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4) Jobs creation: the entry of foreign companies into retailing in Saudi Arabia will not only create job opportunities but will also ensure quality in them, improving standards of living and life styles.

Al Hokair: Eased restrictions on foreign investors: perception vs reality
The liberalization of the Saudi retail industry raised concerns among Al Hokair investors regarding the potential loss of the Inditex franchise, which we estimate accounts for 8% of its total stores. We think this risk is overstated for the following reasons:

• Relationship with parent: Unlike its peers, Al Hokair enjoys favourable access to prime locations in well-located shopping malls owned by its parent shareholder, Al Hokair Group. The group owns and operates 13 shopping malls across Saudi Arabia (1.2m sqm of prime real estate) through its subsidiary Arabian Centres Company. However, we understand that rents are currently negotiated on commercial terms, thereby limiting the risk of a conflict of interest. We do not think the situation will change.

• Real estate is key to entering the market: Fashion retailers continue to compete for good-quality real estate in shopping centres and on high streets. Going forward, there is likely to be significant competition between these companies for new sites, especially in prime shopping centres, as they all require similar locations, typically prominent, wide-fronted premises. Zara, in particular, uses its shop windows to advertise its products.

• Local manufacturing and distribution network would add execution risks and costs to international retailers such as Inditex: While Saudi Arabia has not yet provided the details and conditions of the potential eased restrictions on foreign investors, we understand that the government is looking to attract investments, diversify its economy and improve Saudization. This means foreign retailers could be asked to set up local manufacturing and distribution networks within Saudi Arabia, which we believe could discourage retailers such as Inditex from entering the market directly.

More malls, less bargaining power with international retailers
The accelerating pace of mall developments in Saudi Arabia by regional competitors to Al Hokair's parent company suggests a rising risk of diminishing bargaining power for Al Hokair with its international brand partners such as Inditex. We expect Shumoul Holding 55% owned by Mabanee, the Kuwaiti mall operator, to develop a 400k sqm mall in Riyadh while Dubai-based Majid Al Futtaim recently announced that it is looking to develop two malls in Riyadh of 300k and 100k sqm of GLA respectively resulting in four times more stores (300) in the next five years. Such new entrants can then accommodate foreign retailers (such as Inditex), which could question the sustainability of Al Hokair's franchise model.

Jarir: exposed to NTP innovations
What if Apple enters Saudi Arabia
Should Apple enter Saudi Arabia, it would negatively impact the Apple resellers such as Jarir as the majority of the sales would be transferred to the Apple-branded stores. As such, we highlight 2 key risks to Jarir that would ultimately deteriorate earnings outlook: (1) rising competition from Apple resulting in a weaker footfall trend due to weaker electronic sales, which are key for store traffic; and, (2) intensifying competition from organised retail space (malls), reducing the market share of specialist retailers such as Jarir.

Jarir’s earnings sensitive to electronics business
With c40% of revenues and c20% of gross profit derived from the electronics segment, Jarir remains vulnerable to the threat of foreign retailers entering directly Saudi Arabia.

62 GEMs Paper #26 | 30 June 2016
Merrill Lynch
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