| 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.
Sama believes that the result will be a more active market that will generate enough business for all participants, including the banks. “By utilizing the capital market, banks will be able to offer a wider range of innovative and sophisticated products and services to their customers. This will provide banks with opportunities to increase income, particularly fee income,” says Al-Sayari.
The governor also argues that “the non-banking financial institutions will complement the banking system by providing services that are not well suited to banks” and that the core businesses such as “deposit taking and lending will be largely unaffected as non-bank financial institutions are prohibited from accepting deposits”.
The commercial banks say they relish the opportunities and endorse Sama’s view that the capital market law offers opportunities to diversify and expand services. At Jeddah-based National Commercial Bank, Abdulkareem Abu Alnasr, deputy general manager, welcomes the law as a “great improvement in terms of transparency” and he says it “will lead to higher professional standards. It will create asset management opportunities and advisory opportunities when companies are taken to the market. We are looking forward to it and are very excited by it.”
The reforms will be judged by whether there are sufficient IPOs to create a broader and more diversified stock market – Bakheet reckons there should be 200 to 300 quoted companies for an economy of Saudi Arabia’s size – and whether the exchange is attractive enough to persuade Saudi individuals and institutions to put their money there rather than in international markets.
New IPOs are likely to come from two main sources. First, the family companies that have dominated Gulf trading for a generation will have an opportunity to go public as the regulations for flotation are interpreted more practically. “This process will become more simplified. There are a number of well-run family businesses with a good franchise which want to institutionalize themselves. They have come to the second or third generation management with the same culture. In addition some firms will be attracted by the idea of issuing corporate paper,” says Suliman Al-Gwaiz, deputy chief executive at Riyad Bank.
The second source will be through the sale of the government’s stakes in leading companies and the privatization of state industries. Among the former are petrochemicals company Sabic, in which the government has a 70% stake, NCB (70%) and Saudi Electricity (80%). Ministers say that the sale of shares in NCB “could happen soon”. The government would also have little difficulty in selling more of its holding in STC, particularly if it wanted to sell the 10% stake that is held by state-owned institutions.
The government has also approved a list of 20 areas of commercial activity in which some state-owned shares can be sold. These include electricity, water, desalination, air transport – where there is now to be domestic competition to Saudi Arabian Airlines – airport services, the mail, highway management, railways, some healthcare services and some areas of education and hotels.
Ministers are confident that the experience with STC and the buoyant performance of the stock exchange in the past six months shows that there is plenty of appetite if the projects are right. Indeed bankers say there is more liquidity in the country than for many years.
Bakheet says that money has been repatriated following the fall of US markets in the past three years and that there is little enthusiasm for making cash deposits because of the low level of interest rates.
“People do not want to return their money to the US markets at the moment. There is a threat of their assets being unreasonably sequestered by the US authorities. They are nervous about investing in US companies because of the dot-com bubble burst and Enron accounting problems and their confidence in the US dollar is very shaken,” Bakheet says.
