Egypt: A Valued Investment

Contents
Case in Brief............................................................................................................................. 3 Pillars of Growth ..............................................................................................................4

Improving Political and Legislative Landscape ................................................... 4 Increased Government Spending .............................................................................. 4 Demographics.................................................................................................................. 5 Geographical Location.................................................................................................. 6 A Highly Solvent Financial System ............................................................................ 7 Access to Energy .............................................................................................................. 8 Natural Gas Production in Egypt............................................................................... 8 Electricity Generation in Egypt .................................................................................. 8

Growth Industries ......................................................................................................... 11 Telecoms ............................................................................................................................ 11 Electronics, Domestic Appliances and Fast-Moving Consumer Goods.......... 11 Banking and Financial Services ................................................................................ 12 Middle Income Real Estate .......................................................................................... 13 Autos ................................................................................................................................... 13 Agriculture........................................................................................................................ 14 Infrastructure .................................................................................................................. 15 Logistics ............................................................................................................................ 16 Building Materials (Cement, Steel, & Paint).......................................................... 16 Tourism .............................................................................................................................. 17

Economic Snapshot .......................................................................................................9

Egyptian Stock Market Overview....................................................................... 18 Comparison of World Markets to Egypt ...................................................... 18 Stocks to Watch .................................................................................................................... 19

Egypt: A Valued Investment

Preceding the global economic crisis in 2008 was a period of political and economic reform in Egypt. From the 1990s on, structural reforms, improved fiscal and monetary policies, increased privatization, and expansion of the Capital Markets role helped modernize the Egyptian economy and encourage foreign investment. A change in the political and legislative framework also helped boost investor confidence: changes in election laws, a more liberal political landscape, liberalised press, as well as the establishment of specialised economic and commercial courts. This concerted effort has improved the competitiveness of Egypt as an investment destination. A new cabinet, dominated by reputed businessmen and technocrats, was assigned in 2003; Prime Minister Dr. Ahmed Nazif and his team undertook an even more aggressive effort at modernising the country. The new government has led an effort to expand the fiscal and monetary system, consolidate and privatise the banking sector, reduce import and income taxes, reduce barriers-to-entry for new businesses, improve the credit system, and enhance Egypts Capital Markets breadth and depth. Economic growth averaged 7% during the period between 2005 and 2007.

Case in Brief

PILLARS oF GRowTH IN EGyPT:

- Improving Political & Legislative Landscape - Increased Government Spending - Demographics - Geographical Location - Highly Solvent Financial System - Access to Energy

Egypts diversified economy, large internal market, high liquidity rates and improving business environment helped buffer it from the negative effects of the global financial crisis. The Egyptian economy still managed an impressive 4.7% growth during 2008/2009, comparing well to negative global averages. FDI inflows, nearly nonexistent in the early years of the decade, have risen to over US$13bn 2007/2008 thanks to increased visibility of the Egyptian economy on the international investors map and increasing opportunities for investing.

Egypt is expected to benefit even further from its improving fundamentals and aggressive reforms as the worlds economy recovers. A real GDP growth of 5.5% in 2009/2010 has been achieved, followed by an anticipated 6.0% in 2010/2011. Some government economists are currently forecasting growth rates in excess of 7%. While growth may remain subdued in the post-crisis environment this year, the unemployment rate is expected to drop to 9% in 2011.

A few risks are apparent in the current socioeconomic structure of Egypt. While changes have been made to reform the political system, a transition to market economics for an economy such as Egypt is usually not without some pain. Pockets of unrest still remain in the country with demonstrations, civil strikes, and worker union demonstrations increasing in the last couple of years. Inflation is set to remain fairly stable (forecasted at 12% in 2010/2011), there is a large upside risk from potential increases in commodity prices and removal of subsidies. Stringent credit terms, rising interest rates and the inability of a large percentage of the population to obtain access to full banking services may limit prospects of consumer spending and internally generated growth. Unemployment levels could rise significantly from the return of hundreds of thousands of workers from the Gulf if the region does not recover considerably over the next years. Exchange rate volatility is also a risk in a country with a widening deficit, especially for foreign investors. Egypts Pillars of Growth remain a solid platform on which economic growth and investments can rely going into the future.
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Egypt: A Valued Investment

Pillars of Growth
The Egyptian political and legislative environment has shown significant leaps towards making the country more democratic and liberal. Egypt has moved from an army-run totalitarian regime, installed by the 1952 revolution, to an exceedingly tolerant system that is trying to install a more democratic process; one that allows for freedom of press and a multiparty system. Egypt held its first multicandidate presidential election in 2005. Despite negative reports on the electoral process, this is undoubtedly a step in the right direction. Additionally, parliamentary elections are being supervised by the judicial apparatus to ensure fairness. The new government has also tried to remove layers of bureaucracy which were previously hindering the reform process. Procedures for setting up new companies have been cut to less th an half. Improvements have been made to the tax system, cutting taxes by half to a 20% flat rate, yet making it more inclusive. This expanded the taxable environment and hence increased overall tax revenues. Specialised commercial and economic courts have also been set up to go around the delays in the regular judicial system. Overall reforms are helping to develop a more progressive political and legislative environment, which will be conducive to a positive investment outlook for Egypt.

Improving Political and Legislative Landscape

Tax cuts, reduced subsidies, eased price controls, and liberalisation are positive changes.

Stimulus packages will contribute to investment in the countrys infrastructure.

Increased Government Spending

Since late 2008, the government has attempted to stimulate the economy with infrastructure spending. Three spending packages have been announced, totalling EGP24bn; the most recent was in January of this year. The spending should encourage optimism for the future of the utilities, construction and materials, transportation, and social services sectors. Government contracts for infrastructure-related projects have grown in value from US$1.9bn in 2009 to $3.7bn last year, with 47 new projects slated to be awarded in 2011.

Egypt: A Valued Investment

Egypt has the largest population in the region, roughly estimated at 79 million people and growing at rate of 2% annually (source). This translates into a large internal market sustaining growth in the country. There is an especially young population here; over 60% of the population is currently below the age of 30, relative to that of the EU and United States, who have aging population. This young population, coupled with an improving education system, is giving companies operating in Egypt access to cheap labour and improved cost structures. As this young population grows, demand within the economy is expected to increase. Demand on cars, houses, consumer goods, schooling and so on is expected to rise with the maturing of this population. It should be noted that the fastest growing period for western economies with a young population was after the baby boomers population came into effect and demand increased internally. Egypt is currently in the same situation. Egypt is currently in the same situation as countries such as the US and Europe were experiencing when their baby boomer population came of age 20 years ago. The Egyptian labour force currently stands at 24.5 mn people. Increased investments and improved education systems are expected to increase the Egyptian middle class and improve the purchasing power of the local population. This strengthens the internal market for higher-end goods and services, banking and financial services, and white goods (e.g. refrigerators, washing machines, and durable goods). The growing market will act as a catalyst for industry to grow at a faster pace, decreasing its reliance on unstable export markets. Domestic consumption contributed to 76.2% of the GDP in 2008/2009, and will be supplemented by increasing consumer confidence and a growing middle class. These factors will continue to provide both a growth catalyst and buffer for the Egyptian economy over the next few years.

Demographics

Egypts young population gives the country years of potential growth.

Population (m)
88 86 84 82 80 78 76 74 72 2005 2006 2007 2008 2009 2010 2011

GDP per head (US$ at PPP)

7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011

Recorded unemployment (av; %)

12 10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011

Egypt: A Valued Investment

Geographical Location

With access to both the Red Sea and the Mediterranean, and its central location between Africa, Asia, and Europe, Egypt is a potential central hub for trade between North and South, Europe, Asia, and Africa. Its access to Middle East and African markets provides a unique advantage, with over 600 million potential customers in close proximity. This is an opportunity for not only trade-based companies, but also for industry as well as logistics companies and ports. In the last two decades, Egypt has forged preferential trade agreements with all of the Arab countries, Europe, the Mediterranean Basin, Africa, and the United States. A large labour force and a low average wage of US$2,300 in 2008/2009 make Egypt an attractive country for production and exports, especially when paired with its geographical surroundings and trade agreements.

Egypt: A Valued Investment

A Highly Solvent Financial System

After 2003 and the appointment of Prime Minister Ahmed Nazif, a reform process was initiated to modernize the economy. One of the outcomes of the new policy was the consolidation and privatization of the banking sector, which reduced the number of banks from 57 to 34 from 2004-2007. The remaining banks had stronger financials, and contributed to the low loan-to-deposit ratios and high liquidity. An example of a successful privatization can be found in the National Bank of Alexandria, which was sold to Italys Intesa San Paolo in 2006. Private banks in Egypt have shown a clear commitment to improving their infrastructure and focusing efforts on brand development. A number of foreign banks have also bought into Egypts growth story with names such as HSBC, Barclays, Credit Agricole, and Piraeus opening up to the Egyptian public. The liquidity in the financial system will provide the grease for the engine that is the Egyptian economy. Increased competition amongst banks and the high liquidity in the system are upping the pressure on banks to soften credit terms and increase the universe they cover. The increased money supply should stimulate demand within the economy and give industry better access to growth finance. Another area that has shown significant improvement is the insurance sector. Increased competition and forcing insurance companies to provide better coverage, especially to industry, has been a positive change for the sector A more active capital market has also allowed for a larger presence of complex financial structures to allow companies access to better, cheaper sources of funding. We see the solvent financial system as an important component of a growth economy with cheap access to credit, fueling both domestic consumption and industry growth.
Domestic Liquidity
900000 800000 700000 600000 500000 400000 300000 200000 100000 0 2004 2005 2006 2007 2008 2009

LE Million

Domestic Liquidity (1+2)(M2)

Money Supply
200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 2004 2005 2006 2007 2008 2009 Money Supply (1) (M1)

LE Millons

Currency in circulation outside the banking system Demand deposits in local currency

Egypt: A Valued Investment

Access to Energy

Egypt is in the fortunate position of being able to produce oil, natural gas, and hydroelectricity; this allows for providing Egyptian companies with relatively cheaper energy. This diversification in energy sources will contribute to future stability in energy supply as demand increases. The Middle East region was the only region last year to see aboveaverage growth of natural gas consumption. This growth can be attributed to strong domestic consumption among energy-exporting nations and rapidly increasing trade between the Middle East regions. Consumption of natural gas has increased from 13.7bn cubic metres in 98 to 40.9bn for a market share of 1.3% .

Natural Gas Production

Source: U.S. Energy Information Administration,

As Egyptian oil consumption and production have dropped over the last decade, natural gas reserves have grown steadily since the end of Natural gas reserves have the 80s to reach a market share of 1.2% by 2008. 0.33 (trillion cubic grown steadily since the end of the 80s to reach a market metres) to 2.17 (88- 08). share of 1.2% by 2008. The High Dam in Aswan is a main source of hydroelectricity. This dam, which began power generation in 1967, powers twelve generators each rated at 175 megawatts and produces a hydroelectric output of 2.1 gigawatts. When the dam first reached peak output it produced around half of Egypts entire electricity production. Now, Electricity Generation the dam still provides slightly over 12% of energy production after some of the production needs have covered by new thermal plants in Egypt. Egypts warm weather also provide opportunities for companies to take advantage of solar energy and wind generated energy. The access to two seas has also encouraged some international players to experiment with producing energy from Algae and other alternative sources.

The Egyptian government is also embarking on an ambitious plan to produce 20% of Egyptian energy needs from cheap nuclear technology by 2020.

The Egyptian energy sector offers some attractive investment opportunities. The diversification of energy sources and access to cheap energy gives an extra competitive advantage to the Egyptian industry in general.

Source: U.S. Energy Information Administration

Economic Snapshot

Egypt: Growth Industries

Total Domestic Liquidity M2

Money Supply - M1

M0

Money Supply

Overall balance

Capital & Financial Account

Current Account/Nominal GDP

Current Account

Total Imports

Total Exports

Trade Balance

Balance of Payment

Gross External Debt

Gross Domestic Public Debt Government Debt

Overall Fiscal Surplus/(Deficit)

Cash Surplus/(Deficit)

Total Expenditures

Total Revenues and Grants Government Finance

Population

Unemployment

Inflation

Per capita GDP

Real GDP Growth Rate

Real GDP Item

(%)

(%)

(%)

(USD billion)

(USD billion)

(%)

(USD billion)

(USD billion) (USD billion)

(USD billion)

(USD billion)

(EGP billion)

(EGP billion)

(EGP billion)

(EGP billion)

(EGP billion)

(million)

(%)

(YoY %)

(USD)***

(EGP billion) (%) Unit

2008/2009

1,793.20 288.55 356.94 755.30 25.16 2.28 31.53 76.80 9.96 9.40

796.84 4.65

2009/2010

1,861.09 303.36 77.80 10.70 8.96

837.77 5.14

(72.38)

(68.39)

396.77 888.66 23.88 3.35 8.33 33.64

(93.41) (98.89)

(50.33) (3.39) 8.40 3.10 7.30 (2.30) (4.43)

(25.18)

(48.99) (2.00) (4.31)

(25.12)

10.40

17.00

16.00

Egypt: Growth Industries

Perhaps the biggest risk to Egypt at the moment is potentially high inflation rates driven from the international commodity markets and a weakening currency; this is mainly due to a widening current account deposit.

Inflation

Inflation in Egypt was little changed in October 2010, giving the central bank room to keep its benchmark interest rate at a four-year low to support economic growth. The urban inflation rate, the main indicator monitored by the central bank, slightly rose to an annual 10.97% from 10.91% in August, according to the website of the Cairo-based Central Agency for Public Mobilization and Statistics (CAPMAS). The CPI climbed by 1.37% in Oct 2010 compared with last month on the same year on the monthly basis. Starting from Sep 2010, the CAPMAS will begin to publish the 9th series of the consumer price index which is based on the 2008/2009 Household, Income, Expenditure and Consumption (HIEC) Survey, to replace the 8th series which was based on the 2004/2005 HIEC survey. The new series covers 964 goods and services, which represent an addition of 138 goods and services over the 8th series. We believe that, in the meeting to be held on Dec. 16th, the CBE will keep the interest rate unchanged to support the economic growth rate. Egypts economy, driven by tourism, manufacturing and construction expanded at a 5.14% annual rate in FY09/10. Growth is still below the average of 7% achieved in the three fiscal years through June 2008.
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Oct-09 Dec-09
CPI YoY

CPI Items Movements

13.27

13.61

12.76 13.25 13.28 12.22 11.33 10.52 10.70 10.70 10.88 10.91 10.97

Food & Non ALcoholi Beverages Tobacco Clothing & Footwear Housing,Water,Elec.,Gas,Fuel Furniture & Equipments Health

Transport Communication Recreation & Culture Education Hotels,Cafes Restaurants Miscellaneous -5.00% 0.00% Sep-10 Oct-10 5.00% 10.00% 15.00% 20.00%

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Overnight Deposit Rate

Overnight Lending Rate

The New CPI Basket

Item Food & non-alcoholic beverages Housing, water, electricity, gas and other fuel Clothing & footwear Transportation Education Health Previous Weight(%) 43.90 7.90 5.20 4.40 13.50 4.20 New Weight(%) 39.92 2.19 5.41 3.77 Diff. -3.98

Domestic Price Indicators

Furnishings, household equipment and routine maintenance of the house Communications Tobacco Total Restaurants, cafes & hotels Recreation & culture

18.37 6.33 5.68

-11.31 -2.49 2.13 13.17 -0.63 1.48

Miscellaneous goods and services

4.20

3.60

3.60

3.60 100

3.40

3.12

2.50

2.43

4.63 100

4.43

-0.48 1.03 1.03 1.23

3.73

-1.17

What are the key weight changes in the 2008/2009 CPI basket? The 2008/2009 consumer basket shows a decline in the weight of food and beverage item from 43.90% to 39.92% and Housing, water, electricity, gas and other fuel item from 13.50% to 2.19%. Meanwhile, there was an increase in the weight Transportation item compared to the 2004/2005 basket. This explains the slight movement in the CPI index in September. We expect the annual change in headline inflation to hit 12.20% within the next two months of this year, driven by an increase of commodities prices worldwide specifically sugar and wheat prices.
10

References: CBE , CAPMAS , IDSC , Reuters.USD= 5.7840 EGP

Egypt: Growth Industries

Telecoms Telecoms in Egypt have been doing particularly over the last decade. Public and private investments in improving the technology infrastructure are paying off. The country boasted 5.9 million new mobile subscribers in the first half of 2009, with internet subscribers increasing by more than twofold during the same period. The country has become a hub for outsourcing and improving telecoms outreach and internet access in a fast-growing market. Mobinil and Vodafone are the leading mobile operators in Egypt, both of which held control of the entire market until the introduction of Etisalat Misr in 2007. The low level of market penetration rate, especially in rural areas, speaks to the opportunity for quite a bit of growth; along with this are increased opportunities in 3rd generation & smart phone services. Internet banking may also be an increased opportunity for the sector. ARPU remains higher than the rest of Africa and comparable to the rest of the Middle East.

Growth Industries

As for the fixed-line market, Telecom Egypt still dominates as the only land line provider as of today. Unfortunately, this market lost 1.9 million subscribers in 2009, most likely caused by the growing mobile market. As a whole, the fixed-line market is still healthy, but does not allow for competition from alternative operators as of today. Since Telecom Egypts initial public offering in 2005, 20% of its shares have been free float. In early March 2010, Communications Minister Tarek Kamel announced a possible sale of new stake in Telecom Egypt within the next two years. It is expected that the government may also issue a second fixed-line license within the next five years. The government has also allowed bids on limited licenses within gated communities as a first step. Broadband internet service is a growing sector with a penetration rate of just 1.2%. This is expected to more than double in the next three years. Telecom Egypts services are increasing in market share, using ADSL as the primary form of internet service. In the future, more competition in this market may drive down prices and fuel growth in the broadband sector. Internet penetration is still lower in rural areas than in urban areas; government programmes such as a computer for every household may help solve this and increase the level of penetration. Overall, the sector provides for relatively stable cash flows, even if with limited growth compared to previous years.

Electronics, Domestic Appliances and Fast-Moving Consumer Goods Consumer electronics is a rising market with major growth potential in Egypt. Because of the youth and expansion of the population, the demand for electronics will continue to rise. The leading products in the consumer electronics market include mobile handsets, computers, and AV devices. Worth approximately US$2.65bn in 2008, this market is forecasted to grow to US$4.63bn by 2013. The same factors apply to the domestic appliance market. As the young Egyptian population matures and moves into larger homes, they will increase the demand for long-lasting household items such as washing machines, heating units, and refrigeration equipment. In 2007 the white goods market stood at 5.3 billion with a 14% CAGR. The industry also gets government subsidies for exports.

The fast-moving consumer goods market also benefits from the rising population number. Complementing this factor is a reduction in import taxes, which not only diminishes the burden on manufactures but makes it easier for them to bring new, affordable products to market. Still, a considerable challenge to this industry lies in Egypts inhibitive regulatory environment as well as tariffs that act as a barrier to entry to international brands. Still, the future looks promising as food consumption is expected to rise, and plenty of room exists for development in the consumer goods market.
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Banking and Financial Services

Egypt: Growth Industries

Banking in Egypt presents an impressive growth opportunity. While considered a large sector, there is a largely untapped pool of resources in the middle-class retail community and the small and micro enterprises. An effort by the government has resulted in the gradual privatisation of the banking system in Egypt. These private banks are focusing more heavily on marketing efforts, branding, and improving banking operations; these changes in the sector are attractive to foreign investors and favourable to new banking customers in Egypt. Foreign investors have the ability to inject capital into the newly reformed banking sector. As privatisation increases and improvements continue, foreign investments will increase as well.

Egypts high liquidity levels helped the country to weather the recent financial crisis, allowing to fare rather well compared to its global counterparts.

Several opportunities exist for the banking sector in Egypt. First, Egyptian banks have one of the lowest loan-to-deposit ratio, giving fuel to fund the growing economy. Second, banks in Egypt were acting only as loan and deposit institutions, hence expansion in fee-based value added services is still a big opportunity. Third, the young population will gradually mature and find the need for personal banking, loans, and investment services from Egyptian banks. Third, as smaller banks are consolidated and larger, wellregulated banks remain, the sector as a whole will continue to improve. Lastly, SMEs, which account for approximately 80% of the Egyptian private sector, have a need for banking services. As the economy continues to open up, there will be a demand for more sophisticated services. Return on Equity is also considered high compared to global and regional peers, currently above 22% on average. The Egyptian banking sector seems to hold one of the golden keys to the growth of the economy, with high potential growth rates, higher than average ROEs, high liquidity, and ample investment opportunities to fuel its imminent growth.

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Egypt: Growth Industries

Middle Income Real Estate The relatively expanding young population and middle class is giving rise to more demand on middle income real estate. More young people means more houses in demand. Currently, there is a large oversupply of upper-end housing in Egypt, while the low-end housing market is undersupplied by 40,000 units per year. This gap in middle-class demand and supply is expected to be an opportunity for companies working on this sector for years to come. By 2025 urban dwellers are expected to reach 83%- 79 million people. To accommodate this demand, the government plans to increase the number of cities in Egypt from 17 to 59 by the end of 2017. Right now, home sales are still considered to be volatile in the aftermath of the global crisis. Some development companies are seeking alternative investments, such as those in hospitality projects, to insure a steadier income. However, the long-term potential for the residential housing market is huge. In January 2010, the government introduced a new stimulus package, which included EGP 300 million (US$55 million) for housing projects and EGP 500 million (US$91.65 million) for developing land near suburban areas.
1.3

The current state of the real estate industry holds potential for companies targeting this sector and their feeding industries. Contribution to GDP (%) Autos In regards to size of industry, Egypt comes in at seventh in the region, with great growth potential. The government has been working to reduce the tariff barriers and modernize the market, as to allow the industry to expand more freely.
1.25 1.2 1.15 1.1 1.05 1 0.95 2007 2008e 2009f 2010f 2011f 2012f 2013f

With only a handful of local Egyptian auto brands, there are many opportunities for new manufacturers to enter the market. While further trade liberalisation is needed, Egypt has been moving in the right direction. In the future, high sales tax and affordability for consumers will be key obstacles to overcome in the auto industry. However, as Total Sales (US$bn) the young population matures, they will be a contributing factor in 25 the increased demand for automobiles. Furthermore, while sales 20 taxes may be high for local autos, the extra costs of importing a 15 vehicle can cost nearly twice as much as the price of the product 10 itself, making Egyptian cars more affordable to the middle class. 5
Source: BMI Egypt Autos Report Q4,
0

2007 2008e 2009f 2010f 2011f 2012f 2013f After a difficult first half of 2009 (following the economic crisis), the Egyptian auto industry is forecasted to perform well over the next several years, experiencing a steady increase in sales and benefitting from additional changes to the external trade tariff structure along with an increase in consumer demand.

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Egypt: Growth Industries

Agriculture Agriculture in Egypt faces several challenges. As it regains strength following the global recession, it will have to face a rapidly growing population and a shortage of domestic water. Water use per capita is below the poverty level of 1,000 cubic metres, at 800 cubic metres. Unfortunately, farming will have to compete with the dayto-day water needs from households.

3000 2500 2000 1500 1000 500 0 Sugar production Sugar consumption

In the face of these challenges, the government is working to improve productivity and increase levels of production in Egyptian agriculture. One of the governments strategies has been to sell state-owned enterprises to private companies. While certain subsidies remain, such as those meant to allow the poor to obtain grains at lower prices, there has been some progress in privatization that has helped to increase FDI flows in recent years. At the same time, young Egyptian graduates have been increasingly attracted to the farming industry thanks to new low-interest-loans and free animals as an incentive to begin working in the agricultural sector.

Source: BMI Egypt Agribusiness Report Q4

2003 2004 2005 2006 2007 2008 2009

6000 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 2010f Exports Imports

Source: BMI Egypt Agribusiness Report Q4

Cotton, while its export potential wanes slightly, is still a main output in Egypt. Sugar showed the strongest output growth in 2009, and consumption of beef, rice, and milk is expected to grow at a doubledigit rate over the next several years. Poultry will remain the leader in livestock production, thanks to a steady domestic demand, with a growth rate of 2.01% projected over the next five years. Wheat and corn supply will continue to be largely imported from Russia, the United States, and Australia. In the fertiliser sector, demand is expected to increase in 2010 due to population growth and the predicted turnaround of the 2009 food deficit. Additionally, the government, beginning in March 2010, lifted the ban on trading N fertilisers in the private sector.

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2003 2004 2005 2006 2007 2008 2009 Wheat production Wheat consumption

Source: BMI Egypt Agribusiness Report Q4

12000 10000 8000 6000 4000 2000 0 Corn production Corn consumption

Source: BMI Egypt Agribusiness Report Q4

2003 2004 2005 2006 2007 2008 2009

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Egypt: Growth Industries

Infrastructure The Egyptian government has announced three stimulus packages since July 2008: EGP15bn, EGP8bn, and EGP11bn in January 2010. These have especially contributed to infrastructure and construction projects, as well as the utilities sector. Egypts Minister for Investment, Dr. Mahmoud Mohieldin, began a program worth EGP82bn with the goal of enhancing the countrys infrastructure. This project totals 47 projects awarded in the next year, equaling three times the value of contracts awarded in Egypt in 2009. As these efforts boost the construction industry, they are anticipated to create jobs and increase consumer spending as well. Egypt has an electrification rate of 98% with a fairly extensive electricity grid. The country plans US$20bn in additional power stations in the next 5 years. The countrys road and rail system also needs significant upgrades. It links the main towns on the Nile basin, from Aswan to Alexandria. It also connects Ain Sokna and Safaga on the Red Sea Coast. The capital also has an underground system with two lines totaling 44 km across 54 stations. A third line currently is being built.

As the aviation industry grows strongly, Egypts government has initiated large upgrades and renovations at several airports, which will contribute to tourism growth in the future along with having a positive effect on air cargo. The country currently has 85 airports in total with 71 having paved runways.

All of this speaks of tremendous opportunities for companies working in this sector. Egypt may also be used as a launching pad for companies who want to target infrastructure-related development in neighbouring countries. The regions budgets are targeted more and more often to improving an infrastructure that can currently no longer serve its population and development needs.

15

Egypt: Growth Industries

Logistics The freight and shipping sector in Egypt has endured a tough economic period recently. The Suez Canal, a main waterway that generates nearly US$3bn in annual revenues for the country, experienced a drop in transit of 18% YoY in July of 2009, with revenue falling 22% in the same time period. Nevertheless, the Suez Canal is a highly important generator of hard currency in Egypt. It provides an alternative route to the high-cost journey around the southern tip of Africa, and will continue to be a globally significant waterway in the years to come. Still, moderate growth in the sector overall is expected over the next five years. An important development to keep an eye on is the investment of Citadel Capital in Nile freight transport; the investment firm has created two companies, the National River Transport Company and the National River Port Management Company, to focus on the underutilised Nile transport opportunities. As of now, shipping over the Nile only makes up 1% of total freight transportation in Egypt, but this is likely to grow as their fleet of barges increases in number and begin operation.

Expected growth 2009-2013

0.0% 1.0% 2.0% 3.0% 4.0%

5.0%

6.0%

7.0%

Pipeline Air freight Inland water transport Road freight Sea cargo Rail freight

An important contributor to Egypts infrastructure is the Suez Canal, which generates nearly US$3bn in annual revenues for the country and is expected to maintain moderate growth over the next five years in spite of a recent slowdown in shipping over the waterway. It accounts for approximately 7.5% of world sea trade today. Another important asset is Port Said, a harbour for exports and fuelling station. Global economists are yet uncertain as to how the port will recover from negative effects of the economic crisis; still some promising signs exist. The port increased its container volumes by 11% in 2009, and in March 2010 signed a concession for a new liquid bulk terminal worth EGP3.2bn.
Source: BMI Egypt Freight Transport Report Q4

In 2004, the Egyptian government announced important changes to the tariff system. The weighted average tariff rate dropped 14.6% to 9.1%, with significant cuts to some of the tariff bands. A number of import fees have been dismissed and several free trade agreements have been given a renewed amount of attention, such as COMESA and GAFTA. Prime Minister Nazif is interested in signing a free trade agreement with the United States in an attempt to add several percentage points to the GDP, but this development may have to wait. The US ambassador to Egypt, Margaret Scobey, has stated that it is not on the U.S. agenda in the near future. Building Materials (Cement, Steel, & Paint) The building materials market in Egypt is poised for an interesting move. Because of the increased government spending on infrastructure, cement, ceramic, porcelain, paint, and other materials are expected to see an increase in demand.

Steel is also on the rise, with consumption is expected to grow by 8-10 percent in the MENA region in 2010 and rebar prices rising as the housing market picks up. Ezz Steel has stated, during a recent conference, that the output of finished products in Egypt is expected to exceed 9.5 million tonnes during 2010. Previous exports of cement from Egypt will slow due to internal demand. Though there are plenty of vacant upper-income housing units, the demand from the middle class for new housing is palpable. The market will continue to improve as the economy recovers, creating a larger demand for construction materials over the next several years. Currently, there are eight new cement licenses up for bid. Cement has seen its consumption double since the beginning of 2009, and 12 new production lines are currently in the process of approval.
16

Because of the higher demand for building materials, prices are expected to rise. Margins and sales of companies operating in this sector are also expected to rise with a CAGR estimated at 9% going forward.

Egypt: Growth Industries

Tourism The Egyptian tourism industry accounts for approximately 5% of the GDP. The country makes up over 8% of the MENA regions total tourism market. Tourist arrivals are expected to experience an average of a 9.25% yoy increase over the next four years. The aviation industry in Egypt has grown strongly in the last several years, initiating large upgrade and renovation programs for several of its airports, and the government is feeling pressure to liberalise the commercial airlines sector, which would contribute to tourism growth down the line.

Recent challenges include H1N1, economic crisis, a downturn characterized by a 9.5% decline in YoY tourist revenue in the first half of 2009. Still, it was an improvement from the first quarter of 09, in which revenues were 17% down from previous year. Additionally, the swine flu scare seems to be fading as media coverage dwindles and the number of incoming tourists begins to rise.
Arrivals Data, 2005-2009 ('000)
14,000 12,000 10,000
('000)

8,000 6,000 4,000 2,000 0 2005 2006 2007 2008 2009

Arrivals Tourists

Source: BMI Egypt Tourism Report Q4

Hotel and resort construction remains strong, especially in cities on the coast. The Egyptian Tourism Development Authority is pushing a strategy of clustering hotels in coastal tourist areas in an effort to expand foreign tourism from the Nile Valley to the Egyptian coast, and a steady stream of new hospitality projects are slated for the next several years.

Slow growth in 2010 and strong growth in 2011 is forecasted for the tourism industry in Egypt. The Egyptian pound remained relatively week through 2009, making the country an attractive destination for tourists with stronger currencies such as the Euro or US dollar. The pound is likely to gain only slight strength in 2010, forecasted at 5.3 to the US dollar.

Egypts tourism industry benefits from its location, history, and affordibility. Its wide range of tourism options range from Pharonic, Roman, Greek, Coptic, and Islamic monuments to adventure activities gives Egypt great potential in the tourism sector, much of which remains unexplored.

17

Egypt: Emerging Opportunities

The Egyptian stock market was one of the worst performing markets in 2008 declining from a high of 12039.19 in April 2008 to a low of 3686 in November of 2008 representing almost a 70% percent drop from its highs. The market has since rebounded strongly owing to the strong fundamentals of the economy and Egyptian companies almost doubling in 2009 and closing at 6208. This sharp rise and the subsequent rise to current levels above 7500 have given investors; especially institutions the push to regain positions into this market. Market structure is changing with more and more companies qualifying for coverage by major funds and brokerage houses worldwide. This should increase liquidity in the local market even further. Volumes in the local market should continue to increase as more and more companies get listed. Market regulation and transparency requirements have also made this market one of the most appealing markets in the region for foreign investors.

Egyptian Stock Market Overview

The APER of our covered universe is currently at 10.4 and expected 9.65, which is comparable to regional peers, however growth levels are expected to be much higher giving much more favourable PEG ratios to regional peers. Going into the future we continue to view the Egyptian market is one of the best performing markets in the region.

Comparison of World Markets to Egypt

-Egypt -United States -Abu Dhabi -Dubai -Kuwait -Saudi Arabia

.QSI

.TASI

.KWSE

.DFMGI

.ADI

.GSPC

EGX 30 Index

6959.17

6121.76

7005.30

1803.58

2743.61

1115.10

6208.77

Pr. Year Close

8475

6400

6865.40

1687.92

2745.58

1224.71

6750

Current

21.78%

4.55%

-2.0%

-6.41%

0.07%

9.83%

8.72%

YTD%

18

Egypt: A Valued Investment

Stocks to Watch

Arab Cotton Ginning (ACG) ACG performed greatly better in the first quarter in 2010/2011 compared to the first quarter in 2009/2010. Revenues increased by 77% and the GP increased by 167%. Net profit reached around EGP14 million compared to less than 2 million in the previous quarter. ACG performance has been improving in the last years and the trend is expected to continue. Dividend distribution for the last financial year has reached EGP0.95 and the company said it will maintain or even increase its distributions in the future.

Ismailia Misr Poultry The company is starting to reap the fruits of its efforts in 2009. During the previous year the company, under its new management, undertook a total restructuring, including operational and financial. As a result the growth in the company performance was outstanding causing revenues to double and GP to more than quadraple. Net profit increased from EGP1.78 million to EGP27.74 million. And we still believe that the stock may grow more as the real estate activity also start to add to the company and as the poultry continue its growth as planned. Namaa Real Estate Development Namaa net profit in the 9M period of 2010 almost tripled reaching EGP21.31 million compared to EGP7.31 million. GP aalso grew by 204% as the top line increased by 157%. Namaa also has projects in New Cairo and in other areas with commercial and managerial focus that are expected to give the company a huge push upwards in the future.

National Company for Maize Products (NCMP) NCMP revenue and net profit grew by 6% and 7% respectively. Although not impressive as the other companies mentioned above, The company announced recently that its new production line will start operation and is expected to yield EGP100 million annually. For more details please check our trade note about the company.

Ezz Steel ES & Al-Ezz Al-Dekheila (EZDK) Steel industry was one of the most suffering during the crisis, but this is starting to change. Although still demand has not picked up in 2010 as was expected it is certainly improving compared to 2009 and the end of 2008. Steel prices has recently reached EGP4,000. All this has been reflected on the results of ES and EZDK as both of the companies has witnessed a huge growth in their performance. Consolidated revenues increased by 23% and 31% for ES and EZDK respectively, while the net profit increased to EGP242 million and EGP559 million respectively. It is worth mentioning that the comparable periods results were EGP29 million only for the first and EGP367 million for the latter. For more details please check our initiation of coverage reports on ES and EZDK.
19

El Sewedy Electric El Sewedy continued its growth, increasing its net profit by 30% from EGP560 million to EGP727 million. This is also a result of a 35% increase in net revenues which reached around EGP9.21 billions during the first 9M of 2010. For more details about our view on El Sewdy please check our initiation of coverage report about the company.

94 Tahrir Street - Maghraby Plaza - Dokki, Giza, Egypt Tel: (202) 37493443 (202) 37494302 (202) 37494305 Fax: (202) 37493373 (202) 37494552 Email: info@at-financial.com www.at-brokerage.com