying construction steel items. It has also very recently entered into trading in
various kinds of wood materials.
Since the company is specialized in cement & steel handling it relies heavily on the
construction companies, ready-mix companies, bricks & blocks companies, steel,
In steel, the company has cement retailers and individual customers. Almost 60% of the cement is sold to the
a dedicated sales offtake
of 22% with the total corporate sector with the remaining 40% being accounted for by the retailers. In Steel,
revenue contribution most of the sales is to the corporate sector with almost 57% accounted for by four large
being between 8-10%.
construction houses with the remaining 43% sales being made to the small enterprises.
In steel, the company has a dedicated sales offtake of almost 22% with the total
revenue contribution being between 8-10%.
The manufacturing plant in Iran has placed KPCC in a strategically stronger position
than its competition because of the low cost of production the cement plants in Iran
have, though there might be concerns as to the quality of cement. The plant presently
has a very small production capacity of 300 tons per day, but its capacity is being
increased to 1000 tons per day which would be made operational by the mid of the year
2003. The cement manufacturing plant in Iran is located near to the main raw material
source of limestone. It is located on the free trade zone and has easy availability of
electricity and water. Since the plant is located near the port area it would help it in the
import of raw materials as well as in the export of finished goods.
The manufacturing process to be followed by the company in its Iran plant would be
the dry method which is energy efficient and therefore cost effective. After the phase II
of the Iranian manufacturing plant, KPCC can import for its requirement in Kuwait
from Iran in 2 days time which would help it improve its inventory management
substantially and also help it reduce its shipping cost (transportation cost). This would
help in improving the overall profitability of the company.

Past Performance
KPCC’s financial performance has been outstanding marked by its high profit
margins and returns on its strategic investments. Because of its strategic investments
in the shares of MTC, the profitability of the KPCC has remained stable as the KPCC’s net profit has
recorded a positive CAGR
fluctuations in the cement prices have been neutralized by the gains from the of 11% between 1995 and
investments. As in other cases we have tried to focus our financial analysis on 2001.
normalised earnings of the company and its free cash flow. Between 1995 and the
year 2001, the turnover of the company has recorded a negative CAGR of 8% , while
its net profits during the same period have recorded a positive CAGR of 11%. This
has been achieved as a result of the better cost management and return on its
investment portfolio which has helped KPCC maintain its absolute profits and be a
cash rich company even during the periods when the cement prices were at their
lowest. The company needs to improve its receivables and payables management to
improve its performance further.
Strong Cash Flows
The company’s biggest assets from the investors perspective is its free cash flow.
KPCC is a cash rich company which has seen its investment portfolio grow from
nearlyKD14.6mn in 1995 to approx. KD43mn in 2001. The gains registered by KPCC has been
consistently recording
the local stock market in the last couple of years has also helped the company in high positive free cash
improving its return on investments. The company has been regularly making flows.
free cash flows in excess of KD3mn for the last 3 years. It is also a very investor
friendly company and has been rewarding its investors with good dividends. For
the year 2000, the company had a dividend payout ratio of more than 100%
which is remarkable as the company had to dip into its reserves to pay the
dividends.
High Profit Margins
KPCC has consistently recorded high gross, operating and net profit margins
compared to its local competition in the cement sector. Even though lower cement
prices have reduced its gross profit and operating profit margins, it has been able to
record high and stable net profit margins as a result of its investment income. It
gross profit margins declined from 34.35% in 1998 to 23.38% in the year 2001,
while during the same period the net profit margin improved from 33.38% to
65.09%. Accordingly, its return on equity and return on shareholder’s capital has
been the highest in the cement sector viz. 21.49% and 102.82% respectively as on
Dec,2001.

Figure 06: Profitability Ratios of KPCC
120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
1998 1999 2000 2001
ROAE ROCE
Earnings Outlook
While developing the future projections we have been tried to include only normalized
Higher net profits in 2001 earnings. The focus is on actual cash flow. KPCC last year (2001) made approx. KD7.4mn
because of UNCC profit which included KD1.1mn income from the UNCC and KD4.3mn gain from
payment & investment
income. revaluation of investments available for sale. This non-cash income was partially offset by
the loss from revaluation of investments held for trading. Free cash flow for the year ending
December 2001 was KD3.1mn. As per our assumptions we have assumed that the free cash
would increase to KD4mn in 2002 and then stabilize at around an average of KD2.8mn.
For our financial projection we have assumed that KPCC would have 28% market
share of the total cement market. Selling and General Administrative expenses have
been assumed to grow 2% and 5% (y-o-y) respectively. The future expenses have been
built in line with the company’s past track record. We have also assumed that the
company would keep on increasing its dividend payments and this would help in
keeping the investors attracted towards the stock.
Table 28: Earnings Quality & Valuation ratio’s

2002F 2003F 2004F 2005F
Net Profit (KD mn) 5.06 7.16 5.43 5.42
GPM (%) 29.30 35.83 29.00 28.78
NPM (%) 34.30 39.18 33.66 33.18
ROAA (%) 9.99 13.71 10.22 10.27
ROAE (%) 11.80 16.45 12.36 12.55
EPS (fils) 71 101 77 76
Book Value (fils) 597 618 610 597
As discussed earlier, because of our assumption of normalised earnings and focussing on

mainly adjusted cash based earnings, KPCC should be able to achieve a net income of

KD5.06mn in 2002. The profit margins are likely to increase from the current levels and
stabilize at around 33%. At the end of the year 2002, the EPS is expected to be 71fils and
subsequently it should increase to 101 fils in the year 2003 prior to stabilizing at 77 fils.
In our projections we have not built the returns from its cement unit acquisition in Iran.
Valuation: Exciting times ahead
Based on a DCF value of 1,109 fils we recommend a buy on the company’s stock. At
this price the P/E of the company should increase from the current 12.7x to 15.5x
which is lower than the average P/E for the cement sector of 16x, but considering the
fact that there are more positives in the cement sector we believe that there is potential
for the cement current sector P/E and P/BV to increase further. Based on the current
avg. P/E and P/BV, the estimated price for KPCC has been projected which have been
provided as shown in the table 29 below.

DCF P/E P/BV
May 8, 2002 1,109 1,137 1,224 1,156
KPCC seems undervalued on the basis of the discounted earnings value because of its
strategic stake in the telecommunication major MTC. Because of its stake in the MTC, Based on DCF, KPCC
shares are valued at
KPCC’s income has stabilized and a part of the growth in the MTC stock is also visible in 1,109fils
the growth of the KPCC stock. Its Price to Book Value ratios are also fairly reasonable. We
believe the company should be able to achieve its target price of 1,156 fils in one year.
The stock gained nearly 21% in the first four months of the current financial year,
though the stock price has subsequently came down as a result of the ex-dividend
effect. This is a reflection of the positive performance by the company both in its core
business as well as in its investments.


2000 2001 2002 (F) 2003 (F) 2004 (F) 2005 (F)
Sales Revenue 13,623,160 11,301,182 14,750,358 18,262,622 16,136,730 16,326,385
Gross Profit 3,668,603 2,642,002 4,321,483 6,543,978 4,679,143 4,698,108
Less:General & Admn.
Expenses -169,912 -609,878 -640,372 -672,390 -706,010 -741,311
Less: Staff Costs -572,867 -545,001 -555,901 -567,019 -578,359 -589,927
Less : Distribution Expenses -371,420 -162,375 -295,007 -365,252 -322,735 -326,528
Less: Depreciation -228,577 -218,211 -232,412 -241,709 -251,377 -261,432
Operating Income 2,325,827 1,106,537 2,597,791 4,697,608 2,820,662 2,778,911
Add: Other Income 11,350 15,123 15,425 15,734 16,049 16,370
- Other Income - Interest 447,993 269,309
Investment Income/ (Loss) 1,217,434 1,539,600 2,204,030 2,299,187 2,352,216 2,360,216
Profit on disposal of investments 345,138
Gain on Exchange 7,735 4,244
Gain/ (loss) on revaluation of
investments available for sale 4,309,146 610,967 629,296 648,175 667,620
Add/ (less) provision for
investments -532,033
Gain/(Loss) extraordinary item 1,069,961
Profit Before Contribution to
KFAS & BOD fees 4,355,477 7,781,887 5,428,213 7,641,824 5,837,101 5,823,117
Net Profit attributable to
shareholders 4,138,367 7,356,456 5,059,907 7,155,513 5,431,100 5,417,739

2000 2001 2002 (F) 2003 (F) 2004 (F) 2005 (F)
Bank & cash equivalents 956,096 720,394 1,080,743 1,073,600 880,069 503,056
Accounts Receivable 4,046,685 4,438,134 3,835,093 4,748,282 4,195,550 4,244,860
Inventories 965,695 1,616,251 1,042,888 1,171,864 1,145,759 1,162,828
Short term Deposits 7,038,418 3,845,998 4,322,971 4,294,401 3,520,277 2,012,224
Investment Portfolios 5,666,912 7,468,375 7,617,743 7,770,097 7,925,499 8,084,009
Other current assets 100,515 55,402 59,001 73,050 64,547 65,306
Long-term investments
(unquoted) 1,460,806 1,497,483 1,497,483 1,497,483 1,497,483 1,497,483
Investments available for sale 11,173,427 30,548,344 31,464,794 32,408,738 33,381,000 34,382,430
Net fixed assets 1,349,444 1,520,256 1,645,401 1,775,552 1,910,909 2,051,680
Total Assets 31,257,998 50,210,637 51,066,117 53,313,068 53,021,092 52,503,876
Accounts payable 445,965 288,197 573,588 644,525 630,167 639,555
Other current liabilities 869,443 1,679,841 2,115,762 2,412,192 2,329,108 2,359,552
Proposed dividend 4,251,138 4,959,661 5,313,923 5,668,184 6,022,446 6,376,707
Employee Indemnity Provision 242,949 282,680 316,602 354,594 397,145 444,802
Statutory reserve 7,155,000 7,155,000 7,155,000 7,155,000 7,155,000 7,155,000
Voluntary reserve 7,155,000 7,155,000 7,155,000 7,155,000 7,155,000 7,155,000
General reserve 500,000 500,000 500,000 500,000 500,000 500,000
Treasury shares -514,699 -514,699 -514,699 -514,699 -514,699 -514,699

Ending Date: 2000 2001 2002 2003 2004 2005

Liquidity Ratio's
- Current Ratio 3.10 2.40 2.06 2.02 1.81 1.55
- Quick Ratio 2.93 2.17 1.93 1.89 1.68 1.43
- Total Asset Turnover 0.43 0.28 0.29 0.35 0.30 0.31
- Total Net Fixed Asset Turnover 11.26 7.88 9.32 10.68 8.75 8.24
- Equity Turnover 0.53 0.33 0.34 0.42 0.37 0.38
- Gross Profit Margin (%) 26.93 23.38 29.30 35.83 29.00 28.78
- Return on assets (%) 13.21 18.06 9.99 13.71 10.22 10.27
- Return on Equity (%) 16.23 21.49 11.80 16.45 12.36 12.55
Activity Ratios
Ratios Used For Valuation
- EPS (fils) 58 104 71 101 77 76
- Book Value Per Share (fils) 356 601 597 618 610 597

Hilal Cement Company (HCC)

Company Background
Established in the state of Kuwait in 1984 as a closed Kuwaiti shareholding company,

Hilal Cement Company (HCC) is a major player in the Kuwait Cement Industry with
HCC established in 1984 nearly 14% share of the cement market. In the year 2000, it merged one of the group
has approx. 14% share of companies Atlas Commercial Company WLL with HCC. Atlas Commercial Company
the current cement market
in Kuwait. deals with various kind of woods used for construction and other construction materials
like steel sheets, thereby increasing its product portfolio. Atlas Commercial Co.,
established in 1962, enjoys a good market share of the various kinds of woods used for
construction and is expected to add significant value to HCC. HCC is also the first
cement company to have received ISO certification in Kuwait.
Hilal’s management comprises of a 5 member Board of Directors with Mr. Marwan

Marzouq Boodai, Mr. Jassim Mustafa Boodai, Mr. Tarek Ahmed Abdul-Kareem, Mr.
Yaqoub Saleh Al-Sharhan and Mr. Saleh Sulaiman Al-Huwaidy being the board
members. The day to day management of the Company is handled by a General
Manager with the help of an able team of executives who have substantial experience
in the operation of cement and various other logistics involved in the import and sale of
cement in Kuwait. The experienced executive team of the Company is ably supported
by the top management who have a hands on approach on the business and takes very
active participation in the management of the company.
Equity History
HCC has 33 mn shares Hilal Cement has 33 mn shares outstanding. Boodai Enterprises Co. and Boodai
outstanding.
Trading Co. hold nearly 23% stake in the company. Various institutions hold another
30% stake in the Company, while the rest nearly 47% is held by different shareholders
including companies & individuals.
The stock of HCC has been very illiquid and one of the reasons could be that floating
stock available in the stock market is low while the owners of the stock have not been
willing to sell their stake. The shares turnover in the year 2001, when the stock market
of Kuwait performed very well saw the HCC’s stock registering only 20 transactions
with the volume of shares traded having declined to 120,000 as shown in the table 33.
The market capitalization of the company has also subsequently declined to
KD18.48mn compared to KD24.09mn in the year 1999. But subsequently, the stocks
prices and liquidity of the stocks have improved to some extent in the first quarter of
the year 2001 as we could see in the table 33.

Table 33: Liquidity of the HCC stock

1999 2000 2001 2002 (Jan-March)
Volume of share traded (’000) 8,270 115 120 5
Shares turnover (%) 27.57 0.38 0.364 .015
Value traded (’000 KD) 5,794 77 71 3
No. of transactions 960 20 19 1
Market Capitalisation (’000KD) 24,090 18,810 18,480 19,140
HCC’s main activities include import, storage, bagging and distribution of cement. The HCC trades in cement,
wood, steel & newsprints.
Company currently sells two kinds of cement which include the more in demand
Ordinary Portland cement (OPC) and the Sulphate Resistant cement (SRC). HCC also
has plans to introduce other related cement products such as White cement, Slag
cement, oil well cement, etc. in the near future.
Atlas Commercial Company (ACC), the recently acquired subsidiary of HCC markets
various kinds of wood and steel material used for construction as mentioned below:
Softwood : Ashwood, White wood, Canadian timber,etc.

Hardwood : Mahogany, Teak items, etc.
Decorative : MDF, hardboard, embossed panel wood, etc.
Construction : Ordinary Plywood, blackboard, film faced plywood, etc.
Others : Steel sheets, Aluminum sheets, GI sheets, etc.
As per its strategy described in our earlier report, ACC has recently made foray into the
trading in newsprint which is a high profitable business. This would add further to the
improving margins of the company as well as help it stabilize its bottomline.
HCC like its peers in the cement industry has been using the traditional channel of
selling the bulk of its cement capacity to the construction and ready mix concrete
companies. The remaining cement capacity is sold in bags through the retail building
material outlets and traders on its own brand name. Each of these avenues of selling
has an entirely different economic and distribution potential. While the margin of
selling directly to the bulk buyers and ready-mix concrete companies is lower, it leads
to higher and more stable offtake of cement from the Company. At the same time retail
sales involves higher margins but the offtake is more cyclical and would vary
substantially during periods of high and low demand.
HCC out sources various services like freight and local transportation for specialization
and lower cost. HCC has entered into strategic alliance with a few ready-mix concrete
& construction companies which helps it in marketing the bulk of its cement in the
market.

Past Performance
HCC’s operating history in the past has largely been in line with the happenings of the
cement sector apart from the year 2000 when they added ACC stabilizing its portfolio
Turnover of HCC with other building products. This helped it improve its turnover and improve its
increased at a CAGR of absolute profit figures. The turnover of the company has increased at a CAGR of 8.1%
8.1% between 1995 and
2001. since 1995 till 2001. Its gross & operating profits during the same time periods has
remained almost the same. But it has been able to improve its net profits by a CAGR of
almost 13% in the last 7 years. As of December 2001, the turnover and net profits of
the company stood at KD8.5mn and KD1.08mn respectively.
Impressive liquidity management
In view of the difficult operating environment in the last two years the company has
been able to manage its cash very well. It has been able to manage both its inventory
and receivables well so as to have a smaller cash cycle of only 69 days in 2001. It has
helped the company in reducing its interest cost by releasing cash faster to be used in
the operations of the company. In other words it shows that the company has been able
to convert its inventory faster into sales and has also been able to convert its
receivables into cash faster.
Table 34 : Cash cycle (No. of days)

1999 (A) 2000 (A) 2001 (A) 2002 (F) 2003 (F)
Inventory stock 29 43 67 67 62
Receivables outstanding 56 43 65 66 60
Length of operating cycle 85 87 132 133 122
Payables outstanding 53 37 62 81 74
Length of cash cycle 32 49 69 52 48
Profitability affected by lower cement prices
Gross profit margins of Lower cement prices have led to lower profits for HCC and have affected its operations
the company have
reduced from 31% in severely. The gross profit margins of the company have reduced from 31% in 1998 to
1998 to 18.59% in 2001 18.59% in 2001. The addition in the product portfolio of other low margin building
products have also driven the gross profit margins lower even though they have helped
improve the turnover of the company. Similarly the operating profit margins and net
profit margins have been reduced from 24.93% and 24.48% in 1998 to 9.43% and
12.66% in 2001 respectively. It has led to decline in its return on average assets
(ROAA) and return on average equity (ROAE) as shown in the figure 08 below:

Figure 07: Profitability ratios of HCC
50.00%
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1998 1999 2000 2001
ROAA ROAE
HCC has low operating leverage because its fixed costs are low compared to the other
two players in the cement industry. It would help the company to improve its HCC has lower fixed
profitability at an increasing rate for small increases in the turnover of the company. costs compared to its
competitors.
Also since the company’s equity base is small any corresponding increase in the net
profits would increase the earnings per share at a much faster rate.
Earnings Outlook
Higher cement prices this year is likely to push the gross profit margins and net profit
margins to approx. 30% and 20% respectively. It should help the company achieve
gross profit and net profit of approx. KD3mn and KD2mn respectively on a turnover of We have projected that
the company through its
approx. KD10.07mn. We have presumed in our assumptions that the company would consistent efforts will
be able to expand its market share to 16% of the total cement market. We believe that increase its market share
to 16%.
the cement prices should record another increase either towards the later part of this
year or early next year. But for our assumption we have built the increase in cement
prices on profitability for next year and have also assumed that the prices in 2004
should come back to the current levels.
Table 35: Earnings Quality & Valuation ratio’s
2002F 2003F 2004F 2005F

Net Profit (KD mn) 1.89 2.97 1.89 1.87
GPM (%) 29.50 34.71 27.68 27.59
NPM (%) 19.56 25.29 17.99 17.74
ROAA (%) 19.04 25.95 14.75 14.13
ROAE (%) 30.71 38.66 21.08 20.04
EPS (fils) 57.31 89.96 57.17 56.76
Book Value (fils) 202.73 262.69 279.87 286.62

As commented earlier, because of the low operating leverage and the small
shareholders capital the increase in the earnings per share (eps) would be substantial for
Projected eps for the year a little increase in the turnover and net profits of HCC. At the end of the year 2002, the
2001 at 57fils. eps is expected to increase to 57fils and subsequently to 89.9fils in the year 2003. This
would positively affect the share prices of the company.
Valuation : Liquidity could be a barrier for the stock prices to move up
Based on a DCF value of 646 fils we recommend a buy on the company’s stock. At this
price the P/E of the company should increase from the current 10.1x to 11.3x which is
lower than the average P/E for the cement sector of 16x, but considering the fact that
there are more positives in the cement sector we believe that there is potential for the
cement current sector P/E and P/BV to increase further. Based on the current avg. P/E
and P/BV, the estimated price for HCC has been projected which have been provided
as shown in the table 36 below.

DCF P/E P/BV
May 8, 2002 646 913 415 658
Based on the price to book value, the stock appears to be reasonably priced, although
its price to book value is the highest among its peers. We believe HCC we continue to
command this premium on account of low fixed costs, small equity and high return on
equity.
Even though the average price for HCC is projected at 658 fils for the next one year,
We have valued the HCC we believe for the stock of HCC to achieve these price levels would be difficult
stock at 625fils. because of the illiquidity of the stock. Accounting for a 5% illiquidity discount to the
avg. share price of the HCC stock we think a more reasonable target price for the HCC
stock would be 625fils.
Year to date gain by the stock has been approx. 2%, this is a reflection of the positive
sentiment for the cement stocks and the likely improvement in their profitability. We
believe in case the liquidity of the HCC stocks improve, it will be able to achieve its
true potential.

2000 2001 2002 (F) 2003 (F) 2004 (F) 2005 (F)
Sales Revenue 7,985,450 8,533,101 9,669,209 11,738,238 10,487,564 10,556,245
Gross Profit 1,756,446 1,586,417 2,852,081 4,073,877 2,903,475 2,912,404
Less: Distribution costs -265,777 -316,646 -345,585 -442,143 -376,713 -377,194
Less : Administrative expenses -155,733 -210,074 -160,000 -168,000 -176,400 -185,220
Less : Salary -259,158 -255,276 -260,000 -273,000 -286,650 -300,983
EBIDT 1,075,778 804,421 2,086,496 3,190,735 2,063,712 2,049,007
Add: Other Income from operations 344,326 419,281 420,000 428,400 436,968 445,707
Less: Interest -124,031 -73,806 -134,822 -134,099 -134,292 -134,185
Less: Depreciation -254,367 -272,525 -270,637 -278,756 -287,119 -295,732
Less: Prior period adjustments 366,469
Profit Before KFAS & Minority
Interest 1,041,706 1,243,840 2,101,037 3,206,280 2,079,269 2,064,797
Net Profit attributable to shareholders 915,058 1,080,450 1,891,077 2,968,695 1,886,764 1,872,930
2000 2001 2002 (F) 2003 (F) 2004 (F) 2005 (F)
Bank & cash equivalents 569,444 266,046 1,308,857 2,932,076 3,860,832 4,209,943
Accounts Receivable 1,299,933 1,751,138 1,740,458 2,112,883 1,887,761 1,900,124
Inventories 1,251,239 1,281,299 1,227,083 1,379,585 1,365,136 1,375,891
Other assets 115,981 662,147 672,950 692,936 699,868 712,311
Net fixed assets 5,230,512 5,515,990 5,442,419 5,366,640 5,288,589 5,208,195
Total Assets 8,467,109 9,476,620 10,391,766 12,484,119 13,102,187 13,406,465
Accounts payable 449,723 366,762 374,942 421,540 417,125 420,411
Other current liabilities 687,444 843,271 898,271 953,271 1,008,271 1,063,271
Short term loan 138,000 138,000
Trade Finance 369,500 1,190,500 1,090,740 1,226,298 1,213,454 1,223,015
Term Loan 776,000 638,000 500,000 500,000 500,000 500,000
Minority Interest 566,065 579,959 570,637 569,139 567,702 566,204
Statutory reserve 505,962 619,185 817,706 1,128,485 1,326,556 1,523,187
Voluntary reserve 505,962 619,185 817,706 1,128,485 1,326,556 1,523,187

Ending Date: 2000 2001 2002 2003 2004 2005

Liquidity Ratio's
- Current Ratio 2.15 1.56 1.98 2.74 2.96 3.03
- Quick Ratio 1.29 1.04 1.47 2.19 2.43 2.5
- Total Asset Turnover 0.98 0.95 0.97 1.03 0.82 0.8
- Total Net Fixed Asset Turnover 1.56 1.59 1.76 2.17 1.97 2.01
- Equity Turnover 1.43 1.53 1.57 1.53 1.17 1.13
- Gross Profit Margin (%) 22 18.59 29.5 34.71 27.68 27.59
- Return on assets (%) 11.27 12.04 19.04 25.95 14.75 14.13
- Return on Equity (%) 16.43 19.37 30.71 38.66 21.08 20.04
Activity Ratios
Ratio's Used For Valuation
- EPS (fils) 27.73 32.74 57.31 89.96 57.17 56.76
- Book Value Per Share (fils) 167.69 170.43 202.73 262.69 279.87 286.62

Appendix-A
The different steps in cement manufacturing has been outlined briefly in the figure1
shown below :
Figure 1: Cement Manufacturing Process

ELECTROSTATIC
COAL CLINKER STORAGE
AIR QUALITY CONTROL SHALE STOCKPILE RAW PRECIPITATOR CEMENT STORAGE
STOCKPILE SILO
MASS METERING MEAL SILO
CYPSUM
IRON ORE STOCKPILE SILO
QUALITY ASSURANCE STOCKPILE
RAW COAL SILO
SHALE QUARRY COAL MILL
ROTARY CEMENT KILN

LIMESTONE QUARRY
QUARRYING PRE-BLENDI RAW MILLING BURNING CEMENT LOADING

AND NG AND AND MILLING AND
CRUSHING STORAGE HOMGENISATION DISPATCH
Quarrying and Crushing
AIR QUALITY CONTROL The primary raw material for cement manufacture is
MASS METERING
QUALITY ASSURANCE
calcium carbonate or limestone. This is obtained from the
SHALE QUARRY quarry where, after the removal of overburden, the rock is
blasted, loaded into trucks and transported to the crushers.
LIMESTONE QUARRY
A multistage crushing process reduces the rock to stone less
than 25mm in diameter. Most modern cement factories are
QUARRYING AND located close to the source of limestone as about 11/2 tons
CRUSHING of limestone are needed to produce one ton of cement.
Blending and Storage
SHALE STOCKPILE The crushed rock is stored in stockpiles whereby a

IRON ORE STOCKPILE carefully controlled process of stacking and
reclaiming across the stockpile and blending takes
place and a uniform quality of raw material is
achieved. Systematic sampling and laboratory
testing monitors this process. The other raw
PRE-BLENDING AND materials, normally shale, iron ore, bauxite, and
STORAGE sand, are also stored in stockpiles.
Raw Milling and Homogenisation

RAW
MEAL Carefully measured quantities of the various raw materials are
SILO fed to the ball mill, where they are grounded to a fine powder to
create a combination of values for silica/ alumina/ lime, etc in
the mixture. If the wet process is applied, the grinding goes on
with water so that a slurry is produced after grinding. This slurry
is further mixed in mixers and pumped to the kiln. For a dry
RAW MILLING AND
HOMGENISATION

process kiln, the ground powder is send to blending silos for uniform mixing of
components added during the grinding stage. Homogenising silos are used to store the
"meal" where it is mixed thoroughly to ensure that the kiln feed is uniform, a prerequisite
for the efficient functioning of the kiln and for good quality clinker.
Burning
Burning is the most vital step in the manufacturing process.and it takes place in the
huge rotary kilns. Initially, the blended material from the blending silos are feed to the
preheater/ calciner. The preheater is a group of cyclones placed over one another
where in material comes down and hot gases goes up heating the material and calcining
it in the process. Calcination means liberating carbondioxide and converting calcium
ELECTROSTATIC
PRECIPITATOR COAL
carbonate to calcium oxide. Calciner is nothing
STOCKPILE but a duct added to give more residence time to
material for calcination. This partially calcined
RAW COAL SILO
COAL MILL material then comes to the kiln, which is
4 STAGE
SUSPENSION refractory lined rotating tube having burner
PRE-HEATER
fitted in the other end. This burner fires coal/
ROTARY CEMENT KILN
oil/ natural gas to create a temperature of 1600°
C at the discharge end. As the material in the
kiln rolls down towards the discharge end,
BURNING
various reactions take place among the
components resulting in a mass known as clinker. The nodules of clinker drop into
coolers and taken away by conveyors to the clinker storage silos. The coolers are either
planetory type or grate type. Grate coolers of modern times are more efficient resulting
in better heat recuperation and allows reusing this heat in the kiln. The gas leaving the
kiln is cleaned by electrostatic precipitators prior to discharge into the atmosphere. The
cooled clinker then either goes to storage silo or clinker yard.
Cement milling
CLINKER
STORAGE SILO
CEMENT From the clinker yard cooled clinkers are taken
STORAGE SILO
CYPSUM for grinding. The cement mills use steel balls of
STOCKPILE
various sizes to grind the clinker, alongwith a
small quantity of gypsum to a fine powder which
is then called cement. Without gypsum, cement
would flash set when water is added and gypsum
is therefore required to control setting times. The
CEMENT finished cement is stored in silos where further
MILLING
blending ensures consistency.
Quality Assurance
Extensive sampling and testing during the manufacturing process ensures the
consistency and quality of the end product. Testing takes place at the stages of the
manufacturing process indicated by the symbol.

Global Research
Global Investment House
Tel: (965) 2400551, ext 132 - Fax: (965) 2400661
research@global.com.kw
www.globalinv.net

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Investment Summary ............................................................................................................................. 1

Global Cement Industry ........................................................................................................................... 3

Arabian Cement Industry ......................................................................................................................... 6

Kuwait Cement Industry........................................................................................................................... 13

- Economic Link ................................................................................................................................... 13

- Industry Structure .............................................................................................................................. 15

- Demand & Supply.............................................................................................................................. 18

- Porter’s Five Forces .......................................................................................................................... 20

Comparative Analysis of the three Cement Companies........................................................ 25

Valuation Matrix .......................................................................................................................................... 29

Kuwait Cement Company ....................................................................................................................... 32

Kuwait Portland Cement Company ................................................................................................... 39

Hilal Cement Company ............................................................................................................................ 46

Manufacturing Process ............................................................................................................................ 53

May - 2002 Cement Sector 1

Chart : KCC stock price movement

General Industrial KCC

Chart : KPCC Price movement

Price in KD Index Values

KPCC General Industrial

Chart : HCC stock price movement

HCC General Industrial

2 Cement Sector May - 2002

Cement Industry - Global Cement Markets

Table 01 : World Cement Demand Growth (in mn tonnes)

Volume 1996 1997 1998 1999 2000 2001E 2002E

May - 2002 Cement Sector 3

scale modernization programmes to extend their capacities. Greatest number of idle

Table 02 : Estimated capacity utilization rates by region in 2000 (million tons)

Company Consumption Production Utilization No. of

4 Cement Sector May - 2002

May - 2002 Cement Sector 5

Cement Industry – Arab & GCC Cement Markets

Table 03 : MENA Region : Cement Demand (Million Tonnes)

6 Cement Sector May - 2002

The United Arab Emirates (U.A.E)

Description Particulars 1995 1996 1997 1998 1999 2000

cement produced in the U.A.E.

May - 2002 Cement Sector 7

Table 05 : Cement Capacities in the U.A.E.

8 Cement Sector May - 2002

Table 06 : Saudi Cement Sector Profile

May - 2002 Cement Sector 9

Figure 01: Cement Cost Structure of Companies in Saudi Arabia

Source : CCFI Database

10 Cement Sector May - 2002

Table 07: Clinker Stock Vs. Production Capacity of Saudi Cement

May - 2002 Cement Sector 11

an installed capacity of 2mtpa of Oman cement Company (producing around 1.25mtpa)

12 Cement Sector May - 2002

Cement Industry – Kuwait

May - 2002 Cement Sector 13

Table 09: Construction, real estate expenditure (Change)

Table 10: Development expenditure (Change)

14 Cement Sector May - 2002

May - 2002 Cement Sector 15

16 Cement Sector May - 2002

May - 2002 Cement Sector 17

Demand & Supply

Table 12: Cement consumption in Kuwait