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Al Rajhi Capital: Leejam Sports Co. Aggressive expansion plans to drive earnings growth

IM Insights
By IM Insights
3 months ago
Al Rajhi Capital: Leejam Sports Co. Aggressive expansion plans to drive earnings growth

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  1. Leejam Sports Co Consumer Discretionary LEEJAM AB : Saudi Arabia 11 July 2019 US$1.11bn Market cap Target price Current price 39.55% US$2.47mn Free float Avg. daily volume SAR 90.0 SAR 79.3 +13.5% over current as at 7/10/2019 Existing rating Underweight Neutral Research Department Pratik Khandelwal Tel +966 11 211 9301, pratikK@alrajhi-capital.com Leejam Sports Co. Overweight Neutral Key themes Top-line growth is expected to be driven by double digit growth in female subscriptions, corporate segment and personal training segment. For male segment we expect a modest growth of 4-5% in membership and expect the average revenue per member to remain flattish or marginally lower in the long term. We expect the company to deliver robust growth in the near term mainly due to strong expansion plans which would increase its market share. Subscriptions are offered at a discounted price in the corporate segment and thus could partially offset the higher margins from female segment. Performance Aggressive expansion plans to drive earnings growth We initiate coverage on Leejam with a target price of SAR90/share based on equal weightage to DCF based valuation (SAR91/sh.) and P/E based valuation (SAR89/sh. based on 18x FY20e). Leejam is the market leader with a ~27% market share in KSA. The company is a play on the changing culture and reforms in Saudi with key growth drivers being rising employment of women, increasing disposable incomes, declining unemployment rate and improving health awareness. Unlike a typical gym, it is a concept based proven fitness centre offering a range of fitness and sports related activities. Its moat is a combination of its strong brand image and wide geographical presence which give it a competitive advantage over its peers. The company has plans to expand its stores aggressively by ~30% over the next three years. With 33% topline growth in 3 years, clean balance sheet, healthy EBITDA margin of 39% (in 2018), ROIC of 17% (FY 2018) and a healthy dividend payout ratio (historically over 50%), the company looks extremely attractive from a long term perspective. With an upside of 13.5% from our target price we initiate our coverage with an Overweight rating. Investment themes Topline growth to continue amidst market share expansion  The company added 35 gyms (126 total gyms as on 2018) from 2015 to 2018 implying a CAGR in gym area of 11% leading to a topline growth of 13%. We expect new 63 gyms to be added in the coming 4 years which will help the company to grow its topline by CAGR 10% during 2019-23 as area expands by 8% during the same period. This would improve its member density from 0.6 subscribers/sqm to 1 subscriber/sqm (lower than global average of 2.5 subscribers/sqm). This will improve capacity utilization, top line and sequentially the bottom line.  We believe there is ample demand given that current gym penetration rate stands at 8% and the market is still nascent. With regards to the total market, as of the latest data, there were 971 fitness centres with 1.1mn fee paying members dominated by male (82% male members). The total addressable market in terms of the number of members is ~14mn which translates to a total market size of SAR2.9bn.  Leejam has a reasonable presence in the corporate sector as it derives ~12% (FY 2018) of its revenue from corporate segment. It is the fastest growing segment as it grew 400% over the last three years (revenue stood at SAR103mn in 2018). The company is focusing on increasing its corporate tie ups and expects this segment to grow by 50% in 2019. Source: Bloomberg, Al Rajhi Capital Earnings estimates Period End (SAR) 12/17A 12/18A 12/19E 12/20E Revenue (mn) 733 800 944 1057 Revenue growth 5% 9% 18% 12% EBIDTA (mn) 292 317 383 425 EBIDTA Growth -4% 9% 21% 11% EPS 3.33 3.44 4.5 5 -14% 3% 31% 11% EPS Growth Source: Company data, Al Rajhi Capital Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.
  2. Leejam Sports Co Consumer Discretionary 11 July 2019 Healthy margins to sustain due to cost optimization  Lower marketing expenditure is expected to improve margins in the near term. Fitness industry as a whole is highly competitive and promotions and marketing plays an important role to drive members to the centers. In 2017, consumer spending weakened due to various Government levies. To support the top-line growth marketing expenditure was increased in 2018 as a result of which the net margins were negatively impacted. In the future the company indicated that it will lower its marketing cost by focusing more on social media campaigns which are cheaper compared to direct advertisements. This should improve the net profit margin in the near term.  The promotional expenditure in the form of direct discounts is also expected to be reduced compared to previous years. Company has recently signed an MoU with PPA (Public Pension Agency) to provide discounts up to 50% to retired people and their spouses. This move should help the company in utilizing the space during non-peak hours. In the female segment due to mismatch in demand and supply the need for any promotions is reduced, therefore we expect the net margin to improve by 300bps from 22.5% to 25.5% by the end of 2019E.  The company operates on leasing model (~98% of the total properties are leased) rather than owning the properties. It reduces any debt requirements and hence interest cost is low, this improves the net profit margin. Going forward we expect the company to fund capex for expansion through a mix of debt and cash (maintain the current debt equity ratio) therefore the margins in long term are expected to remain intact. We assume the net margins to gradually settle around 23% by 2023E. Higher demand in female segment to boost topline in near term; however competition in medium term to ease margins  The acquisition of female centre license in 2017 gives the company a first mover advantage and an opportunity to increase its member base in a new and untapped female fitness market. As of 2018 the company had 26 female centres and it plans to open 10-12 centres each year over the next 4-5 years horizon. We expect the female segment to contribute ~30% to the total revenue (expected to reach to SAR 338mn by 2021E).  One of the reasons for increase in demand for female gyms is affordable subscription prices in current scenario. Due to limited supply few years back, the subscription charges on a monthly basis were as high as SAR 2000; post licensing this has reduced significantly to SAR 400 per month. Another often underestimated reason for low women gym penetration in the past was high transportation costs. Earlier female subscribers had to spend considerable amount on transport expenses on reaching the gym. However now with application based cab service providers as well as Government’s move to allow female driving has reduced this cost thus bringing down the total cost of going to gym significantly.  Due to higher demand for female gyms and relatively low supply the company is able to maintain higher gross margin (~50%) compared to the male segment, a higher level of margins enables it to breakeven in just three months (globally 12-15 months). In the long term we believe the competition to intensify and once there is a price discovery in the market the need for higher promotions to capture market share will negatively impact the margins. The gross margin of female segment will gradually fall to ~37% by 2023E. Figure 1 Revenue from female segment 3,871 100,000 3,834 80,000 60,000 40,000 20,000 52,440 38,000 70,794 3,686 2018 2019E 2020E 88,493 SAR3,900 3,850 3,800 3,750 3,797 3,700 3,650 3,600 3,550 2021E Average f emale members Average revenue per member (RHS) Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 2
  3. Leejam Sports Co Consumer Discretionary 11 July 2019 Government focus towards increasing participation of citizens towards fitness activities augers well for the overall industry Figure 2 Government 's Expenditure on healthcare (SAR bn) 120 Government is focusing to increase the participation of citizens towards sports and fitness by creating world class sports facilities and infrastructure. As a part of the survey conducted by General Sports Authority it was found that only 20% men and 7% women participate in physical activity once a week. This sedentary lifestyle is one of the key reasons for increasing lifestyle related diseases such as obesity and diabetes in Saudi Arabia. Government intends to increase the participation rate to 20% by 2020 and 40% by 2030G. As a result of its initiative, the Council of Economic and Development Affairs (CEDA) have accepted some reforms such as granting license to female fitness centres, creating infrastructure for sports around the country and developing sports community group throughout the kingdom. In our view such initiatives increases the size of the overall fitness market in the kingdom. 113 SAR bn 96 100 80 80 60 40 20 2016 2017 2018 Source: Company data, Al Rajhi Capital Diversified product portfolio mitigates the risk of rising competition Leejam offers various sports activities in a uniform subscription based format. In KSA there are very few (almost negligible) fitness centres which provide various fitness activities viz gym, football, volley ball, basketball, swimming, tennis court, lounge facilities, etc. under one roof. Due to high capital requirement and technical knowhow related to real estate and operations we believe that the company’s business model cannot be copied easily. Therefore amidst rising competition it should be able to retain its members due to its unique offering and brand image. Figure 3 Cash Flows (SAR mn) 400 314 300 352 200 100 357 370 270 77 121 106 97 2019E 2020E 2021E 25 2017 2018 Cash Flow f rom Operations Free Cash Flows Source: Company data, Al Rajhi Capital Positive FCF makes room for future expansion and high dividend payout The company leases most of the fitness centres (~98% are leased); this reduces the need for debt and results in a lean balance sheet. Due to low debt the interest cost remains low and net margins remains high. Moreover due to advance receipt of subscription income company’s working capital needs reduces and helps it to maintain a positive cash flow which in turn supports future expansion and healthy dividend pay-out. Valuation We value Leejam using equal weights for five year DCF and P/E based relative valuation. Our DCF based target is SAR 91 per share, assuming 9% WACC and 3% terminal growth. Our P/E based target price (based on 18x FY20e earnings) stands at SAR89 per share. Accordingly, the equal weighted target price stands at SAR 90, implying 13.5% upside from the current price. Figure 4 Summary of DCF Valuation 2019E 260 2020E 288 2021E 313 2022E 341 2023E 371 123 137 150 164 179 25 12 10 12 12 Less: Capex -236 -264 -288 -252 -210 Free Cash Flow to Firm 174 178 167 245 331 PV of Free Cash Flows 160 148 145 191 226 Sum of present values of FCFs 869 Post-tax operating profit Add: Depreciation & amortisation Change in working capital Terminal Value 4319 WACC 9% Terminal Growth Rate 3% Enterprise Value 5187 Net Debt -465 Equity Value 4722 Number of Shares 52.38 Target Price 90 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3
  4. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 5 DCF based target sensitivity to assumptions Term inal Grow th Rate (%) 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.9% 96.4 97.3 98.2 99.1 100.0 100.8 7.9% 92.0 92.8 93.7 94.5 95.3 96.2 8.9% 87.8 88.6 89.4 90.2 91.0 91.8 9.9% 83.8 84.5 85.3 86.1 86.8 87.6 10.9% 80.0 80.7 81.4 82.2 82.9 83.6 WACC (%) 90.2 Source: Company data, Al Rajhi Capital Figure 6 Sensitivity of Target Price to Terminal Gross Margin Terminal Gross Margin Fair Price 30% 76.3 31% 78 32% 79.7 33% 81.4 34% 83.1 35% 84.8 36% 86.5 37% 88.2 38% 89.9 39% 91.6 40% 93.3 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4
  5. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 7 Income Statement (SAR mn) 2017 2018 733 800 944 1,057 5% 9% 18% 12% (454) (495) (584) (655) Gross income 278 305 360 402 Gross income growth -9% 10% 18% 12% Gross margin (%) 38% 38% 38% 38% (89) (111) (113) (126) 7 13 13 13 EBITDA 292 317 383 425 EBITDA Growth -4% 9% 21% 11% EBITDA margin 40% 40% 41% 40% Operating income 197 208 260 288 Revenue Revenue growth (%) COGS SGA Other operating income 2019E 2020E EBIT Growth -12% 6% 25% 11% EBIT margin 27% 26% 28% 27% (15) (18) (19) (18) (4) (8) (3) (3) Financing expenses Other income Net Income Before Zakat Tax (Zakat) 178 (3) 182 (2) 238 (5) 266 (5) Net income 174 180 233 261 Growth (%) -14% 3% 29% 12% Net margin (%) 24% 23% 25% 25% EPS (SAR) 3.33 3.44 4.46 4.98 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 5
  6. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 8 Balance Sheet (SAR mn) 2017 2018 2019E 2020E Cash & Cash Equivalents 56 Accounts Receivable 26 19 86 42 20 38 42 Prepaid Expenses & Other receivables 53 62 76 85 Other Current Assets 64 68 71 79 199 170 271 248 1,285 1,419 1,540 1,639 - - - - Current Assets Total Current Assets Non-Current Assets Fixed Assets Investment in associates Prepaid Expenses 12 Goodwill 11 11 11 9 9 9 9 Total Non-Current Assets 1,306 1,438 1,560 1,659 Total Assets 1,505 1,609 1,830 1,906 . Current Liabilities Total Short Term Debt 76 108 120 120 Accounts Payable 37 37 42 47 Accrued Expenses 4 3 5 5 Interest & Dividend Payable Other payables and accruals - - - - 49 34 40 45 Others 266 248 343 351 Total Current Liabilities 433 429 550 567 366 376 349 209 Pension Liabilities 24 27 28 32 Other long term liabilities 53 61 88 76 Total Non-current liabilities 443 465 466 417 Total Liabilities 876 894 1,015 985 524 524 524 524 Statutory Reserve 17 17 23 26 Retained Earnings / Accumulated losses 88 174 267 372 629 715 815 922 1,505 1,609 1,830 1,906 Non-current liabilities Long Term Debt Shareholders' Equity Paid-up Capital Total Shareholders' Equity Total Liabilities & Shareholder Equity Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 6
  7. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 9 Cash Flow (SAR mn) 2019E 2020E 268 361 390 (237) (244) (236) (264) 77 24 125 126 Cash flow from financing activities (93) (77) (167) (170) Change in cash (16) (54) (42) (45) Cash flow from operations CAPEX Free Cash flow 2017 2018 314 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7
  8. Leejam Sports Co Consumer Discretionary 11 July 2019 Contents Company Overview …………………………………………………………………………9 KSA Fitness Industry Overview…………………………………………………..…..12 Key Growth Drivers………………………………………………………………………..16 Leejam: Market Leader in KSA……………………………...………….................16 Increasing focus on expanding subscriber base…………………………………17 Short term benefits from female segment to boost margin…………………17 Government’s push to increase participation……………………………………19 Low market penetration of organized players…………………………………..19 Diversified service portfolio…………………………………………………………...20 Positive FCF to drive future growth……………………………..………………….21 Key Investment Risks…………………………………………………………………….23 Key Financials…………………………………………………………….……………......25 Appendix…………………………………………………………………….………………..30 Disclosures Please refer to the important disclosures at the back of this report. 8
  9. Leejam Sports Co Consumer Discretionary 11 July 2019 Company Overview : Business background Leejam Sports Company opened its first fitness centre in 2005 and has expanded to 134 fitness centres by the end of June 2019 (130 in Saudi Arabia and 4 in UAE). It operates under the brand name of fitness time and has a strong brand image in the kingdom. The company plans to add 10-12 female centres on a yearly basis over the next five years which should help the company in capturing a significant portion of the female fitness market. It operates through various formats targeting mid income to high income people and has a unique business model compared to its peers where it offers a range of sports activities under one roof. The average size of fitness time centre is 3450sqm. Figure 10 Fitness Centre Features and Services by Brand Feature or Service Fitness Time Plus Fitness Time Fitness Time Pro Fitness Time Ladies Fitness Time Ladies Pro Fitness Time Junior Fitness Time Academy Cardio Yes Yes Yes Yes Yes Yes No Body building Yes Yes Yes Yes Yes Yes No Group exercise Yes Yes Yes Yes Yes Yes No Rowing Yes Yes No Yes No No No Kinesis Yes Yes No Yes No No No Circuit training Yes Yes Yes Yes No No No Spinning Yes Yes Yes Yes No No No TRX Yes Yes Yes Yes No No No Functional training Yes Yes Yes Yes No No No Swimming pool Yes Yes Yes Yes Yes Yes No Jacuzzi (hot/cold) Yes Yes Yes Yes No No No Sauna and steam bath Yes Yes Yes Yes No No No Basketball Yes Yes Yes Yes Yes Yes No Volleyball Yes Yes Yes Yes Yes Yes No Football Yes Yes Yes Yes Yes Yes Yes Squash Yes Yes No No No No No Tennis Yes No No No No No No Billiards Yes Yes No Yes No No No Internal running track Yes Yes Yes Yes Yes Yes No Virtual golf Yes No No No No No No Towels Yes Yes No Yes No No No Lounge Yes Yes No Yes No No No Amenities Yes Yes No No No No No Valet parking Yes Yes No No No No No Yoga No No No Yes Yes No No Pilates No No No Yes Yes No No eXtreme Fitness Yes Yes Yes Yes Yes No No eXtreme Boxing Yes Yes Yes Yes Yes No No eXtreme Bootcamp No Yes Yes Yes Yes No No Personal Training Yes Yes Yes Yes Yes No No Source: Company data, Al Rajhi Capital The company has a good exposure towards corporate business and as on 2018 it derived ~12% of its total revenue from corporate segment. In this segment subscriptions are offered at a discounted price but it is more reliable in terms of member retention, this segment has grown four times over the last three years. (Revenue for 2018 was SAR99mn) and management expects this segment to grow by 50% in 2019. Disclosures Please refer to the important disclosures at the back of this report. 9
  10. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 11 Revenue contribution from different business Revenue % of total revenue Number of Centres 27,476 3.7% 4 3,686 FT 360,752 49.2% 51 82,547 FT Pro 206,968 28.2% 41 73,792 FT Basic 1,320 0.2% 0 FT Junior 20,276 2.8% 8 3,718 166 0.02% 0 12,333 Fitness Centre Category FT Plus FT Academy FT Ladies Number of Members 14,576 2.0% 8 Corporate and rental income 101,313 13.8% 0 33,872 Total 732,847 100% 112 209,948 Source: Company data, Al Rajhi Capital. Data as of December 2017. The company operates the largest network of fitness centres (~27% of market share in KSA) in the MENA region under the Fitness Time brand with 112 operational fitness centres in 23 cities in the Kingdom and three cities in UAE. It operates across six primary formats, which include the following: (i) Fitness Time Plus, a luxury and exclusive experience; (ii) Fitness Time, a high-end, full-service male fitness facility; (iii) Fitness Time Pro, aimed at professional and aspiring male athletes; (iv) Fitness Time Junior, targeted at boys and youth in the 5-16 age range; (v) Fitness Time Ladies, a high-end fitness centre dedicated to women, the first of which was opened in 2017; and (vi) Fitness Time Ladies Pro, specifically for aspiring female athletes. (Source: Prospectus) Figure 12 Ownership in the Company Shareholder Shareholding (Pre-IPO) Nominal Number Value of Shares Ownership (% ) (SAR) Hamad Ali Al-Saqri Target Opportunities for Trading Company 31,670,150 Total Shareholding (Post-IPO)* Number of Shares Nominal Ownership (% ) Value (SAR) 60.50% 316,701,500 31,670,150 60.50% 316,701,500 13,148,224 25.10% 131,482,240 1,361,968 2.60% 13,619,680 44,818,374 85.60% 448,183,740 33,032,118 63.10% 330,321,180 Source: Company data, Al Rajhi Capital (*it relates to holding immediately after IPO) Comparison of Leejam with Planet Fitness (USA) and Gym Group (UK) Leejam has a higher net margin compared to its global peers mainly because of better operating efficiency and lower overhead costs. Net margins are higher compared to global peers and we believe the company has the room to increase promotions and discounts to overcome competition in the future. Disclosures Please refer to the important disclosures at the back of this report. 10
  11. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 13 Gross Margin Figure 14 Cost as a % of revenue 70.0% 120.0% 62.0% 98.2% 98.9% 98.9% 99.2% 100.0% 60.0% 50.0% 80.0% 60.0% 40.0% 55.9% 51.7% 48.2% 48.3% 44.1% 51.8% 55.8% 58.5% 40.0% 38.2% 10.0% 0.0% 0.0% Leejam 41.5% 20.0% 43.9% 20.0% 2015 44.2% 30.0% 38.0% 2016 Planet Fitness 2017 2018 1.8% 1.1% 1.1% 0.8% 2015 2016 2017 2018 Leejam The Gym Group Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital Figure 15 SGA as a % of Revenue Figure 16 Net Margins 120.0% Planet Fitness The Gym Group 40.0% 30.4% 100.0% 61.8% 56.1% 28.8% 30.0% 104.6% 23.8% 22.5% 18.8% 88.4% 80.0% 88.0% 89.7% 20.0% 12.9% 11.5% 18.0% 10.0% 60.0% 7.8% 7.8% 2016 2017 0.0% 2015 40.0% 20.0% 16.8% 5.8% 2018 -10.0% 13.2% 14.0% 14.1% 11.7% 12.6% 12.5% 12.6% 2015 2016 2017 2018 -20.0% 0.0% Leejam Planet Fitness The Gym Group Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. -20.6% -30.0% Leejam Planet Fitness The Gym Group Source: Company data, Al Rajhi Capital 11
  12. Leejam Sports Co Consumer Discretionary 11 July 2019 KSA Fitness Industry Overview The fitness and sports industry in Saudi Arabia is at a nascent stage currently , the rising health issues and people’s awareness towards the health benefits and sports as a recreational activities has created a significant opportunities for the overall fitness industry. The fitness market in Saudi Arabia is segmented into male and female, while male market is in its early stage of maturity, female market is in its infancy. There are total 0.9mn fee paying male members and 0.2mn female members while the total addressable market consists of ~13mn members (Source: Prospectus) which creates much scope for growth (Current penetration rate is ~8%). The total addressable market is around SAR 2.9bn in which the female market size is 0.65bn (Source: Prospectus). Figure 17 Average Members ('000) '000 1,000 890 900 790 800 707 700 624 600 500 541 458 400 300 200 100 2012 2013 2014 2015 2016 2017 Source: Company data, Al Rajhi Capital The number of members has grown from 458,000 to 890,000 at a CAGR of 14% from 2012 to 2017 and this number is further expected to increase at a double digit as people are becoming aware of the health benefits in the kingdom. Structural and demographic changes to aid overall industry growth  In Saudi Arabia life style diseases such as obesity and diabetes resulting from unhealthy eating habits and a sedentary lifestyle are very common. As per World health organization ~35% of the total population is obese in the kingdom and it is more common in females compared to their male counterparts. It is one among the top 15 countries in the world where diabetes is prevalent among adults. Thus maintaining fitness is a key issue in Saudi Arabia and with relatively young population the trend is changing as people become aware of the health benefits in the long run. Further there is an increase interest among females to shift towards a healthy lifestyle by joining fitness centres mainly due to affordability of subscription prices and increasing disposable income of the family. Figure 18 Selected Health Indicators in Percentages of Saudi Population for the years indicated Indicator Male Female Total Prevalence of obesity (2016) 31 42 35 Prevalence of diabetes (2017) 17 21 19 Prevalence of hypertension - hypertensive (2013) 18 13 15 Prevalence of hypertension - borderline (2013) 47 34 41 Prevalence of high cholestrol - hypercholesteraemic (2013) 10 7 9 Prevalence of high cholestrol - borderline (2013) 20 21 20 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 12
  13. Leejam Sports Co Consumer Discretionary 11 July 2019  According to the family support and the market survey conducted in 2018 more than 50% of the people admitted that they would like to join the fitness centres subject to timing, price and convenience. This speaks volumes about the prospective increase in the overall fitness market once the market matures with the opening of new gyms. As per our calculations we expect the average Saudi household income to increase to SAR 15,602 per month which should increase the discretionary spending towards fitness and leisure activities. Globally people spend ~4-5% of their total income towards fitness and sports related activities. We have assumed in our analysis that the total expenditure on health and fitness as a percentage of total income will reach to 4% by 2021E thus taking the total monthly expenditure on health and fitness to SAR624mn. Figure 19 Monthly Expenditure on health and fitness as a percentage of total income 700 16,000 15,602 15,500 15,338 624 600 15,078 15,000 14,823 500 537 14,572 14,500 452 14,325 14,083 371 358 13,844 14,000 13,500 300 328 303 13,610 400 200 242 204 100 13,000 - 12,500 2013 2014 2015 2016 2017 Average Saudi household income 2018 2019E 2020E 2021E Expenditure on health and f itness (RHS) Source: GASTAT, Al Rajhi Capital    Government is taking various initiatives like creating infrastructural facilities, raising awareness towards health benefits, relaxation of regulations to create a favorable investment ground for fitness companies. License to female fitness centres is a mega boost to the fitness industry. In 2017, government issued licenses for the opening of exclusive female centres. The current number of female gym member is 0.2mn and this is expected to increase drastically given the fact that the obesity is more prevalent in females. Increasing female employment will increase the disposable income of the women which in turn should increase the female participation towards fitness activities. As shown in the table below the government spending towards health services and social development has increased at a CAGR of 9.20% from 2012-2017. In 2017 the government expenditure towards healthcare was ~11% of the total expenditure, this is a very high number compared to global average (4-5%). Therefore the government is pushing the people hard to adopt a healthy lifestyle so that the overall public spending towards the healthcare is reduced. Figure 20 Government's Expenditure on healthcare (SAR bn) SAR bn 120 113 96 100 80 80 60 40 20 2016 2017 2018 Source: SAMA, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 13
  14. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 21 Government Spending Split per Sector in the Kingdom Sector 2012 2013 2014 2015 2016 2017 CAGR Health Services and Social Development 61 ,284 70,938 78,166 82,071 79,958 95,502 9.20% Transport and Communications 20,566 22,063 23,506 22,348 12,301 25,258 4.10% Economic Resources Development 41,152 46,696 49,537 48,148 26,025 47,051 2.70% 167,970 203,147 209,296 216,022 191,572 200,242 3.50% 10,525 11,702 13,540 12,592 7,708 26,147 20.00% Human Resources Development Infrastructure Development Municipal Services 25,460 31,729 34,610 34,192 21,246 47,941 13.40% Defence and National Security 211,867 251,325 302,859 306,947 213,207 287,541 6.30% Public Administration, Public Utilities and General Items 107,551 119,948 84,558 80,575 68,553 127,339 3.40% 10,785 14,950 15,375 14,978 3,895 759 -41.20% Government Specialised Credit Institutions Subsidies Total 32,840 47,502 43,553 42,127 35,535 32,220 6.20% 690,000 820,000 855,000 860,000 660,000 890,000 5.20% Source: Company data, Al Rajhi Capital An overview of “Quality Of Life Program 2020” The council of Economic Affairs and Development had defined 12 vision realization programs to achieve the objectives of Vision 2030. Among those 12 “Quality of Life program 2020” is one of them which focuses on improving and enhancing the quality of life mainly through sports, entertainment and sports & culture. Talking about the sports sector in particular, the sector has been underdeveloped mainly due to limited high quality facilities, low awareness and social & regulatory impediments. In Saudi Arabia ~13% of the total population is physically active once a week compared to ~72% in the United Kingdom. Due to insufficient infrastructure and lack of support to pursue sport as a full time career, the participation of Saudi Arabia in Olympics has also been very limited. However government is taking several initiatives to build a sports and fitness ecosystem by building mass participation strategies to motivate people to take up sports and physical activities and inviting private sector to invest in the fitness and sports industry. The current number of Saudi Olympic sportsmen per million of the population is 0.38. The aspiration is to reach 2.81 Saudi Olympic sportsmen per million of the population by 2030 which is in line with globally high performing countries. To achieve this program private sector is expected to play a big role by building a fitness based ecosystem such as gym, sports training centres, health clubs, fitness equipments, etc to name a few. We believe that the entire fitness and sports industry is taking a new shape and it is at the early stages of planning. In the coming years the demand for high quality fitness clubs should increase and Leejam being a market leader in the fitness segment is in a strong position to benefit from the “Quality of Life Program 2020”. (Source: Vision 2030 document) Figure 22 Sports Benchmarking Source: Vision 2030 document, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 14
  15. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 23 Sport Life Journey Source : Vision 2030 document, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 15
  16. Leejam Sports Co Consumer Discretionary 11 July 2019 Key Growth Drivers Market Leader in KSA with strong potential to grow its market share Leejam is a market leader with ~27% of the total gym members in the kingdom operating ~12% of the total gym in KSA. It has a strong brand image with wide presence throughout the kingdom and UAE. The fitness industry has evolved over the last five years from just a traditional gym to a concept fitness centres .One of the reasons why we like Leejam over other players in the KSA is because it offers various fitness regimens under one roof. Figure 24 Market Share Analysis for Saudi Male Primary Fitness Market Segment Primary Fitness Market Market Share (No. of members) Market Share (No. of Fitness Centres) Fitness Time 27% 12% Body Masters 7% 4% The Power Gym 2% 2% Fitness First 1% 1% Gold’s Gym 1% 1% Others 63% 80% Total 100% 100% Source: Company data, Al Rajhi Capital Leejam offers its subscription through six formats however three formats namely fitness time plus, fitness time and fitness time pro generate over 90% of the company’s revenue.  Fitness time plus: It is the premium most offering with five star service facilities, the annual subscription is priced at SAR8, 925. It provides luxurious services including lounge, towels, valet parking and some additional sports amenities like virtual golf and tennis court. There are four FT plus centres with minimum age requirement of 25 years to join a club.  Fitness time: It offers a middle level subscription with lesser facilities compared to FT plus at almost half the price (the annual subscription is SAR4, 988).There are 49 fitness time centres and it contributes almost 50% of the total revenue.  Fitness time pro: It is a value based format which competes with the other budget gyms in the country. The annual subscription is priced at SAR3, 255. It contributes ~25% to the total revenue with 41 centres in the kingdom. Figure 25 Breakdown of revenue by brand Figure 26 Breakdown of revenue by source Rental income, 1.5% FT Plus, 4% FT Ladies, 2% FT Academy, 0.02% FT Junior, 3% Corporate, 12.3% Corporate and rental income, 14% FT Basic, 0.2% FT, 49% FT Pro, 28% Individual memberships, 86.2% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. Source: Company data, Al Rajhi Capital 16
  17. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 27 Standard pricing by brand as of January 2018 Duration Brand Fitness Time Plus Fitness Time Fitness Time Pro Fitness Time Ladies Fitness Time Ladies Pro Fitness Time Junior List Price (SAR) 3 months 3,045 6 months 5,145 12 months 8,925 1 month 788 3 months 1,838 6 months 2,993 12 months 4,988 1 month 524 3 months 1,155 6 months 1,943 12 months 3,255 3 months 1,838 6 months 2,993 12 months 4,988 3 months 1,155 6 months 1,943 12 months 3,255 3 months 1,418 6 months 2,205 12 months 3,728 Source: Company data, Al Rajhi Capital Increasing focus on expanding subscriber base:  Focus on increasing member base by rationalizing promotions and discounts: The key challenges faced by any gym are retaining its existing members and acquiring new customers. Fitness industry as a whole is highly competitive and promotions and marketing plays a key role in differentiating one fitness centre from another. Leejam observed a subdued growth in 2017 (+5% y-o-y) mainly due to decreasing disposable income resulting from structural reforms. However in 2018 the company rolled out promotions and spent heavily on advertising which ultimately had a positive impact on its topline growth in 2018. We believe that the benefits of promotions and marketing will accrue to the company in 2019 without the need to spend any heavy amount towards advertisement. It is indicated that the company will cut off its marketing and promotional expenditure as they resort to aggressive social media campaigns (which is a cheaper alternative) to attract new subscribers. This is expected to improve the margins for the company and higher realized profits. In our expectations the net margin should improve by 250bps from 22.5% to 25% by the end of 2019E. Figure 28 Net Margins 35.0% 30.4% 30.0% 29.0% 23.8% 25.0% 25.0% 22.5% 20.0% 15.0% 10.0% 5.0% 0.0% 2015 2016 2017 2018 2019E Net Margins Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 17
  18. Leejam Sports Co Consumer Discretionary 11 July 2019 We expect the total number of male centres to increase from 96 at the end of 2018 (excluding three male centres were converted into female centres) to 105 by the end of 2021e. Figure 29 Number of Male centres 120 100 93 96 96 2017 2018 99 105 102 83 80 60 40 20 0 2015 2016 2019E 2020E 2021E Source: Company data, Al Rajhi Capital With 105 male centres and 56 female centres by the end of 2021 we expect the company’s revenue to reach to SAR1.15bn by 2021E. Figure 30 Leejam Revenue Year 2018 2019E 2020E 2021E Average no of members 217,000 243970 275731 303676 Male 179,000 191530 204937 215184 Female 38,000 52440 70794 88493 Average revenue per member 3,686 3,871 3,834 3,797 Growth in ARPU Revenue 5% 5% 944 -1% 1,057 -1% 1,153 Source: Company data, Al Rajhi Capital  Improving member density provides further room for improvement: Apart from expansion in new areas the company has scope to improve its LFL growth by increasing the capacity utilization of its current centres, its current utilization rate on an average is 0.6 subscriber/sqm while globally most of the gym operates at 2.5 subscribers/sqm. The company is trying to increase the utilization rate to 1 subscriber/sq. It is also exploring new ways to utilize the gym space during off peak hours by curating special packages for retired persons who can use the gym at off peak timing at special rates. We believe such strategies to drive the top line as well as bottom line.  Corporate segment to drive topline in future: The corporate segment is growing rapidly, in 2018 it comprised of ~12% of the company’s total revenue. In corporate dealings it offers discounts ranging from 20% to 45% to the members. The corporate segment grew 400% over the last 3 years (SAR 103mn of revenue in FY2018). Going forward the company is taking efforts to increase the corporate tie ups which should increase the revenue contribution of this segment. The management expects this segment to grow by 50% in 2019. In 2018 the total corporate clients were 255 and total corporate members were 40,000 and based on our calculations we expect the revenue contribution from this segment to be SAR225mn (19% of the 2021E revenue). However the growth in corporate revenue will have a downward pressure on the gross margins. Disclosures Please refer to the important disclosures at the back of this report. 18
  19. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 31 Revenue Contribution from Corporate segment 200000 2 ,300 180000 2,250 160000 2,200 140000 120000 2,150 100000 2,100 80000 60000 2,050 40000 2,000 20000 0 1,950 2018 2019E 2020E Number of Corporate members 2021E Revenue f rom Corporate Members (SAR '000) Revenue per corporate member (SAR) (RHS) Source: Company data, Al Rajhi Capital Short term benefits from female segment to boost margin however competition to ease margins in long term: The company gained a first mover advantage by opening ~26 centres in two years (2017 and 2018) after acquiring female centre license in 2017. The company benefitted from the demand supply mismatch in the recent past resulting in a higher margins and a faster breakeven period (Currently the breakeven period for female centres is three months compared to 12-15 months globally). Another reason for increase in female subscription is affordability in subscription prices, few years back there were very few female gyms where the average monthly subscription would cost around SAR 2000 and an additional cost of SAR 1000 was paid to car drivers to drive the female to the gym and take her back home. Now with licensing of female fitness centres in 2017 and granting of driving license to female has created a positive impact in terms of demand for the gyms in the kingdom which in turn has created significant opportunity in untapped female fitness segment. The average price for a mid-tier fitness centre has come down to SAR300-400 per month due to increasing supply and demand. Based on management guidance and our estimates we expect a CAGR of 20% for the number of female fitness centres from 26 in 2018 to 66 in 2023. As per our calculations, revenue from female segments should increase to SAR483mn by the end of 2023 (we have assumed 75% occupancy) and contribute approximately more than one third to the total revenue of the company. Rising female employment is another reason why we believe the higher demand for the female segment is sustainable. Currently only 13% of the total employed females are going to the gym, we expect this number to increase and reach to 20% by 2023e. Figure 32 Gym going females as a % of total female workforce 500,000 25% 429,200 450,000 400,000 20% 350,000 316,233 300,000 17% 271,445 200,000 200,000 15% 15% 233,000 250,000 150,000 20% 368,412 13% 10% 11% 9% 100,000 5% 50,000 0 0% 2018 2019E 2020E Gym going f emales 2021E 2022E 2023E As a % of total f emale workf orce Source: Company data, GASTAT, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 19
  20. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 33 Average Revenue per member SAR 140 ,000 3,900 127,429 3,871 120,000 3,850 3,834 100,000 40,000 3,800 88,493 80,000 60,000 106,191 3,797 3,797 3,797 3,750 70,794 3,700 52,440 3,686 38,000 3,650 20,000 3,600 - 3,550 2018 2019E 2020E 2021E Average f emale members 2022E 2023E Average revenue per member (RHS) Source: Company data, Al Rajhi Capital Overall fitness Industry to take a new shape driven by government’s push to increase participation in fitness activities: One of the initiatives of the government as a part of vision 2030 is to increase the participation of citizens towards sports and fitness. As a part of the survey conducted by General Sports Authority it was found that only 20% men and 7% women participate in any kind of physical activity once a week. Sedentary lifestyle and lack of good quality fitness facilities are the key reasons for the obesity and other lifestyle related diseases affecting the people. Therefore government intends to increase the participation to 20% by 2020 and 40% by 2030G. As a part of its initiative the council of economic and development affairs (CEDA) have accepted some reforms to transform the provision of physical activity in the kingdom. Some of the initiatives are designing and delivering university sports groups throughout the kingdom, increasing female participation by licensing of fitness centres for women, developing community sports group throughout the kingdom. We believe such measures would increase the awareness about the benefits of physical activities and bring a cultural shift where people would pursue sports as a career and give high priority to health. This will in turn benefits companies like Leejam which provides various sports facilities. Low market penetration of organized players provides an opportunity for Leejam The fitness industry in Saudi Arabia is highly fragmented and under penetrated, as of 2017 there were approximately 971 fitness centre with 1.1mn fee paying members dominated by male (82% male members). As per the company’s prospectus, the total addressable market in terms of the number of members is ~14mn which translates to a total market size of SAR2.9bn; this means the current penetration rate of gym stands at 8%. Leejam has a strong brand image in the kingdom and it has a wider presence in the prominent cities like Riyadh (48 centres), Jeddah (23 centres), Dammam and Al-Khobar with 6 centres each. The majority of the population with high disposable income is concentrated in the above mentioned four cities and management is planning to add 10-12 female centres and 3-5 male centres each year in the upcoming future. We believe such expansion will help the company in maintaining a strong leadership position in the fitness industry. Though the entry of barriers is relatively low in fitness industry but high capex requirement will lead to a market consolidation with a shift towards the organized players in future. Figure 34 Kingdom’s Male Fitness Centre Members Year Member 2012 2013 2014 2015 2016 2017 CAGR 458,000 541,000 624,000 707,000 790,000 890,000 14% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 20
  21. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 35 Leejam Geographic Footprint Source : Investor Presentation, Al Rajhi Capital Diversified service portfolio to offset threat from rising competition:  Offerings for all age group: Its wide product offering ranges from traditional gym to swimming pool, group classes, football ground, tennis court, rowing, basketball court, Jacuzzi, lounges, virtual golf course, volley ball, circuit training, HIIT, boxing, squash, semi Olympic pool and business centres. Amidst limited entertainment options and sports facilities in the kingdom a fitness time centre provides everything under one roof. With wide service offerings it attracts members of different age group and provides a great place for socializing.  Personal training a high margin growing segment: The Company provides personal training (PT) facilities at an additional cost, to maintain the standard and quality it doesn’t allow any freelancing in PT segment. This is gaining a strong traction and under this model trainers are paid on a commission basis based on the number of personal training sessions they conduct. The revenue contribution from PT is SAR60mn (+29% Y-O-Y) which was 7% of the total 2018 revenue. We expect this segment to grow in the coming years and being a high margin segment it should have a positive impact on the bottom-line of the company. Positive FCF to drive future growth  Leasing Model: The Company leases its centres rather than owning (~98% of the centres are leased while 2% are owned). This makes Leejam a cash generating unit as the debt requirement reduces significantly, one key advantage of this business model is that the company can finance future capex (especially to expand the female fitness centres) through FCF thus keeping the debt at minimum level. We expect the company to incur a capex of SAR236mn and SAR264mn in 2019E and 2020E respectively which will be funded by a mix of debt and equity. This will also help the company in servicing the interest and debt repayment on time. Disclosures Please refer to the important disclosures at the back of this report. 21
  22. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 36 Cash Flows (SAR mn) 450 390 400 350 405 361 314 300 270 250 200 126 125 150 116 100 77 50 25 2017 2018 2019E Cash Flow from Operations 2020E 2021E Free Cash Flows Source: Company data, Al Rajhi Capital   Low working Capital requirement- The company receives the subscription in advance from its members as a result of which it has a very low working capital requirement (recognizes deferred revenue in its balance sheet). Strong FCF to support high dividend payout ratio- Leejam’s historical pay- out ratio has been over 50% and we believe that it is sustainable in the long run even after aggressive expansion because once the company repays its debt its FCF will free up which will allows the company in maintaining the existing payout levels. We expect DPS to increase to SAR2.63 by 2021E. Other growth opportunities The company is taking initiatives to grow its existing core portfolio of men’s fitness facilities by adding various value added services like providing laundry services, business centres, lounge facilities and different exercise plans like group classes, professional training for football to provide world class experience to its members. We see Leejam as a complete health club where a member gets access to a wide range of fitness activities with a single subscription. With unique business model which ensures strong cash flow the company is well poised to drive its topline going forward with sustainable margins (revenue growth 12% for 2020E) and a healthy dividend pay-out ratio. Disclosures Please refer to the important disclosures at the back of this report. 22
  23. Leejam Sports Co Consumer Discretionary 11 July 2019 Key Investment Risks : Competitive Industry  Increasing competition from local players will put pressure on margins- The fitness industry is highly fragmented in Saudi Arabia with the top five players having a market share of 38% in terms of membership and 20% in terms of fitness centres. The barriers to entry in this market are relatively low as the business model could be easily replicated by the competitors in a very less time. Thus the fitness industry is a highly competitive one as well cost sensitive. Any cost cutting by smaller players might hurt Leejam as its margin will come down in an effort to retain its members. Moreover the female centres just started in 2017 and any successful pricing strategies in this segment can be copied easily by other competitors which in turn would have an adverse impact on margins in the short term. Figure 37 Market Share Analysis for Saudi Male Primary Fitness Market Segment Primary Fitness Market Market Share (No. of members) Market Share (No. of Fitness Centres) Fitness Time 27% 12% Body Masters 7% 4% The Power Gym 2% 2% Fitness First 1% 1% Gold’s Gym 1% 1% Others 63% 80% Total 100% 100% Source: Company data, Al Rajhi Capital If the number of ladies gym is opened faster than our estimates then the impact of competition (especially in the ladies segment) will impact the financials of the company in the short to medium term. In the worst case the net profit margins for 2019E and 2020E might decrease significantly to 19% and 20% as against our best case estimate of 25%. Figure 38 Impact of Competition 2019E 2020E 2021E Average Total Members With Competition 217,000 224,532 257,026 Average Total Members Without Competition 243,970 275,731 303,676 OPM With Competition 22% 23% 25% OPM Without Competition 28% 27% 27% NPM With Competition 19% 20% 21% NPM Without Competition 25% 25% 24% Source: Company data, Al Rajhi Capital  Threat of new entrants especially in female segment- Since the fitness industry in Saudi Arabia is still in early stages of maturity there are high chances of international players entering the market due to huge potential especially in the female segment. The US based Xponential fitness centre has recently signed a franchise agreement to open 50 female studios over the next three years; this is going to increase the competition as well as challenge for Leejam to maintain its market share and net margins. In Fig 38 we have shown the impact of intensifying competition on the company’s margin. Disclosures Please refer to the important disclosures at the back of this report. 23
  24. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 39 Female Members (' 000) 90 85 80 68 70 60 68 52 50 42 38 40 30 20 10 2019E 2020E Without Competition 2021E With Competition Source: Company data, Al Rajhi Capital  New government levies to increase the cost of living- Any new government levies like increase in expat levy, dependent levy or any increase in price of utilities will negatively impact the disposable income of the people. This in turn will have an adverse impact on the company’s business as spending towards gym and leisure forms a part of discretionary spending. In past Leejam has faced such a slowdown in 2017 and 2018 when the government stopped cost of living allowance and increased the prices of utilities, Leejam’s top line grew 5% and 9% respectively while the bottom-line had a negative growth of -14% in 2017 and a marginal growth of 3% in 2018. In our view any such structural changes which decrease the disposable income of the people will have an adverse impact on the company’s financials. Figure 40 Revenue and Profit Trend in past SAR mn 900 35% 800 700 30% 30% 29% 25% 600 24% 500 23% 400 20% 15% 300 10% 200 5% 100 - 0% 2015 2016 Revenue 2017 Net Prof it 2018 Net Prof it Margins (RHS) Source: Company data, Al Rajhi Capital  Home Personal Training- Home personal training is gaining a good traction in Saudi Arabia, though very low currently still it poses a risk as home personal trainer provides a customized fitness plan according to the specific requirements. Disclosures Please refer to the important disclosures at the back of this report. 24
  25. Leejam Sports Co Consumer Discretionary 11 July 2019 Key Financials Revenue : The company has delivered a strong topline growth in the past except for 2017 (+5% y-o-y) and 2018 (+9% y-o-y) where the business was impacted due to weaker consumer spending on the back of structural reforms in the economy. However we are expecting a higher consumer spending towards health and fitness as people adapt to the reforms. In our view the topline is expected to grow by 18% y-o-y in 2019E mainly driven by ~35% growth in the number of female subscribers and 4% growth in the number of male subscribers. Over the time due to low entry barrier as the competition intensifies we expect the top line growth to subside to close to ~9% and reach SAR 1.3bn going forward by 20203E. Figure 41 Revenue Trend (SAR mn) SAR mn 1,600 1,376 1,400 1,261 1,153 1,200 1,057 1,000 944 800 600 400 200 2019E 2020E 2021E 2022E 2023E Source: Company data, Al Rajhi Capital Operating Costs: The majority of the company’s cost is employee’s salary as the company hires best fitness trainers from Asian and African countries; the salary levels have increased ~5-6% in 2018. The company is currently in the green zone of Saudization. The second biggest expenditure after salaries is lease rentals as the company leases almost 98% of the properties, rentals comprises of ~16% of the total revenue and it is going to increase going forward as the company expands, however cost related to marketing and promotions should reduce in near future as company resorts to social media marketing (a cheaper alternative) however in medium term we expect this cost to increase as the competition increases before again falling down in long term. The overall SG&A is expected to remain 12% of the total sales in long term. Disclosures Please refer to the important disclosures at the back of this report. 25
  26. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 42 Cost Break-up (2018) Maintenance, 1% Other, 9% Advertising, 3% Cleaning, 8% Employees, 50% Utilities, 13% Rent, 16% Source: Company data, Al Rajhi Capital Impact of Saudization: The Company has paid an expat levy of SAR~3-3.5mn in 2018. Since most of the trainers are hired from abroad we don’t see any negative impact on operations due to Saudization requirements as the company is currently in green zone of Saudization. It is entitled to claim the refund of expat levy but as per our last discussion with the management in March 2019 they have not claimed any refund of expat levy paid. Figure 43 Impact of Saudization 31-Dec-15 Company Leejam Sports Co Fitness Time Co Total NonSaudi Saudi Total 31-Dec-16 Saudization % / Category NonSaudi Saudi 615 1,064 1,679 36.7% (Green) 674 57 98 155 36.8% (Green) 4 672 1,162 1,834 36.70% 678 1,493 1,493 31-Dec-17 Saudization % / Category Total 2,167 4 2,171 31.3% (Green) 100% (Platinum) 31.30% NonSaudi Saudi 718 4 722 1,656 1,656 Saudization % / Category Total 2,374 4 2,378 32.2% (Green) 100% (Excellent) 30% (Green) Source: Company data, Al Rajhi Capital Margins: We expect the gross margins to improve from 38% in 2017 and 2018 to 39% in the near term, however as the competition increases and the demand supply balances for female segment the gross margins will gradually settle down to 37% in the long run. EBIT margin is expected to increase in 2019E by 200 basis points to 28% mainly due to slight decrease in SA&A and then settle down gradually to 26%. The net profit margins should increase in near term (26% in 2019E and 2020E) on the back of higher revenue and gross margins, however in the long term it will settle down gradually between 22-23%. Disclosures Please refer to the important disclosures at the back of this report. 26
  27. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 44 Margins 45 % 40% 38% 38% 38% 38% 35% 28% 30% 27% 26% 25% 27% 25% 25% 24% 23% 20% 15% 10% 5% 0% 2018 2019E 2020E Gross Margin EBIT Margin 2021E Net Margin Source: Company data, Al Rajhi Capital Figure 45 Income Statement (SAR mn) 2020E 2021E Revenue 2018 800 944 1,057 1,153 EBITDA 317 383 425 462 Operating income (EBIT) 208 260 288 313 Tax (Zakat) 2019E (2) (5) (5) (6) Minority Interest - - - - Net Income 180 233 261 275 Source: Company data, Al Rajhi Capital Figure 46 Balance Sheet (SAR mn) 2018 2019E 2020E 19 86 42 70 1,609 1,830 1,906 2,068 Total Liabilities 895 1,015 985 1,035 Total Shareholders' Equity 715 815 922 1,033 Total Net Debt 465 466 417 477 Cash & Cash Equivalents Total Assets 2021E Source: Company data, Al Rajhi Capital Figure 47 Cash Flow (SAR mn) 2018 Cash flow from operations CAPEX Free Cash flow 2019E 2020E 268 361 390 2021E 405 (244) (236) (264) (288) 24 125 126 116 Cash flow from financing activities (77) (167) (170) (88) Change in cash (54) (42) (45) 29 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 27
  28. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 48 Key Ratios 2017 2018 2019E 2020E 3 3 5 5 5 FCF per share 77 25 125 126 116 Book value per share 12 14 16 18 20 EPS 2021E Valuation ratios (x) PE 23 22 18 17 16 PBV 6 5 5 4 4 EV/Sales 7 7 6 5 5 19 17 16 14 13 Gross margin 38% 38% 38% 38% 38% Operating margin 27% 26% 28% 27% 26% EBITDA margin 40% 40% 38% 38% 38% Net profit margin 24% 23% 25% 25% 24% EV/EBITDA Profitability ratios (% ) Return Ratios Div per share 1.8 1.8 2.2 2.5 2.6 Payout Ratio 54% 52% 48% 48% 52% ROE 3.6 4.2 3.7 4.0 4.2 ROA 0.12 0.11 0.12 0.13 0.12 Current ratio 0.46 0.40 0.49 0.43 0.51 Quick Ratio 0.15 0.09 0.23 0.14 0.19 Inventory 0 0 0 0 0 Receivables outstanding 4 9 15 15 15 30 27 26 25 26 4 9 15 15 15 -26 -18 -11 -10 -11 0.7 0.6 0.6 0.5 0.5 Liquidity ratios Operating ratios (days) Payables outstanding Operating cycle Cash cycle Leverage Ratios Debt/Equity Debt/ EBITDA (x) Interest Coverage ratio (x) 1.5 1.5 1.3 1.1 1.2 13.4 11.7 13.5 14.4 10.2 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 28
  29. Leejam Sports Co Consumer Discretionary 11 July 2019 Impact of IFRS 16 on company ’s Equity As per company’s disclosure the impact of transition from IAS 17 to IFRS 16 on company’s equity is negative SAR 98mn as disclosed in figure 39: Figure 49 Impact of IFRS 16 on company’s Equity Particulars Amount (SAR) Assets Right of Use 879,913,021 Prepayments and other assets (67,941,747) Total impact on assets 811,971,274 Liabilities Lease liabilities 974,263,057 Deferred rent liability (64,591,342) Total impact on liabilities 909,671,715 Equity (97,700,441) Total impact on equity (Approx) (97,700,441) Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 29
  30. Leejam Sports Co Consumer Discretionary 11 July 2019 Appendix Figure 50 Number of Fitness Centres 2017 2018 2019E 2020E 4 4 4 5 Fitness Time * 51 47 51 53 Fitness Time Pro* 41 41 44 45 Fitness Time Junior 8 4 NA NA Fitness Time Basic NA 0 NA NA Corporate wellness, Academy, Kidzenia NA 4 4 4 8 26 36 46 Total 112 126 139 153 Additions 18 14 13 14 Closures 1 NA NA NA Temporarily closed as at year end for conversion 7** NA NA NA Net Additions during the year 10 14 13 14 Fitness Time Plus Fitness Time Ladies and Fitness Time Ladies Pro* Source: Company data, Al Rajhi Capital. * Including fitness centres in the UAE. ** In addition to the seven male/junior fitness centres closed as at 31 December 2017 for conversion purposes, the Company closed, converted and reopened four male/junior fitness centres as female fitness centres during the year. Figure 51 Revenue by Type 2017 2018 2019E 2020E 631,533 648,000 848,340 795,500 Corporate 90,420 82,000 10,660 165,000 Rental income 10,892 10,000 10,000 10,000 60,000 75,000 86,500 732,846 800,000 944,000 1,057,000 Individual memberships 86.20% 81.00% 89.87% 75.26% Corporate 12.30% 10.25% 1.13% 15.61% 1.50% 1.25% 1.06% 0.95% 7.50% 7.94% 8.18% SAR in '000 Individual memberships Personal Training Total As % of total revenue Rental income Personal Training KPIs Average Individual members 176,659 217,000 243,970 275,731 Average Corporate members 32,265 40,000 50,000 57,667 Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 30
  31. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 52 Like-for-Like vs . New Openings Number of Fitness Centres Financial year ended 31 2015 2016 CAGR Increase/Decrease 2017 2015-2016 2016-2017 2015-2017 (SAR '000 except for % ) Revenue Like-for-like (openings prior to 1 January 2015) 60 439,548 447,358 418,691 1.8% -6.4% -2.4% Opened in FY15 13 29,583 77,980 73,140 163.6% -6.2% 57.2% Opened in FY16 10 - 17,317 50,578 N/A 192.1% N/A Opened in FY17 10 - - 23,513 N/A N/A N/A 9,220 2,956 - -67.9% N/A N/A 12.6% Discontinued fitness centre - Converted Centres - Main offering 20,279 27,319 25,698 34.7% -5.9% 498,630 572,930 591,620 14.9% 3.3% 8.9% -43.9% -1.5% 40.2% Fitness Time Basic closed for conversion - 1,360 2,351 1,320 72.9% Fitness Time Junior 8 8,019 11,808 15,772 47.3% 33.6% Fitness Time Junior closed for conversion - 5,288 8,087 4,518 52.9% -44.1% -7.6% Fitness Time Academy closed - 355 4,008 167 1029.0% -95.8% -31.5% Fitness Time Ladies 7 - - 15,180 N/A N/A N/A UAE 4 4,322 9,938 13,646 129.9% 37.3% 77.7% Corporate and others - 76,866 91,762 90,623 19.4% -1.2% 8.6% Total revenue - 594,839 700,885 732,846 17.8% 4.6% 11.0% Like-for-like (openings prior to 1 January 2015) - 40.9% 44.0% 39.0% 3.1% -5.0% -1.9% Opened in 2015 - 1.2% 29.5% 23.9% 28.2% -5.6% 22.6% Opened in 2016 - N/A -5.5% 21.5% N/A 27.0% N/A Opened in 2017 - N/A N/A -0.5% N/A N/A N/A Fitness Time Basic -119.3% -45.3% -21.4% 74.0% 23.9% 97.9% Fitness Time Junior -11.3% -11.4% -33.3% -0.1% -21.9% -22.0% 57.4% 96.5% N/A 39.1% N/A N/A N/A N/A 35.8% N/A N/A N/A -146.5% -32.6% -29.1% 113.9% 3.5% 117.4% 44.1% 43.9% 38.0% -0.1% -5.9% -6.1% Gross margin Fitness Time Academy Fitness Time Ladies UAE Total Source: Company data, Al Rajhi Capital. Data only till 2017 is provided in prospectus. This is for informational purposes only. Data for 2018 and later are not available. Disclosures Please refer to the important disclosures at the back of this report. 31
  32. Leejam Sports Co Consumer Discretionary 11 July 2019 Figure 53 Revenue by City CAGR Financial year ended 31 December SAR in '000 Increase/Decrease 2016-2017 2017 2015-2016 2015 2016 2015-2017 Riyadh 223,730 261,537 260,199 16.9% -0.5% 7.8% Jeddah 118,002 138,127 143,043 17.1% 3.6% 10.1% KSA Dammam 34,198 40,030 43,906 17.1% 9.7% 13.3% 137,722 159,492 181,429 15.8% 13.8% 14.8% 513,652 599,185 628,576 16.7% 4.9% 10.6% 4,322 9,938 13,646 129.9% 37.3% 77.7% 76,866 91,762 90,623 19.4% -1.2% 8.6% 594,839 700,885 732,846 17.8% 4.6% 11.0% Riyadh 41 43 42 2 -1 1 Jeddah 19 21 22 2 1 3 Dammam 5 6 5 1 -1 0 Other cities 24 30 39 6 9 15 Total KSA 89 100 108 11 8 19 2 2 4 - 2 2 Riyadh 6,144 6,078 6,019 (66) (59) (125) Jeddah 6,603 6,996 6,352 393 (644) (251) Dammam 6,630 5,880 6,014 (750) 622 Other cities 6,634 6,384 5,354 (250) (1,030) Total KSA 6,404 6,336 5,908 (68) (428) UAE 3,201 4,969 4,845 Other cities Subscription membership revenues & rental revenue (excluding Corporate and Rental UAE revenues) UAE Corporate and others revenue Total Number of fitness centres UAE Average revenue per fitness centre 1,768 (124) (128) (1,280) (496) 1,644 Source: Company data, Al Rajhi Capital. Data only till 2017 is provided in prospectus. This is for informational purposes only. Data for Disclosures Please refer to the important disclosures at the back of this report. 32
  33. Advanced Petrochemicals Co Petrochemicals –Industrial 11 July 2019 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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  34. Advanced Petrochemicals Co Petrochemicals –Industrial 11 July 2019 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. 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