POST REVOLUTION SECTORS OUTLOOK February 21, 2011

The ongoing political disturbances raised countless questions to investors today, wondering which sectors of
Sector Outlook the Egyptian economy are set for a safe investment. Our sentiment on different sectors has changed, where
some of these sectors have taken an opposite direction to what we saw prior to the incidents of January, 25,
2011.
Oil & Gas Positive
In our perspective, the one sector that we believe still has real foundation is the Oil and Gas sector. The Oil
and Gas sector is expected to boom in the coming period mainly driven by higher crude oil prices
Banking Neutral which have reached a high of US$103/barrel amid fears of shutting down the Suez Canal due to the political
uncertainties. In addition, as a result of hiking oil prices, the stretching of exploration and production pro-
Pharmaceuticals Neutral jects worldwide is expected to increase coupled with oil supply dependent companies benefiting from soaring
oil prices.
Despite our expectation for a significant slow down/shrinking of most sectors, we expect the current po-
Fertilizers Neutral litical and economic disturbances to have a minimal effect on industries such as pharmaceuti-
cals, fertilizers, telecom and food due to their defensive nature (i.e. necessary goods). Moreover,
Telecommunication Neutral most of the government subsides are directed to serve the above mentioned sectors curbing selling price
fluctuation. Accordingly, we haven’t revised our assumptions on demand, supply, prices and margins for
those sectors.
Food Neutral Regarding the Pharmaceutical sector, given the inelasticity to systematic risk, pharmaceuticals consumption
is not expected to be negatively impacted. We anticipate that people will continue to consume, if not at an
increased rate. Hence, given that per capita pharmaceutical expenditure for Egypt is estimated at US$34 in
Real Estate Negative FY10, we maintain our estimates of per capita pharmaceutical expenditures at US$37.40, up by 10% Y-o-Y.
Furthermore, Telecom sector will lose traffic from roaming activities as tourists influx drop, however this drop
will be offset by strong network usage coupled with large population base and promotions offered by opera-
Tourism Negative
tors.
For the food sector, we have maintained our consumption assumptions forecasting that the aggregate con-
Building Materials sumption and per capita consumption are projected to culminate at LE228 billion and LE2,800, respectively,
during 2011.
We have a neutral sentiment on the banking sector as we expect financial performance to be sup-
Cement Negative ported by income from high yield treasuries, in addition to service charges and fees. On the other hand, we
expect revaluation losses from financial investments and increased provisioning to weigh negatively on in-
Steel Negative come.
We believe that the prevailing circumstances will have a significant negative effect on cyclical
industries. Therefore, we suppose that Tourism, Real Estate and Building Materials sectors will be hindered
Contracting Negative
in terms of demand, supply, prices and margins throughout 2011. Moreover, one of our major concerns re-
garding the real estate sector remains in the legal aspect associated with the validity of land purchase con-
Automotive Negative tracts and the fair value of previously obtained land. This will add more pressure on Real Estate and Tourism
sectors as most of those companies are predicted to be charged with additional costs and penalties given the
accused allegations.
Prime Research Team In terms of Tourism, outbound tourism receipts are expected to be slashed to US$7.5 billion compared to
US$11.6 billion in 2010 backed by the tendency of some countries to deport Egyptians back to their mother
Phone +202 3300 5728 countries. Occupancy rates have also slumped severely below the normal levels of 65%-100% to a stagger-
Email Research@egy.primegroup.org ing 0%-15%.
Last but not least, government spending on infrastructure projects is forecasted to plummet by 30% directly
affecting building materials sector dynamics (demand, supply, prices and margins) which are accordingly
predicted to shrink.

The Impact of the Egyptian Revolution on Sectors Dynamics

Sector Demand Supply Prices Revenues Margins
Oil & Gas Higher Higher Higher Higher Higher
Pharmaceuticals Constant Constant Constant Constant Constant
Fertilizers Constant Constant Constant Constant Constant
telecommunication Constant Constant Constant Constant Constant
Food Constant Constant Constant Constant Constant
Real Estate Lower Lower Lower Lower Lower
Tourism Lower Lower Lower Lower Lower
Building Materials
Cement Lower Lower Lower Lower Lower
Steel Lower Lower Lower Lower Lower
Contracting Lower Lower Lower Lower Lower
Automotive Lower Lower Lower Lower Lower
Sector Loans Deposits Interest Rate Revenues Margins
Banking Lower Constant Higher Lower Lower
 ENERGY AND BANKING SECTORS February 21, 2011

Energy Outlook-Positive
E&P companies are Generally speaking, oil leads all commodities and hence when talking about energy, we’re mainly concerned
expected to continue about oil price, supply and demand.
stretching their
projects worldwide Brent crude oil price has hiked to US$103/bbl amid fears of Suez Canal shutting down due to political instability
to benefit from in Egypt. However, after fears have gone, it went down again to the current level of US$100.6/bbl. Similarly,
soaring prices
OPEC basket price has surged up this month to US$96.12/bbl then eased to stand at US$91.12.
Considering this recent progression in price, E&P companies are expected to continue and further stretch their
Oil & Gas companies
projects worldwide to benefit from soaring prices and thus achieving higher margins. According to OPEC, total
are expected to
witness higher sell- supply stands currently at 89.3 million barrels up from 88.1 million barrels in the previous month. On the other
ing prices and mar- hand, total demand is 89.9 million barrels versus 87.9 million barrels a month earlier. Furthermore, local de-
gins mand is seen to grow steadily unaffected by Egypt turmoil backed by sound consumption of a great population.
Consequently, oil supply dependant companies in Egypt are expected to proceed their business activities and
benefit from soaring oil prices by imposing higher selling prices in attempt of attaining higher sales but not
higher margins as cost rises.

Banking Sector Outlook-Neutral

The loans to deposits ratio averaged 55% over the past 5 years, hence a strong liquidity position. Even though
We expect deposits
to grow at a sub- a panicking attitude by savers is expected to lead to outflow of funds, we believe that high interest rate given
dued rate of 5% by Egyptian banks will help in maintaining funds. Accordingly, we expect deposits to grow at a subdued rate of
over the course of 5% over the course of 2011, compared to our earlier estimate of 15%. Similarly, loans are expected to grow at
2011, compared to
our earlier estimate
a lower rate, as investors and consumers alike, gradually regain confidence. Hence, we expect loans to show
of 15% 3% growth over the course of 2011 from our earlier estimate of 11%. Accordingly, L/D to stand at 51%.

At the current moment, we identify areas of risk as follows;

• Loans given to companies led by specific entrepreneurs, namely Ezz Group, TMG and Palm Hills. Total
loans given to the 3 companies amount to LE13.6 billion or 3% of total loans in Egypt. Hence, limited risk,
especially that these loans are guaranteed by the corporation, rather than the entrepreneur;
• Retail loans, due to the risk of lay offs. Currently, retail loans constitute 22% of total non-government
Average NPL ratio loans. We expect this area to face difficulty in repayment;
for large cap banks • Tourism sector, is another area of concern at the moment. Tourism comes under the services sector which
under coverage constitutes 27% of total non-government loans. We, also, expect this area to face difficulty in repayment.
stands at 3.5%
expected to reach
5.5% Large cap banks under our coverage enjoy coverage ratio higher than 100%. Accordingly, we believe that pos-
sible increase in NPL’s will not lead to devastating increases in provision expenses. Currently, average NPL ratio
for large cap banks under coverage stands at 3.5% expected to reach 5.5%, given the above mentioned risks.

Exposure to Treasuries, Egyptian Stock Market & Banks Abroad

• Egyptian banks continue to maintain huge investments in government t-bills amounting to LE328 billion as
at November 2010 and representing 35% of total deposits, hence, a considerable portion of the govern-
ment sovereign risk is transferred to the banking sector;
• Exposure to the Egyptian stock market is limited where financial investments stand at LE42 billion, or 4.5%
of total deposits;
• Due to banks abroad stood at LE24.8 billion or 2% of total assets as of November 2011. Hence, very low
exposure and limited risk from outflow of funds.

We expect financial performance to be supported by income from high yield treasuries, in addition to main-
tained momentum from service charges and fees. Over the coming period, we expect to see growing exporta-
tion activities, hence, boosting service charges and fees. On the other hand, we expect revaluation losses from
financial investments to weigh negatively on non-interest income. Another negative is expected to come from
higher provisioning charges.

Prime Research 2
 PHARMACEUTICAL, FERTILIZERS AND FOOD February 21, 2011
SECTORS OUTLOOK

Pharmaceutical sector-Neutral
we maintain our We have a neutral sentiment on Pharmaceutical sector; thus, we haven’t revised our previous assumptions for
estimates of per this sector. During the coming period of 2011, the Egyptian drug making business is poised to see a moderate
capita Pharmaceuti- increase in demand. Given that pharmaceutics are inelastic in demand, people will remain consumers, yet at an
cal expenditures at
US$37.40 up by 10% increased rate of consumption. Moreover, given that the per capita Pharmaceutical expenditure for Egypt is
Y-o-Y estimated at US$34 in FY10, we maintain our estimates of per capita Pharmaceutical expenditures at
US$37.40, up by 10% Y-o-Y.

Government’s restrictions on pricing pharmaceuticals, achieved through a cost plus method, allows the govern-
ment to set the price of the drug after reviewing all the costs incurred by the company. Therefore, due to the
Government price pharmaceutical industry’s structure and government restrictions on pricing, prices are expected to remain un-
restrictions set on
cost plus method changed. We expect the companies to witness an increase in its COGS backed by two factors: 1) 85% of raw
materials used in the manufacturing of drugs are imported 2) Depreciation of the Egyptian pound against US$
to reach approximately LE6.2/US$, which represents a burden on companies in the sector. Consequently, cus-
toms for pharmaceutical raw materials have been dropped by the government from 10% to 2%; reducing pres-
sures of higher costs.

Maintained margins Given that demand is expected to increase, producers are expected to increase production to accommodate
due to government
restrictions on prices customers demands. Thus, it is expected that revenues will increase; resulting from the sale of a larger number
of pharmaceutical drugs.

Although revenues and sales are expected to witness growth, margins for pharmaceuticals are expected to be
sustained at 40% and 30% for EBITDA and NI margins respectively; due to government’s aim at calming and
sustaining the public and not raising prices.

Fertilizers Sector Outlook-Neutral

The fertilizers production industry depends on the agricultural sector which produces food and thus protected
from any political disturbance. Therefore, local demand is seen constant as well as local supply for no new ex-
pansions to come online in 2011. However, we are concerned about both phosphate and nitrogen based fertil-
izers.
Nitrogen based fertilizers, which the Egyptian farmers use the most, are subsidized by the government which is
Nitrogen fertilizers reluctant to liberalize prices in the foreseeable future. Nevertheless, natural gas, the main feedstock and source
selling prices and
feedstock are subsi- of energy for all nitrogen based fertilizers’ producers, is also subsidized and provided at the fixed rate of US$3/
dized maintaining mbtu. Moreover, producers are allowed to export only after governmental approval which usually comes after
margins sufficing the local market. International urea and ammonia prices currently reached all time highs since 2009 to
US$395/ton and US$445/ton respectively. Accordingly, local producers might achieve better sales volume and
hence higher revenues but are not expected to witness any change in margins.
Phosphate fertilizers
Phosphate based fertilizers sector has no government intervention and is directly affected by changes in inter-
sector has no gov-
ernment intervention national prices. Producers mainly depend on phosphate rock and sulfur as feedstock. Sulfur price followed the
and is directly af- hike in oil price reaching US$180/ton. The said increase in cost is usually added to the selling price maintaining
fected by changes in margins. However, local sales volume is expected to decline slightly as some farmers may not apply phosphate
international prices
and hence higher fertilizers but given the facts that producers are able to export their production without governmental approval
exports and lower in addition to global recovery and soaring wheat and corn prices, export sales will more likely increase signifi-
local sales are ex- cantly on higher sales volume and selling prices.
pected in 2011
It is worth mentioning that Egypt is a net exporter of fertilizers with an export value of US$725 million and a
total imports value of US$257 million in FY10.

Food Sector Outlook-Neutral

Food is necessary Consumption in the food sector has been witnessing steady growth for the past few years and is expected to
good and is pro- remain strong during the coming period. This is due to the fact that food consumption is mainly driven by the
tected against any robust Egyptian population. Therefore, we have maintained our assumptions on consumption and per capita
political disturbance consumption of food at LE228 billion and LE2,800 during 2011, respectively.

Most of food prices in the local market have followed an upward trend since the beginning of 2010 associated
with the increase in international prices driven by the decline in global production and increase in international
demand. Most of food companies were able to pass the increases to consumers, however the government will
exert more efforts to reduce further increases in some prices.

Prime Research 3
 TELECOM, TOURISM AND REAL ESTATE SEC- February 21, 2011
TORS OUTLOOK

Telecom Sector Outlook-Neutral

The sector will lose The government suspended mobile services in Cairo and some large metropolitan areas on January 28 and the
some of the traffic services returned back in the next day, however, SMSs and internet ban continued almost 5 days. Organization
from roaming activi- for Economic Co-operation and Development (OECD) estimates that the sector lost revenues of US$91 million
ties as tourists influx
drop, however this during the suspension of the services. In addition, some branches of TE Data, Mobinil, Vodafone and telecom
drop will be offset by services companies such as Ring, were looted. The sector will lose some of the traffic from roaming activities
strong network as tourists influx drop, however this drop will be offset by strong network usage coupled with the large popula-
usage coupled with
the large population
tion base and promotions offered by operators.
base and promotions
offered by operators. Mobile operators have also offered free minutes for clients as the market suffered a lack of scratch charge
cards which negatively affected usage for a short time. We expect that further drops in calling prices will be
motivated by normal market competition and will be offset through more network usage.
Profit margins are
expect to decline by Telecom operators’ sales are not expected to slump in 2011 due to intensive network usage and more internet
1%-2% backed by access through mobiles in addition to the new facilities offered by operators such as e-finance.
increasing competi-
tion
We expect margins to witness a slight decline ranging between 1% and 2% due to the increased market com-
petition across operators.

Tourism Sector Outlook-Negative

Tourism sector, which is one of the most important financial resources of the Egyptian economy, has plum-
Outbound tourism meted significantly since the outbreak of the revolution. Total losses have reached US$1,600 million since the
receipts are ex- beginning of the events till now. On the other hand, Occupancy rate dropped below the normal levels from
pected to be slashed
to US$7.5 billion
65%-100% to 0%-15%. We believe that the current situation will continue during 2011, hence the sector out-
compared to bound tourism receipts are expected to be slashed to US$7.5 billion compared to US$11.6 billion in 2010
US$11.6 billion in backed by the tendency of some countries to deport citizens of Egypt. Tourism activities are assumed to focus
2010 backed by the on inbound tourism which will be enhanced by lower average rate per room. We expect the sharp decline in
tendency of some
countries to deport tourism demand to create a downward pressure on average rate per room and profit margin.
citizens of Egypt
Real Estate Sector Outlook-Negative
The Egyptian real estate developers witnessed increasing legal risks which raised from facing court case allega-
tions over their land bank. We believe that the uncertainty regarding the legality of land purchase contracts will
create a negative sentiment on the Egyptian real estate market. Total demand on real estate was expected to
High income level is
assumed to follow
reach 432,197 units, of which 61% is concentrated among low income, 6% high income level and 33% middle
wait and see strat- income level. After 25 January 2011, we suppose that the demand for real estate will not be speculative but
egy. On the other will reflect a real demand. Therefore, high income level is assumed to follow “The wait and see strategy”. On
hand, the real de- the other hand, the real demand which stems from middle and low income levels is supposed to decline by
mand which steam
from middle and low 17% Y-o-Y to 345,757 units. We also expect the developers to postpone launching of new projects. Therefore,
income level is sup- we have reduced our supply estimates to 162,598 units, down by 4%.
posed to decline by
17% Y-o-Y to
345,757 units.
Developers who target high income level were reluctant to reduce their prices in 2010. They chose to ease
their selling strategy in terms of payment facilities and extended payment periods. We expect those developers
to reduce their selling prices by 10%-15% in 2011 with the decline in demand. Developers who target middle
and low income levels reduced their selling prices by 15%-20% in 2010. As a consequence of the slowdown in
Selling prices are real demand from middle and low income levels, we expect a further decline in prices by 10%-20% in 2011 to
predicted to decline attract new buyers. We believe that the developers will focus of speeding up constructions of the currently held
by 10%-20% projects to match their delivery schedules. All developers are expected to witness a slowdown in sales figures
in 2011 by approximately 20%-30%. Accordingly, they are facing a decline in their advance payment accounts
which represents the major sources of financing for real estate developers.

Furthermore, the Egyptian real estate companies are forecasted to face a declining margin pattern associated
Developers will face
a declining margins with the decline in selling prices and the expected additional charges driven from acquiring land bank at lower
and sales. than fair value.

Prime Research 4
 CONTRACTING, STEEL AND CEMENT SECTORS February 21, 2011
OUTLOOK

Contracting Sector Outlook-Negative

Government spend- With a temporary government currently managing the country and amid growing concerns over political stabil-
ing on infrastructure ity, the government will focus on subsidies and inflation curbing. In addition, the government may postpone
projects is expected new mega infrastructure projects till a new president is elected and a new government policy is initiated. This
to decline by 30% in
FY11 means that current temporary ministers will not be able to formulate plans to long term projects and will only
focus on completing previously scheduled projects at a slowing rate. The private sector will be reluctant to initi-
ate mega projects in 2011 for political and economic concerns. Consequently, the current government will try
to stimulate projects under the system of PPP during the next months of the year. Accordingly, it is predictable
to see contractors accepting low margins in 2011 to obtain contracts from the private sector.

Steel Sector Outlook-Negative

We anticipate that The prevailing circumstances in the Egyptian steel market specifically definitely leaves a lot of question marks
local demand will
plummet by approxi-
for many investors today, given both the political allegations and operational risks the sector may be facing. In
mately 13% (to terms of the local steel dynamics, we have previously expected that the total local consumption and production
reach 5.6 million figures would reach 6.2 million tons and 6.89 million tons respectively by the end of FY11. However, after the
tons by the end of incidents witnessed on January 25, 2011, we have accordingly revised our projections expecting a more pessi-
the current year.
mistic outlook in general, if not a total change in the market dynamics. The slowdown of construction and in-
frastructure activities will have a major effect of the demand for the basic building materials involved . Hence,
we anticipate that local demand will plummet by approximately 13% to reach 5.6 million tons by the end of the
current year. This will directly impact the local supply which will pretty much follow the lead also slumping by
an estimated 7% to 6.2 million tons in FY11.

The forecasted Local steel prices as of January 2011 had shot up to LE4,500/ton driven by the substantial increase in the inter-
dwindle in local
demand and supply national raw material and steel prices which reached US$800/ton. Given that the global raw material prices
after the current account for 40% of the total COGS, steel producers chose to maintain their margins by rising local prices in
chaos will subse- attempt of passing on the hike to end consumers . At present, we don't believe that January price levels will be
quently lead to a
slump in sales vol-
maintained. The forecasted dwindle in local demand and supply after the current chaos will subsequently lead
umes, local prices to a slump in local prices to an average LE4,000 ton for FY11, down by 11%. Our main concern yet remains in
and profit margins. how steel producers will be able to sustain margins given the hiking international raw material prices but also
cope with the declining market in Egypt.

In our perspective, In our perspective, all steel producers are to witness slowdowns in sales volumes, average selling prices and
all steel producers margins . Focusing more on margin forecasts, in the so called “growth period”, the average market gross profit
are to witness slow-
downs in sales due
margins ranged between 15%-25%. Given that we are now to encounter a declining phase, we anticipate that
to expected decline the margins will decline to range between 10%-14%. Furthermore, we expect the steel companies to record
in their key revenue net losses in 2011.
driver.

Cement Sector Outlook-Negative

Following the steel industry, the slowdown of construction and infrastructure activities will have a major effect
A decline in total
cement production
on the supply and demand of the cement sector. The new 12 licenses that were expected to be launched this
and consumption by year to meet local demand will be postponed. We have previously anticipated that the total local consumption
12% and 14% and production figures would reach 53.4 million tons and 52.2 million tons respectively by the end of FY11.
However, after the current situation, we have accordingly reduced our forecasts for the production and con-
sumption in FY11 to register 45.7 million tons and 45.7 million tons respectively, a decline of 12% and 10.7%
respectively from the previously forecasted figures.

Local companies will We believe that companies will focus on the export market to offset the decline in the domestic sales
focus on the export and benefit from the depreciation of EGP against US$. Meanwhile, any further deterioration in EGP/USD should
market encourage the foreign importers to buy Egyptian cement which will be equivalent to approximately US$88/tons
in FY11. Consequently, we increased our assumption of exports from 10% to 20% of total production to capi-
talize on high export margins.

Prime Research 5
 CEMENT AND AUTOMOTIVE SECTORS OUT- February 21, 2011
LOOK

Cement Sector Outlook (Cont’d)-Negative

An expected decline During the last few weeks building materials witnessed a sudden increase in prices due to the low supply be-
in local cement cause of the closure of many warehouses and the difficulty of traffic and work stoppage in some factories from
prices by 10%-20% production during the curfew. In the meantime, the individuals have accelerated the construction in upper
in FY11
Egypt governorates due to the disappearance of police and municipals. Accordingly, prices reached its highest
levels of LE1,000/ton since the crash started. However, prices commenced to retreat to the earlier announced
prices of LE520/ton. We believe that local cement prices will go down by 10%-20% in 2011 to record LE440/
ton -LE495 /ton.
Cement companies
are predicted to
witness a decline in Cement companies recorded an average GPM ranging from 50%- 60% during the growth phase of the busi-
its GPM by an aver- ness cycle. We believe that the decrease in revenues will push the margins down to an average of 45%.
age of 15%

Automotive Sector Outlook- Negative

We forecast the automotive market sales to drop almost 10%-15% in 2011 down from a prior growth expecta-
tion . The three factors below will pressure down margins based on the type of the vehicle and client. The im-
pact of recent political crisis in Egypt on the automotive market will basically come from three factors:
Automotive sector
demand is expected • The government‘s pledge to sustain subsidies on energy and food in 2011 amid growing international
to decline by 10%- prices will increase the expected public deficit and growing inflation pressures and hence, higher interest
15% backed by the rates which will decrease auto loans.
expected decline in
auto loans • We believe that the impact of the recent events in Egypt will be more apparent on the demand for buses
and cars from the tourism sector.
• Appreciation of the US$ against the Egyptian pound will raise the cost of vehicles for automakers and as-
semblers reducing demand and margins.

Prime Research 6
 February 21, 2011

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Prime Research 7