real estate companies uae global inv june 2011

Global Research

Sector – Real Estate

Equities - UAE

June 22, 2011

UAE Real Estate Sector

Debt burden an overhang for economic growth in the medium term

Pressure on property prices persistent through to end of 2012

Prefer Emaar and Sorouh over Aldar on liquidity and near term earnings

Strong Buy – Emaar, Hold – Aldar, Buy – Sorouh

Debt burden an overhang for economic growth in the medium term The debt burden on Dubai government and its GREs is a key overhang to economic growth, in our

view. Total Dubai related debt is estimated at USD113 billion, equivalent to 37.3% of the UAE 2010

GDP. Despite the several successful rounds of debt restructuring by Dubai GREs, the large debt

burden still proposes challenges given exposure of the banking sector to the troubled real estate

GREs. However, markets appear to have priced in short term factors with the appetite for Dubai risk

growing given the continuous improvements in Dubai CDS, currently at 332 bps, the lowest level

since November 2009 driven by solid evidence that Dubai is well positioned as the region’s safe

haven during the recent political tensions.

Pressure on Dubai & Abu Dhabi property prices persistent through to 2012 Dubai residential selling prices have dropped almost 56% from their peak in 4Q08 until 1Q11 while

those of Abu Dhabi lost 45% over the same period. We estimate a current vacancy rate of 30% in

Dubai and 3% in Abu Dhabi. The figure for the latter is subject to significant increase in the coming

2.5 years given the influx of 65,000 units in the residential market. We forecast another drop of 10%

to take place through to the end of 2012 in Dubai and a 15-20% decline in Abu Dhabi.

We prefer Emaar and Sorouh on better liquidity profile and near term earnings

Of the three big real estate names in the UAE property sector, Emaar is our favorite pick on

sustainable earnings from its high quality retail and hospitality portfolio and the contributions from

international operations over the next three years. We also like its stable debt profile after the new

bond issuance. In Abu Dhabi, we prefer Sorouh over Aldar for its near term earnings on 2011

deliveries along with its relaxed debt profile. We like Sorouh’s growing investment portfolio although

it remains of smaller size and lower quality compared to those of Emaar and Aldar. For Aldar, the

restructuring plan has provided the needed short term lifeline at the expense of high dilution and a

weakened recurring future earnings portfolio. We also believe that Aldar’s earnings will be whipped

out, to a large extent, by the high debt service expense.

Initiate coverage on UAE real estate Initiate coverage on the three largest UAE real estate listed stocks. We initiate on Emaar with a

target price of AED3.91/share and a STRONG BUY recommendation, Aldar with target price of

AED1.51/share and a HOLD recommendation and Sorouh with a target price of AED1.52/share and

a BUY recommendation.

Global Research - UAE Real Estate

Company CMP Mkt. Cap P/E P/B ROE Target Upside Rating

AED (AED mn) 2011e 2011e 2011e Price Potential

Emaar 3.15 19,187 11.2 0.6 5.0 3.91 24% STRONG BUY

Aldar 1.37 3,948 8.4 0.6 4.3 1.51 10% Hold

Sorouh 1.34 3,518 5.9 0.5 9.0 1.52 13% Buy

Source: Bloomberg, Global Research

UA

E R

eal E

sta

te

Faisal Hasan, CFA

Head of Research [email protected] Tel: (965) 2295-1270 Mostafa El-Maghraby

Senior Financial Analyst [email protected] Tel: (965) 2295-1279 Global Investment House www.globalinv.net

Global Research - UAE Real Estate Sector

June 2011 2

Valuation & Recommendation

Valuation Methodology

For arriving at the fair value targets for listed UAE real estate developers, we utilize a Sum Of The Parts (SOTP) approach by

valuing each project separately. We apply a one stage DCF valuation methodology for development sales projects over the

project life given management guidance and our judgment of delivery dates and selling prices. For DCF based valuations, we

use the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity of each company and adjust the WACC to the upside

based on our projections for the degree of riskiness of each project. We value the hospitality segment using a two stage DCF

approach with inputs on ADRs and occupancy rates being driven from market data and forecasted in line with long term trends.

For investment properties related valuations, we value retail properties utilizing a capitalization rate for the current year net

operating income or for the second operating year for properties under construction. We apply a two stage DCF for commercial

and residential properties held for investment. For all three companies, we exclude land from the valuation given our negative

views on the market and the difficulty to unlock land value in the near term.

Emaar Properties

Emaar has an exceptionally well performing operational investment portfolio comprising 5.28 million sqf of GLA of high end malls

and retail outlets that run high occupancy rates on long term contracts. The retail segment realizes high margins hovering around

80% with revenues growing from AED499 million in 2008 to AED1.9 billion in 2010, a level we see sustainable in the future given

low maintenance capex requirements and operational expenses. The hospitality segment is also well performing given the high

profile of Emaar’s hotels and Dubai’s tourism attractions, especially on the back of the recent regional political troubles.

Moreover, International operations will pick up pace and contribute an expected AED11.1 billion to revenues between 2011 and

2014 mitigating the phase out from Dubai sales. The current share price of AED3.15 implies that investors are ignoring the

combined value of UAE development sales and International operations and only factoring in the value of the retail and hospitality

segments. We value Emaar at AED3.91/share, which implies an upside potential of 24% from the current market price of

AED3.15/share and initiate with a STRONG BUY.

Aldar Properties

In our view, the restructuring plan that Aldar undertook in January 2011 to reschedule its maturing loans saved the company from

an imminent bankruptcy and rounds of settlement with debtors, which would impair management ability to proceed with

scheduled projects as planned. Further, the impairment charges have cleaned up the asset base positioning the company at a

better starting point. However, we are skeptical on Aldar’s ability to meet its high debt and capex requirements given its current

project profile. We are also not proponents of the continuing process of operating asset transfers to the government at low

margins after the company incurs the time and cash investment. We believe 2013 will conclude revenues from Aldar’s

development sales backlog, assuming no delays. This fall will not be mitigated by the growing recurring income, which accounts

to only 36% of our aggregate four year revenues. We also believe that earnings and cash flow will be under attack from the hefty

debt service costs, which we forecast at an aggregate AED1.7 billion between 2011 and 2014. Our SOTP valuation of Aldar

Properties yields a fair value target of AED1.51/share implying an upside potential of 10% from the current market price. We

initiate coverage with a HOLD recommendation on the stock.

Sorouh Real Estate

Sorouh property sales will witness high activity through to 2013 as the delivery of units across its various projects materialize. In

2011, we see complete sales from the completed towers of Shams Abu Dhabi while deliveries from Al Ghadeer and the Gate

residential towers will contribute to the top line towards the end of 2012 and into 2013. We like Sorouh’s growing investment

portfolio with its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of concerns

over the downwards trending yield. The size and quality of Sorouh’s investment portfolio remain on the weak side when

compared to those of Emaar and Aldar. Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010

through which it raised AED2.7 billion four-year loan facility repayable over a period of 48 months starting September 2012 after a

grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash

from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which

should ease any pressures on debt repayments going forward. Our valuation for Sorouh yields a fair value target price of

AED1.52/share implying an upside potential of 13% over the current market price. Accordingly, we initiate coverage with a BUY

recommendation.

Global Research – UAE Real Estate Sector

June 2011 2

MENA Real Estate Listed Equities Multiples

Ticker Security P/E P/B P/S EV/EBITDA

United Arab Emirates

EMAAR UH Equity Emaar Properties PJSC 9.4 0.6 1.7 7.8

ALDAR UH Equity Aldar Properties PJSC na 0.9 1.6 na

SOROUH UH Equity Sorouh Real Estate Co na 0.6 2.7 12.3

DEYAAR UH Equity Deyaar Development na 0.4 0.7 na

UPP UH Equity Union Properties PJSC Na 0.4 0.4 12.6

RAKPROP UH Equity RAK Properties PJSC 4.2 0.2 2.0 3.8

Average

6.8 0.5 1.5 9.1

Saudi Arabia

ALARKAN AB Equity Dar Al Arkan Real Estate Development 5.8 0.6 2.2 9.7

EMAAR AB Equity Emaar Economic City na 0.8 64.4 na

MCDCO AB Equity Makkah Construction and Development 17.9 1.5 46.7 na

SRECO AB Equity Saudi Real Estate Co 15.6 0.9 6.3 10.7

REDSEA AB Equity Red Sea Housing Services Co 22.1 2.1 1.9 12.5

ADCO AB Equity Arriyadh Development Co 14.3 1.0 8.2 9.9

Average

15.1 1.1 21.6 10.7

Kuwait

ALTIJARI KK Equity Commercial Real Estate Co 31.4 0.5 7.2 20.3

URC KK Equity United Real Estate Co 18.3 0.6 3.2 21.4

SRE KK Equity Salhia Real Estate Co KSC 9.9 0.8 1.7 5.9

TAMEERK KK Equity Tameer Real Estate Invest 8.3 0.5 2.9 15.7

MABANEE KK Equity Mabanee Company SAKO 25.0 3.7 18.2 23.4

Average

18.6 1.2 6.6 17.3

Egypt

OCDI EY Equity Six of October Development 18.1 1.1 3.3 8.3

TMGH EY Equity Talaat Moustafa Group 13.0 0.4 2.0 12.9

PHDC EY Equity Palm Hills Developments SAE 6.2 0.6 1.3 7.2

MNHD EY Equity Medinet Nasr Housing 32.1 8.4 4.2 23.7

HELI EY Equity Heliopolis Housing 14.8 6.4 7.0 13.1

ZMID EY Equity Zahraa El Maadi Investment & Dev. 5.5 2.6 4.5 4.8

Average

24.0 2.7 7.8 15.7

Morocco

ADH MC Equity Douja Promotion Groupe 18.6 3.3 4.1 15.9

CGI MC Equity Cie Generale Immobiliere 66.1 5.8 11.6 54.4

ADI MC Equity Alliances Development 19.0 3.0 2.4 17.8

Average

34.5 4.0 6.0 29.4

Qatar

BRES QD Equity Barwa Real Estate Co 6.5 1.0 5.7 157.5

UDCD QD Equity United Development Co 5.4 0.7 2.4

Average

5.9 0.9 4.0 157.5

MENA Average

17.5 1.7 7.9 40.0

As of 21 June 2011 Closing

Source: Bloomberg, Global Research


June 2011 4

UAE Economic Profile

UAE’s 2010 real GDP is estimated to have grown by 2.1% after dropping 1.6% in 2009 and is expected to grow by 3.6% in 2011

on higher oil prices and improved economic prospects given the country, and specifically Dubai, being a main beneficiary of the

regional political turmoil. With the exception of the real estate, construction and financial services sectors, most other sectors are

witnessing healthy growth. The UAE’s current account has been realizing comfortable surpluses thanks to contributions from oil

exports.

The debt burden on Dubai government and government related entities (GRE) remains the main overhang to economic growth,

in our view. The IMF estimates total Dubai related debt at USD113 billion, equivalent to 37.3% of the UAE 2010 GDP up from

1.6% of 2007 GDP and expected to grow to 41% of GDP in 2016. Despite the several successful rounds of debt restructuring by

Dubai GREs, the large debt burden still proposes challenges given exposure of the Dubai banking sector to the troubled GREs

specifically the real estate related ones. The aggregate UAE debt due through to the end of 2012 is estimated at USD60 billion

proposing roll-over risks in the short term.

Markets appear to have priced in short term factors with the appetite for Dubai risk growing given the continuous improvements

in Dubai CDS at 332 bps, the lowest level since November 2009 and down 158 bps from the 491 bps level recorded when Dubai

Holding announced it seeks extensions on its maturing debt. We believe the improving appetite for Dubai risk is driven by solid

evidence that Dubai has been the region’s safe haven during the recent political tensions. Moreover, the new USD500 million

EMTN Dubai government program has attracted strong investor interest with the 10-year bonds three times oversubscribed at a

5.59% yield down 1.11% from last year’s 5-year bonds priced at 6.7%. This, however, does not rule out Dubai’s vulnerability to

any short term shocks and its ability to absorb them.

With the exception of the debt exposure of Abu Dhabi’s property sector, the capital’s debt profile appears more relaxed given the

stable oil revenues and inherent sovereign wealth. Abu Dhabi 5-year CDS has been trading at a more stable collar between 64.5

and 165 bps since August 2009 reflecting a more stable macro setting. The Abu Dhabi government has been successful in

interfering as needed to fund its failing GREs as was the situation with Tabreed and Aldar when Mubadala stepped in to save

both companies ahead of bankruptcy.

UAE Gross Public & GREs Debt Profile

Maturing In Total

USD bn 2011 2012 After 2012

Government of Abu Dhabi 0.4 1.3 9.9 11.6

Abu Dhabi GREs 16.6 9.3 66.4 92.4

Total Abu Dhabi 17.1 10.6 76.3 104.0

Percent of Abu Dhabi 2010 GDP 8.9% 5.5%

54.2%

Government of Dubai 5.6 1.6 28.8 36.0

Dubai GREs 10.4 13.6 52.9 76.9

Total Dubai 16 15.2 81.7 112.94

Percent of Dubai & Northern Emirates 2010 GDP 14.5% 13.8%

102.6%

Other Emirates Sovereign 0 0 2.8 2.8

Other Emirates GREs 0.9 0.3 1.2 2.4

Total Other Emirates 0.9 0.3 4 5.2

Federal Government

19.1

Percent of UAE 2010 GDP

6.3

Total UAE 33.1 25.8 158.0 236.1

Percent of UAE 2010 GDP 11.0% 8.5%

78.2%

Source: IMF


June 2011 5

Global GRE Gross Debt as Percent of GDP

Source: IMF

Dubai GREs Debt Maturity Profile

Source: IMF, Bloomberg

Dubai & Abu Dhabi CDS

Source: Bloomberg

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

2

4

6

8

10

12

14

16

18

2011 2012 2013 2014 2015 2016 2017 2018 After 2018

US

D b

n

Non Restructured Restructured

0

200

400

600

800

1,000

Sep-0

8

Nov-0

8

Jan-0

9

Mar-

09

May-0

9

Jul-09

Sep-0

9

Nov-0

9

Jan-1

0

Mar-

10

May-1

0

Jul-10

Sep-1

0

Nov-1

0

Jan-1

1

Mar-

11

May-1

1

Spre

ads b

ps

Dubai Abu Dhabi

Regionalpolitical turmoil

DW standstill announcement

Peak of crisis

DW debt restructuring plan

European crisis


June 2011 6

Demographic Profile

According to the UAE Ministry of Economy (MoE) latest figures, 5 million people resided in the UAE in 2009 of which 82% where

expatriates. Dubai is the most populous emirate with 34% of the aggregate population followed by Abu Dhabi housing 32% and

Sharjah 20% of the total figure. The national population in Abu Dhabi represents 25% of the emirate’s 1.6 million residents as

opposed to only 9% in Dubai providing the capital with more sustainable demand prospects. Although UAE laws allow freehold

ownership of property and long term leasehold for expatriates, we believe that a large share of expatriate demand is driven by

speculation or investment purposes rather than owner occupation and hence, can be easily exhausted and willing to exit the

market at any sign of weakness.

Aggregate UAE population grew 23.4% between 2005 and 2009 according to MoE figures with 2009 witnessing a 6.3% growth

over 2008. Several other statistical services put the absolute aggregate figure and population growth rates at varying numbers.

The EIU Country Report asserts that UAE population decreased by 4.4% in 2009 before an estimated 3% growth in 2010. We

lean towards this view on population growth trend given the 2009 distressed economic environment associated with massive

layoffs and anecdotal evidence from slowing business and traffic across major cities.

During the period 2005-2008, Dubai residential market witnessed large tenant outflows to Sharjah and Ajman due to affordability

constraints. This pattern has been largely reversed after the crash of the Dubai property market made housing accessible to a

larger segment in spite of the persistence of the price discrepancy between both markets, which is justifiable provided Dubai’s

higher quality offering. As of 2H09, the same pattern was established between Dubai and Abu Dhabi as tenants moved to Dubai

and commuted to Abu Dhabi on a daily basis to take advantage of favorable rentals in Dubai. We expect this pattern of pent up

demand to reverse in the future as prices in Abu Dhabi become more affordable creating more demand in the capital and further

pressuring Dubai’s demand prospects downwards.

UAE Population Breakdown by Emirate 2007-2009

Source: Ministry of Economy

UAE National and Expatriate Breakdown 2005-2009

Source: Ministry of Economy

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Abu Dhabi Dubai Sharjah Ras Al Khaimah

Fujairah Ajman Umm Al Quwain

'000

2007 2008 2009

825 839 864 892 923

3,281 3,390 3,624 3,873 4,143

-

1,000

2,000

3,000

4,000

5,000

6,000

2005 2006 2007 2008 2009

'000

National Expatriate


June 2011 7

Dubai & Abu Dhabi Real Estate Market Themes

Residential Market

Dubai residential market currently has an estimated 93,000 vacant units out of a total of 309,000 stock with an additional 60,000

units expected to come in the market through to 2013. The vacancy rate in Abu Dhabi is more contained at an average of 3% out

of the total existing stock of 185,000 units at the end of 2010. Abu Dhabi is expected to see an influx of a fresh 65,000 units

through 2013 representing an addition of 35% over the existing stock.

Dubai Residential Supply 2009-13 Abu Dhabi Residential Supply 2009-13

Source: Jones Lang LaSalle, Global Research Source: Jones Lang LaSalle, Global Research

273309 309

335358

2623

12

0

50

100

150

200

250

300

350

400

2009 2010 2011e 2012e 2013e

'000

Completed New Supply

175 185 185205

230

20

25

20

0

50

100

150

200

250

300

2009 2010 2011e 2012e 2013e'0

00


We estimate that Dubai residential selling prices have dropped almost 55% between the peak of 4Q08 and 4Q10 with average

selling prices dropping to AED1,000/sqf down from AED2,150/sqf in 4Q08. We expect another drop of 5-10% to take place

through to the end of 2012 when new demand enters the market, increasing the rate of absorption, and the pace of new supply

entering the market slows down. Although we see some positive signals in 1Q11 witnessed in increasing sales volume and a

slowdown in the pace of drop in rental and selling prices, we believe this is created by an exceptional wave of tenant and capital

movement of local and foreign investments from Egypt and Bahrain on the current political unrest in the two countries.

Abu Dhabi selling prices have dropped 43% between 4Q08 and 4Q10, according to estimates of industry sources. Although Abu

Dhabi vacancies remain low at a consensus average of only 3% (Reuters Poll April 2011), the overhang of new supply entering

the market along with lower construction and tenant mobilization to Dubai are factors pressuring prices lower. We forecast Abu

Dhabi recovery to span longer than Abu Dhabi due to the lag in the correction move downwards as the supply/demand balance

holds in the short term. We expect a Peak to bottom correction of 55% implying an average selling price of AED1,000/sqf.

Dubai Average Appartment Selling Prices Per Sqf Abu Dhabi Average Appartment Selling Prices Per Sqf

Source: Various Industry Source, Global Research Source: Various Industry Source, Global Research

-30%

-20%

-10%

0%

10%

20%

-

500

1,000

1,500

2,000

2,500

Average Price / sqf (LHS) QoQ Change (RHS)

-15%

-10%

-5%

0%

5%

10%

15%

-

500

1,000

1,500

2,000

2,500

Average Price / sqf (LHS) QoQ Change (RHS)


June 2011 8

Dubai Land Transactions

Source: Dubai Land Department, Global Research

Dubai Land Transactions Value


Dubai Land Implied Value per Transaction



June 2011 9

Rental performance followed a similar pattern with average blended apartment rents falling almost 59% and 48% in Dubai and

Abu Dhabi, respectively from their peak in 4Q08. We estimate the current blended average rent of 1, 2 & 3 bedroom apartments

in Dubai to stand at AED65,000 compared to AED97,000 in Abu Dhabi placing the capital at a 49% premium. The premium is

temporarily justified with the supply surplus/deficit situation that has been in place in both markets since 2009. We expect the gap

to narrow down gradually over the next two years as Dubai rentals bottom out while those of Abu Dhabi continue declining on

increasing vacancy rates. The key risk we see to this assumption is the pace of re-mobilization of Abu Dhabi ex-tenants who

moved to Dubai, mostly during 2010, to benefit from lower rents. We expect this shift to gradually take place smoothing out the

decline process in the capital.

Residential yields in Abu Dhabi have recorded an 18% average premium over those of Dubai between 4Q07 and 4Q10. We

estimate Dubai rental yield have moved down to 6.2% in 4Q10 down from a peak of 7.5% in 2Q09 when selling prices declined at

a faster pace than rents. Abu Dhabi current yield is estimated at 7.7% implying a 25% premium over Dubai yield. This pattern

further justifies our view of additional expected drop in Abu Dhabi rents over the coming two years to eventually converge to the

long term average ahead of narrowing down the historical yield gap. We expect this pressure to unravel as early as 1H11 as new

deliveries in Al Raha Beach and Reem Island take place allowing tenants to upgrade to better quality units at affordable prices.

Dubai Residential Rent Performance Abu Dhabi Residential Rent Performance

Source: Various Industry Sources, Global Research Source: Various Industry Sources, Global Research

Blended Average Rent Dubai & Abu Dhabi Average Rental Yield

Source: Various Industry Source, Global Research Source: Various Industry Source, Global Research

7.37.2 7.3

7.5

7.1

6.7

6.2 6.3

6.5

6.2

8.8 8.7

9.1 9.0

8.7

8.3 8.4

7.9

7.67.7

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Dubai Abu Dhabi

150 155

120113

10797

9078

7265

175

192177

167157

142130

118110

97

0

50

100

150

200

250

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

AE

D '0

00/a

n.

Dubai Abu Dhabi

0

50

100

150

200

250

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

AE

D '0

00/a

n.

1 BR 2 BR 3 BR

0

50

100

150

200

250

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

AE

D '0

00/a

n.

1 BR 2 BR 3 BR


June 2011 10

Office Market

The office market witnessed a more aggressive declining pattern. The average drop in Dubai office selling prices is 58% between

the peak in 4Q08 and the end of 1Q11 with average selling prices dropping from AED2,250/sqf to AED933/sqf during the same

period. We expect pressures on selling prices to persist over the short to medium term as vacancy rates remain high at 40% and

new supply of 19 million sqf, equivalent to 33% of existing supply, enters the market by 2013. We believe asset prices need to

adjust further downwards to generate investor interest in the oversupplied market. We expect a further 10-12% decline in Dubai

office prices from current levels to settle at a blended average selling price of AED830/sqf.

In Abu Dhabi, vacancy rates hover at below 10% of the total existing 24 million sqf. The vacancy rate is expected to increase

significantly as a new 13 million sqf, a 54% addition to existent supply, enters the market between 2011 and 2013. Most of the

new supply entering the market is of grade A, which runs the largest shortage in Abu Dhabi office market as opposed to

abundance in lower grades stock.

Dubai Office Supply 2009-13 Abu Dhabi Office Supply 2009-13


44

56 56

68 72

12

4 3

-

10

20

30

40

50

60

70

80

2009 2010 2011e 2012e 2013e

mn S

qf


20 24 24

29 32

5

3

5

-

5

10

15

20

25

30

35

40

2009 2010 2011e 2012e 2013e

mn

Sq

f


Dubai Office Selling Prices Performance 2006 - 1Q11

Source: ASTECO, Global Research

-62% -64% -56% -55%-52%

-63%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Tecom JLT Dubai Silicon Oasis

DIFC Dubai Investment Park

Business Bay

AE

D / s

qf

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Peak to 1Q11


June 2011 11

Office rents dropped 69% and 45% in Dubai and Abu Dhabi, respectively from the peak in 4Q08 through to 1Q11. Average office

rents in Dubai stand at AED64/sqf/an. with DIFC charging higher rates of AED120-175/sqf/an. Accordingly, we estimate that the

current Dubai office market rental yield hovers at 6.9% with DIFC experiencing the highest yield of 7.4% while offices located in

Business Bay, Tecom and JLT rent for a 6.7% yield. Going forward, we expect prime office rents in areas like DIFC and

Downtown Burj Dubai to diverge downwards closing the gap with other ex-CBD areas, which should be nearing a long term

bottom. A reversal of the declining trend remains out of sight for the next five years, in our view, given the present high vacancy

rates, supply increase and economic conditions.

Abu Dhabi commercial units are currently renting at a 76% premium to that of Dubai at AED113/sqf.an. with an associated yield

of 8.6%. Abu Dhabi rents have outperformed their respective Dubai ones down only 44% from their peak of AED200/sqf/an. in

4Q08 supported by the supply shortage, which granted higher rents over the past two years. We expect the decline in Abu Dhabi

rents to speed up in the coming two years as the new grade A supply enters the market accelerating the vacancy rates of grades

B and C and eventually pressuring grade A rents downwards.

Average Dubai Office Rent Performance Average Abu Dhabi Office Rent Performance

Source: Various Industry Sources, Global Research Source: Various Industry Sources, Global Research

204

182

149

125113

9891

8273

64

0

50

100

150

200

250

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

AE

D/S

qf/

an.

200

174 168155 150

143 139 135124

113

0

50

100

150

200

250

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

AE

D/S

qf/

an.


June 2011 12

Retail Market

Dubai retail outlets are mostly of high quality attracting global brands and, in turn, positioning the city as the regional retail hub.

Offered GLA stands at 26 million sqf as of the end of 2010 and is expected to increase to 31.3 million sqf in 2013 via the addition

of several small retail centers in 2011 ahead of the opening of mall of Arabia in 2013, which will add 3.8 million sqf of retail space.

Available retail space per person is significantly high at 15sqf/person compared to 9.7 in Abu Dhabi, 11.3 in USA and 2.7 across

European countries.

In line with the declining trend in the Dubai real estate market, average retail rents have dropped 47% to AED193/sqf/an. in 4Q10

from AED366/sqf/an. in 1Q09 reflecting the oversupply situation and high vacancy rates of 15-30%. We expect Dubai retail rentals

to bottom out in 2011 on the lack of new supply of high end retail space. We remain doubtful, however, on the capacity of an

upside move before 2014 given the existent undersupply situation and a decline in footfall from Abu Dhabi shoppers as new high

end retail space enters the capital’s market.

Abu Dhabi retail space is of lower quality and is short in luxury space of regional and super regional malls. Current available GLA

stands at 16 million sqf expected to increase to 19 million sqf in 2011 on the opening of 6 new malls. Abu Dhabi vacancy stands at

only 5% but is expected to increase significantly over the next 3 years as available GLA increases 40% to 23 million sqf. Retail

rents remained constant over the past 6 quarters due to undersupply but we also expected them to drop going forward.

Dubai Retail Supply 2009-13 Abu Dhabi Retail Supply 2009-13


Dubai Average Retail Rent Abu Dhabi Prime Rent


2426 26

27.5 27.51.5

3.8

0

5

10

15

20

25

30

35

2009 2010 2011e 2012e 2013e

mn S

qf


1516 16

19

22

3

3

1

0

5

10

15

20

25

2009 2010 2011e 2012e 2013e

mn S

qf


366344

303

264

232

205 205193

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

0

50

100

150

200

250

300

350

400

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

AE

D/S

qf/

an.

Average Rent (LHS) QoQ Change (RHS)

294

279

255 255 255 255 255 255

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

230

240

250

260

270

280

290

300

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

AE

D/S

qf.

/an.

Average Rent (LHS) QoQ Change (RHS)


June 2011 13

Hospitality Market

As of 1Q11, Dubai had a total of 51,200 hotel rooms operating while Abu Dhabi had 10,150 rooms. New supply entering both markets will encumber improvements in hotel occupancy rates and ADRs in spite of the growing number of tourist arrivals and hotel overnight stays. Hotel occupancy rates stood at 70% in Dubai and 66% in Abu Dhabi during 2010 before leaping further to 82% and 74% in 1Q11 due to tourism diversion to the UAE on the back of the regional political unrest affecting almost all Dubai’s tourism rivals. Performance of the hospitality segment softened in 2009 on new supply of hotel rooms entering the market coupled with slowing tourist arrivals over the year. In 2010, tourist arrivals recovered in the two major markets as Dubai hotel guests increased 10% to 8.7 million while Abu Dhabi saw 18% growth over 2009 to 1.8 million guests. Occupancy rates in Dubai appear to have bottomed out in 2009 at 74% while ADR continue to witness minor declines on the back of new supply entering the market. We do not see the pickup in 1Q11 occupancy rates as sustainable on the long term. We believe that despite the UAE’s positioning as a regional safe haven for tourism, a gradual rebalancing of regional tourist arrivals will materialize over the second half of the year as the political situation stabilizes in Egypt, Tunisia and Bahrain, which will partially redirect arrivals away from Dubai. Abu Dhabi positioning as a destination for corporate tourism continues to play the major role in deriving demand in the hospitality market. According to Abu Dhabi Tourism Authority, the business and exhibition sectors represented 80% of all arrivals in 2010. Occupancy rates and ADRs, however, remain fragile as the market lacks the leisure drive and the branded positioning as that of Dubai.

Dubai Hotel Room Supply 2009-13 Abu Dhabi Hotel Room Supply 2009-13


42,572 42,572

50,218 52,585

58,285

7,646

2,367 5,700

4,500

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2009 2010 2011e 2012e 2013e

Roo

ms


9,220 9,220 10,000

11,100

15,100

780 1,100

4,000

2,700

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2009 2010 2011e 2012e 2013e

Room

s



June 2011 14

Sector Earnings & Price Performance

A total of 7 UAE real estate developers are listed on both markets comprising 3 on ADX (ALDAR UH, SOROUH UH, RAKPROP

UH) and 4 on DFM (EMAAR DB, UPP DB, DEYAAR DB, DDB DB). There are 4 Kuwaiti real estate developers (SHOP DB,

MAZAYA DB, NRE DB, GRAND DB) that have a dual listing on both KSE and DFM. Aggregate earnings of UAE based listed

developers on both markets peaked in 2007 at AED11.5 billion representing 17.7% of UAE publicly traded companies’ earnings.

Earnings trended downwards since 2008 in tandem with the real estate and financial markets. ADX listed real estate equities

reported 2010 net losses of AED12.5 billion driven by Aldar’s AED12.7 billion loss, RAKPROP’s AED187 million net profit and

Sorouh’s AED7.5 million profit. In Dubai, Emaar net profit of AED2.4 billion was muted by UPP’s net loss of AED1.5 billion and

Deyaar’s net loss of AED2.3 billion while DDC reported a net profit of AED0.6 million.

Emaar share price peaked on January 2006 at AED24.9/ share before sliding to its current price of AED 3.22/share reflecting an

87% drop in line with DFMGI, which lost 80% of its value from peak of 8,013.99 points on January 2006 to the current level of

1,598.79 points. On the ADX, the move of listed real estate equities has significantly underperformed the index, which dropped

47% from its 5-year high of 5,253.99 points in January 2005. Aldar share lost 89% of its value from its high of AED13.3/share in

June 2008 to its current price of AED1.4/share while Sorouh dropped 87% from its peak of AED10.48/share in March 2008 to a

current market price of AED1.36/share.

ADX & ADX Listed Real Estate Earnings Perofrmance 2006-2010 DFM & DFM Listed Real Estate Earnings Perofrmance 2006-2010

Source: ADX, Global Database Source: DFM, Global Database

Price Performance 2006 - Present

Source: ADX, Global Database

2.7 3.7 5.7 1.7

(12.5)

20.6

29.2 27.5

24.4 27.3

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

2006 2007 2008 2009 2010

AE

D b

n

Real Estate Other ADX

7.0 7.8

1.7 (0.1) (1.4)

10.3

24.0

8.4 8.5

5.5

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2006 2007 2008 2009 2010

AE

D b

n

Real Estate Other DFM

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11

Sorouh Emaar Aldar DFMGI ADI


June 2011 15

Company Profile


Emaar Properties

June 2011 16

Market Data

Bloomberg Code: EMAAR UH

Reuters Code: EMAAR.DU

CMP (21 June 2011): AED3.15

O/S (mn) 6,091.2

Market Cap (AED mn): 19,187.3

Market Cap (USD mn): 5,228.1

P/E 2011e (x): 11.2

P/B 2011e (x): 0.6

Price Performance 1-Yr

High (AED): 4.00

Low (AED): 2.41

Average Volume: (000) 16,027.1

1m 3m 12m

Absolute (%) 0.9 16.9 9.6

Relative (%) 3.7 8.7 3.9

Price Volume Performance

Mostafa El-Maghraby Senior Financial Analyst [email protected] Tel.: (965) 22951279

Highly lucrative investment portfolio

International operations to mitigate phasing out Dubai revenues

Market missing on property sales value

Initiate coverage with a STRONG BUY and TP of AED3.91

Highly lucrative investment portfolio

Emaar has an exceptionally well performing operational investment portfolio comprising 5.28 million sqf of high class Malls and retail outlets with a high occupancy rate of 90%. The retail segment revenues grew from AED499 million in 2008 to AED1.9 billion in 2010 with a gross margin of 79%, a level we see sustainable given the segment’s low operating expenses and required maintenance capex. The hospitality segment is also well performing given Emaar’s hotels high profile and Dubai tourism attractions on both the business and leisure fronts.

International operations to mitigate phasing out Dubai revenues

Emaar residential sales comprise three projects in the UAE and 15 projects in the international markets. UAE units are expected to be fully handed over by 2013 marking the last year, on sight, of Dubai contributions to property sales revenues. International sales that commenced in 2008 are expected to pick up pace spanning through to 2014. We expect international sales to contribute AED11.1 billion to Emaar revenues between 2011 and 2014 partially mitigating the fade out of Dubai property sales. Regional political troubles are the main risk with probability of delivery delays.

Market missing on property sales value

Emaar’s current share price of AED3.15 implies that investors are ignoring the combined value of UAE development sales and International operations and only factor in the value of retail and hospitality segments. We believe that in spite of the current fragile Dubai property market conditions, the upcoming deliveries scheduled between 2011 and 2013 offer a degree of earnings visibility. Further, the international operations will have significant contributions over the coming three years given that most of the projects have started several years back and are scheduled for delivery.

Initiate Coverage with TP AED3.91/share

We value Emaar using a SOTP approach by valuing each project separately according to its credentials and our perception of its riskiness profile. Our SOTP valuation of Emaar Properties yields a fair value target of AED3.98/share, which implies an upside potential of 24% from the current market price of AED3.15/share. We, accordingly, initiate a STRONG BUY recommendation.

Investment Indicators

2010 2011e 2012e 2013e 2014e

Revenue (AED mn) 12,150 8,463 7,781 8,276 6,708

Net Profit (AED mn) 2,448 1,714 1,550 1,732 1,513

EPS (AED) 0.40 0.28 0.25 0.28 0.25

BVPS (AED) 5.13 5.68 5.94 6.22 6.47

EV/EBITDA (x) 7.4 8.3 8.5 7.1 7.8

P/E (x) 8.9 11.2 12.4 11.1 12.7

P/B (x) 0.7 0.6 0.5 0.5 0.5

Source: Company Annual Reports & Global Research

Strong Buy Target Price

AED3.91

AED


June 2011 17


For arriving at a fair value for Emaar Properties, we utilized a Sum Of The Parts approach by valuing each project separately. We have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Emaar and adjusted our WACC to the upside based on our projections for the degree of riskiness of each project.

A risk-free rate of 4.2% has been assumed which is the yield on 10 year Dubai Government Bond.

A market risk premium of 7% has been assumed.

Adjusted beta assumed at 1.46.

The cost of equity derived from the above assumptions using the Capital Asset Pricing Model is 15.7%.

The cost of debt has been assumed at 8%.

On the basis of above assumptions we have derived a UAE WACC of 11.8%.

The WACC Utilized on international projects is calculated utilizing the CAPM based on each country’s respective inputs.

Emaar Properties - Equity Valuation

AED (000) Value /share Methodology

Development Sales 1,046,778 0.17 DCF

Hospitality 3,947,558 0.65 DCF

Retail 15,138,116 2.49 Capitalization Rate 10%

International operations 3,929,352 0.65 DCF

Total NPV 24,061,803 3.95

Subsidiaries 1Q11 4,431,124 0.73 Book Value

Emaar Economic City 1,827,713 0.30 Market Capitalization

Add: 1Q11 Cash 6,067,962 1.00

Less: Debt 1Q11 12,299,490 2.02

Less: Minority Interest 280,883 0.05

Total Equity Value 24,250,129 3.91

CMP

3.15

Upside Potential 26% Source: Global Estimates

Emaar NPV Geographical Breakdown Emaar NPV Segmental Breakdown

Source: Global Estimates Source: Global Estimates

10%1%

84%

3%2% 0.2% 0.4%

Egypt

Pakistan

UAE

KSA

Morocco

Syria

Turkey

Development Prioperties

20%

Hospitality 18%

Retail 62%


June 2011 18

Recommendation

Emaar’s current share price of AED3.15 implies that investors are ignoring the combined value of UAE development sales and International operations. We believe that in spite of the current fragile Dubai property market conditions, the upcoming deliveries scheduled for 2011 and through to 2013 offer a degree of earnings visibility. Further, the international operations will have significant contributions over the coming three years given that most of the projects have started several years back and are scheduled for delivery. We like Emaar’s retail and hospitality portfolio and see sustainable and visible earnings contributions from these segments going forward. Our SOTP valuation of Emaar Properties yields a fair value target of AED3.91/share, which implies an upside potential of 24% from the current market price. We, accordingly, initiate coverage with a STRONG BUY

recommendation.

Key Risks to Valuation

Prolonged political turmoil in the region

Although Dubai was a main beneficiary of the regional political disturbance that took place during 1Q11, we believe that Emaar’s regional operations could be significantly affected by any prolonged political interruptions. The trade to Emaar comes in the form of higher hospitality income from regional flow of tourism to Dubai at the cost of delays of international deliveries, which contribution over the short term is more significant.

Extended slowdown in Dubai economy

Although we do not factor in any additional Dubai based property sales over the current ongoing ones, we see the downfall from the negative macro sentiment impacting Dubai businesses at large.

Delays in project delivery

Our earnings forecasts are based on management guidance of scheduled delivery of units on both the UAE and the international levels. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.


June 2011 19

Profile Emaar Properties was established in 1997 with a paid up capital of AED1 billion and was made public in 2000 through listing in the Dubai Financial Market. In 2005, Emaar doubled its share capital through a rights issue making it, at the time, the largest listed property developer in the world with a market capitalization of AED92 billion (USD25 billion). Emaar is 31.2% owned by the Investment Corporation of Dubai, which is 100% owned by the Government of Dubai. The remaining 68.8% are owned by the public. Foreign ownership limit in Emaar is 49%.

Emaar Ownership Structure

Source: Zawya

Investment Corporation of Dubai, 31.20%

Public, 68.80%

The tie with Dubai government came in the form of several land grants at near zero cost during the early development phases of the emirate. Emaar, along with other government owned real estate developers have undertaken the role of building the city of Dubai. Emaar’s track record includes the delivery of more than 15,100 villas and 17,800 apartments between 2001 and 2010 spread over several of its developments. Emaar’s flagship developments include Burj Khalifa, the world’s tallest tower, the downtown Burj development and Dubai mall along with its luxury hotel portfolio.

Business Model

Emaar is engaged in the development of full communities. The core activity of the company is property investment and development, property management services, hospitality, retail and financial services. Emaar Group PJSC is the holding company managing the group operations via several subsidiaries. The key business divisions include Emaar Dubai, which is responsible for property development and management in Dubai, Emaar International, which manages international operations, Emaar Investments, responsible for handling financial services operations, Emaar Malls, which manages the group’s retail portfolio and Emaar Hospitality, responsible for the group’s hotels. Unlike Aldar and Sorouh whose operations are geographically concentrated in Abu Dhabi, Emaar has a wide exposure to international markets with current projects in Saudi Arabia, India, Egypt, Turkey, Morocco, Syria, Canada and Jordan. Emaar land bank spans a 215 million sqf in the UAE and 2,550 million sqf internationally. International operations contributions to aggregate revenues have been slow over the past years being in their early phases. The contribution was also muted by the high revenue realization from Dubai sales. International operations contributed 7.5% and 8% of aggregate revenues in 2009 and 2010, respectively. Emaar also manages a highly prestigious investment portfolio in Dubai and growing across the international markets where it operates. The portfolio comprises over 5.28 million sqf GLA of world class retail outlets including the Dubai Mall and Marina Mall along with other retail outlets. The hospitality group manages 11 hotels in Dubai, five of which are 5-star hotels, two 4-stars and four standard ones. The move towards international operations and a more recurring income model was well timed for Emaar as it hedged against the slowing Dubai property market to which Emaar had a high concentration risk. Given our feeble outlook for Dubai property market, we believe the investment portfolio will be the main driver of revenues on the medium to long term as deliveries of the final stages of Dubai developments exit the backlog over the coming two years. Over the coming three years, contributions from international operations are expected to significantly support the top line.


June 2011 20

Emaar Subsidiaries and Associates

Name Country of Incorporation Ownership (%)

Emaar Hospitality Group UAE 100.00%

Emaar Hotels & Resorts UAE 100.00%

Emaar International UAE 100.00%

Emaar International Jordan [via Emaar International] Jordan 100.00%

Emaar Malls Group UAE 100.00%

Emaar Misr for Development Company [via Emaar International] Egypt 100.00%

Emaar Morocco T, S & O [via Emaar International] Morocco 100.00%

Emaar Turkey [via Emaar International] Turkey 100.00%

Emaar Properties Canda Ltd. [via Emaar International] Canada 100.00%

Hamptons International Middle East UAE 100.00%

Emaar Johns Laing Homes [via Emaar International] United States 100.00%

District Cooling UAE 100.00%

National Investments UAE 100.00%

Emaar Utilities UAE 100.00%

APIC India 74.00%

Emaar DHA Islamabad Limited [via Emaar International] Pakistan 67.00%

Emaar Lebanon [via Emaar International] Lebanon 60.00%

Emaar Middle East [via Emaar International] Saudi Arabia 61.00%

Emaar Syria [via Emaar International] Syria 60.00%

Emaar Bawadi UAE 50.00%

Turner International Middle East [via Emaar Investment Holding] UAE 50.00%

Amlak Finance UAE 48.08%

Emaar MGF Land Limited [via Emaar International] India 45.50%

Emaar Industries and Investments UAE 40.00%

Emaar Financial Services UAE 37.50%

Emrill Services [via Emaar Dubai] UAE 33.33%

Emaar Economic City Saudi Arabia 30.50%

Dead Sea Company for Tourist and Real Estate Investment Jordan 29.33%

Source: Company Reports, Zawya


June 2011 21

Emaar Cumulative Unit Delivery 2004-2010

Source: Emaar Properties

3,335 4,870 5,9658,217

12,15214,686

17,813

3,608

8,04810,227

13,185

14,226

14,768

15,173

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2004 2005 2006 2007 2008 2009 2010

Apartments Villas

Emaar Segmental Revenue Breadown 2008-2010 Emaar Geographical Revenue Breadown 2008-2010

Source: Company Reports Source: Company Reports

90%74% 76%

5%

18% 16%

5%8% 8%

0%

20%

40%

60%

80%

100%

2008 2009 2010

Property Sales Rental Income Hospitality

99%92% 92%

1%8% 8%

0%

20%

40%

60%

80%

100%

2008 2009 2010

UAE International


June 2011 22

Project Profile

Property Developments

Emaar current residential sales comprise three projects in the UAE and 15 projects in the international markets. The aggregate number of units completed or under development stands at 21,122 units domestically and internationally. UAE units are expected to be fully handed over by 2013 marking the last year, on sight, of Dubai contributions to the property sales revenues, based on company guidance and assuming no delays. International sales that commenced in 2008 are expected to pick up pace through to 2014. Emaar has 7,469 units that are scheduled to be developed in the international markets provided conditions are favorable and will also deliver 2.1 million sqf of commercial space in 2011 in Downtown and Dubai Marina developments in 2011 and 2012.

Emaar UAE Property Developments

Project Units Under

Development

Deliveries

2011 2012 2013

Downtown Dubai 2,016 320 947 749

Umm Al Quwain 277 277 - -

Arabian Ranches 89 89

Total Residential 2,382 686 947 749

Downtown Dubai Commercial sqf 1,353,034 974,501 378,533 -

Dubai Marina Commercial sqf 758,237 758,237 - -

Total Commercial 2,111,271 1,732,738 378,533 -


Emaar International Property Developments

Country Entity Units

Completed Units UD

Units TBD 11-13

Deliveries

2009 2010 2011 2012 2013

Egypt Emaar Misr 100 1,829 3,684 - 100 380 1,325 1,066

Saudi Arabia Emaar Middle East 32 523 866 - 31 133 381 481

Pakistan Emaar DHA Islamabad 78 198 47 40 11 91 98 -

Emaar GIGA Karachi - 300 300 - - - 300 -

Syria Emaar IGO 443 - 971 32 262 72 77 192

Morocco Emaar Tinja - 123 107 - - - 123 107

Canada Emaar Canada 65 43 0 21 11 40 36 -

Turkey Emaar Turkey 174 54 740 96 6 24 102 457

Lebanon Metn Renaissance - 147 535 - - 87 154 147

India Emaar MGF 100 15,408 - - 100 2,524 3,850 4,230

Jordan Samarah Project 68 115 219 - 22 26 55 122

Total

1,060 18,740 7,469 189 543 3,377 6,501 6,802


Emaar International Property Unit Sales – As of 1Q11

Country Entity Released Sold % Sales

Egypt Emaar Misr 2,495 1,753 70%

Saudi Arabia Emaar Middle East 434 299 69%

Pakistan Emaar DHA Islamabad 285 199 70%

Emaar GIGA Karachi 213 55 26%

Syria Emaar IGO 1,013 695 69%

Morocco Emaar Tinja 123 49 40%

Turkey Emaar Turkey 186 123 66%

Lebanon Metn Renaissance 307 208 68%

India Emaar MGF 15,508 12,118 78%

Jordan Samarah Project Dead Sea 114 65 57%

Total

20,678 15,564 75%



June 2011 23

Retail Portfolio

Emaar retail portfolio comprises 5.28 million sqf of high class Malls and retail outlets that experiences a high overall occupancy

rate of 90%. Dubai Mall, one of the world’s largest malls, is Emaar’s flagship retail outlet. The mall spans a GLA of 3.65 million sqf

and had an occupancy rate of 92% at the end of 2010. Emaar owned malls maintain a high tenant profile with a number of

exclusive tenants only having regional presence in Dubai Mall. The retail portfolio includes Dubai Mall, Marina Mall, Souk Al

Bahar, the Business Square and other retail locations in the Burj Dubai development, the Gold & Diamond Park along with other

small retail locations. Emaar lease terms for non-anchor tenants are 3-5 year lease contracts while anchor tenants contracts are

longer term extending up 20 years.

The retail segment revenues grew from AED499 million in 2008 to AED1.9 billion in 2011 while gross margins dropped from 82%

in 2009 to 79% in 2010, a level we believe is sustainable given the segment’s low operating expenses and required maintenance

capex.

Dubai Mall Footfall


Emaar Retail Revenue & GPM 2008-2010


1.74

2.27 2.78

3.42

4.15

3.753.57

4.174.47

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

mill

ion v

isitors

499

1,510

1,901

64%

82%79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2008 2009 2010

AE

D 0

00

Retail Revenue Retail GPM


June 2011 24

Hospitality

Emaar hospitality portfolio currently manages 9 hotels. Emaar Hotels & Resorts, a fully owned subsidiary of Emaar Group owns

and manages the Armani Hotel while Emaar Hospitality controls full ownership and management of Nuran LLC, The Address

Hotels, Emaar Hotel Management, Emaar Leisure Group and Emaar International Hospitality. The hospitality group owns and

manages the other 8 hotels. Emaar has exclusive license rights of the “Armani” brand along with the wholly owned brands of “The

Address”, “The Palace” and “Nuran”

Emaar Hospitality Portfolio

Hotel Management Company Category Rooms Operational

Armani Hotel - Burj Khalifa Emaar Hotels & Resorts 5 Star 160 2010

The Address Dubai Mall The Address Hotels & Resorts 5 Star 244 2009

The Address Dubai Marina The Address Hotels & Resorts 5 Star 200 2009

The Address Downtown Dubai The Address Hotels & Resorts 5 Star 196 2008

The Palace Old Town The Address Hotels & Resorts 5 Star 242 2007

Al Manzil Southern Sun 4 Star 197 2007

Qamardeen Hotel Southern Sun 4 Star 186 2007

The Dubai Polo & Equestrian Club Emaar Hospitality Standard 11 2007

The Address Montgomerie Dubai The Address Hotels & Resorts Standard 21 2006

Nuran Marina Residences Nuran Standard 90 2006

Nuran Greens Residences Nuran Standard 228 2006


Occupancy rates and ADRs across all hotels reported significant improvements in 1Q11 on the back of a flight to Dubai from

neighboring countries on the wake of the regional political events. The first quarter is also considered a high season for tourism in

Dubai given the good winter weather and the Dubai Shopping Festival, which are an annual attraction to the city. We do not see

these improvements sustainable and favor a gradual decrease of ADRs to 2010 averages.

Emaar Hospitality Performance

Hotel Occupancy % ADR RevPar

2009 2010 1Q11 2009 2010 1Q11 2009 2010 1Q11

The Address Downtown 75% 86% 96% 1,131 1,296 1,535 847 1,112 1,472

The Palace 67% 77% 90% 954 1,059 1,216 635 819 1,100

The Address Dubai Mall 58% 79% 90% 1,161 1,116 1,297 675 884 1,173

The Address Dubai Marina 35% 62% 80% 930 749 933 322 463 744

Al Manzil 79% 76% 89% 563 628 718 445 475 639

Qamardeen 72% 70% 83% 354 531 618 354 369 512



June 2011 25

Financial Highlights Emaar revenues peaked in 2007 at AED17.9 billion before sliding downwards to AED12.2 billion in 2010 after registering AED8.4

billion in 2009. 2010 had the lowest gross margin since 2003 at 37% down 1,200bps from 2009 and from the previous five year

average gross margin of 49%. The pressure on 2010 margins was mainly driven by lower realized margins of property sales from

condominiums, villas and commercial space. Retail gross margin was also 300bps lower than 2009 but was still significantly

higher than the 2008 figure. The hospitality segment saw the only margin improvement at 36% compared to 33% in 2009.

Emaar Revenue Performance 2006-2010

Source: Company Reports

Emaar Gross Margin by Segment 2008-2010


14,006

17,566

10,717

8,413

12,150

68%

25%

-39%

-21%

44%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2006 2007 2008 2009 2010

AE

D m

illio

n

Revenues Growth

36%

64%

84%

36%

64%

35%

56%

79%

33%

82%

28%

37%34% 36%

79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Condominiums Villas Commercial & Land Plots

Hospitality Retail

2008 2009 2010

Operating margins dropped from 33% in 2008 to 20% in 2010 in line with the decrease in the gross margin. Emaar operating profit

registered AED2.4 billion in 2010 compared to AED3.5 billion and AED2.3 billion in 2008 and 2009, respectively. Net income

came in at AED2.5 billion in 2010 considerably higher than the AED166 million and the AED327 million registered in 2008 and

2009. The lower net income of the prior two years was attributable to write-downs of assets of discontinued operations that were

directly charged to the income statement.

On the funding side, Emaar raised AED3.67 billion (USD1 billion) in the form of USD500 million guaranteed convertible bonds

maturing in 2015 priced at 7.5% and convertible at AED4.75/share in addition to USD500 million in the form of international sukuk

maturing in 2016 priced at 8.5%. The latter issue came under a program that allows Emaar to raise bonds up to USD2 billion.


June 2011 26

As of 1Q11, Emaar reported a cash balance of AED6 billion against short term bank loans maturing within 12 month of AED7.5

billion. We believe the company is in a strong position to meet its short term obligations given that a large share of the maturing

loans can be rolled over like the USD1 billion Musharaka Islamic Syndicated facility that includes an option to be refinanced up to

USD750 million.

Assets Breakdown 1Q11 Liabilities & Equity Breakdown 1Q11


Cash 10% Receivables 6%

Development Properties 42%

Associates 12%

PP&E 13%

Inv. Properties

13%

Other Assets 5%

Equity 49%

Payables 14%

Customer Advances 15%

Debt 19%

Other Liabilities 2%


June 2011 27

Key Forecast Assumptions

Based on management guidance, we roll out sales from the majority of Dubai related projects in 2011 with the exception of

Downtown Dubai residential units and commercial space that are scheduled for delivery in 2012 and 2013. Accordingly, we factor

in the sale of 1,696 residential units in 2012 and 2013 along with 378,533 sqf of commercial space in 2012. For international

operations, we forecast the largest contributions to take place between 2012 and 2014 as projects phase out based on scheduled

deliveries. Emaar has sold an average of 75% of its international units, which supports stronger visibility for future earnings.

Given Emaar’s long term contracts for the retail portfolio, we expect current revenue levels to be sustainable going forward with

minor increases driven by growing occupancy levels. We factor in a 4% growth in 2011 retail revenues followed by 2% going

forward. For the hospitality segment, we believe 1Q11 occupancy rates and ADRs are exceptionally high and should normalize to

more stable levels during the remaining of 2011. However, we factor in growing rates going forward given our view on improving

tourism and business conditions over our forecast horizon.

Earnings

We expect Emaar’s revenues to register a -14% CAGR through to 2014. Based on our outlook for Emaar’s segment performance,

UAE sales will fully exit the books by 2013 after declining contributions from AED3.4 billion in 2011 down to AED1.4 billion in

2013. The drop in UAE sales will be mitigated by the growing contribution from international sales, which we forecast to peak in

2013 at AED3.5 billion. For the retail and hospitality segments, we forecast 2011 revenues of AED2 billion and AED1.1 billion.

Emaar Revenue Forecasts

AED 000 2011 2012 2013 2014

Development Sales 3,445,069 1,992,071 1,417,707 -

Investment Properties 2,018,415 2,058,784 2,099,959 2,141,959

Hospitality 1,104,815 1,176,481 1,264,193 1,360,375

International Revenue 1,894,908 2,553,948 3,494,330 3,205,550

Total Revenues 8,463,208 7,781,284 8,276,189 6,707,884

Source: Global Forecasts

Our 2011 net income stands at AED1.7 billion with a net margin of 20%. We expect net margins to remain at this level in 2012 and

2013 given contributions from the low margin property sales. For 2014, we see margin improvements on growing percentage

contributions from the high margin retail and hospitality segments. We forecast a net income of AED1.5 billion in 2014, the last

year of our forecast horizon and an associated margin of 23%.

Emaar’s near term catalysts, in our view, will stem from any accelerated property sales contributing to the topline. We see a higher

probability of this surprise event taking place in the international operations where market conditions are more solid as compared

to the local Dubai market. Against the small contribution of the hospitality segment, forecasted at 13% of 2011 revenues, we view

any signs of sustainable growth and rate improvements in this segment as another potential catalyst.

Revenues & Gross Margin Forecasts Net Income & Net Margin Forecasts


8,463 7,781

8,276

6,708

41%

42%

43%

44%

45%

46%

47%

48%

49%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2011e 2012e 2013e 2014e

AE

D m

illio

n

Revenues Gross Margin

1,714

1,550

1,732

1,513

19.0%

19.5%

20.0%

20.5%

21.0%

21.5%

22.0%

22.5%

23.0%

1,400

1,450

1,500

1,550

1,600

1,650

1,700

1,750

2011e 2012e 2013e 2014e

AE

D m

illio

n

Net Income Net Margin


June 2011 28

Financial Statements

Income Statement Emaar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Revenues

10,717

8,413

12,150

8,463

7,781

8,276

6,708

Cost of revenues

(5,487)

(4,314)

(7,604)

(4,765)

(4,358)

(4,511)

(3,488)

Gross profit

5,230

4,099

4,547

3,698

3,424

3,766

3,220

SG&A

(1,610)

(1,276)

(1,224)

(1,206)

(1,089)

(1,324)

(1,073)

EBITDA

3,620

2,823

3,323

2,492

2,334

2,441

2,147

Depreciation & amortization

(295)

(636)

(805)

(803)

(804)

(803)

(762)

Provisions -

(80)

(192) - - - -

Net other operating income

169

232

113

78

62

50

40

EBIT

3,494

2,340

2,439

1,767

1,593

1,689

1,424

Net Interest income

346

139

(90)

(55)

(6)

100

140

Net other income

349

(451)

129

57

46

37

29

Net profit before tax

4,189

2,028

2,478

1,770

1,633

1,825

1,594

Taxes

3

24

(1)

(35)

(65)

(73)

(64)

Net profit after tax

4,191

2,051

2,477

1,734

1,568

1,752

1,530

Loss from discontinued operations

(4,068)

(1,762) - - - - -

Minority interest

42

38

(29)

(20)

(18)

(20)

(18)

Net profit excluding minority

166

327

2,448

1,714

1,550

1,732

1,513 Source: Company Reports & Global Research The company's Financial Year ends in December


June 2011 29

Balance Sheet Emaar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Cash and bank balances

5,175

1,860

1,773

1,301

1,836

1,002

1,611

Marketable securities

218

406

3,269

4,329

3,328

2,466

1,883

Receivables

638

750

711

510

512

518

491 Investments in associates and JV

8,314

7,861

7,592

7,592

7,592

7,592

7,592

Intangible assets

439

439

46

46

46

46

46

Other Assets

6,434

6,385

5,971

5,753

5,864

6,001

5,863

Development Properties

26,799

31,076

26,492

25,483

25,617

25,920

24,535

Net fixed assets

18,662

15,368

16,649

15,846

15,079

14,314

13,589

Total assets

66,680

64,145

62,504

60,860

59,875

57,861

55,610

Accounts & notes payables

9,680

9,545

8,939

7,900

7,941

8,035

7,606

Advances from customers

18,109

15,888

9,889

9,692

7,978

6,786

4,614

Total Debt

9,174

8,625

11,169

7,921

7,054

4,399

3,271

Other Liabilities

1,116

1,207

1,207

696

699

707

672

Total liabilities

38,079

35,266

31,204

26,207

23,672

19,926

16,163

Paid up capital

6,091

6,091

6,091

6,091

6,091

6,091

6,091

Other Adjustments

14,923

14,910

15,191

14,960

14,960

14,960

14,960

Retained earnings

7,586

7,878

10,018

13,602

15,152

16,883

18,396

Shareholders' equity

28,601

28,879

31,300

34,653

36,203

37,934

39,447

Total liabilities & equity

66,680

64,145

62,504

60,860

59,875

57,861

55,610 Source: Company Reports & Global Research

The company's Financial Year ends in December


June 2011 30

Cash Flow Statement Emaar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e


4,189

2,028

2,478

1,770

1,633

1,825

1,594


295

636

805

803

804

803

762

Net Interest

(346)

(139)

90

55

6

(100)

(140)

Changes in accounts & notes receivables

(706)

164

227

202

(3)

(6)

28

Changes in accounts & notes payables

4,259

3

(490)

(1,039)

42

94

(429)

Change in Development Properties

(5,824)

(3,020)

2,953

1,010

(134)

(303)

1,385

Changes in advances from customers

4,016

(2,221)

(5,999)

(198)

(1,713)

(1,193)

(2,171)

Other adjustments

250

799

400

(8)

12

(53)

(4)

Operating cash flow

6,132

(1,751)

464

2,595

646

1,068

1,024

Additions to fixed assets

(5,986)

(2,495)

(1,080)

803

767

766

725

Other investing activities

3,305

(11)

(1,718)

-

-

-

-

Investing cash flow

(2,681)

(2,505)

(2,798)

803

767

766

725

Net financing raised

2,265

1,196

2,653

(3,248)

(867)

(2,655)

(1,128)

Dividends Paid

(1,199)

(4)

(1)

(609)

-

-

-

Other financing activities

94

(148)

(394)

-

-

-

-

Financing cash flow

1,160

1,044

2,258

(3,857)

(867)

(2,655)

(1,128)

Net changes in cash

4,611

(3,213)

(76)

(459)

546

(822)

621

Other Adjustments

(1,568)

(102)

(12)

(12)

(12)

(12)

(12)

Beginning cash

2,132

5,175

1,860

1,773

1,301

1,836

1,002

End cash

5,175

1,860

1,773

1,301

1,836

1,002




June 2011 31

Ratio Analysis Emaar Properties

2008 2009 2010 2011e 2012e 2013e 2014e

Liquidity Ratios

Current Ratio (x) 0.98 0.65 0.42 0.61 0.83 0.87 0.87

Quick Ratio (x) 0.66 0.41 0.20 0.40 0.60 0.62 0.62

Cash Ratio 0.55 0.37 0.15 0.35 0.55 0.57 0.57

Working Capital (mn) -5,177 -8,616 -5,606 -1,788 -1,360 -1,326 -1,181

Profitability Ratios

Total Assets Turnover (x) 0.16 0.13 0.19 0.14 0.13 0.14 0.12

Total Net Fixed Assets Turnover (x) 0.57 0.55 0.73 0.53 0.52 0.58 0.49

Gross Profit Margin 48.8% 48.7% 37.4% 43.7% 44.0% 45.5% 48.0%

Operating Margin 32.6% 27.8% 20.1% 20.9% 20.5% 20.4% 21.2%

Net Profit Margin 1.5% 3.9% 20.1% 20.3% 19.9% 20.9% 22.5%

Return on Assets 6.3% 3.2% 4.0% 2.8% 2.6% 2.9% 2.7%

Return on Equity 14.6% 7.1% 7.9% 5.0% 4.3% 4.6% 3.9%

Leverage Ratios

Times Interest Earned (x) 46.34 10.80 6.87 4.96 5.02 8.53 9.68

Debt / Equity (x) 0.32 0.30 0.36 0.23 0.19 0.12 0.08

Degree of Total Leverage (x) 0.00 2.38 0.47 0.99 1.19 1.85 0.67

Valuation Ratios

Basic EPS (AED) 0.03 0.05 0.40 0.28 0.25 0.28 0.25

Basic Book Value Per Share (AED) 4.69 4.74 5.13 5.68 5.94 6.22 6.47

EV/Revenue 2.14 3.04 2.08 2.51 2.60 2.15 2.54

EV/EBITDA (x) 6.07 8.37 7.37 8.26 8.45 7.14 7.79

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Market Price (AED) 2.61 4.16 3.58 3.15 3.15 3.15 3.15

Market Capitalization (AED mn) 15,911 25,361 21,825 19,203 19,203 19,203 19,203

P/E Ratio (x) 96.10 77.50 8.90 11.20 12.39 11.09 12.70

P/B (x) 0.60 0.90 0.70 0.55 0.53 0.51 0.49

Source: Company Reports & Global Research

* Market price for 2011 and subsequent years as per closing prices on Jun 21, 2011


Aldar Properties

June 2011 32

Market Data

Bloomberg Code: ALDAR UH

Reuters Code: ALDR.AD

CMP (2 June 2011): AED1.38

O/S (mn) 2,577.9


Market Cap (USD mn): 1,074.8

P/E 2011e (x): 8.4

P/B 2011e (x): 0.6


High (AED): 3.23

Low (AED): 1.26

Average Volume: (000) 910.0

1m 3m 12m

Absolute (%) -2.8 8.5 -53.2

Relative (%) -0.0 0.3 -58.9


Restructuring plan is a lifeline, but concerns persist

Property sales revenues to phase out by 2013

Future earnings pressured by high debt service costs


Restructuring plan is a lifeline, but concerns persist

In our view, the restructuring plan that Aldar undertook in January 2011 to reschedule its maturing loans saved the company from an imminent bankruptcy and rounds of settlements with debtors, which could have impaired management ability to proceed with scheduled projects as planned. Further, the impairment charges have cleaned up the asset base positioning the company at a cleaner starting point. However, we are skeptical on Aldar’s ability to meet its high debt requirements given its current project profile. We are also not proponents of the continuing process of operating asset transfers to the government at low margins after the company incurs the time and cash investment.

Property sales revenues to phase out by 2013

Based on scheduled deliveries, we believe sales form Al Zeina and Al Muneera will be reported in 2011 and 2012 along with units remaining from Al Bandar and Al Gurm villas while Al Bateen park will participate to 2013 revenues concluding all development sales in Aldar’s backlog, assuming no delays. This fall will not be mitigated by the growing recurring income, which accounts to only 36% of our aggregate four year revenues.

Earnings pressured downwards by high debt service costs

Aldar’s debt stood at AED34 billion on 1Q11 inclusive of bank loans and bonds. We believe that earnings and cash flow will be under attack from the hefty debt service costs, which we forecast at an aggregate AED1.7 billion between 2011 and 2014. We forecast a net income of AED683 million on a revenue of AED7.1 billion in 2011 followed by a net loss of AED27 million on revenues of AED4.3 billion in 2012.


Our SOTP valuation for Aldar Properties yields a fair value target of AED1.51/share Our price target for Aldar Properties implies an upside potential of 10% from the current market price. We initiate coverage with a Hold recommendation on the stock.


2010 2011e 2012e 2013e 2014e

Revenue (AED mn) 1,791 7,140 4,296 3,179 2,305

Net Profit (AED mn) (12,658) 838 (27) 290 184

Diluted EPS (AED) (3.06) 0.16 (0.01) 0.07 0.04

Diluted BVPS (AED) 1.02 2.24 2.40 2.44 2.47

EV/EBITDA (x) na 10.4 12.5 12.0 13.7

P/E (x) na 8.4 na 19.7 31.0

P/B (x) 1.3 0.6 0.6 0.6 0.6



Hold Target Price

AED1.51

AED


June 2011 33


For arriving at a fair value for Aldar Properties, we utilized a Sum Of The Parts (SOTP) approach by valuing each project separately. For DCF valuations, we have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Aldar and adjusted our WACC to the upside, when warranted, based on our projections for the degree of riskiness of each project. The following assumptions were made in order to arrive at the SOTP target value:

A risk-free rate of 4.3% has been assumed which is the yield on Abu Dhabi Government Bond maturing in 2020.





On the basis of above assumptions we have derived a UAE WACC of 11.9%.

Aldar Properties - Equity Valuation



Hospitality 2,522,221 0.61 DCF

Investment Portfolio 8,590,550 2.07 DCF / Capitalization Rate 10%

Other operations 2,100,662 0.51 DCF

Total NPV 18,640,829 4.02

Add: Subsidiaries 1Q11 694,291 0.17 Book Value

Add: Other Assets 15,656,702 3.78 Market Capitalization

Add: 1Q11 Cash 6,156,111 1.49

Less: Debt 1Q11 34,874,260 2.02

Total Equity Value 6,273,673 1.51

CMP

1.38

Upside Potential 10% Source: Global Estimates

Aldar NPV Breakdown

Source: Global Estimates

Development Sales, 29%

Retail Lease, 28%

Commercial Lease, 19%

Hotels, 14%

Other, 11%


June 2011 34

Recommendation

Aldar operations are solely concentrated in Abu Dhabi and hence, have suffered from the property downturn that hit the market since 2008. In line with our views on the market, we do not see any significant potential for renewable interest in property sales once current projects exit Aldar’s backlog. Although we favor the operational quality of Aldar’s rental and hospitality assets over those of Sorouh, we believe earnings will be significantly hit on the long term on declining sales revenues. We also do not favor Aldar’s high debt service and believe it will create a considerable drag on net income throughout our forecast horizon spanning till the end of 2014. Our SOTP valuation of Aldar Properties yields a fair value target of AED1.51/share implying an upside potential of 10% from the current market price. We initiate coverage with a HOLD recommendation on the stock.


Geographic concentration risk

Aldar’s operations have a unilateral geographic concentration posing high risk as all projects are based in Abu Dhabi. Although we do not perceive any political risk evolving in the emirate and prefer its overall economic conditions to those of Dubai, the lack of diversification due to the sole exposure to one market poses a threat in the case of any unforeseen events.

Long term earnings sustainability

Although we like the operational quality of Aldar’s rental and hospitality properties, we believe the contribution from these is incapable of supporting Aldar’s top line over the long term. Recurring income from investment properties represents only 36% of our four year forecasted revenues through to 2014 while the remaining 64% comes from property sales and construction projects undertaken on behalf of the government, both of which are unsustainable over the long term.


Our earnings forecasts for Aldar are based on management guidance of scheduled unit deliveries. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.

Funding risks

In spite of the hefty recent cash injection from the restructuring program with the government of Abu Dhabi, concerns over Aldar’s ability to achieve its investment targets and meet its debt obligations are high. We see the probability of project cancellations, further asset sales or new rounds of refinancing quite plausible for Aldar.

More provisions and impairments

In spite of the size of the 2010 impairments, we believe that the property market of Abu Dhabi is still prone to further asset price deteriorations over the coming three years. Accordingly, the probability of further impairments on Aldar’s assets cannot be ruled out. Provisions against receivables can also materialize.


June 2011 35

Profile Aldar Properties PJSC was established in 2000 as a real estate development and management company headquartered in Abu Dhabi. Aldar raised AED1.5 billion through an IPO in 2004 representing AED675 million subscribed by the founders and AED825 million allocated to the public with a share offer of AED1/share. The issue was the largest in the history of the UAE financial markets at the time and was 448 times oversubscribed raising AED373 billion in demand. The majority of Aldar’s initial founders were government and quasi government entities. Current permitted foreign ownership in Aldar is 40%.

Aldar Ownership Structure

Source: Zawya

Mubadala 27.7%

ADIC 5.7%

NBAD 5.1%

Public 61.5%

Business Model

Aldar was incorporated to lead the development of Abu Dhabi's strategic sites in line with the Abu Dhabi government long term plan. Aldar’s main business activity is real estate development, investment and management services. It is also involved in the ownership and operation of hospitality, retail, leisure and educational properties like resorts, hotels, malls, amusement parks, sport clubs, specialized outlets and schools. Aldar also offers project management services and advisory to the government of Abu Dhabi and its related entities.

Aldar Subsidiaries

Name Country of Incorporation Ownership (%)

Al Raha Gardens Property LLC UAE 100%

Al Jimi Mall LLC UAE 100%

Al Raha Infrastructure Company LLC UAE 100%

Aldar Academics LLC UAE 100%

Aldar Facilities Management LLC UAE 100%

Aldar Commercial Property Developments UAE 100%

Aldar Hotels & Hospitality LLC UAE 100%

Aldar Marinas LLC UAE 100%

Abu Dhabi World Trade Centre LLC UAE 100%

Yas Marina LLC UAE 100%

Yas Yacht Club LLC UAE 100%

Yas Hotel LLC UAE 100%

Yas Links LLC UAE 100%

Al Muna Primary School UAE 100%

Addar Real Estate Services LLC UAE 99%

Farah Leisure Parks Management LLC UAE 85%

Source: Company Reports, Zawya


June 2011 36

Aldar, via its subsidiaries, manages seven business divisions solitary operating in Abu Dhabi. The property development division is the company’s largest segment. Aldar developments are mostly fully fledged mix-use sites including residential, commercial, retail, hotels, educational and leisure attractions. The property segment has always been the major contributor to revenues. Property sales contribution dropped from 98% during 2007-2008 to 50% in 2010 on slow deliveries and steadily growing income from other segments. The estates management division manages the company’s rental portfolio, which has exposure to residential, commercial and retail properties. Recurring revenues from the investment portfolio grew consistently from AED23 million in 2006 to AED415 million in 2010 representing 23% of revenues in the latter year. The hospitality segment first contribution to the top-line took place in 2009 when Aldar opened 6 hotels in Yas Island in addition to Hala Arjan hotel in downtown Abu Dhabi. Hotels revenues increased from AED57 million in 2009 to AED314 million in 2010, the first full year of operations. Aldar currently owns three schools, The Pearl, Al Yasmin and Al Muna, which are managed through its subsidiary Aldar Academics LLC. The first school was opened in 2007 and contributed AED23 million to 2008 revenues. In 2010, the schools segment generated AED91 million in revenues representing 5% of aggregate revenues. The leisure segment includes Farah Leisure Parks Management and Aldar Marinas LLC. Aldar developed the Ferrari Theme Park, which was later transferred to the government in the company’s restructuring plan that took place in January 2011. The leisure segment is planned to manage the Yas Water Park when it starts operations in 2013. Aldar marinas LLC manages Yas Marina, on behalf of the Abu Dhabi government and will manage Al Bandar Marina that is scheduled to open in 2011. Leisure revenues stood at AED6 million and AED71 million in 2009 and 2010, respectively. Aldar Segmental Revenue Breakdown 2006-2010


Aldar Revenue & Gross Margin 2006-2010


5%

98% 98%84%

50%

12.2%

2% 2%

10%

23%

3%

17%

0.5% 3%5%

0.3%4%

83%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010

Property & Land Sales Investment Properties Hotels

Schools Leisure Construction

188 1,227

4,978

1,979 1,791

16%

46%

54%

22%16%

0%

10%

20%

30%

40%

50%

60%

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010

AE

D m

n

Revenue GPM


June 2011 37

Project Profile Property Developments

Aldar residential sales comprise five projects. Al Bandar, the first residential development in Al Raha Beach was completed in 2010 and sold units were handed over in 3Q10. Al Gurm villas comprise 73 villas and was also completed and handed over in 1Q11. Unit sales from Al Gurm and Al Bandar represented the only property sales for Aldar in 1Q11. Al Muneera and Al Zeina are located in Al Raha Beach and are scheduled for delivery between 3Q11 through to 4Q12 representing the only property sales income over the coming six quarters ahead of the scheduled delivery of Al Bateen Park development in 1Q13.

Property Developments Profile

Project NSA sqm Units Percent Sold Completion

Al Bandar 80,202 511 87% 3Q10

Al Gurm Villas 147,191 73 90% 1Q11

Al Muneera 281,014 1,445 75% 4Q11-2Q12

Al Zeina 270,388 1,221 45% 3Q11-2Q12

Al Bateen Park 99,267 348 0 1Q13

Source: Aldar Properties, Global Estimates Investment Properties

Aldar is in the process of developing a high profile investment portfolio of properties, especially on the retail segment. Currently, Aldar has 125,402 sqm of operating retail outlets inclusive of the IKEA store in Yas Island, the largest in MENA region that was delivered in 1Q11 and Motorworld, delivered in 2Q11. Aldar operating retail properties are 100% leased reflecting the undersupply of class A and specialized retail outlets in Abu Dhabi and the high profile of Aldar’s outlets. An addition of 336,906 sqm will be added to the retail portfolio by 3Q13 inclusive of Yas Mall, which will span 228,083 sqm and accommodate 440 stores.

Investment Properties: Retail

Project Type sqm Leased Operational

Al Jimmi Mall Retail 46,500 100% 1Q06

Community Retail Retail 7,116 100% 2Q09

IKEA Store Retail 32,499 100% 1Q11

Motorworld (Phase 1) Retail 39,287 100% 2Q11

Community Retail Retail 44,959

4Q12

Central Market Retail 63,864

3Q13

Yas Mall Retail 228,083

2Q13

462,308

Source: Aldar Properties

The commercial segment spans an operating and leased 84,421 sqm since 2009 and the new addition of the flagship HQ development that was completed in 3Q10 and is currently 75% occupied bringing Aldar’s net area available for lease to 133,774 sqm. The Central Market development will further boost Aldar’s commercial exposure by 74,301 sqm. Although we do not favor exposure to the commercial market, Aldar’s developments are of high quality, which runs a significant shortage in Abu Dhabi.

Investment Properties: Commercial


Al Mamoura Commercial 65,466 100% 2Q09

Injazat Data Centre Commercial 52,639 100% 2Q09

Baniyas Towers Commercial 40,617 100% 3Q09

HQ Commercial 49,353 75% 3Q10

Central Market Commercial 74,301

3Q13

208,075

Source: Aldar Properties, Global Estimates


June 2011 38

The Central Market 474 residential units scheduled for delivery in 3Q13 will be the only exposure to the residential rental market. Aldar also has a small 5,000 sqm unit of the Imperial College London Diabetes Centre, which is leased on a long term contract.

Investment Properties: Other


Imperial College London Diabetes Centre Healthcare 5,000 100% 2Q06

Central Market Residential 474 Units

3Q13


Hospitality

The hospitality segment comprises an operating 2,429 rooms spread over 8 hotels that started operations in 2009. The six Yas

Golf hotels serve leisure and corporate visitors to Yas Island and are 3-4 star hotel managed by various global hotel management

brands. The Yas Marina is a 5-star hotel located in the Yas Marina development and is the only development managed by Aldar’s

subsidiary Aldar Marinas. Hala Arjan is a 50:50 joint venture between Aldar and Royal House with 166 hotel apartments. The only

upcoming project in the Hospitality segment will be the Central Market 195 rooms’ hotel scheduled for 2Q13.

Hospitality Properties

Hotel Management Rooms Category Operational

6 Yas Golf Hotels Several Global Brands 1,763 3 & 4 Star 2009

Hala Arjan Global Brand 166 3 Stars 2009

Yas Marina Aldar Marinas 500 5 Star 2009

Central Market TBD 195 5 Star 2Q13


Schools

Aldar operates 3 schools with a capacity of 2,850 students that will grow by 1,100 students when the company delivers Al Bateen

School in 3Q11. All Aldar’s schools are managed by its subsidiary Aldar Academics.

Schools

Schools Capacity Management Operating Revenue / student 2010

Pearl Primary School 550 Students Aldar Academics 3Q07

AED 31,845 Yasmina School 1,800 Students Aldar Academics 3Q08

Muna Primary School 500 Students Aldar Academics 3Q09

Al Bateen School 1,100 Student Aldar Academics 3Q11


Other Projects

Aldar manages projects on behalf of the Abu Dhabi government for a project management fee. The fee on these projects

averages between 2-7% of the total project value. Reimbursable Projects

Project Type

Interchanges at Al Raha Beach Infrastructure

Shabhat Infrastructure Infrastructure

Cleveland Clinic Healthcare

Sheikha Salama Mosque Mosque

Al Falah Residential

Khalifa University Higher Education

MIST 1A at Masadar City Higher Education

MIST 1B at Masadar City Higher Education

The Courtyard at Masadar City Commercial

Parking Structure at Masadar City Multi-storey Parking



June 2011 39

Financial Highlights Aldar revenues peaked in 2008 at AED5 billion before sliding 60% in 2009 to AED2 billion then another 10% in 2010 to AED1.8

billion. Gross margins averaged between a low of 16% in 2010 and a high of 54% in 2008. The high margins of 2007 and 2008

were driven by aggressive sales of high margin land plots, which constituted 75% of total revenues in both years. Aldar had an

operating loss of AED1.2 billion and AED5.2 billion in 2009 and 2010, respectively on the back of high provisions and asset

impairments in both years. Aldar reported a project impairment of AED528 million in 2009 followed by AED2.9 billion in 2010.

In 2010, Aldar reported a fair value loss on investment properties of AED7 billion. The loss whipped out the combined revaluation

gains of AED6.6 billion that the company realized since 2006 through to 2009 bringing the investment properties asset values to

below their 2005 level. Accordingly, Aldar reported 2010 net loss of AED12.7 billion. Adjusted for the fair valuation impact, Aldar

would report an adjusted 2010 net loss of AED5.7 billion.

Aldar Revenue and Growth 2006-2010


Aldar Profitability Margins 2006-2010


-124%

13%35%

-60%

-290%

-88%

10%38%

-49%

-316%

16%46% 54%

22% 16%

-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

2006 2007 2008 2009 2010

Gross Margin EBIT Margin Adjusted Net Margin

188

1,227

4,978

1,979 1,791

-53%

554%

306%

-60%

-10%

-100%

0%

100%

200%

300%

400%

500%

600%

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010

AE

D m

n

Revenues Growth


June 2011 40

Aldar undertook a restructuring plan in early 2011 to reschedule its maturing loans. The plan was structured such that the

government of Abu Dhabi would inject a cash amount of AED19.2 billion in Aldar. The amount included reimbursements and sales

totaling AED10.9 billion in exchange for the transfer of infrastructure assets on Yas Island including Ferrari World Abu Dhabi

theme park along with roads, bridges, marine infrastructure sites and land. Aldar also issued a convertible bond worth AED2.8

billion to Mubadala. The bond carries a profit rate of 4% and is convertible in December 2011. The last component of the plan was

the sale of residential units and land from Al Raha Beach developments for AED 5.5 billion to the Abu Dhabi Government.

The plan provided Aldar with the needed lifeline in the short term given the company’s stressing debt maturity schedule including

the maturity of AED9.8 billion in 2011 in addition to the convertible liability of AED6.5 billion. According to management, the

company expects to receive another AED5 billion of revenues from property sales over the coming three years bringing the total

cash inflow to AED24.2 billion. This amount will be channeled through an estimated AED12 billion of capex related to investment

properties and the ongoing development sales projects and AED12 billion of debt repayment.

In our view, the restructuring plan saved Aldar from an imminent bankruptcy and rounds of settlement with debtors, which could

have impaired management ability to proceed with scheduled projects as planned. Further, the impairment charges have cleaned

up the asset base positioning the company at a better starting point. However, it came in at a high cost to investors with the

impairment charge depressing BVPS from AED5.7/share in 3Q10 down to AED1.6/share ahead of further dilution on converting

the newly issued Mubadala bond. We are also not proponents of the continuing process of the transfer of operating assets to the

government at low margins after the company incurs the time and cash investment.

Aldar Debt Maturity Schedule - 1Q11


16,311

2,204 4,117

5,511 5,671

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2011 2012 2013 2014 Beyond 2014

AE

D m

n

Aldar Asset Breakdown 1Q11 Aldar Liabilities & Equity Breakdown 1Q11


Fixed Assets 30%

Trade Receivables

13%

Gov. Receivables 14%

DWIP 30%

Cash 12%

Other Asstes 1%

Equity 9%

2011 Convertible 14%

Non Convertible 17%

Borrowings 39%

Payables 13%

Other Liabilities

8%


June 2011 41

Key Forecast Assumptions

Based on scheduled deliveries, we account for sales form Al Zeina and 30% of Al Muneera in 2011. We also factor in the sale of

the remaining units from Al Bandar along with the sale of 55 units from Al Gurm 73 villas in 2011. In 2012, we factor in the

remaining sales from Al Muneera and Al Gurm villas and in 2013 we account for the sale of Al Bateen Park 359 units concluding

all development sales in Aldar’s backlog. We do not account for any land sales during the four years of our forecast horizon.

For investment properties, we assume 9.5% yield on commercial properties in 2011. We only factor in minor declines in rents over

the next three years on Aldar’s new properties given their high profile and positioning in the Abu Dhabi market. For retail

properties, we assume the delivery of Yas Mall in 2014 will be the significant addition to the segments revenues adding AED500

million and we exclude Motorworld phases 2 & 3 from our valuation.

For the hospitality segment, we assume 2011 occupancy rate of 65% for Yas Island hotels and increase it to 80% in 2014 on

better market conditions and the addition of more leisure attractions in Yas Island. For Hala Arjan, we assume 2011 70%

occupancy rate.

Earnings

Based on our forecasts, we expect Aldar’s revenues from property sales to drop from AED5.8 billion in 2011 to AED1.4 billion in

2013 in line with delivery schedules. Investment Properties revenues will receive a significant 52% boost in 2013 on the delivery of

Central Market followed by a 60% increase attributable to the opening of Yas Mall in 2014. Aldar’s revenues will witness a

declining trend to bottom out in 2014 at AED2.3 billion after which a gradual pick up in revenues should take place on stable

recurring income profile.

Aldar Revenue Forecasts

AED (000) 2011 2012 2013 2014

Development Sales 5,796,470 2,893,160 1,419,178 -

Investment Properties 562,009 568,680 864,510 1,385,458

Hospitality 415,327 427,787 483,338 501,223

Other Revenue 366,267 406,798 412,252 417,869

Total Revenues 7,140,074 4,296,424 3,179,278 2,304,550


We expect gross margins to increase from 24% in 2011 to 48% in 2014 on growing contributions from the higher margin segments

and the phase out of property sales. We do not account for any further project or receivable related provisions going forward. Our

operating margin for 2011 comes in at 9.2%, accounting for a growing depreciation expense, and increases to 14% in 2014.

Below EBIT, we believe earnings will suffer from high debt service costs over the coming four years. Net income in 2011 will

register AED838 million with a net margin 12%.



11.7%

2.4%

9.1%8.0%

838

105

290

184

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-

100

200

300

400

500

600

700

800

900

2011e 2012e 2013e 2014e

AE

D m

illio

n

Revenue Gross Margin

7,140

4,296

3,179

2,305

24.0%28.7%

42.9%

48.7%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011e 2012e 2013e 2014e

AE

D m

illio

n

Revenue Gross Margin


June 2011 42


Income Statement Aldar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Revenues

4,978

1,979

1,791

7,140

4,296

3,179

2,305

Cost of revenues

(2,295)

(1,542)

(1,503)

(5,428)

(3,065)

(1,815)

(1,182)

Gross profit

2,683

437

288

1,712

1,231

1,364

1,122

SG&A

(587)

(917)

(665)

(553)

(365)

(429)

(311)

EBITDA

2,096

(480)

(377)

1,159

866

935

811


(25)

(94)

(514)

(501)

(519)

(510)

(486)

Provisions

(312)

(606)

(4,308)

-

-

-

-

EBIT

1,759

(1,180)

(5,199)

657

347

424

325

Share of gain from associates and JV's

47

(88)

(28)

33

25

20

16

Fair value gain on investment properties

1,533

1,797

(6,992)

-

-

-

-

Interest income

472

469

263

156

106

78

57

Interest expense

(372)

(275)

(718)

(619)

(528)

(259)

(247)

Other income

8

114

16

455

23

27

33


3,447

837

(12,658)

683

(27)

290

184

Taxes

-

-

-

-

-

-

-

Net profit after tax

3,447

837

(12,658)

683

(27)

290

184

Minority interest

-

-

-

-

-

-

-

Net profit excluding minority

3,447

837

(12,658)

683

(27)

290

184




June 2011 43

Balance Sheet Aldar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Cash and bank balances 3,226 2,663 648 26 80 1,454 1,051

Marketable securities 8,841 7,650 1,783 - - - -

Work in progress 7,172 10,909 13,878 9,081 6,188 3,094 -

Receivables 5,639 14,598 5,453 5,998 3,599 1,367 1,272

Inventories 1 101 422 357 215 95 46

Assets held for sale - - 5,932 - - - -

Total current assets 24,878 35,921 28,116 15,462 10,081 6,011 2,368

Net Fixed assets 22,801 27,141 14,969 15,981 16,313 17,959 20,445

Intangible assets 163 40 25 15 15 14 14

Investments in associates and JV 875 627 543 597 597 597 597

Other Assets 1,109 2,616 3,692 3,692 3,692 3,692 3,692

Total long term assets 24,947 30,423 19,228 20,285 20,617 22,263 24,748

Total assets 49,825 66,345 47,344 35,748 30,698 28,274 27,117

Short term bank loans & bank overdrafts

2,663 4,696 10,473 3 3,754 4,590 1,000

Accounts & notes payables 7,412 6,527 6,171 7,069 4,253 3,147 2,282

Other short term liabilities 2,178 2,444 7,153 2,311 1,456 - -

Total current liabilities 12,253 13,667 23,797 9,383 9,464 7,737 3,282

Long term debt 19,928 34,001 17,761 15,483 9,437 8,380 11,367

Other liabilities 1,546 1,876 1,539 1,688 1,852 2,033 2,231

Total long term liabilities 21,474 35,877 19,300 17,171 11,289 10,413 13,598

Other 10,213 10,512 10,761 15,483 16,251 16,251 16,251

Retained earnings 5,885 6,289 (6,514) (6,289) (6,305) (6,127) (6,014)

Shareholders' equity 16,098 16,801 4,247 9,194 9,946 10,124 10,237

Total liabilities & equity 49,825 66,345 47,344 35,748 30,698 28,274 27,117




June 2011 44

Cash Flow Statement Aldar Properties

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Net profit before tax 3,447 837 (12,658) 683 (27) 290 184

Depreciation & amortization 25 94 514 501 519 510 486

Interest income (472) (469) (263) (156) (106) (78) (57)

Interest expense 163 248 682 619 528 259 247

Share of gain from associates & JV's (47) 88 28 (33) (25) (20) (16)

Other adjustments (1,519) (1,157) 11,343 (28) 28 (603) (532)

Operating CF before changes in WC 2,112 (358) (354) 1,586 916 359 312

Change in work under progress (3,115) (1,240.84) (2,702) 4,796 2,893 3,094 3,094

Changes in accounts & notes receivables (4,048) 838.71 763 (545) 2,399 2,231 96

Change in inventories - (100.74) (321) 65 142 119 49

Changes in accounts & notes payables 4,281 (987.68) (345) 898 (2,815) (1,106) (866)

Other changes 2,121 792.07 244 6,339 (855) (1,456) -

Operating cash flow 1,350 (1,056) (2,715) 13,138 2,680 3,242 2,685

Additions to fixed assets (1,485) (15,374) (4,329) (1,012) (332) (1,646) (2,486)

Other investing activities - 1,889 6,304 - - - -

Investing cash flow (19,385) (13,485) 1,975 (1,012) (332) (1,646) (2,486)

Net financing raised 17,378 15,653 502 (12,748) (2,295) (221) (603)

Other financing activities (1,176) (1,674) (1,778) - - - -

Financing cash flow 16,202 13,978 (1,275) (12,748) (2,295) (221) (603)

Net changes in cash (1,833) (563) (2,015) (622) 54 1,374 (404)

Beginning cash 5,059 3,226 2,663 648 26 80 1,454

End cash 3,226 2,663 648 26 80 1,454 1,051




June 2011 45

Ratio Analysis Aldar Properties

2008 2009 2010 2011e 2012e 2013e 2014e

Liquidity Ratios

Current Ratio (x) 2.03 2.63 1.18 2.01 1.30 0.81 0.79

Quick Ratio (x) 1.44 1.82 0.33 1.00 0.63 0.40 0.77

Cash Ratio 0.98 0.75 0.10 0.37 0.25 0.22 0.38

Working Capital (mn) 12,625 22,254 4,319 9,482 2,872 -1,472 -702



Total Net Fixed Assets Turnover (x) 0.22 0.07 0.12 0.45 0.26 0.18 0.11


Operating Margin 35.3% -59.6% -290.3% 9.2% 8.1% 13.3% 14.1%

Net Profit Margin 69.2% 42.3% -706.7% 9.6% -0.6% 9.1% 8.0%

Return on Assets 6.9% 1.3% -26.7% 0.6% -0.1% 1.0% 0.7%

Return on Equity 21.4% 5.0% -294.7% 4.3% -0.3% 2.8% 1.8%

Leverage Ratios

Times Interest Earned (x) 4.73 -4.29 -7.24 1.06 0.66 1.64 1.32

Debt / Equity (x) 1.40 2.30 7.67 1.67 1.33 1.28 1.21

Degree of Total Leverage (x) 0.25 1.26 169.48 -0.34 2.79 45.06 1.32

Ratios Used for Valuation

Diluted EPS (AED) 0.83 0.20 (3.06) 0.16 (0.01) 0.07 0.04

Diluted Book Value Per Share (AED)

0.06 0.08 0.08 0.06 (0.00) 0.03 0.02

EV/Revenue 2.11 14.34 14.41 1.69 2.53 3.54 4.82

EV/EBITDA (x) 5.02 na na 10.40 12.54 12.05 13.69

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Market Price (AED) 4.39 5.04 2.33 1.38 1.38 1.38 1.38


P/E Ratio (x) 5.30 24.90 na 8.37 na 19.74 31.05

P/B (x) 1.10 1.20 0.60 0.57 0.60 0.60 0.60




Sorouh Real Estate

June 2011 46

Market Data

Bloomberg Code: SOROUH UH

Reuters Code: SOR.AD

CMP (20 June 2011): AED1.34

O/S (mn) 2,881.6


Market Cap (USD mn): 957.6

P/E 2011e (x): 5.9

P/B 2011e (x): 0.5


High (AED): 2.01

Low (AED): 0.99

Average Volume: (000) 7,977.8

1m 3m 12m

Absolute (%) -0.7 29.5 -29.5

Relative (%) 2.0 21.5 -35.4


Short term earnings visibility a positive

Stable liquidity position alleviates funding concerns

Revenues and earnings to peak in 2013

Initiate with a Buy recommendation and TP of AED1.52

Short term earnings provide short term visibility

Sorouh property sales will witness a high degree of activity between 2011 and 2013 as the delivery of 7,187 units across its various projects materialize. In 2011, we see complete sales from the completed towers of Shams Abu Dhabi towers. Deliveries from Al Ghadeer and the Gate residential towers will contribute to the top line as scheduled on 2012, but we factor in some delayed deliveries and shift part of the recognized revenues to 2013. In addition to the near term visibility, we like Sorouh’s growing investment portfolio with its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of our concerns over the lower trending yield.

Stable liquidity position alleviates funding concerns

Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010 through which it raised AED2.7 billion four-year loan facility bearing an interest rate of EIBOR + 4.5% repayable over a period of 48 months starting September 2012 after a grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which should ease any pressures on debt repayments going forward.

Earnings to peak in 2013 concluding development sales contributions

We expect Sorouh’s revenues to peak in 2013 at AED3,514 million as the majority of the current projects under construction are due for delivery. We also do not factor in any land sales in our revenue forecasts given the current stagnant market. We forecast 2011 EBIT of AED499 million with an associated margin of 16%. Our margin forecasts improve going forward given lower development sales revenues. We expect 2011 Net income of AED709 million reflecting a margin of 22% followed by AED625 million in 2012 with a margin of 18%. We expect net income to peak in 2013 at AED777 million reflecting a margin of 20% before registering 1,500 bps improvement in 2014 at 35%.

Initiate coverage with a BUY recommendation and TP of AED1.52/share

We value Sorouh at a fair value target price of AED1.52/share implying an upside potential of 13% over the current market price. Initiate with a BUY recommendation.


2010 2011e 2012e 2013e 2014e

Revenue (AED mn) 1,205 3,097 3,127 3,762 1,932

Net Profit (AED mn) 7 709 646 824 742

Diluted EPS (AED) 0.00 0.23 0.20 0.26 0.23

Diluted BVPS (AED) 2.14 2.56 2.75 3.01 3.25

EV/EBITDA (x) 11.5 6.7 6.2 2.1 na

P/E (x) 631.4 5.9 6.8 5.2 5.8

P/B (x) 0.8 0.5 0.5 0.4 0.4



Buy Target Price

AED1.52

0

0.5

1

1.5

2

2.5

-

10,000

20,000

30,000

40,000

50,000

Ju

n-1

0

Aug-1

0

Oct-

10

Dec-1

0

Feb-1

1

Apr-

11

Jun-1

1

Volume (000) Sorouh (AED)


June 2011 47


For arriving at our fair value of Sorouh Real Estate share, we have used a Sum Of The Parts approach by valuing each project separately given its credentials. We have used the Capital Asset Pricing Model (CAPM) to arrive at the cost of equity for Sorouh Real Estate and adjusted our WACC to the upside based on our projections for the degree of riskiness of the project. The following inputs were used to arrive at the SOTP value of Sorouh Real Estate:

A risk-free rate of 4.2% has been assumed which is the yield on Abu Dhabi Government Bond maturing in 2020.





On the basis of above assumptions we have derived a WACC of 13.6%.

Sorouh Real Estate - Equity Valuation



IP 2,119,594 0.81 DCF

Other Subsidiaries 426,472 0.16 DCF

Total NPV 4,301,897 1.48

Subsidiaries 1Q11 482,904 0.18

Add: 1Q11 Cash 964,737 0.37

Less: Debt 1Q11 1,641,346

Less: Minority Interest 118,760

Total Equity 3,989,432 1.52

CMP

1.34

Upside Potential

13%

Source: Global Research

Sorouh NPV Breakdown

Source: Global Estimates

Development Sales 41%

Investment Properties 49%

Other Revenues

10%


June 2011 48

Recommendation

Sorouh’s 2011 revenues offer a high degree of visibility given the scheduled property deliveries of the Shams Abu Dhabi projects. We also like Sorouh’s growing investment portfolio despite its high exposure to the Abu Dhabi rental market given our expectations of high absorption rates in spite of our concerns over the lower trending yield. We also prefer the low exposure to the commercial market and the growing retail portfolio. Our SOTP valuation of Sorouh Real Estate yields a fair value target of AED1.52/share implying an upside potential of 13% over the current market price. Accordingly, we initiate coverage on Sorouh with a BUY recommendation.


Geographic concentration risk

Sorouh’s operations have a high geographical concentration risk as all the company’s projects are based in Abu Dhabi. Although we do not perceive any political risk evolving in the emirate and prefer its overall economic conditions to those of Dubai, the sole exposure to one market poses a threat in case of any unforeseen events.

Long term earnings sustainability

Although we like the gradual shift towards more recurring income, we see the contribution from investment properties as minor and incapable of supporting Sorouh’s top line over the long term. Recurring income from investment properties represents only 14% of our four year forecasted revenues through to 2014 while the remaining 86% comes from property sales and construction projects undertaken on behalf of the government, both of which are unsustainable over the long term.


Our earnings forecasts for Sorouh are based on management guidance of scheduled unit deliveries. Although we have factored in delivery delays where appropriate, deviations in actual deliveries are a common practice and could alter our valuation outcomes of specific projects.


June 2011 49

Profile Sorouh Real Estate was established in July 2005 with the aim of capturing a share of the growing real estate market in the UAE capital. Sorouh develops real estate projects in Abu Dhabi with a vision of turning the Emirate into a regional business and lifestyle destination in sync with the Abu Dhabi plan 2030. Sorouh went public in December 2005 via raising USD374 million for a 55% offering of the company. Current ownership is broken into 11.6% to Al Joud Investment Company, 7% owned by Abu Dhabi Investment Company, a 98% government owned entity and 81.4% owned by the public. Permitted foreign ownership is 15%.

Sorouh Ownership Structure

Source: Zawya

Abu Dhabi Investment

Company 6.97%

Public 84.40%

Al Joud Investment Company 11.63%

Business Model

Sorouh, through its subsidiaries, is involved in real estate development, investment and management. The company is also engaged in the hospitality sector via the ownership and management of hotels and resorts as well as providing financing solutions services. The Emirate of Abu Dhabi represents the sole geographical exposure to Sorouh’s offerings, to date. Sorouh, however, is currently in the process of evaluating the feasibility of two projects that are in the predevelopment phase located in Egypt and Morocco.

Sorouh Subsidiaries

Name Country of

Incorporation Ownership

(%)

Sorouh International Limited UAE 100

Gate Towers - Shams Abu Dhabi LLC UAE 100

Sorouh Abu Dhabi Real Estate LLC UAE 100

Sorouh International Development Limited UAE 100

Sorouh International Morocco Limited UAE 100

Lulu Island for Project Development UAE 100

Tilal Liwa Real Estate Investing LLC UAE 100

Al Seih Real Estate Management LLC UAE 91.4

Seih Sdeirah Real Estate LLC UAE 91.4

Sorouh Egypt for Investment and Tourism Development JSC Egypt 80

Khidmah LLC UAE 60

Pivot Engineering & General Contracting Co. (WLL) UAE 60

Source: Company reports


June 2011 50

Initially, Sorouh revenues were highly reliant on land sales, which peaked in 2008 at AED3.5 billion representing 95% of total revenues before sliding down to AED367 million in 2010 representing only 30% of revenues. Sorouh land bank was acquired in the form of raw land at almost no cost from the government of Abu Dhabi. The company’s strategy, in its early years of operations, was to generate cash from land sales to utilize it in the high capex requirements associated with property developments. The first property sales revenue was realized in 2009 from the sale of phase 1 of the Golf Garden project. Sorouh reported development sales revenues of AED1.2 billion and AED284 million in 2009 and 2010 respectively reflecting slower sales and declining prices. Development sales gross margins stood at 16% and 25% in the same two years. Contract revenues are generated from low margin construction and project management services undertaken by the company on behalf of the Abu Dhabi government as in the ongoing project of Watani and the newly awarded projects by the Urban Planning Council for AED2.9 billion to build 1,470 villas for UAE nationals in Al Ghuraibah and Al Sila’a. The recurring income Investment portfolio comprises units designated for rent in Sorouh’s developments along with the hospitality segment. Lease income stood at AED139 million and AED210 million in 2009 and 2010, inclusive of service charges, representing 4.5% and 17.4% of total revenues in both years, respectively. The hospitality segment only includes the 4-star Tilal Liwa Hotel in Al-Gharbia region. The hospitality segment contributed 1% of Sorouh 2010 revenues. As of 1Q11, Tilal Liwa had an occupancy rate of 74%.

Sorouh Revenue Breakdown 2007-2010


38%

13%

86%95%

51%

31%

3% 6%37%

14%

2%5%

7%1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010

Property sale Land sales Contract revenue Lease income Hotels

Sorouh has two international projects located in Morocco and Egypt. Both projects were scheduled to commence construction in 2010 but have been put on hold till market conditions become more favorable.

International Operations

Area sqm BUA sqm

Designated for Sale

Investment Properties

Morocco 2,005,253 545,193 294,440 281,782

Egypt (Sorouh City) 4,910,000 4,651,159 3,240,246

Source: Sorouh Real Estate


June 2011 51

Project Profile Sorouh residential sales developments consist of a total of 7,187 units to be delivered between 2011 and 2013 generating most of the company’s revenues over the next ten quarters. Shams Abu Dhabi developments encompass 5,055 of the aggregate residential units designated for sale including 1,522 units of Sun, Sky and Tala Towers that started delivering in 2011.

Residential Sales

Development BUA sqm Designated for Sale sqm Units Delivery

Al Ghadeer 257,468 202,361 2,132 2012

Shams Abu Dhabi

Sky Tower 207,632 66,247 474 2011

Sun Tower 119,493 83,669 673 2011

Tala Tower 42,825 42,825 375 2011

The Gate 741,302 372,898 3,533 2012


The only commercial space designated for sale in Sorouh’s developments is the 74,302 sqm of Sky Tower in Shams Abu Dhabi development. Sorouh’s commercial space is expected to be delivered in 2011.

Commercial Sales

Development BUA sqm Commercial Space Designated

for Sale sqm Delivery

Sky Tower 207,632 74,302 2011


Sorouh’s investment portfolio exposure is relatively higher to Abu Dhabi’s residential market and very low to the commercial market, our least preferred segment in the capital’s real estate sector. We believe that despite the declining rental yield in Abu Dhabi, the present under supply situation guarantees high absorption of residential units in the short term. Over the medium term, we see Sorouh residential exposure as a positive given a scenario of tenants relocating from Dubai to Abu Dhabi as supply is made available at affordable levels. The upcoming additions to the retail segment comprise 63,445 sqm, which should be operative during 2011 and 2012.

Investment Properties

Development Residential Commercial Retail Other Delivery

Khalidiya Village 48,132

Completed

Al Oyoun Village 40,601

Completed

Sas Al Nakhl Village I & II 170,636 298

Completed

Al Ain Mall

47,422

2011

Al Rayyana 213,000

3,000 2011

Danat Abu Dhabi 30,081

2,522

2011

Podium

13,501 12,412 2012

The Gate: Storage Area

13,675 2013


Existing properties designated for rent are comprised of Khalidiya Village, Al Oyoun Village and Sas Al Nakhl 1& 2 developments spread over 259,369 sqm. The three developments have a blended average occupancy rate of 95% and generated AED171 million of income in 2010 solidifying our view on the continuing absorptions for Sorouh’s upcoming residential units.


June 2011 52

Operating Investment Properties

Development

Number of Bedrooms

Total Units Rental Income 2010

(mn) Average

Occupancy 3 4 5 6

Khalidiya Village 0 69 69 12 150 AED37.1 98%

Al Oyoun Village 128 16 4 0 148 AED12.3 97%

Sas Al Nakhl Village I & 2 307 244 37 0 588 AED121.5 95%


Other projects undertaken by Sorouh include the low margin construction and project management services on behalf of the Abu Dhabi government for the construction of projects like Watani that was awarded in 2009 and is due for completion in 2013.Sorouh was also awarded two projects with a similar scheme by the Urban Planning Council for AED2.9 billion to build 1,470 villas for UAE nationals in Al Ghuraibah and Al Sila’a.


June 2011 53

Financial Highlights Sorouh revenues dropped sharply in 2009 and 2010 after peaking in 2008 at AED3,732 million to AED3,103 million and AED1,205 million in the two years, respectively. The large drop was mainly due to a sharp slowdown in land sales over the two years with the realization of revenues from property sales not keeping pace and the absence of any significant improvements in contributions from other segments. Revenue Performance 2007-2010


-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010

AE

D 0

00

Property sales Land sales Contract revenue sale

Lease income Hotels Growth

Gross margins were pressured downwards in 2009 by the low 38% margin on land sales versus 73% in 2010. Other segments all reported higher margins with the leasing segment reporting 86% gross margin and development sales at 26% in 2010 compared to 16% in the comparable period. EBIT and EBIT margin were also pressured downwards by the continuously growing impairments accounts created against fair value adjustments to investment properties and PP&E along with provisions against doubtful debts. Net income peaked in 2008 at AED1.9 billion up 48% over the comparable 2007 period. 2009 and 2010 witnessed sharp declines, in line with the declining revenues, reporting AED483 million and AED7.4 million in both years, respectively. In line, net margin dropped from 54% in 2007 down to 16% in 2009 and 1% in 2010.

Gross Margin 2009-2010 EBIT & EBIT Margin 2007-2010


38%

16%

78%

9%

73%

26%

86%

11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Land Developments Leasing Subsidiaries

2009 2010

1,102

1,610

443

-42

47%43%

14%

-3%-10%

0%

10%

20%

30%

40%

50%

60%

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2007 2008 2009 2010

AE

D 0

00

EBIT Growth


June 2011 54

Sorouh’s liquidity position is sound given the company’s financing arrangements in 2010 through which it raised AED2.7 billion four-year club loan facility. The loan bears an interest rate of EIBOR + 4.5% per annum and is repayable over a period of 48 months starting September 2012 after a grace period of 27 months. We believe that by the time the first installment is due, Sorouh would have collected sufficient cash from property sales to meet its obligations. Further, we see 2012 as the last year of Sorouh’s hefty capex requirements, which should ease any pressures on debt repayments going forward. The company’s current ratio stands at 1.73x as of 1Q11 with a net positive working capital of AED4.5 billion. 62% of Sorouh’s current assets, however, are non-liquid assets representing inventories, land held for sale and development WIP. Trade and other receivables stood at a high 259% of revenues in 2010, a figure we expect to shrink significantly in 2011 as Sorouh realizes higher revenues on growing property sales and settles down pending receivables on land and property sales.

Sorouh Assets Breakdown 1Q11 Sorouh Liabilities & Equity Breakdown 1Q11


Net Fixed Assets 15%

Receivables 24%

Cash 7%

DWIP 43%

Other Current Assets 4%

Other Non Current Assets 7%

Equity 44%

Other Non Current Liabilities 0.4%

Current Liabilities 44%

LT Debt 12%


June 2011 55

Forecast Assumptions

We expect Sorouh development sales to witness a high degree of activity between 2011 and 2013 as the delivery of its ongoing

7,187 units across its various projects materializes. In 2011, we factor in complete sales from the three completed towers of

Shams Abu Dhabi. The Sun, Sky and Tala towers will hand over 1,522 units during the year along with the sale of the 74,300

sqm of commercial space in Sky tower. Beyond 2011, deliveries from Al Ghadeer and the Gate residential towers will contribute to

the top line. Although the scheduled delivery date for both projects is 2012, we factor in some delayed deliveries and shift part of

the recognized revenues to 2013.

Sorouh’s current residential investment properties of 259,369 sqm will be boosted significantly with the addition of Al Rayyana

development, Danat Abu Dhabi and Al Ain Mall in 4Q11/1Q12. Collectively, the three projects will add 296,700 sqm to Sorouh’s

portfolio of rental properties. Sorouh’s rental portfolio is characterized by high exposure to the residential segment, which we

expect to witness declining yields over the coming 3 years although we forecast a high absorption rate at affordable rental prices.

Earnings

Based on our previous forecasts, we expect Sorouh’s revenues to peak in 2013 at AED3,514 million as the majority of the current

projects under construction become due for delivery. In our view, 2012 revenues would be pressured downwards by a gap in

delivery of development sales as we factor in a delay in the delivery of The Gate towers and Al Ghadeer till 2013 and accordingly,

expect only partial contributions to materialize in 4Q12. We also do not factor in any land sales in our revenue forecasts given the

current slow market conditions although we maintain the view that sales from Saraya project could materialize.

Sorouh Revenue Forecasts

2011e 2012e 2013e 2014e

Development Sales 2,312 1,241 2,234 498

Investment Properties 216 428 432 437

Other Revenues 569 849 847 847

Total Revenues 3,096 2,518 3,514 1,782


We forecast 2011 EBIT of AED499 million with an associated margin of 16% before peaking in 2013 at AED647 million with a

margin of 17%. EBIT margin will improve considerably in 2014 at 26% given lower development sales revenues. Our expected

2011 net income stands at AED709 million reflecting a margin of 22% and ROE of 9% followed by AED625 million in 2012

reflecting a net margin of 18% and ROE of 7%. In line with our revenue and EBIT forecasts, we expect net income to peak in 2013

at AED777 million reflecting a margin of 20% before registering a 15% improvement in 2014 at 35%.



3,097 3,127

3,762

1,932

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2011e 2012e 2013e 2014e

AE

D m

illio

n

Revenues Gross Margin

709646

824

742

17%

19%

21%

23%

25%

27%

29%

31%

33%

35%

37%

-

100

200

300

400

500

600

700

800

900

2011e 2012e 2013e 2014e

AE

D m

illio

n

Net Income Net Margin


June 2011 56


Income Statement Sorouh Real Estate

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Revenues 3,723 3,103 1,205 3,096 3,018 3,514 1,782

Cost of revenues (1,427) (2,190) (674) (2,326) (2,179) (2,628) (1,122)

Gross profit 2,297 912 532 771 839 886 659

SG&A (631) (287) (206) (217) (241) (211) (125)

EBITDA 1,677 651 365 1,042 1,081 1,096 784

Depreciation & amortization (12) (26) (39) (55) (78) (76) (73)

Provisions (56) (183) (367) - - - -

EBIT 1,610 443 (42) 554 598 675 534

Share of gain from associates and JV's 51 (51) 49 187 57 57 57

Interest income 121 83 60 46 30 80 128

Interest expense (80) (123) (103) (65) (49) (20) (8)

Other income 83 142 53 - - - -

Net profit before tax 1,784 495 16 723 636 791 711

Taxes - - - - - - -

Net profit after tax 1,784 495 16 723 636 791 711

Minority interest (74) 12 9 13 11 14 13

Net profit excluding minority 1,858 483 7 709 625 777 698




June 2011 57

Balance Sheet Sorouh Real Estate

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e

Cash and bank balances 5,517 1,606 1,133 1,599 1,244 2,795 4,268

Marketable Securities 1,322 1,158 174 - - - -

Work in progress 2,475 3,778 5,273 4,640 3,898 1,754 702

Receivables 2,393 2,813 3,117 2,941 2,777 2,635 1,514

Inventories 30 13 36 77 75 70 36

Other Assets 787 659 617 615 615 553 553

Total current assets 12,523 10,027 10,350 9,873 8,609 7,807 7,072

Fixed assets 88 172 153 157 159 160 162

Intangible assets 652 613 445 445 445 445 445

Investment properties 930 1,240 1,675 2,495 2,495 2,495 2,493

Other noncurrent assets 2,746 1,645 1,011 662 652 642 633

Total long term assets 4,416 3,670 3,284 3,760 3,751 3,743 3,733

Total assets 16,939 13,698 13,634 13,632 12,359 11,550 10,805

Short term bank loans & bank overdrafts 105 19 13 13 13 13 13

Accounts & notes payables 6,727 5,437 5,762 4,644 3,169 2,284 1,158

Non-convertible sukuk 2,011 971 - - - - -

Total current liabilities 8,844 6,427 5,774 4,657 3,182 2,296 1,171

Long term debt 115 113 1,630 1,422 1,066 426 171

Non-convertible sukuk 1,874 970 - - - - -

Other financial liabilities 148 63 52 52 52 52 52

Total long term liabilities 2,137 1,146 1,682 1,473 1,118 478 222

Paid up capital 2,500 2,500 2,625 2,625 2,625 2,625 2,625

Other Adjustments 372 522 559 573 584 598 610

Retained earnings 3,086 3,103 2,994 4,305 4,851 5,553 6,177

Shareholders' equity 5,958 6,125 6,178 7,502 8,060 8,776 9,413

Total liabilities & equity 16,939 13,698 13,634 13,632 12,359 11,550 10,805




June 2011 58

Cash Flow Statement Sorouh Real Estate

(AED mn) 2008 2009 2010 2011e 2012e 2013e 2014e


1,784

495

16

723

636

791

711


18

35

44

55

78

76

73

Interest income

(121)

(83)

(60)

(46)

(30)

(80)

(128)

Interest expense

80

123

103

65

49

20

8

Provisions & Impairments

1,383

1,133

379

-

-

-

-

Other adjustments

(23)

(76)

34

1

-

-

-

OCF before changes in working capital

3,122

1,626

517

797

733

807

665

Changes in DWIP

(1,315)

(1,456)

(1,485)

633

742

2,144

1,052

Changes in accounts & notes receivables

(2,027)

373

215

(176)

(165)

(142)

(1,121)

Change in inventories

4

17

(22)

(42)

2

5

35

Changes in accounts & notes payables

2,689

(2,267)

303

(1,117)

(1,475)

(885)

(1,126)

Other changes in working capital

358

119

24

(2)

-

(61)

-

Operating cash flow

2,832

(1,589)

(449)

93

(163)

1,868

(495)

Additions to fixed assets

(208)

(397)

(493)

(825)

(2)

(1)

1

Other investing activities

(1,751)

383

1,075

1,407

165

324

2,223

Investing cash flow

(1,958)

(15)

582

582

163

323

2,224

Net financing raised

3,495

(1,975)

(591)

(208)

(355)

(640)

(256)

Dividends Paid

(308)

(293)

(6)

-

-

-

-

Other financing activities

0

(40)

(10)

-

-

-

-

Financing cash flow

3,187

(2,309)

(606)

(208)

(355)

(640)

(256)

Net changes in cash

4,060

(3,912)

(473)

466

(355)

1,551

1,473

Beginning cash

1,458

5,517

1,606

1,133

1,599

1,244

2,795

End cash

5,517

1,606

1,133

1,599

1,244

2,795




June 2011 59

Ratio Analysis Sorouh Real Estate

2008 2009 2010 2011e 2012e 2013e 2014e

Liquidity Ratios

Current Ratio (x) 1.42 1.56 1.79 2.11 2.60 3.25 5.77

Quick Ratio (x) 1.04 0.87 0.77 0.97 1.21 2.28 4.75

Cash Ratio 0.77 0.43 0.23 0.33 0.33 1.13 3.45

Receivables Outstanding (Days) 0.0 330.9 944.1 346.8 335.8 273.8 310.3

Working Capital (mn) 3,680 3,600 4,576 5,174 5,269 5,525 6,048



Net Fixed Assets Turnover (x) 3.66 2.20 0.66 1.19 1.24 1.54 0.81


Operating Margin 43.2% 14.3% -3.4% 16.1% 17.3% 17.2% 26.2%

Net Profit Margin 49.9% 15.6% 0.6% 21.1% 18.2% 19.9% 34.6%

Return on Assets 10.5% 3.6% 0.1% 4.9% 4.8% 6.6% 6.3%

Return on Equity 31.2% 8.0% 0.3% 9.0% 7.3% 8.8% 7.3%

Leverage Ratios

Times Interest Earned (x) 20.06 3.61 -0.40 7.74 11.16 32.73 61.43

Debt / Equity (x) 0.60 0.31 0.43 0.37 0.28 0.11 0.05

Degree of Total Leverage (x) 0.69 4.33 1.47 25.66 -13.57 1.57 0.22

Ratios Used for Valuation

EPS (AED) 0.71 0.18 0.00 0.23 0.20 0.26 0.23

Book Value Per Share (AED) 2.27 2.33 2.14 2.56 2.75 3.01 3.25

EV/Revenue (x) na 0.71 3.48 1.21 1.23 0.40 na

EV/EBITDA (x) na 3.38 11.50 6.75 6.20 2.11 na

Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Market Price (AED) 3.01 2.48 1.63 1.34 1.34 1.34 1.34


P/E Ratio (x) 4.70 14.80 631.40 5.90 6.80 5.16 5.77

P/B (x) 1.50 1.20 0.80 0.52 0.49 0.44 0.41




June 2011 60

Disclosure

The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant

disclosures which apply to this particular research have been mentioned in the table below under the heading of disclosure.

Disclosure Checklist

Recommendation Bloomberg

Ticker Reuters Ticker Price Disclosure Company

Emaar Properties STRONG BUY EMAAR UH EMAAR.DU AED 3.15 1,10

Aldar Properties HOLD ALDAR UH ALDR.AD AED 1.38 1,10

Sorouh Real Estate BUY SOROUH UH SOR.AD AED 1.34 1,10

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ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year, Global Investment House has managed or co-managed a public offering for this company, for which it

received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial

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company in the next three months. 10. Please see special footnote below for other relevant disclosures.

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