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Table 13: Summary of key sectors likely benefiting from and impacted by the National Transformation Program Sectors likely benefiting from NTP Rationale Petrochemicals With US$ 11bn being allocated to project development, downstream chemicals second largest focus of NTP; significant increase in natural gas availability (indigenous and imported); expansion opportunities Healthcare Volume growth opportunities for private healthcare providers (management contracts); private health insurance growing; participation in privatisations; significant increase in local pharmaceutical production Insurance (healthcare) Private insurance coverage to increase to 31mn from 10.5mn currently; rising availability of private healthcare facilities Real estate Higher home ownership targeted; improved access to financing/housing subsidies to both developers and buyers; volumes set to expand as NTP targets higher real estate sector growth; increased opportunities for private sector investment Consumer staples Demand growth from religious tourists; formalisation and Saudisation of retail sector; growth in locally produced poultry sales; longer-term private sector job creation Telecom Government spending US$2bn to enhance FTTH and Mobile networks; focus on increasing internet usage; religious tourism will boost demand Metals and mining Provision of new mining licenses; potential investment opportunities for international mining companies Defence Increased localization will cut imports, develop local industrial capabilities and create jobs Sectors likely negatively impacted by NTP _ Rationale Consumer discretionary Near-term squeeze on consumer disposable income and sentiment; increased competition as foreign entities given 100% ownership entitlement; development of Saudi postal system possibly a precursor to online shopping increase Petrochemicals Potential reduction in feedstock subsidies; potential for increased competition from international companies Real estate Land tax on white land could impact cost base and prices in urban areas; higher competition from new entrants All sectors Rising costs on reduced subsidies (particularly water and energy); higher wage costs; increased financing burden on private sector as government partially shoulders NTP costs Source: National Transformation Program, BofA Merrill Lynch Global Research, Six key investible themes from the NTP are emerging Using this frame work we believe a number of investible themes are emerging including: 1. Ambitious plans to grow religious tourism: with Hajj visitors set to increase from 1.5mn to 2.5mn and Foreign Umrah Pilgrims from 6mn to 15mn per annum, we see significant potential for the travel & tourism, transport sectors, consumer discretionary and telecom services sectors to benefit. 2. Down trading as pressure mounts on the consumer: With the NTP looking to reduce subsidies on energy (including transport fuels) and water, we see pressure on the disposable income of Saudi consumers rising in the short- to medium-term (although in the longer term, we expect higher employment levels, growing home ownership and accelerating growth to offset these factors). These issues could be further augmented by a slowdown in public sector wage growth and growth in the proportion of residents employed by the private sector, In reflection, we believe that the consumer will likely become more value conscious in the near- to medium-term as stress on consumer discretionary spend mounts. As such, we continue to prefer the consumer staples and the grocery retailers in this environment. We also believe the grocery retailers will benefit from the government’s focus on formalising the sector (it is highly fragmented currently and dominated by smaller independent stores) in an effort to increase Saudi participation. That said, we believe consumer discretionary companies which offer more affordable and economic goods could benefit as they take market share. 3. Rising focus on healthcare provision: Saudi Arabia is focused on significantly growing accessibility to healthcare for its residents. The provisions in the NTP include a significant increase in medical centres (hospitals and clinics), wider provision of private health insurance and an increase in the level of 40 GEMs Paper #26 | 30 June 2016 38 Merrill Lynch HOUSE_OVERSIGHT_016150