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Jan 18 2006

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Integration of GCC Stock Markets: To Cross List or Not to Cross List?

Cross listing in the Middle East has shown outstanding growth in two sectors, namely the cement industry and investment banking. In the Gulf region, only four stock markets have indulged in cross listing activities and they are Bahrain Stock Exchange (BSE), Abu Dhabi Securities Market (ADSM), Dubai Financial Market (DFM) and Kuwait Stock Exchange (KSE).

The potential advantages of listing on a secondary exchange include an enlarged investor base, increased visibility, a highly liquid secondary market, and the opportunity to raise new capital.

Lama Abu Ghali, Senior Market Analyst at the Dubai-based business information firm, ABQ Zawya, told APD that cross-listed firms have higher valuations, more accurate analyst forecasts, and less evidence of insider trading compared to firms that are only available on home exchanges.

Finance experts widely agree on the benefits of cross listing and see few drawbacks. While capital markets gain liquidity from cross listing of companies, one potential disadvantage relates to restraints on the companies' own liquidity, said Walid Shihabi, head of research at Dubai-based asset management and investment firm, Shuaa Capital.

If a company floats 10% of its stock in two exchanges, it will have to divide that percentage between the first market and second market by equal shares, he explained. When cross listing, companies also face possible cost factors and managerial burdens from having to adhere to sets of regulations on their new bourse that may differ from those on their home exchange, Shihabi told APD.

He also noted that the comparison of share prices of a cross listed corporation between its first and second markets often is not a good indicator of a company's performance.

The only solution to such disadvantages would be creation of a single depository where all stock markets are linked to one common market and where any investor could trade any amount of shares in any country at the same time and with the same simplicity in trading as on his home exchange, said Shailesh Dash, head of research at Kuwait-based finance and investment firm, Global Investment House.

Shuaa Capital and Global Investment House are both among the companies that have cross listed in GCC stock markets.

With 26 occurrences of cross listing on four GCC bourses that practice this activity, a market by market analysis shows that cross listed companies cannot yet expect their secondary markets to contribute greatly to their share price performance and very few of these firms fared better in their secondary market than on their home exchange.

In any case, up till now trading in cross listed companies has not fully matured in the region, because investors are not well accustomed to the process and because of expenses incurred when trading in a different market other than the parent country.

Much to look forward to
The practice of cross listing in the Middle East is fairly recent and not yet permitted on all of the region's bourses. So when stock markets like Saudi Arabia, Qatar, Oman, and Jordan liberate their financial markets, the Middle East market will likely witness more cross listed companies.

As Ghali told APD, the arguments for cross listing can be compelling not only for companies but also for investors. "From the investor's perspective, the cross-listing mitigates some of the uncertainties and costs involved with making direct purchases in foreign markets, which in many cases in this region is not even an option, i.e. expats cannot trade in the Saudi market," she explained.

"Even if the person is able to invest in the foreign market, investing directly involves not only higher transaction costs and a greater likelihood of failed trades, but also potentially poor financial information that owes to varied accounting practices, disclosure requirements, and enforcement," Ghali added.

Cross listing is expected to improve especially after several Arab stock markets link themselves electronically in the hope of being able to merge in the future into one large stock market.

Two noteworthy efforts in this regard were the electronic linkage between the Muscat Securities Market (MSM) and Abu Dhabi Securities Market (ADSM) and between Dubai Financial Market (DFM) and ADSM. It is expected that these two steps will further improve trading volumes and liquidity of both the markers and to induce more transparency and accountability.

ADSM had also signed in 2004 a memorandum of understanding with Egypt's Cairo and Alexandria Stock Markets to facilitate mutual listings.

New cross listings are in the pipeline in the UAE stock markets where on January 3, 2006, the UAE minister of economy and Planning Chairperson of the Emirates Securities and Commodities Authority, Lubna Al-Qassimi, approved the listing of two Kuwait-based companies: National Real Estate Company and Public Warehousing Company.

First Dubai Real Estate Development Company, which is a subsidiary of the Kuwait-based First Dubai Holding Company, will be listed on the Kuwait Stock Exchange in April 2006. The share of First Dubai Real Estate is traded at present at 170 Kuwaiti fils on the informal market.

The largest liberalization advances are currently anticipated for the Saudi Stock Market, the largest Arab stock market. This expectation is founded in part on Saudi Arabia's accession to the World Trade Organization in December and also on the fact that Saudi authorities have urged family companies to take steps for converting into public companies.

Experts expect opening of Saudi companies to constitute an important preliminary step towards allowing other Gulf companies to cross list on the region's largest bourse by market capitalization in order to benefit from the Kingdom's high liquidity and large investor base.

This issue is also the theme for more than 250 representatives from private Saudi companies who are going to meet in a three day conference from January 31 to February 2, 2005 to discuss ways to open up to the public.

Bahrain Stock Exchange
Insurer ARIG, although a Bahraini company, was first listed on the KSE. It became the first cross listed value in GCC stock markets when it started to trade on the BSE in 1999.

Since registering on the BSE, ARIG's share performance in Bahrain proved better than its performance on the KSE by around 40%.

Doha-based Qtel also demonstrated a 34% improved BSE performance over the first market (Doha Securities Market) that it started to trade on.

Throughout their cross listing history, ARIG and Qtel were the only two companies which performed better on the BSE than in their first traded countries.

This means that 2 out of 8 (25%) cross listed companies have positive outcomes while the other six companies either posted negative results or did not trade at all like the Kuwait-based company, The International Investor.

Arab Insurance Group (ARIG)
ARIG was first listed in KSE in 1997 and then cross listed in two stock markets (DFM in 2004 and BSE in 1999). ARIG, the largest Arab-owned reinsurance company has an authorized capital of $500 million and a paid up capital of $200 million. Its global depository receipts (GDRs) are traded on London Stock Exchange (1 GDR is equal to 10 shares).

Between listing on the BSE and end of 2005, ARIG's share performance on the BSE recorded an increase of 101.6% while posting a 60% increase for the same traded period in its first country (KSE).

BankMuscat
BankMuscat, Oman's premier banking institution started trading on BSE in May 28, 2002 at $3.22 and closed at $6.00 in its last trading day (June 24, 2004) with an increase of 86.3%.

BankMuscat's trading in its home market posted a 109% increase for the same trading period.

The bank last year became the first Omani entity and the first bank from the GCC region to have its Global Depository Receipts (GDRs) successfully listed on the London Stock Exchange (LSE).

Global Investment House (Global)
The share price of Kuwait-based Global Investment House on the BSE recorded an increase of 271.5% from the first trading day on October 11, 2004 until the end of 2005, from BD 0.915 to BD 3.4.

On its home exchange, Global posted a 312.2% increase for the same trading period.

Global's net profits rose between 2001 and 2004 from KD 2.5 million ($8.4 million) to KD 21.3 million ($72 million), on revenue from KD 5.3 million ($18 million) to KD 29.2 million ($98 million).

As for the first half of 2005 results, the company's net profits recorded an increase of 171% compared to the same period last year, reaching KD 20.1 million ($68 million), which translates into an EPS of 83 fils; whereas revenues reached KD 26 million ($88 million) a 160% increase.

International investment Group (IIG)
IIG is a Kuwaiti firm that offers Sharia-compliant financial and investment services. In June 2005 it listed its shares in the Bahrain Stock exchange. By August 7, 2005 (the last day on which the company traded to date), the share's price increased by 63.4% from BD 0.367 to close at BD 0.60.

IIG's trading in its home market posted a 224.5% increase for the same traded period.

Net profits for the first nine months of 2005 skyrocketed by more than 1,400% and reached KD 15.77 million compared with KD 1.02 million in the first nine months of 2004.

Qatar Telecom (Qtel)
Qtel is listed in two stock markets other than Qatar: Abu Dhabi Stock Market (ADSM) and Bahrain Stock Exchange. The company was listed on BSE in November 11, 2001 at $20.6 and it increased by 200.9% to close at $62.0.

Qtel's trading on its home exchange posted a 166% increase for the same traded period.

In the first nine months of 2005, Qtel and its subsidiaries achieved revenues of QR 2.14 billion (2004 - QR 1.73 billion), an increase of 23.3% over the corresponding period last year, and an EBITDA of QR 1.3 billion (2004 - QR 1.17 billion), an increase of 11.3%.

The International Investor (TII)
The company started its trading activities on KSE in January 14, 2001 at KD 0.218 and it increased by 90.3% to close at the end of 2005 at KD 0.415.

Although listed on the BSE, TII did not have any trading activities on bourse.

United Finance Company (UFC)
UFC is an Omani company specialized in financing for commercial, industrial and contracting companies and personal loans. It listed its shares on BSE in February 11, 2004 at $5.2 and the stock price climbed by 8.7% to $5.7 in its last trading day this year.

UFC's trading in its home market posted a 28.3% increase for the same traded period.

United Gulf Bank (UGB)
UGB started trading on BSE in December 9, 1999 at $0.17 and closed at the end of 2005 at KD 0.31 with an increase of 82%.

Kuwait Stock Exchange
Cross listing in KSE showed even less favorable outcomes since only one company out of 5 (20%) cross listed firms performed better on the secondary market than in its home country.

Bahrain-based insurance firm BKIC registered a 21% improved share performance on the KSE when compared to its performance on its home exchange.

Al Khaleej Development Company (TAMEER)
TAMEER started trading on the KSE on September 5, 2005 at KD 0.420 and closed at the end of 2005 at KD 0.425 posting a 1.1% gain in only three months.

TAMEER's trading on its home exchange posted a 30% increase for the same traded period.

The company's performance showed a net income increase of 777% for the first half of 2005 and reached $6.25 million from $804,000 for the same period of 2004.

Bahrain Kuwait Insurance Company (BKIC)
BKIC listed its shares on KSE on November 3, 2003 at KD 0.26 and closed at KD 0.36 at the end of 2005 with an increase of 38.4%.

BKIC's trading in its parent country posted a 17.3% increase for the same traded period.

Commercial International Bank (CIB)
Egypt-based CIB started trading on KSE in November 29, 2004 at KD 2.0 and closed at KD 2.4 at year end 2005 with an increase of 20%.

CIB's trading in its home market posted a 39.5% increase for the same traded period.

Egypt Kuwait Holding Company (EK Holding)
EK Holding listed its shares on KSE in January 4, 2005 at KD 0.238 and closed at KD 0.435 at the end of 2005 with an increase of 82.7%.

EK Holding's trading in its parent country posted an 88.3% increase for the same traded period.

Solidere
Lebanese real estate company Solidere started trading on KSE on March 8, 2005 at KD 2.7 and closed at KD 3.95 at the end of 2005 with an increase of 46%.

Solidere's trading on its home exchange posted a 90.6% increase for the same traded period.

Abu Dhabi Securities Market (ADSM)
Cross listing on ADSM showed similar results with 2 out of 9 companies performing better on their secondary market. On the other hand, Fujairah Cement Industries and SCIDC had negative results in the cross listed country and positive results in their primary stock markets. Umm Al Qaiwain Cement had negative results in both markets from July 27, 2005 to the end of 2005.

Commercial International Bank (CIB)
Egypt-based CIB started trading on ADSM in November 29, 2004 at KD 2.0 and closed at KD 2.4 at year end 2005 with an increase of 20%.

Fujairah Cement Industries
The company started trading on ADSM in October 30, 2005 at KD 0.08 and closed at KD 0.395 at the end of 2005 with an increase of 393%.

Gulf Cement Company
The company started trading on ADSM in January 13, 2003 at AED 0.79 and closed at AED 15.00 at the end of 2005 with an increase of 1798%.

The company's performance on its first exchange, the KSE, posted a 1677% for the same traded period.

Palestine Telecommunications Company (PalTel)
PALTEL was listed on December 26, 2005 at AED 80.00 and closed on New Year's Day at AED 75.00.

Qatar Telecom (Qtel)
Qtel started trading on ADSM in May 26, 2002 at AED 120.00 and landed at AED 223.00 posting an 85% increase in stock price.

Qtel's trading in its home market posted a 120% increase for the same traded period.

Ras Al Khaimah Company for White Cement and Construction Materials
The company started trading on ADSM in March 25, 2003 at AED 0.51 and closed at AED 2.88 at year end 2005 with an increase of 464.7%.

RAKWC's trading in its posted a 445% increase for the same traded period.

Sharjah Cement and Industrial Development Company (SCIDC)
SCIDC listed its shares on KSE in October 4, 1992 at KD 0.08 and increased by 13.4% to close at KD 0.68 at year end 2005 with an increase of 750%.

SCIDC cross listed in ADSM in August 6, 2005 at AED 11.8 and closed at AED 8.57 registering a decline of 27.37%. Over the same period, the company's share improved by 38% in its first market (KSE).

Sudan Telecommunications Company (SudaTel)
UAE businessmen and investors have paid more than AED 40 million to own shares in the region's premier Telecommunication Corporation - SudaTel, increasing the UAE nationals' equity in the corporation to more than 20%.

SudaTel started its trading activities on ADSM in June 20, 2003 at AED 64.5 and its share's price has increased by 100.6% and closed at AED 129.40 on December 29, 2005.

SudaTel shares are listed in Bahrain and ADSM but SudaTel's shares in BSE did not witness great trading activities since it traded only once at $17.5 in 2002. But the company posted a 100.6% increase when traded on ADSM.

Umm Al Qaiwain Cement Industries Company
The company listed its shares on ADSM in July 27, 2005 at AED 8.00 and the price declined by 35% to close at AED 5.20.

Dubai Financial Market (DFM)
Cross listed values on the DFM broke even since 2 out of 4 companies showed better performances than in their primary markets. These were ARIG and Shuaa Capital which posted respective 2% (ARIG) and 120% (Shuaa) increases over their performances in the first traded markets.

Arab Insurance Group (ARIG)
ARIG is the first non-UAE company to be listed on DFM. The company started trading on DFM in December 13, 2004 at AED 3.80 and closed at the end of 2005 at AED 4.60 with an increase of 21%.

ARIG's trading in its first listed country (KSE) posted a 19% increase for the same traded period.

Global Investment House (Global)
Global trading price closed at AED 31.60 at September 19, 2005 and closed at AED 32.00 registering a 1.26% increase at the end of 2005.

Global's trading on its home exchange posted a 10.6% increase for the same traded period.

International Financial Advisors (IFA)
IFA started trading on DFM in October 1, 2005 at AED 24.40 and increased by 33.2% to close at AED 32.50.

IFA's trading in its home market posted a 59.3% increase for the same traded period.

Shuaa Capital
Shuaa Capital started trading on DFM in January 5, 2002 at AED 1.65 and closed at AED 9.97 at the end of 2005 with a 504.2% increase.

When compared with the same period in its first listed country (KSE) the company posted a 383.8% increase. [TS-FC]

News Analysis by Nadim Issa, APD Staff Writer in Beirut

© APD (Arab Press Digest) 2006