JPM Talaat Mostafa Group 2010-06!06!422705

8/8/2019 JPM Talaat Mostafa Group 2010-06!06!422705

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MENA Equity Research07 June 2010

Talaat Mostafa Group

Initiation

OverweightTMGH.CA, TMGH EY

Play Cairo RE the TMG way - Initiate with OWPrice: E7.99

Price Target: E10.70

Property

Muneeza HasanAC

(971) 4428-1766

[email protected]

JPMorgan Chase Bank, N.A., Dubai Branc

Christian Kern(971) 4428-1789

[email protected]

JPMorgan Chase Bank, N.A., Dubai Branc

Harm Meijer(44-20) 7325-9248

[email protected]

J.P. Morgan Securities Ltd.

4.5

6.0

7.5

9.0

E

Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Price Performance

Talaat Mostafa Group Holding Company (TMGH.CA;TMGH EY)

FYE Dec 2008A 2009A 2010E 2011E 2012EAdj. EPS FY (E) 0.71 0.53 0.77 0.87 1.35Sales FY (E mn) 5,421 4,822 7,109 9,024 10,914

Sales growth (%) FY -11% 47% 27% 21%EBITA FY (E mn) 1,715 1,240 1,949 2,226 3,571Net profit FY (E mn) 1,442 1,106 1,566 1,775 2,748Net profit growth(%) FY -23.3% 41.5% 13.4% 54.8%P/E FY 11.2 15.1 10.4 9.1 5.9P/BV FY 0.7 0.7 0.7 0.6 0.6Net D/E FY 19.6% 23.7% 20.7% 16.0% 11.1%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataPrice (E) 7Date Of Price 03 Jun

Price Target (E) 10Price Target End Date 31 Dec52-week Range (E) 8.6

4Mkt Cap (E bn) 1Mkt Cap (US) ($ bn) Shares O/S (mn) 2,0Free Float 45.3Mnth Avg daily value (US$MM)

9

See page 50 for analyst certification and important disclosures, includi ng non-US analyst d isclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making thinvestment decision.

TMG - Landbank by location

78%

8%

14%

Cairo Outside Cairo Saudi Arab

Source: Company reports

We initiate coverage of Talaat Mostafa Group Holding (TMG) with anOW rating and Dec 2010 SOTP based PT of EGP10.7; we also add thestock to the Analyst Focus List (AFL). At current prices, we see 34% upsidein the stock, which trades at a 34% price to NAV discount. TMG is up 16%YTD, outperforming the benchmark EGX30 Index by 15%. However, weexpect stock price momentum to continue and the price to NAV discount tonarrow with better upcoming QoQ results on the back of planned handoversand a further pick up in new sales momentum.

Strong domestic driven housing demand benefits TMGs Cairo-heavylandbank: Targeting Egypts middle (35%) and upper middle (12%)income segment, which accounts for c. 47% of the countrys total

population, TMG is the largest listed developer on the Cairo StockExchange with 50mn sq m in its landbank. About 86% of TMGs landbankis Egypt based, with the rest located in Saudi Arabia a market with strongdemand dynamics similar to Egypt. We forecast Cairos housing shortfall toreach 264k units by end-2010, with demand for middle and upper middleincome segments estimated at 125k units. TMG plans to launch off-plansales in Riyadh, Saudi Arabia in 4Q10.

Strong sales backlog at EGP24bn and self-funded business model:Current sales backlog of EGP24bn provides TMG with high visibility on 3-yr earnings the highest within our MENA coverage universe. Thecompany has historically and continues to rely on a self-funded businessmodel, with construction costs funded through cash-based off-plan sales.

Given this, TMGs balance sheet position is healthy with net debt/equity at23% at end-1Q10 at the favorable lower end of the net debt/equity rangefor its GCC peers.

Key risks: The downside risks to our OW rating could come from weakerthan forecast revenue from planned handovers in 2010-2012, weaker thanforecast margins on residential units, lower than expected demand forhousing and a poor response to the off-plan sales launch in Saudi Arabia.


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Muneeza Hasan(971) [email protected]

Table of Contents

Play Cairo RE the TMG way.....................................................3Initiate with OW and Dec 2010 SOTP based PT of EGP10.7 .......... ........... ........... .....3Strong domestic driven housing demand benefits TMG's Cairo-heavy landbank .......3Strong sales backlog at EGP24bn (1Q10)....................................................................4Self-funded business model; low gearing ........... .......... ........... ........... .......... ........... ....5Strong valuations underpinned by robust underlying fundamentals ........... ............ .....5TMG in Saudi Arabia Off-plan sales to be launched in 4Q10 ........... ........... ........... .6Recurring revenue to account for c. 7% cumulative revenue.......................................7Key downside risks to our rating and PT.....................................................................7

Valuations OW TMG with Dec 2010 SOTP based PT ofEGP10.7.....................................................................................8Key drivers of TMGs SOTP fair value.......................................................................9

TMG Strong valuations with 34% price to NAV discount ........... ........... ........... ....11Egypt 11% of MENA GDP; 28% of MENA population .......14Egypt MENAs most populated country.................................................................15

Egypt property market ...........................................................17High demand for housing amid low affordability levels............................................17Housing deficit in upper middle, middle & low income segment..........................18but affordability levels remain low .......... .......... ........... ........... .......... ........... .........18

Cairo Residential shortfall to reach 264k units by end2010 .........................................................................................20Over 550k marriage contracts signed annually; another way to gauge housingdemand.......................................................................................................................20Cairo among the worlds top 10 most populated cities...........................................21 Cairo's rapidly developing suburban communities .......... ........... ........... ........... .........21Residential prices have been relatively stable for middle income housing................23Cairo Commercial - Office space remains undersupplied ..25Cairo Retail and Hospitality...................................................27Cairo Retail limited GLA for high-end retail..........................................................27Hospitality..................................................................................................................28

Key players - TMG is the largest ...........................................29Talaat Mostafa Group - Changing Cairo's landscape..........32Management...............................................................................................................33Self-funded business model core in Egypt..............................................................34

Key Projects - Madinaty is the largest ..................................36Madinaty 62% of TMGs SOTP ........... .......... ........... .......... ........... .......... ........... ...37Al Rehab 1 and 2 12% of TMGs SOTP value.......................................................38 Al Rabwa 2 2% of TMGs SOTP value..................................................................39TMGs first international project Nasamat Al Riyadh; 5% of the SOTP................40Hotels and Resorts 20% of TMGs SOTP ........... ........... ........... .......... ........... ........41

Revenue outlook 3-yr revenue CAGR of 31% ...................43EBITDA and net profit outlook .......... ........... .......... ........... ........... ........... .......... .......43

Cash flows and balance sheet ..............................................45Low gearing with liquidity likely to improve going forward.....................................45

Valuation Methodology and Risks ........................................48


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Play Cairo RE the TMG way

Initiate with OW and Dec 2010 SOTP based PT of EGP10.7

We initiate coverage of Talaat Mostafa (TMG) with an OW rating and Dec 2010

SOTP based PT of EGP10.7. We also add TMG to the CEEMEA Analyst Focus List.

Targeting Egypts middle (35%) and upper middle (12%) income segment, which

accounts for c. 47% of the countrys total population, TMG is the largest listed

developer on the Cairo Stock Exchange with 50mn sq m in its landbank and

experienced management with a good track record of on time deliveries (c. 25,000

residential deliveries since inception). About 78% of the company's landbank is

located in Cairo, 8% outside Cairo, while the rest is located in Riyadh and Jeddah,

Saudi Arabia a market with equally strong demand dynamics as Egypt.

The stock trades at a 34% discount to 2010E NAV and our price target implies 34%

upside from current levels. Offering a 3-yr revenue and net income CAGR of 31%and 35%, respectively, on our estimates, TMG is also one of the most attractively

valued stocks in terms of P/B when compared to its regional peers with similar

underlying demand dynamics.

Key near- to medium-term catalysts include upcoming quarterly earnings for 2010

driven by planned handovers, landbank revaluation by CBRE (last valuation carried

out in June 2008), completion and launch of the Nile Hotel in Cairo and the Nasamat

Al Riyadh (Saudi Arabia) off-plan sales launch in 4Q10. The downside risks to our

OW rating could come from weaker than forecast revenue from planned handovers in

2010-2012, weaker than forecast margins on residential units, lower than forecast

demand for housing and a poor response to the off-plan sales launch in Saudi Arabia.

Strong domestic driven housing demand benefits TMG'sCairo-heavy landbank

TMG owns roughly 50mn sq m in its landbank of which nearly 78% is concentrated

in Cairo, Egypt. Being the commercial hub and the capital of Egypt, Cairo attracts a

significant number of local migrants with nearly 1,000 people moving into the capital

every week according to a UN development report.

Figure 1: Egypt and Cairos housing shortfall

405282

9619

264

134 9332

800

6

0

200

400

600

800

1,000

Overall

shortfall

Low Middle Upper

Middle

Luxury

'000 Egypt Cairo

Source: Company reports and J.P. Morgan estimates

Figure 2: TMG - Egypt's largest developer by landbank

Cairo

78%

Outside Cairo

8%

Saudi Arabia

14%


Table 1: TMG EPS - JPM vs. Bbergconsensus

EGP 2010E 2011E 2012E

Bberg Conc 0.96 1.45 1.80JPMorgan 0.77 0.87 1.35

Source: Bloomberg and J.P. Morgan estimates

Talaat Mostafa is Egypts largest

listed developer with 50mn sq min its landbank, 78% of which is

located in Cairo

Planned handovers during 2H10,

landbank revaluation by CBRE

and the launch of off-plan sales

in Saudi Arabia in 4Q10 should

be key near- to medium-term

triggers for stock performance


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Bursting at the seams, the city is amongst the worlds top 15 densely populated cities

with nearly 18mn people. Despite the new developments coming on stream within

the new suburban communities surrounding Cairo, the citys housing pressures areunlikely to subside with the urban population estimated to grow at a much faster rate

than rural given relatively better employment prospects and lifestyle. Hence, given

continued strong growth in Cairos population, we estimate Cairos housing stock

deficit to reach 125k for the middle to upper middle income segment by end-2010

with the overall housing shortfall reaching 264k.

Strong sales backlog at EGP24bn (1Q10)

Current sales backlog of EGP24bn provides TMG with high visibility on 3-yr

earnings the highest within our MENA coverage universe. The tough global

environment in 2009 has had a modest impact on TMG sales, where customer

contract cancellations peaked in 1H09 and currently account for less than 5% of the

total backlog. These have been more than offset by new sales generated in 2H09 and

1Q10. The company generated new sales of EGP1.2bn in 1Q10 and plans to maintain

the overall backlog at EGP25bn for 2010; implying new sales of EGP3bn in 2010,

according to our estimates. TMG plans to further increase its sales backlog to

EGP30bn (net of revenue recognition of units being completed in 2011) by end-

2011; implying new sales of EGP4bn.

Figure 3: TMG - Landbank by proj ect and location

66%

10%

2%

14%

8%

Madinaty (Cairo) Al Rehab (Cairo) Al Rabwa (Cairo)

Riyadh and Jeddah Hotel projects (Egypt) Source: Company reports

Madinaty is TMGs largest project by landbank with nearly 33mn sq m accounting

for 66% of the companys total landbank and 62% of our SOTP based value. Divided

into 6 overlapping phases, the Madinaty project is due for completion by 2020,

where the first set of handovers is planned for 2H 2010. Once completed in 2020,

Madinaty will become MENAs largest integrated community style development.

This is followed by the Al Rehab project located in the New Cairo region with nearly

4mn of incremental land area under development.

We estimate Cairos residential

housing shortfall to reach 264k

by end-2010. Of this, the

shortfall for middle to uppermiddle income segment is

estimated at 125k units

TMG's current sales backlog of

EGP24bn provides 3-year

earnings visibility the highest

within our MENA universe

Madinaty is TMG's largest

development project and once

completed in 2020 will become

MENAs largest integrated

community complex


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Self-funded business model; low gearing

TMG relies largely on a self-funded business model with little upfront funding

requirement to develop city and community complexes. The payment for purchasedland parcels does not entail an initial cash outlay and is typically settled in kind in the

form of residential apartments to the Ministry of Housing (e.g. Madinaty and Al Rehab).

The upfront costs involving development plan and initial infrastructure are funded via

equity or debt, while the overall project construction cost is financed through customer

advances that are typically linked to phased cash outflow. Given the restrictions on

mortgage financing, commercial banks cannot fund off-plan sales directly; thus the self-

funded, off-plan sales model has worked well for TMG. Given this, the companys

balance sheet is healthy with net debt/equity of 23% as of 31st March 2010 at the

favorable lower end of the net debt/equity range for its GCC peers.

Figure 4: TMG enjoys on e of the lowest net debt/equity ratios among i ts GCC peers454%

190%

110%45% 23% 22%

-4%-10%

90%

190%

290%

390%

490%

Barwa -

Qatar

Aldar - UAE Palm Hills -

Egypt

Dar Al Arkan

- KSA

TMG - Egypt Emaar -UAE Sorouh -

UAE

Net Debt / Equity Source: Bloomberg, Company reports and Zawya

Strong valuations underpinned by robust underlyingfundamentals

In Feb 2009, TMG's stock hit a low of EGP2.37, down 81% from its 2008 peak of

EGP12.51. We believe that this was a combination of 1) general lack of appetite for

and risk aversion from equities, where real estate developers among others across the

globe hit their trough valuations and 2) legal proceedings against the former

chairman of TMG (these charges have recently been dropped as per Bloomberg).

However, following better than expected macro numbers, limited default from local

real estate investors driven by limited speculative demand and better than expected

sales and earnings announcements by the company, the stock has seen a sharp

recovery from its mid 2009 lows, where its up 44% in 12 months.

Figure 5: TMG Price performance sin ce listin g (rebased)

0

20

40

60

80

100

120

140

Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10

TMG EGX 30 Index Source: Bloomberg

At 23% (1Q10), TMGs net

debt/equity is at the lower end

relative to its MENA peers

Despite the recent run up, TMGs

valuations remain attractive with

the stock trading at 9x 2010E

earnings and at a 34% discount

to 2010E book


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Despite this recovery, the stock still trades at a 34% discount to 2010E NAV and 9x

2010E earnings. TMG is by far the only stock within our MENA universe that offers

a 34% discount to 2010E NAV despite the strong underlying demand dynamics ofthe Cairo real estate. In Saudi Arabia where underlying demand dynamics are equally

strong and speculative buying remains non-existent, the largest real estate developer

by market cap, Dar Al Arkan, trades at a 5% discount to 2010E book (Bloomberg

consensus).

Figure 6: MENA Large Cap Real Estate develop ers on P/B 2010E

81%62%

31%20%

-5%-14%

-22% -34% -39%-58%-80%

-60%-40%-20%

0%20%40%60%80%

100%

Jabal Omar -

KSA

DLF Ltd. -

India

Barwa -

Qatar

Palm Hills Dar Al Arkan

- KSA

Saudi RE -

KSA

Sorouh TMG Emaar -UAE Aldar

Discount// Premium to P/B

Source: Bloomberg and J.P. Morgan estimates, Priced on June 03

TMG in Saudi Arabia Off-plan sales to be launched in4Q10

TMG has picked Saudi Arabia (KSA) to develop its first mixed used project as part

of the company's geographical diversification strategy. KSA offers a blend of both

strong domestic demand, with its largest population base of 28mn in the GCC, and

strong macros driven by oil backed revenues. Riyadh is Saudi Arabias fastestgrowing housing market with annual population growth averaging at 2.2%.

According to the Riyadh Development Authority, Riyadh needs nearly 18,000 units

of annual supply over the next 20 years to fill up the housing deficit. With high pent

up demand, Riyadh has been one of the few places where residential prices and rents

have remained stable in the prime residential areas. TMG is a JV partner in Nasamat

Al Riyadh project with a total of 4mn sq in land area (TMGs share is estimated at

2mn sq m 50% of the total), where the company plans to launch off-plan sales

during 4Q10. TMGs share in this project is at 5% of our SOTP value. Apart from

this project, the company owns additional landbank of 2.8mn sq m (TMGs share is

50% of that) in Jeddah, which will be developed going forward after master

development plans are finalized.

14% of TMGs landbank is

located in Saudi Arabia a

market with equally strong

underlying fundamentals as

Egypt


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Recurring revenue to account for c. 7% cumulative revenue

TMG currently has 3 operational hotels with 684 room keys through its hotels and

resorts management subsidiary Arab Company for Hotels and Tourism Investment(ICON). The fourth hotel, Nile Hotel with 191 room keys, is due for completion by

3Q10, while the company plans to raise this to 5,000 room keys in 5 years of which

1,725 room keys are committed and under development. We only take into account

the committed and under development hotel room keys when calculating our DCF

from the hotel and resort portfolio. The companys hotel and resort portfolio benefits

from reasonable occupancy levels and healthy operating margins given robust visitor

traffic into Egypt annually. The existing portfolio allows TMG to tap the business

and tourism traffic flow particularly into Cairo and Sharm el-Sheikh (Egypts key

tourist destination). With three operational hotels and five hotel and resort projects in

the pipeline, the companys hotels and resorts portfolio accounts for 20% of our

TMG SOTP value. However, with development revenues from Madinaty and Al

Rehab accounting for a sizable proportion of the companys consolidated revenues,

the contribution from hotels and resorts at the revenue level is c.7% on average

(2010-2012), as per our estimates.

Key downside risks to our rating and PT

Weaker than forecast revenue for planned handovers

The revenue from villa sales is split into two stages, where TMG records revenue

from the land area for underlying villas upon sales generation and contract

reservation, while revenue from the built up area (BUA) for villas as well as

apartments is recorded only upon handover. Hence, if the company generates lower

than expected new villas sales, it could lead to weaker than estimated revenues over

our forecast period. Similarly, revenues from land sales are also recorded upfront,

hence lower than forecast land sales to Mega Developers in any quarter can result in

lower than estimated revenues from this segment.

Poor response and potential delay in launch of off-plan sales in Riyadh

TMGs share in Nasamat Al Riyadh is 50%, where the project represents 5% of the

companys combined SOTP on our estimates. We estimate TMG to achieve 5% sales

of the total BUA in Nasamat Al Riyadh when the project is launched in 4Q10. This

assumption is already below the companys planned launch at 10% BUA of the total

for 2010. However, the downside to our PT could come from poor response from

Saudi investors thus leading to weaker than forecast new sales in the companys

Saudi project.

Slowdown in residential demand in Cairo

Assuming annual 2% growth in Egypts population, we estimate the residentialshortfall in Cairo to reach 264K in 2010. However deterioration in Egypts macro

fundamentals driven by continued weakness in global macro fundamentals could

result in reduced investor risk appetite leading to lower demand and limited

affordability for housing.

TMGs hotels and resorts

portfolio accounts for 20% of ourcombined SOTP with recurring

revenues representing 7% of the

consolidated topline


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Valuations OW TMG with Dec 2010

SOTP based PT of EGP10.7The largest contribution to our TMG SOTP comes from the Madinaty, a large

community complex with target population of 600K and construction tenure of 20

years (to be completed in 6 overlapping phases over the course of its construction).

Madinaty accounts for 62% of our TMG combined SOTP, followed by Al Rehab (1

& 2) accounting for c. 12% of the companys SOTP value. We exclude TMGs

landbank from our SOTP calculation, as we forecast cash flows from all of TMG

projects including Madinaty and Al Rehab for their entire construction period. We

also exclude TMGs land plot in Jeddah (2.8mn sq m), where construction plans have

not yet been finalized. Slicing our SOTP according to development type, the

development proportion of the companys SOTP represents 80%, while the

remaining 20% contribution comes from existing investment portfolio and potential

cash flows from planned hotel and resorts projects.

Table 2: TMG - SOTP valuation summ ary

ProjectDevelopmentstatus

Completiondate

Valuedinterest

Discountrate

Total projectvalue 2010(EGP mn)

TMG's shareof projectNPV 2010(EGP mn)

Pershare(EGP)

As % oftotal

Mixed used projectsAl Rehab 1 Construction stage 2012 100% 15.3% 481 481 0.2 2%Al Rehab 2 Construction stage 2017 100% 15.7% 2,822 2,822 1.4 10%Al Rabwa 2 Construction stage 2013 100% 15.3% 489 489 0.2 2%Madinaty Construction stage 2020 100% 15.7% 17,441 17,441 8.6 62%Nasamat Al Riyadh - KSA Pre-construction 2012 50% 15.5% 2,737 1,368 0.7 5%Hotel projects Construction stage 2015 100% 15.5% 2,827 2,827 1.4 10%Hospitality Portfolio Completed 100% 14.8% 2,700 2,700 1.3 10%

28,129 13.9

(+) Other assets 23,326 11.5(-) Liabilities -29,654 (14.6)

TOTAL 21,801

Shares outstanding (mn) 2,030

NAV/share 10.7Target discount 0%

Target NAV 10.7


At current prices, our SOTP

based Dec 2010 PT of EGP10.7

implies 34% upside


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Figure 7: TMG SOTP breakup by property type

80%

20%

Master developments Investment portfolio


Figure 8: TMG SOTP breakup by projects

11.7%

1.7%

4.9%

10.1%

9.6%

62%

Al Rehab Al Rabwa 2Madinaty Nassamat Al Riyadh - KSAHospitality Projects Hospitality Portfolio


Key drivers of TMGs SOTP fair valueWe rate TMG OW with Dec 2010 SOTP based PT of EGP10.70. We do not apply a

discount to our SOTP, as we find Egyptian property market dynamics rather robust

with the residential demand largely driven by domestic population rather than expats.

However, we use a high WACC of 14.8% to reflect low affordability levels and high

interest & inflation (11.4% as of May 2010) rate environment in the country.

Table 3: TMG J.P. Morgan WACC calcu lation

Egyptian 1yr Treasury bill 10.5%Equity Market Risk Premium (EMRP) 6.0%Base cost of equity 16.5%

Current Cost of Debt 12.0%Income Tax Rate 20.0%

After Tax Cost of Debt

Debt to Total Capital (Target) 25.0%

Weighted Average Cost of Capital 14.8%

Project and tenure wise discounting guide

Yielding properties 14.8%Construction stage 15.3%Preconstruction stage 15.5%Projects 3 years out 15.8%Projects 4 years out 16.0%Projects 5 years out 16.3%Projects 6 years out and beyond 16.5%

Source: J.P. Morgan estimates

Our WACC is calculated using Egypt's benchmark 1 year Treasury bill rate

(currently at 10.5%) to which we add an equity risk premium of 6%, resulting in our

base cost of equity of 16.5%. We use 12% as our base cost of debt, which reduces to

9.6% after we apply a 20% corporate tax rate. Using a target debt to capital of 25%,

we calculate our base WACC at 14.8%. We use our base cost of WACC to discount

cash flows from TMGs operational investment properties. However, for properties

under construction, we apply an average WACC of 15.3% and for projects that are

still in the preconstruction stage, we add a further 25bps to our construction stage

WACC to discount potential cash flows.

We calculate our SOTP using

base case WACC of 14.8%,

derived via base cost of equity at

16.5%, after tax cost of debt at

9.6% and target debt to capital of

25%


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For Madinaty Phase 5 and 6 that we estimate to be completed in 2017 and 2020,

respectively, we add an incremental 25bps for each phase to our pre-construction

WACC of 15.5%. This takes our Madinaty Phase 5 and Phase 6 WACC of 15.8%and 16%, respectively and results in a phase BUA-weighted WACC of 15.75%. We

use a 2% terminal growth rate to discount cash flows from TMG's recurring income

generating investment properties

Table 4: TMG - WACC range across p rojects

WACC range for phasesProjects Stage Completion Low High AverageAl Rehab 1 Construction stage 2012 15.3% 15.3% 15.3%Al Rehab 2 Construction stage 2020 15.3% 16.0% 15.6%Al Rabwa 2 Construction stage 2013 15.3% 15.3% 15.3%Madinaty Construction and pre construction stage 2020 15.3% 16.5% 15.7%Nasamat Al Riyadh - KSA Pre-construction 2012 15.5% 15.5% 15.5%Hotel projects Construction and pre construction stage 2015 15.5% 15.5% 15.5%Hospitality Portfolio Completed 14.8% 14.8% 14.8%



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TMG Strong valuations with 34% price to NAV discount

TMG offering a favorable mix vs. its peers

Trading at a 34% discount to NAV (average since 2008) and underpinned by strongresidential demand fundamentals, TMG makes a compelling buy case when

compared to its regional emerging market peers in our view. The housing demand

dynamics within Egyptian real estate are more comparable to Saudi Arabia, India and

Malaysia among other emerging markets, where real estate developers are trading at

close to or at a premium relative to their 2010E NAVs.

Take, for example, Dar Al Arkan, Saudi Arabias largest RE developer by market

cap with similar demand dynamics i.e. residential housing shortfall and under

penetrated mortgage market, trades at an average 5% price to NAV discount.

Similarly, DLF Limited, Indias largest listed developer, is trading at a 66% premium

to its 2010E book. In contrast, while TMGs UAE peers trade at comparable price to

NAV discounts, we note that the two countries, in our view, differ on the basis of

underlying demand fundamentals.

TMG is up 16% YTD and 15% relative to its Cairo based benchmark EGX30 Index.

In Feb 2009, TMG's stock hit a low of EGP2.37, down 81% from its 2008 peak of

EGP12.51.

Table 5: TMG vs. Key Emerging mark ets RE developers (>1bn in Mkt cap)

Market Cap P/B Total Return YTDCompany Country US$ bn X %

DLF Ltd India 10.2 1.66 -25Emaar Prop UAE 5.3 0.61 -17Dar Al Arkan Rea Saudi Arabia 3.9 0.96 -3Unitech Ltd India 3.8 1.54 -15Jabal Omar Development Saudi Arabia 3.2 1.81 -6Growthpoint Prop South Africa 3.1 1.03 10TMG Holding Egypt 2.8 0.65 12Barwa Real Estate Qatar 2.9 1.31 -7Redefine Property South Africa 2.5 0.93 0Aldar Properties UAE 2.2 0.42 -37DBRealty Ltd India 2.1 2.72Emaar Economic C Saudi Arabia 1.9 1.00 -11Housing Development India 1.8 1.08 -38Uem Land Hldg Malaysia 1.5 2.72 16Sorouh Real Estate UAE 0.7 0.78 -14.8

Average 1.28 -9.7

Source: Bloomberg and J.P. Morgan estimates, Priced on June 02

Hence, we believe that TMG's 34% price to NAV discount should further narrow

moving forward supported by near-term triggers including upcoming quarterlyresults for 2010 on the back of planned handovers in Madinaty, a pick up in sales

(1Q10 new sales recorded at EGP1.2bn) and 4Q10 off-plan sales in Riyadh.

The stock is up 16% YTD and15% relative to the benchmark

EGX30 Index. However we

expect momentum to continue,

with improved upcoming QoQ

earnings through planned

handovers and positive

response from off-plan sales in

Saudi Arabia


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Figure 9: TMG price performance vs . top MENA peer average

0

20

40

60

80

100

120

140

Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10

TMG Dar Al Arkan Aldar Emaar Sorouh Palm HillsBarwa

Source: Bloomberg

Figure 10: TMG P/B histori cal trend

0.20.30.40.50.60.70.80.91.01.11.2

1.3

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10

Price/Book avg+2std avg+1stdavg-1std avg

Source: Bloomberg


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EgyptPro

pertyMar

ket


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Egypt 11% of MENA GDP; 28% of

MENA populationLocated in Northern Africa, bordering the Mediterranean Sea, Egypt is one of the

largest economies within the MENA region accounting for 11% of the combined

MENA GDP of US$1.7Tr (2009). Despite the challenging global macro dynamics,

Egypt has managed to weather the storm, posting the third highest GDP growth

within the MENA region at 5% in 2009. Our regional economist expects the positive

growth trend to continue well into 2010 with an estimated real GDP growth of more

than 5%.Based on these forecasts, we expect Egypt to achieve GDP per capita ofUS$ 3,100 in 2010, up from US$2,500 in 2009. Egypts manufacturing, Oil&Gas

and agricultural sectors are the key contributors to GDP, accounting for an aggregate

46% and 17%, 15% and 14%, respectively. The Suez Canal revenues are 3% of

Egypts GDP.

Figure 11: Egypt - key sector s' con tribu tion to GDP (2008-09)

15%

17%

11%

3%

40%

14%

Oil, Gas & Others ManufacturingAgriculture, Forests & Fishing Wholesale & Retail Trade

Suez canal Others

Source: CAPMAS

Figure 12: MENA GDP by major econom ies

Saudi Arabia

22%

Qatar

6%

Kuwait

7%

Egypt

11%

Others

20%

Iran

20% UAE

14%

Source: CIA factbook

The Egyptian pound is a freely floating currency ($1=EGP5.5) but has been fairly

stable for the last few years vs. peer emerging market economies. The countrys

inflation peaked at 20% in 2008, dropping to 10% in 2009. J.P. Morgan estimates

Egypts inflation to contract further to 7.4% for 2010.

Figure 13: MENA econom ies GDP per capita (2009)

46,582

32,488

24,353

75,978

2,450

14,87118,718

-

10,000

20,000

30,000

40,00050,000

60,000

70,000

80,000

Qatar UAE Kuwait Bahrain Oman KSA Egypt

GDP per Capita (US$)


Figure 14: MENA economies r eal GDP growth (2009)

11%7%

5%4%4%4%

3%3%3%

2%1%

0%-1%-2%

-5% 0% 5% 10% 15%

QatarLebanon

EgyptIraq

YemenOman

BahrainSyrian ArabJordan

LibyaIran

United ArabSaudi Arabia

Kuwait


Egypt economy grew 5% in

20093rd highest within MENA

driven by continued FDI flows,

remittances and tourism

revenues


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15



Egypt MENAs most populated country

With its large indigenous population base of 75mn, Egypt accounts for 28% of the

combined population of the MENA region at 281mn. Over the years, Egypt'spopulation has been growing at a natural rate of 2% making infrastructure

maintenance and improvement all the more challenging for the government.

Agriculture is the main identifiable source of income generation and, according to

the government statistics, 11% of the countrys workforce is employed in the

agricultural sector. This is followed by manufacturing and related services at 5%.

Despite high economic growth, living conditions for Egyptians remain modest with

c.57% of Egypt's population dwelling in rural areas despite faster urban population

growth rate at 2.3% vs. 0.7% growth in the rural population. Poverty is concentrated

in rural areas and in Upper Egypt with nearly 20% (CIA factbook) of Egyptians

living below the poverty line.

Figure 15: Population - Egypt ranks no . 1 in MENA (281mn)

Egypt

28%

Saudi Arabia

9%

Iraq

11%

Rest of the

MENA

10%

Yemen

8%

Syria

7%

Iran

27%

Source: CIA Factbook

Figure 16: Egypts popul ation growing steadily at 2%

60

65

70

75

80

85

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

1.0%

1.2%

1.4%

1.6%1.8%

2.0%

2.2%

2.4%

Population Growth

Source: CIA Factbook

On a positive note, the country boasts one of the youngest populations in the world

with an average age of 24 years. According to the Ministry of Investment, over 52%

of Egypts population is aged between 5-30 years and only 13% is aged above 45

years.

Figure 17: Egypts popul ation split

RuralPopulation

57%

Urban

Population

43%

Source: CAPMAS

Figure 18: Egypt 52% popul ation i s aged between 5-30 years

5-20 years

32%

30-45 years

24%

20-30 years

20%

Less than 5

years

11%

45-75 years

13%

Source: Ministry of Investments Egypt

Despite faster urban population

growth compared to rural, 57%of Egyptians are still living in

rural areas


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16



The family culture, particularly in urban areas, is rapidly evolving where the concept

of dual income households among the middle and the upper middle class population,

which represents over 48% of the population, is slowly becoming more commongiven low affordability levels of quality living. The middle income segment accounts

for 35% of Egypts population, while c.12% represents the upper middle segment

and only 2% constitute the high income segment based on the housing data provided

by Central Agency for Public Mobilization and Statistics use (CAPMAS).

Figure 19: Egypt - One of the youngest populations in the world

44

29

40

24

0

10

20

30

40

50

Germany

Belgium

South

Korea

Brazil

Mexico

South

Africa

Average age

Source: : Ministry of Investments

Figure 20: Egypt - Income segments based on housing types

Low Income

51% High Income

2%

Upper Middle

12%

Middle

Income

35%

Source: CAPMAS


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17



Egypt property market

High demand for housing amid low affordability levels

Egypts housing demand is driven by indigenous population growth and rapidurbanization.

We estimate Egypts housing deficit to reach 800k in 2010.

Of this, the housing shortfall for middle and upper middle income accounts for378K.

Contributing almost 32% to Egypts combined GDP and close to 25% to Egypts

population, Cairo attracts the highest level of investment and interest in its real

estate market. However, with close to 40% of Cairo's population living in informal

settlements, the data on residential and commercial real estate is patchy. We rely on

information provided by Egypts Ministry of Investments, Central Agency for Public

Mobilization and Statistics use (CAPMAS), CIA Factbook, IMF, UN Development

reports and a handful of real estate agencies that provide insight into Cairos real

estate market including Jones Lang LaSalle, Colliers and ColdWell Banker based in

Egypt.

Figure 21: Cairo's informal settlements

Source: Egyptian-German Participatory Development Programme in Urban Areas (PDP)

We estimate Egypt's housing

shortfall to reach 800K by end-

2010 and calculate Cairo's share

in the total shortfall at 264k units


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18



Housing deficit in upper middle, middle & low incomesegment

Catering to a large urban population as well as being home to local, national and

multinational corporates, Cairo retains its place in Egypt as the commercial hub and

the most active and attractive real estate market. The demand for housing comes

mostly from local home buyers with over 60% being cash based purchases, as the

mortgage market remains largely untapped. Given the less structured expansion and

limited infrastructure in Downtown Cairo, the middle, upper middle and high income

segment has been actively moving away from the centre and towards Greater Cairo,

i.e. the western and eastern extensions of Cairo city. Existing stock of housing is

more than 30 years old and development within Downtown Cairo is nearly

impossible given space limitations. Given low affordability levels and the under

penetrated mortgage market, the new developments have been focused largely on the

upper middle and high income customer segment.

We expect Egypts housing deficit to reach 800K in 2010

We calculate Egypts overall housing deficit to reach 800K units in 2010 based on a

population growth of 2% and an average household size of 4.5 (see Table 6). Of this,

we forecast around half of the housing deficit equal to 405K units in the low income

segment which represents 51% of Egypt's overall population base. We calculate

housing deficit for the middle income segment, with 35% weight in Egypts

population, to reach 282k units in 2010, while we expect the housing deficit for the

upper middle income segment, 12% of the population, to reach 96k units in 2010.

Table 6: Egypt residential market forecast

2008 2009 2010E 2011E 2012EPopulation (000') 74,400 75,888 77,406 78,954 80,533

Y/Y 2.1% 2.0% 2.0% 2.0% 2.0%

Household/unit 4.5 4.5 4.5 4.5 4.5

Required units (000') 16,388 16,715 17,050 17,391 17,739Supplied units (000') 15,875 16,060 16,250 16,440 16,630

Demand (000') 366 328 334 341 347Actual annual supply (000') 175 185 190 190 190

Surplu s/ (Deficit) (000') -513 -656 -800 -951 -1,109

Source: CAPMAS, UN development report, Ministry of Investments and J.P. Morgan estimates

but affordability levels remain low

With real estate loans accounting for less than 1% of Egypt's combined GDP, most

home purchases are cash based or with 30-60% cash and the balance financed over 5,7, 10 or 15 years mostly by the real estate developer itself.

Bank lending for real estate remains low on the back of 1) Central banks restriction

on real estate lending by commercial banks for off-plan units, 2) high interest rates

(14-15%) and 3) lack of awareness among general population with regards to

alternative modes of funding. Egypt's mortgage loans as a percentage of GDP are

also amongst the lowest when compared to other emerging markets with similar

income and population dynamics.

Existing housing stock in

Downtown Cairo is more than 30

years old, where infrastructure

constraints make further

expansion challenging

We forecast residential shortfall

for Egypts middle income

segment at 282K and calculate

Cairos share in this at 93K units

Mortgage market remains

untapped with real estate loansaccounting for less than 1% of

the country's GDP - amongst the

lowest vs. peer emerging market

economies


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19



Figure 22: Egypt - Real estate loans as a % of GDP

0

500

1000

1500

2000

2500

3000

2005-06 2006-07 2007-08 2008-09 1Q10 2Q10

EGP M n

0.1%

0.2%

0.2%

0.3%

0.3%

0.4%

0.4%

Mortgage Finance Companies

BanksMortgage as % of GDP

Source: CAPMAS

Figure 23: Egypt mortg age lending as a % of GDP

12.0%

8.0%

4.0% 4.0%3.0% 2.5%

1.0% 0.4%

0%

2%

4%

6%

8%

10%12%

14%

UAE India IndonesiaTurkey Qatar Russia Saudi

Arabia

Egypt

Source: Central banks, IMF and J.P. Morgan estimates

Table 7 highlights average annual income and housing affordability levels across

different income segments prevalent in Egypt. According to a study done by

USAID, 2% of the population belonging to the high income segment draws an

average annual income of EGP820K and given the relatively high savings rate of

35% can afford luxury accommodation ranging between EGP2-7.5mn (US$360K-

1.2mn). At the other end of the spectrum is the low income segment representing

51% of the population with average annual income of barely EGP90K (US$16K) and

a savings rate of close to 3%.

Table 7: Egypt - Housing affordability levels across various income segments

Income categoriesHousehold

size

Ave. annualFamily income

EGP Housing typeUnit size

(sq m)Price Ranges (EGP

sq m) Unit Price range (EGP )High income 3.8 820,800 Luxury 170-500 12,000-15,000 2mn-7.5mn

Upper Middle 4.0 384,000 Above average 115-200 6,500-9,500 750K-1.9mnMiddle 4.6 165,600 Economic 80-120 4,500-6,500 360K-780KLow Income 5.0 90,000 Low cost / subsidized housing 40-70 750-1,000 30K-70K

Source: USAID, Mortgage and Real Estate Advisory Services Project TAPR and J.P. Morgan Estimates


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20



Cairo Residential shortfall to reach 264k

units by end 2010 We calculate Cairos housing deficit at 264k unit based on its 32% share in Egypts GD

Of the total deficit, we estimate the housing shortfall for the middle and the uppermiddle income segment to reach 125k by 2010.

Deriving Cairo's demand based on its 32% (in 2008 Cairos GDP contribution

accounted for 33% of Egypt combined GDP) contribution to Egypt's combined GDP,

we calculate Cairo housing stock deficit at 264k units for 2010E (see Table 8). We

see strong demand within the middle and upper middle income segment given the

under-leveraged market and growing housing deficit.

As a result, out of the overall housing deficit of 264k units, we forecast a housingdeficit of 125k units within the middle and upper middle income segment in Cairo

and a deficit of 6k units within the high income segment.

Over 550k marriage contracts signed annually; another way to gauge housing demand

According to CAPMAS, over 550k marriage contracts are signed in Egypt annually of which nearly 100k (JLLS estimates)

marriages take place in Cairo alone. While we do not take this into consideration when forecasting annual demand for

housing, it nevertheless strengthens our case for a housing deficit in the country.

Keeping our assumptions conservative, even if we estimate 20% of these married couples look for new housing given low

affordability levels, it still implies demand of nearly 132k units annually. Of this c. 62k represents housing demand in the

middle and upper middle income segment and 3k in the high income segment.

Figure 24: Egypt- Annual marriage contracts

400

500

600

700

2002 2003 2004 2005 2006 2007 2008

000'

Annual registered marriage contracts

Source: CAPMAS

Figure 25: Egypt- Housing demand from new marriages

15 16 16

43 46 47

62 6768

-

50

100

150

2007 2008 2009

000' units

High Income Upper Middle Middle Low Income

Source: CAPMAS and J.P. Morgan estimates

We calculate Cairos residential

shortfall using its 32%

contribution to Egypts total

GDP


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21



Table 8: Egypt and Cairo's residential demand by income segments

Overall shortfall Low Income Middle Income Upper Middle High End

Estimates in 000' Egypt Cairo Egypt Cairo Egypt Cairo Egypt Cairo Egypt CairoAs a % of total demand100%

33% of Egypthousing deficit

51% 51% 35% 35% 12% 12% 2% 2%

2008 513 169 260 86 181 60 62 20 12 42009 656 216 332 110 231 76 79 26 16 52010E 800 264 405 134 282 93 96 32 19 62011E 951 314 481 159 335 111 115 38 23 72012E 1,109 366 561 185 390 129 134 44 26 9

Source: CAPMAS, UN development report, Ministry of Investments and J.P. Morgan estimates; Note: Cairo demand based on Cairos contribution in Egypt's total GDP at 33%.

Cairo among the worlds top 10 most populated cities

Bursting at the seams, Cairo is amongst the worlds top 15 densely populated cities

and the largest within MENA with nearly 18mn people. Cairo is also Egypt's main

residential and commercial market given its strategic location, making it the secondmost attractive location after Dubai in MENA. Being the commercial hub and the

capital of Egypt, Cairo attracts a significant number of internal immigrants with over

1,000 people moving into the capital every week according to a UN development

report. Nearly c. 40% of Cairos inhabitants live in informal settlements and the city

is home to 3 of the worlds 30 largest slums according to the same report.

Figure 26: World's most populated cities

21

33

22

18

5 10 15 20 25 30 35

Tokyo

Seoul

Mexico City

Delhi

Mumbai

New York

Sao Paulo

Manila

Los Angeles

Cairo Population in Mn

Source: http://amolife.com/great-places/top-10-largest-cities-in-the-world.html

Cairo's rapidly developing suburban communities

Originally designed to accommodate 5mn people, Cairo has now become one of the

most populated cities in the world with over 18mn people and one of highest

densities at c. 34,000 inhabitants/sq km and going as high as 100,000 inhabitants/sq

km in certain areas. Hence, in the wake of geographic and infrastructural limitations,the government initiated a plan to reduce the growing congestion in Cairo's

downtown and set up the New Urban Communities Authority (NUCA) in 1979.

According to a UN development

report, nearly 1,000 people

migrate to Cairo per week with

40% of the people living ininformal settlements


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22



Table 9: Suburban communities surrounding Downtown Cairo and their target population

City Targeted Number of Inhabitants Land Area (sq m)

1 6th of October 3,750,000 394,177,8002 New Cairo 2,000,000 2832900003 Sadat 750,000 481,783,2094 Obour 600,000 647520005 Sheikh Zayed 500,000 420888006 10th of Ramadan 500,000 384,465,0007 Badr 430,000 675849008 15th of May 250,000 335901009 Shorouq 50,000 43707600

Total 8,830,000 1,795,439,409

Source: New Urban Communities Authority and JLLS

The NUCAs main objective is redistribution of inhabitants away from the narrow

strip of the Nile Valley running alongside Downtown Cairo by developing suburban

communities surrounding Cairo. According to Jones Lang LaSalle (JLLS), a leading

real estate agency, the ultimate plan is to accommodate 9 million people into these

suburban communities. There are currently 9 major satellite cities surrounding Cairo

the western and the eastern extension of Downtown Cairo. Among these, 6th of

October City and New Cairo City with c. 677mn sq m in total land area are in heavy

demand with NUCAs target population for the two cities ultimately at c. 5.7mn. See

Table 9 for details.

Figure 27: Cairos outskirts in the 1970s

Source: World Bank

Figure 28: Developed sub urban com munit ies around Cairo by 2000s

Source: World Bank

There are 9 satellite cities

surrounding Downtown Cairo

with 6th of October City and NewCairo being the most preferred

locations for people relocating

out of Downtown Cairo


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23



Residential prices have been relatively stable for middleincome housing

Starting late 2008, the global financial crisis did trigger a correction in Cairos high

and upper income housing segment. However, prices within the middle income

segment have remained relatively stable, underpinned by the housing shortfall and

limited supply albeit limited affordability levels. TMG, which is the largest

developer catering to Cairos housing demand within the organized middle and upper

middle income segment, told us that despite demand slowed in 2009, the company

increased average prices by c. 3% and further by 6%YTD.

Figure 29: Cairo residential prices for select locations

6,0004,500

6,5007,0008,000

12,000

15,000

2,0003,000

4,0004,000

8,000

5,000

3,000

0

2000

4000

6000

8000

10000

12000

14000

16000

Zamalek New Cairo 6th of

October

Mohandessin Heliopolis Maadi Nasr City

EGP /Sq M

High Low Source: JLLS

Contrary to this, Palm Hills Development that has historically been focusing

primarily on the high end market lowered its prices by as much as 40% in 2009 inorder to reach a larger target market in the face of more saturated demand from the

high end segment. However, given that the majority of the property transactions are

cash driven and for owner occupation, the number of contract cancellations (peaked

in 4Q08 and 1Q09) has remained relatively low.

Residential prices vary significantly across different regions in Cairo, where prices

for certain locations in Downtown are still at a premium despite infrastructural and

logistical challenges. For example, residential property in Zamalek and Mohandessin

in Downtown Cairo still trade at a premium relative to properties in some of the new

suburban communities in Cairos western and eastern extensions. Within Cairos

western extension, 6th of October (30-90 minutes from Downtown Cairo depending

on the flow of traffic) is a popular location for inhabitants relocating out of

Downtown. On the eastern front, New Cairo is home to a large number of workingclass (see Table 8, Figure 27 and 28 for details). TMG's mega mixed-used

communities Madinaty (under early stages of construction) and Al Rehab (fully

developed community with a population of c. 120k, a commercial district with 6

banks, 3 local and 3 international schools as well as a large retail area) and Emaar's

projects are all located within New Cairo, while the majority of Palm Hills

Development are located in the western region in 6th of October City and beyond.

Residential prices have been

stable for middle income

housing given under supply,

while prices for high end

housing segment have come off

by 35-40% in the last 18months


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24



Residential rents, like prices, also vary from one location to another. However,

average residential rents are high in Zamalek averaging at EGP750 sq m (US$136/sq

m). Zamalek is located along the narrow strip of River Nile and is the heart ofDowntown. In contrast Nasr City, which is further from the Cairo downtown, offers

one of the lowest residential rents averaging at EGP300/sq m p.a. (US$55/sq m p.a.).

Figure 30: Cairo rental rates for select locations

360

540540660

720720

900

600

480 480360 360 300 240

0

200

400

600

800

1000

Zamalek New Cairo Maadi 6th of

October

Heliopolis Mohandessin Nasr City

EGP Sq M p.a.

High Low Source: JLLS

Residential rents in 6th of October City, which is the largest suburban community,

range between EGP360-600/sq m (US$65-109/sq m). The rental yields across Cairo

and greater Cairo (western and eastern extension) vary between 8-15%, where yields

are particularly high in Maadi, which houses major oil and gas multinationals,

embassies and diplomatic agencies.


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25



Cairo Commercial - Office space remains

undersupplied Cairos commercial sector remains fragmented with limited supply of Grade A

office space particularly in Downtown Cairo.

Demand for prime commercial space remains high with less than 1% vacancyrate and rental yields in the range of 12-15%.

Over the next 4 years, we estimate c.1.4mn of new supply to come on stream,which should be able to offset the deficit in the sector.

The demand for the commercial sector in Egypt is characterized by Egypts stable

GDP growth of 5+% and large population base that continues to attract inflow of

major multinational and regional corporates into the market. The country is

increasingly seen as the preferred destination of major multination corporates and

regional businesses given its positioning as the mid point between Africa and the

Middle East offering access to nearly 280mn people within the MENA region.

Egypts capital, Cairo, serves as the commercial hub, however availability of prime

space within Downtown Cairo is constrained and the supply remains fragmented

across Downtown and greater Cairo with favorable vacancy rates of less than 0.5%.

Table 10: Cairo - Existing office supply for select locations

Name GLA (sq m)Rent in USD /sq m / month

SampleOccupiers Location Type

Nile City 100,000 68.4 Orascom, AIG, P7G Nile Corniche Mixed-useCity Stars 70,000 45 Booz & Co, Maersk Nasr City Mixed-useSmart Village 390,000 34.2 Oracle, Vodafone Cairo-Alex, Desert road Business park

Pyramids Heights 180,000 28.8 KPMG, IBM Cairo-Alex, Desert road Business parkWTC 19,000 25.2 Australian Embassy Downtown Tower

Source: JLLS and J.P. Morgan estimates

Given infrastructural constraints in Downtown Cairo, an increasing number of

multinational and local companies are relocating towards Cairos western and eastern

extensions. Cairo has nearly 800k sq m of Grade A office space of which over 570k

sq m office space is located within Smart Village and Pyramids Heights in the 6th of

October City (30-90 minutes from Downtown Cairo). Many local corporates still

located in Downtown Cairo are looking to move facilities and their staff to greater

Cairo in order to avoid traffic congestion and infrastructure constraints within

Downtown Cairo.

Table 11: Cairo - Future supply of Grade A comm ercial spaceLocation GLA (sq m) Expected Year of Completion DeveloperEastown /Westown 920,000 2013 onwards SODIC /SolidereSmart Village Phase 3 293,000 2012 onwards Smart Villages CompanyStone Park 150,000 2013 Rooya GroupCairo Festival City 70,000 2011 Al FuttaimCapital Business Park 50,000 2012 Cayan Investment / Dorra GroupPark Plaza 15,000 2012 Al Arabia / Al Ahly

Source: JLLS

Commercial space within

Downtown Cairo remains limited

with vacancy rates at less than

1%

We estimate new office supply of

1.5mn sq m to come on stream

over the next 4 years


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26



An estimated 1.5mn sq m of new Grade A office supply in the pipeline is expected to

come on stream over the next 4 years. We expect this to be absorbed with robust FDI

flows and continued inflow of new corporates setting up presence in Cairo. EgyptsForeign Direct Investment (FDI) flows have remained robust despite the global

financial crisis, where it attracted nearly US$8bn in 2009 after a peak of US$13bn in

2007-08. About 41% of the FDI flows in the last 5 yrs have been spent on

establishing new corporates, where Egypt has seen nearly 6k new companies being

set up on average annually in the last 5 years. YTD 3,500 new companies have

already been registered according to the Ministry of Investment.

Figure 31: Egypt - Number of newly established corporates

'000

3

6

4

6

8

6

3

0

2

4

6

8

10

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 1H10

Number of newly established companies

Source: Ministry of Investments

Figure 32: Egypt - FDI flows

24

6

11

13

8

0

2

4

6

8

10

12

14

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

FDI Flows (US$Bn)

Source: Ministry of Investments


27/52

27



Cairo Retail and Hospitality

Egypts capital Cairo faces a shortage of destination malls, where per capitaretail space at 0.03/sq m is the lowest in GCC+Egypt.

Key retail outlets and open retail spaces occupy c. 314k sq m of GLA vs. 3mn sqm of retail GLA in Dubai.

Over the next 3 years, we estimate c. 500k sq m of retail space to come on stream,taking Cairos retail GLA per capita to 0.044/sq m.

Cairo Retail limited GLA for high-end retail

Unlike Dubai, Egypt does not have any major destination malls with the existing

Gross Leasable Area (GLA) for the high end segment at only close to 314k sq m vs.

Dubai retail GLA at over 3mn sq m. The lack of retail space can be gauged by retail

space per capita, which, at 0.03 sq m per capita, is well below Riyadh at 0.52 sq m orQatar at 1 sq m, and with Dubai being at the other end of the spectrum with the

highest retail space per capita in MENA region at 1.9 sq m. The City Stars in Cairo is

the largest mall with a total built up area (BUA) of over 700k sq m but GLA of only

close to 150k sq m.

Figure 33: Retail GLA per capi ta across GCC

0.03

0.140.30

0.52

0.87

1.07

1.061.90

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Cairo

OmanKuwait

Riyadh

Abu Dhabi

Qatar

Bahrain

Dubai

GCC Retail Mall GLA per capita (2010)

Source: JLLS, Cairo and J.P. Morgan estimates

Table 12: Cairo - Existing retail GLA

Name GLA (sq m)Rent in USD /

sq m p.a. Location Description

CityStars 150,000 700-900 Nasr City Regional mallDandy Mall 90,000 672-888 Cairo-Alex road Community mall

Maadl City Center 25,000 583-842 Maadi Community mallNile City 12,000 691-886 Nile Corniche Small annex o office complexFirst Mall 10,000 691-907 Giza Speciality luxury goods mall

Source: JLLS, Colliers and J.P. Morgan estimates; Note: The above is note an exhaustive list of retail space across Cairo

Over 500k sq m of high end retail GLA is in pipeline with planned delivery over the

next 3 years. Beyond 2013, SODIC/Solidere are set to start phased delivery of the

retail space in Eastown and Westown within the 6th of October City in Cairo. With

a total GLA of over 377k sq m, this incremental GLA takes Cairos retail

development pipeline to nearly 1mn sq m over the next 4-5 years. Rents for the high

end retail space ranges between US$580-900/sq m per annum.

Cairos retail GLA at 0.03 sq m

per capita is amongst the lowest

vs. its GCC peers


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28



Table 13: Cairo and Greater Cairo - Futu re retail su pply

Name GLA (sq m) Developer Type Location Year of Completion

Eastown & Westown 377,000 SODIC / Solidere Two city centers 6th October / New Cairo 2013 onwardsMall of Africa 176,000 Fawaz El Hukair Shopping mall 6th October 2010Cairo Gate 250,000 Emaar Shopping mall Cairo-Alex Desert Road 2012 onwardsCairo Festival City 160,000 Al Futtaim Mixed-use New Cairo 2011

Source: JLLS, Colliers and J.P. Morgan estimates

Hospitality

As Egypts business hub as well as a popular tourist destination, Egypt attracts

business as well as leisure travelers, where annual visitor traffic into Egypt reached

13mn in 2009 up from 4mn in 2002. Close to 73% of these represent travelers from

European countries, while Arab travelers account for 15% with American travelers at

4%. Given the high number of travelers, Egypts tourist receipts totaled US$13bn in

2009, up from US$8bn in 2006.

Figure 34: Egypt - Annual leisure and business visitors

21% 18% 15% 15%

69% 72% 75% 73%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009

Mn

2

7

12

17

Arabs EuropeansAmericans OthersTotal

Source: CAPMAS

Figure 35: Egypt - Tourism revenues

13

11

9

8

4

6

8

10

12

14

2006 2007 2008 2009

Tourism Receipts (US$ Bn)

Source: CAPMAS

According to Colliers, there were a total of 175 hotels in Cairo with close to 14,600

room keys in 2008. 3 star hotels account for 32% of the total hotels supply at 46 3

star hotels followed by 27 5 star hotels. However, in terms of room keys, 5 star hotel

rooms has the largest share at 59% and c. 8,600 room keys followed by 4 star hotel

room keys at 2,400 accounting for 17% of the total hotel rooms supply. Occupancy

levels in 5 star hotels remain above 85% with average room rate at US$125-150 per

night.

Figure 36: Cairo - Hotel room keys

Source: Colliers

13mn people visited Egypt in

2009 helping Egypt generate

US$13bn in tourism revenues


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Key players - TMG is the largest

According to the 2008 Egypt Housing Survey, about 90% of the country's housing

supply is built informally by what the market refers to as the secret competition.

According to the survey only 10% of the housing supply has been built by

professionals. Within the organized real estate sector, TMG is the leading Egyptian

community real estate developer in terms of total land bank at 50mn sq m, sales

backlog at EGP25bn and housing development of 57,000 units (out of this 32k units

are sold units under construction). This is followed by Palm Hills Development,

Egypts upscale developer, with a total land bank of 49mn sq m. Six of October

Development and Investment Company (SODIC) is relatively small with total

landbank of 5.8mn sq m and development concentrated in Greater Cairo. Emaar

Properties Egyptian subsidiary, Emaar Misr, is one of the leading international

investors in Egypts real estate market with a total development portfolio of

US$5.55bn.

Table 14: TMG - Competitive lands cape

Comparative valuations Business mixMar ket Cap A ve. Tr ad ed Valu e P/B P/E Tar get L and B an k Dev elo pmen t

US$ bn US$ mn (6Mnth) 2010E x 2010E x market sq m mn type

Talaat Mostafa 2,780 8.92 0.61 8.1 Middle & Upper middle 50 City & community complexesPalm Hills 1,064 1.68 1.24 7.2 High-end 49 VillasSix of October Dev. & Inv. C. 523 1.75 1.17 14.8 High end 5.8 Residential & commercial

Source: Company reports, Bloomberg and J.P. Morgan estimates

Figure 37: Geographical distribution of land for Egypt's top 3 real estate developers

89%

37%

100%

4%

49%

7% 14%

0%

20%

40%

60%80%

100%

TMG PHD SODIC

Cairo Outside Cairo International Source: Company reports

Housing development from the

organized sector account for

10% of the total housing

development in Egypt where

TMG has historically been the

only developer within the

organized sector targeting

largely the middle and upper

middle income segment


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TalaatMo

stafaGroupHolding

:

Com

an

Back

rou

nd


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Talaat Mostafa Group - Changing Cairo's

landscapeCompany background and shareholder structure

Talaat Mostafa Group (TMG) is Egypts largest real estate developer with a total

landbank of 50mn sq m and 20-year track record in property development. TMG

develops large scale integrated city and community complexes mainly located in the

Greater Cairo region. Apart from integrated community complexes, TMG also develops

and manages luxury hotels and resorts. It currently has 3 hotels with 684 room keys and

plans to raise this to 5,000 room keys in 5 years, of which 1,725 room keys are committed

and under development. The group has completed development of 3 community

complexes, while 2 other community complexes (Al Rehab 1 and Al Rabwa 1) are

partially competed with development of their subsequent phases currently under way.

Figure 38: TMG - Organization stru cture

Source: Company annual report


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TMG was created in June 2007 as a holding company for TMG groups various real

estate related subsidiaries. As a result of the organizational restructuring, the Arab

Company, Alexandria Real Estate and San Stefano were consolidated into a newHolding company called TMG.

In November 2007 following the organizational restructuring process, TMG offered

395mn shares through a retail offering (IPO). The institutional and international

investors were offered 330mn shares at EGP11.6/sh, while the retail offering for

65mn shares was made at EGP11/sh. The institutional and international offering was

17x over subscribed, while the retail offering was oversubscribed by 41x. Within the

real estate development sector in Egypt, TMG is the largest listed player with a total

market cap of US$2.8bn and average daily traded value of US$9mn (6-month

average).

TMG RE and Tourism Investment, which include the Talaat Mostafa family and the

Saudi group (Bin Laden, Saudi Arabia), owns a 49.85% stake in TMG. Apart fromthe strategic shareholders, other prominent shareholders include Misr Insurance

Company and Banque Misr with 4% and 3% ownership in the company,

respectively. The stock is fairly liquid with a free float of c.43%.

Figure 39: TMG Shareholding structureOthers

43%

TMG Investments

(Including Talaat

Moustafa family and

Saudi Group)

50%

Misr InsuranceCompany

4%

Banque Misr

3%

Source: Company reports and Bloomberg

Management

The TMG groups history goes back 38 years, when Mr. Talaat Mostafa started his

construction business with his three sons. The real estate division was established in

the late 80s when Talaat Mostafas youngest son Mr. Hisham Talaat Mostafa saw the

growing opportunity within the real estate sector and formed the real estate arm. The

formation of the real estate division coincided well with the Egyptian government's

programme to expand Cairo and relocate Downtown inhabitants towards Cairo's

suburban outskirts. Talaat Mostafas eldest son Mr. Tarek Talaat Mostafa tookcontrol of the construction business, while the second son ventured into the

agricultural division.

TMG was formed as a result of

organizational restructuring

completed in Sep 2007

subsequent to which its shares

were listed on the Cairo Stock

Exchange in Nov 2007

Talaat Mostafa Family and Saudi

Bin Laden group each own 25%

strategic shareholding in TMG

TMG is recognized as a strong

brand name in Egypt with its

long history of development and

timely delivery of committed

units


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In September 2008, Tarek Talaat Mostafa was appointed as Chairman and Managing

Director of Talaat Mostafa Group Holding. Prior to that, he was the Chairman and

Managing Director of Alexandria Construction Company, one of the largestcontractors in the MENA Region. He is also the Executive Chairman of other

companies such as Alexandria for Electrical Works, Alexandria for Glass

Manufacturing, Alexandria for Tunnels and Alexandria for Construction and

Decoration, in addition to being a board member of a number of the real estate

development companies in the group. He is an elected member of the Egyptian

Parliament and chairs its Housing and Infrastructure Committee, a member of the

National Democratic Party, the Board of the Egyptian Construction Contractors

Union, and the National Union of the Chambers of Commerce. Over 3,000 people

are employed directly at TMG with about 60,000 on-site workforce.

Self-funded business model core in Egypt

TMG relies largely on a self funded business model with little upfront funding

requirement to develop city and community complexes. The payment for purchased

land parcels does not entail initial cash outlay and is typically settled in kind in the

form of residential apartments to the Ministry of Housing (e.g. Madinaty and Al

Rehab).

The upfront costs involving development plan and initial infrastructure are funded

via equity or debt, while the overall project construction cost is financed through

customer advances that are typically linked to cash outflow.

The company does not start construction unless a considerable portion of the planned

units in a particular phase of the project are sold out in order to ensure liquidity

headroom for at least 12-15 months ahead of construction. The customer payments

on sold units are structured to coincide with the planned construction expenses.

Table 15: TMG - Sold BUA and c ustom er advances for key p rojects

Total BUA Sold BUA Sold BUA Customer advancessq m mn sq m mn As a % of total EGP mn

Madinaty* 17.1 4.8 29% 15,628Al Rehab 1 & 2 2.8 1.2 43% 4,310Al Rabwa 0.12 0.01 59% 315

Total 20.02 6.01 31% 20,253

Source: Company reports. * Madinaty BUA includes district and sector services but excludes land for Mega developers

About 87% of the unit sales in Madinaty are made using one of the long-term

financing arrangements offered by TMG and backed by local and regional banks,

allowing customers to pay in installments. The customer payments depend onapplied financing schemes. Following the contract signing, the customer deposits a

series of post dated cheques with TMG that represent the monthly and annual

installments that add up to the remaining price of the purchased unit including

financing cost. The payments by means of post-dated cheques are structured so that

the instalments during the initial 4-year period prior to delivery of the unit generally

cover all of TMGs construction outlays.

Mortgage financing remains

untapped in Egypt where thecompanys self-funded off-plan

business model has worked well


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Table 16: TMG - Typical payment p lan

% # of Cumulative

Cash Price - Four Years Tenure collected instalments collectionUnit Reservation 10.50% 1 10.50%Contract signing +3 months 10.50% 1 10.50%Annual instalments +12 months 10.50% 4 42.00%Delivery instalment +45 months 10.50% 1 10.50%Monthly instalments 48 26.50%

100.00%

% # of CumulativeTen year payment scheme Tenure collected instalments collectionUnit Reservation 7.0% 1 7.00%Contract signing +3 months 7.0% 1 7.00%Annual instalments +12 months 7.0% 4 28.00%Annual instalments +48 months 4.8% 6 29.00%Delivery instalment +45 months 7.0% 1 7.00%Monthly instalments 48 11.20%

72 10.80%

100.00%Source: Company reports

The post-dated cheques relating to payments falling due after the scheduled date of

delivery of the unit represent a combination of an embedded finance charge covering

TMGs costs of providing the financing arrangement and TMGs profit on the sale. If

TMG does not utilise the cheques in connection with these facilities, TMG retains the

embedded finance cheque for its own account. TMG has entered into arrangements

with local and regional banks that allow it to provide financing to purchasers of its

residential units for periods over 4 years and up to 10 and/or 15 years, which are

longer periods than is typical in Egypt. TMG has entered into two types of financing

facilities that support these financing arrangements. If these financing arrangements

are used, the purchase price includes an embedded finance charge.

Customer installments are linked

to construction cost outlays

thus allowing TMG to keep its

gearing at reasonable levels


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Key Projects - Madinaty is the largest

In its 20-year track record, TMG has completed construction and handover of over

25,000 units, implying 4mn sq m in BUA providing accommodation to over 130,000

inhabitants residing in the Greater Cairo region. Among the companys completed

projects, the largest is Al Rehab 1 (Ph 1-5) City located in New Cairo with over

22,000 units and 120k inhabitants.

Figure 40: TMG - Landbank sp lit by pr oject

66%

10%

2%

14%

8%

Madinaty (Cairo) Al Rehab (Cairo) Al Rabwa (Cairo)Riyadh and Jeddah Hotel projects


Figure 41: TMG - Landbank split by geography

Cairo

78%

Outside Cairo

8%

Saudi Arabia

14%


Al Rehab 1 (Phases 1-5) was completed in 2007 and is a completely self sufficient

city within the New Cairo region. Among the key ongoing projects, Madinaty is by

far the largest with a total land area of 33mn sq m, accounting for 66% of the

companys total landbank. Madinaty was launched in 2006 with the first set of

residential handovers due in 2H 2010.

Table 17: TMG - Projects sn apshot

Built Up Sold BUA Residential Total Start Expected Area sq m as % of total type units date Completion Location Population

Completed projectsMay Fair 592,200 100% Villas 253 2005 El Sherouk in New Cairo 1,265Al Rawda Al Khadra 84,000 100% Villas&Apartments 1,185 1987 Alexandria 6,245Virgenia Beach 365,400 100% Villas 368 1995 North Coast N.A.Al Rehab 1 (Ph 1-5) 3,000,000 100% Villas&Apartments 22,758 1996 2007 New Cairo 120,000Al Rabwa 1 201,190 100% Villas 649 1994 2008 Sixth of October City, Cairo 3,240

Ongoing Projects

Madinaty 19,421648 29%* Villas&Apartments 107,158 2006 2020 New Cairo 600,000Al Rehab 1 (Ph6) & 2 2,728,855 43% Villas&Apartments 15,060** 1996/2006 2011/2017 New Cairo 80,000

Al Rabwa 118,320 59% Villas 340 2006 2012 Sixth of October City, Cairo 1,725Nasamat Al Riyadh 1,214,075 Sales exp. Villas&Apartments 4,315 2009 2012 Riyadh, Saudi Arabia 16,800

in 4Q10

* Madinaty BUA also includes land for Mega developers but sold residential BUA calculated as a % of total residential BUA which is 16mn sq m** Al Rehab - Includes units under construction for Phase 6 of Al Rehab 1 and Phases 7-10 in Al Rehab 2. Also includes 600k sq m Land for Mega developers


Madinaty and Al Rehab account for the majority of TMGs SOTP at 74%. Nasamat

Al Riyadh in Saudi Arabia accounts for 5% of the combined SOTP, while Al Rabwa

represents 2%. Hospitality residential projects and the hospitality portfolio account

for the remaining 20%.

The Madinaty project, in New

Cairo, represents 66% of TMGs

land bank and 62% of our SOTP

value


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At end 1Q10, TMGs sales backlog reached EGP24bn with total customer advances

against this sale at EGP20bn. The customer advances from Madinaty at end 1Q10

totaled at EGP15bn followed by Al Rehab (1&2) at EGP4.3bn.

Figure 42: TMG - Ongoing p rojects h eat map

Source: Company prospectus

Madinaty 62% of TMGs SOTP

With total land area of 33.6mn sq m and BUA of 19mn sq m (excludes attributable land

area for villas and includes land for Mega developers), TMG launched Madinaty in mid

2006. The construction is planned in 6 overlapping phases with the first set of

handovers within phase 1 due for completion and handover starting 2Q 2010. Madinaty

entails construction and handover of c. 100k apartments and 6,793 villas over the next 9

years with final completion by 2020. The payment for the allotted land parcel for this

project will be made to the Ministry of Housing in kind in the form of completed

residential units accounting for 2.7mn BUA of the total projects residential BUA of16.8mn Sq. This cost will be recognized pro rata at the end of each phase. According to

the most recent results, 29% of the residential BUA in Madinaty has already been sold

with roughly EGP15bn in advances from customers against this sale.

Revenue and project costs

We use EGP11,900/sq m (US$2164/sq m) as blended villa prices and average of

EGP5,900/sq m (US$1073) for apartment sales across Phases 1-6 in Madinaty. Furthermo

inline with management guidance, we use villa gross margin at 45% and apartment margin

30%. Unlike some of the other TMG projects, Madinaty is not exempt from tax, hence we

apply a 20% corporate tax to the company cashflows to derive our DCF value.

Once completed in 6 overlapping

phases by 2020, Madinaty will be

home to 600k people with over

100k apartments and c. 6,700

villas

29% of Madinaty's total

residential BUA is already sold


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Table 18: Phased revenue recognition from Madinaty

Revenue on Residential units and land for Mega developers Total BUA* Phase BUA**

EGP mn 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E sq m mn as % of totalPhase 1 3,412 4,523 3,412 5,635 11,194 3.52 29%Phase 2 1,711 1,711 3,423 5,990 4,279 2.68 16%Phase 3 566 566 6,127 5,844 6,127 6,410 2.94 23%Phase 4 1,422 1,067 1,067 3,595 5,490 1.70 17%Phase 5 2,339 3,274 1.10 6%Phase 6 2,056 1.47 9%Total Residential 3,412 4,523 3,978 7,913 20,455 10,334 13,184 16,622 10,821 13.42 100%

Land for Mega Developers 3,300 3,300 3,300 6,600 6,600 6,600 9,900 6.6

Total revenue 3,412 4,523 7,278 11,213 23,755 16,934 19,784 23,222 20,721 20.02

* BUA excludes BUA of 2.7mn sq m attributable to the Ministry as land cost

** Phase BUA calculation excludes BUA allocated for Mega developers


At EGP17.4bn, Madinaty accounts for 62% of our TMG cumulated SOTP value. Weuse a weighted average cost of capital to discount cash flows from Madinaty that

ranges between 15.3% - 16.5% depending upon planned completion. For example the

cash flows from Phase 6 which is due for completion by 2020 are discounted using a

WACC of 16.5%, while Phase 1, which is due for completion by 2013, is discounted

using a WACC of 15.3%.

Figure 43: Madinaty - Projected Cash flows

(20,000)

(10,000)

-

10,000

20,000

30,000

2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E

EGP Mn

(2,000)

-

2,000

4,000

6,000

8,000

10,000

Cash Inflow Cash Outflow Net Change in cash Source: J.P. Morgan estimates

Al Rehab 1 and 2 12% of TMGs SOTP value

Al Rehab 1 complex is TMGs first fully-integrated community with over 22k

residential units and c. 120k residents. It has 3 local and 3 international schools, 6

banks, 2 shopping malls and small area allocated for commercial use. The final

phase 5 in Al Rehab 1 was completed in 2007, while Phase 6 with 633 villas and aBUA of 224k sq m will be completed by 2011. Subsequent to the c

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