Tadawul makes grand entry on to the world stage

A recent report shows that Tadawul, Saudi Arabia's stock exchange, surpassed the London bourse to become the world's second-busiest market for initial public offerings (IPOs) in the first five months of 2008.

According to Reuters, the total of Tadawul IPOs rose 322 per cent from a year earlier to $8.50 billion. This notable increase was on the back of high profile offerings such as the Al Inma Bank IPO which raised $2.80 billion, the $1.87 billion listing of mobile telecom company Zain and the $1.20 billion IPO of petrochemical company Petro Rabigh.

Though the number one spot was occupied by the New York Stock Exchange, thanks largely to the $19.70 billion listing of Visa, Tadawul's grand entry on to the world stage is nothing short of spectacular.

With this phenomenal growth in fund raising, Tadawul has been thrust to the centre of the global market's attention. Its current market capitalisation of over $486 billion makes it one of the largest emerging exchanges. There are 118 listed companies currently traded (expected to reach 123 by year end) on the exchange and the average value of shares traded this year currently stands at almost $2.7 billion per day.

Today, Tadawul is at a defining moment in its history. As the bourse strives to continue to be a leading exchange for IPOs, the opportunity is ripe for its management to build on its success and take the exchange business to a new level that is scalable, profitable and diversified.

The exchange business is a profitable one if managed efficiently along the pillars of cost rationalisation, revenue growth through product development and strategic acquisitions. It is a volume-driven business where economies of scale matter and there is usually scope for further efficiency gains to support earnings growth.

On a global average, the exchange business has a return on equity of over 24 per cent. The 22 listed exchanges have witnessed a revenue growth of over 17 per cent in the past five years while costs have increased by a shade over eight per cent.

The profitability of the exchange business shows that there is great opportunity ahead for Tadawul, which has the potential to grow aggressively in the next five years and be a dominant, highly profitable regional exchange. It appears that the Saudi exchange is well-positioned to develop an "integrated" offering for traditional market opportunities.

Forward looking

Going forward, Tadawul must target revenue diversification through aggressive product development, strategic stakes in regional exchanges with strong product portfolios and acquisition of fast growing niche exchanges or trading platforms that trade products with little or no correlation to the existing portfolio (eg energy, commodities, weather, etc).

As well, Tadawul will need to identify and implement sources of incremental revenue. Its product portfolio needs to be enhanced to include derivatives, fixed income, exchange traded funds, real estate investment trusts, an Islamic (Sharia-compliant) securities platform, and new investible benchmarks.

For Tadawul, structural drivers for volume growth are in place in the form of a robust economy, a growing capital market and increased demand for capital from new issuers and listed companies. Over the years, the Exchange has deployed substantial resources towards development of IT infrastructure, a new trading platform and risk management system. However, continued strong volume growth may come in conjunction with higher fee attrition than currently anticipated as the participants put pressure on pricing.

Tadawul is endeavouring to offer a comprehensive and efficient infrastructure to issuers for raising capital and to investors for transacting and clearing financial products. As a leading IPO marketplace, it is striving to continually innovate and provide its customers (issuers, investors, broker-dealers) with convenient access to quality products and the best price discovery and liquidity at a competitive cost while seeking to create value for its shareholders.

The record IPO-fund raising is a landmark achievement in its history. The time has now come for Tadawul to consolidate its status as a global growth market and position itself for the next phase of its growth.

- The writer is executive vice-president and head of investment management, Morgan Stanley, Saudi Arabia.
( The opinion expressed in the article is that of the author and does not necessarily reflect that of the organisation he represents.)