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| Saudis are buying and using cellphones in record numbers. |
KHALID AL-MOLHEM, president of Saudi Telecom (STC), has the air of a contented man as he ticks off the past year's successes, which include a successful privatization of 30% of the company, the completion of his corporate restructuring plans and an expansion of the mobile business that has seen Saudis buying and using cellphones in record numbers.
STC's share price has more than doubled since its flotation last December. And in the first six months of this year the company's shares have accounted for almost a quarter of trades on the Saudi Stock Exchange (Tadawul), which at present is not open to international investors.
"Before the flotation, the company was valued at SR51 billion, which already made it the largest company in the region, and it is now worth SR117 billion ($30.8 billion). In terms of size we are number 14 in the world and, among the emerging markets, we are second only to China Mobile," says Al-Molhem.
STC is now well placed for the competition that could come in the mobile market as early as next year and for landline business in 2008. Competition for the mobile licence, which is open to foreign companies, is certain to be intense as the market is growing so fast.
"There are now 6.5 million mobile phones and the number is rising by 200,000 a month - we are heading for 10 million mobiles within three years. People are now sending 170 million text messages a month," says Al-Molhem. Average revenue per user is SR1,626 on an annual basis and SR135 a month. That has enabled STC to record revenue for the first half of the year of SR13.01 billion.
Digitalization and early retirement
One of the reasons for STC's success is that it has invested $15 billion in modernizing a network that is now wholly digital - and it has done so with virtually no borrowing. It has continued to grow revenues even though there have been dramatic price cuts designed to expand the market. The company has also introduced a new management structure. "We have completed 95% of our modernization, which has included losing 2,500 people through early retirement," says Al-Molhem.
This strategy has enabled STC to remain the jewel in the crown of the Saudi stock exchange. Its performance is even more impressive as it has been achieved before the passing of the new capital markets law, which is designed to create a more tightly regulated exchange and make it easier for companies to raise debt and issue equities.
The new structure will have a firm base on which to build. The Saudi Arabian Monetary Agency (Sama), the central bank, which has until now regulated the Tadawul, has created a market that is efficient, transparent and offers real-time settlement.
This has enabled it to become by far the largest of the Middle East's stock exchanges, accounting for more than half of the total regional market capitalization of $250 billion and twice as large as the next biggest exchanges. Yet by international standards and by comparison with the overall Saudi economy, it is modest - even with the STC issue, capitalization was only SR477 billion, or 67% of Saudi Arabia's GDP, at the end of June this year and only 70 companies are quoted. There are only 380,000 investors who trade shares actively, the overwhelming majority of these being individuals.
The lack of IPOs is mainly a result of the strict listing requirements imposed on companies by the commerce ministry - this has made shares for anything other than the giants like STC as rare as rain in the desert. The market is also dominated by a few large companies - STC, Saudi Basic Industries Corporation (Sabic) and Al Rajhi Bank account for half of the turnover and 10 companies deliver 80% of the profits of all listed companies - and is very volatile. "It is up by 43% this year. I find this nearly as worrying as if it had fallen by a comparable amount," says one banker.
Towards foreign participation
Ministers and bankers believe that the capital markets law will create the right environment for companies to list and for more investors to commit money to the market. There is also a growing acceptance among ministers that the time is approaching when it will no longer be viable to bar international ownership of shares on the stock market of a country that is becoming more integrated in the global economy and financial system.
The cornerstone of the new system will be the Securities and Exchange Commission (SEC), which will be responsible for making rules and will have the powers to enforce them. This includes the rules for the offering of securities, for the continuous disclosure obligations of publicly traded companies, takeover regulations and for defining insider dealing and other abuses.
One of the SEC's most important duties will be to license and regulate non-bank institutions, including those from overseas - at present brokerage can only be done by banks. These non-bank financial intermediaries will be able to offer investment banking services, including corporate finance, asset management and brokerage.
There has until now been some uncertainty over how Saudi Arabia's existing financial institutions will split their commercial and investment banking businesses. Sama governor Hamad Al-Sayari says that "banks are free to choose the most appropriate organizational model to carry out their investment banking activities".
He adds that: "They may wish to continue as they are today, with internal specialized investment banking units, or to create new specialized subsidiaries. Banks may also wish to enter into joint ventures with foreign banking or non-banking financial institutions."
Competition should shake up the market. "I hope that the opening up of the market will mean there are more participants. It is time the banks' monopoly in investment banking activities was ended. For the last 30 years we have had a declining number of banks, which has meant less competition and a system that has always operated to the advantage of the banks," says Beshr Bakheet, managing partner of Bakheet Financial Advisers.