Roving around Riyadh – A look into a kingdom forging its future through reform (Part 1)
Work trip to Saudi Arabia sheds light on reform progress, geopolitical shifts, and consumer habits.
From September to October, Desertfox spent 1 month in Riyadh, the capital of Saudi Arabia.
We will be releasing a two-part Series covering Desertfox’s recent trip to Riyadh, during which he gained interesting insights into how Saudi Arabia’s soft power push translated to real life experience working with the Saudi public sector, how this might benefit a Hong Kong-listed proxy, and the notable rise of Chinese automakers on the Kingdom’s streets.
A recent work trip to Saudi Arabia has provided valuable insights into the country's extensive international rebranding efforts and its rapidly growing consumer market. In terms of background, my trip involved consulting on strategic communications for a major international event hosted in Riyadh. Further details of the project will not be disclosed to ensure open discussion about dealings with the Saudi government client.
Having an academic and professional background in the Middle East has consistently led to repeated engagements in the region – speaking fluent Arabic certainly opens doors in this part of the world and has been instrumental in gaining some unique insights and perspectives that surpass those of most outsiders. Exploring the Kingdom for the first time was personally captivating, as it showcased the Kingdom's ongoing endeavors to diversify its economy and reduce dependence on hydrocarbons.
Altraman and I have also written about the Kingdom extensively on this blog, particularly in light of its burgeoning relations with China – a major geopolitical trend that all-too-often goes underreported in the international media.
Saudi Arabia’s image makeover efforts are in overdrive – but can money buy real change?
Let’s face it – Saudi Arabia has long had an image problem, at least in the West anyway. Its questionable human rights record, penchant for supporting fundamentalist Islamist movements across the world, and gruesome murder of journalist-dissident Jamal Khashoggi did it no favors in the eyes of the international media.
And yet, with the rise of the young and ambitious Crown Prince Mohammed bin Salman, all of this is set to change with his Vision 2030. Difficult to summarize in a few short lines, the Vision aims to diversify the Kingdom’s economy away from oil through policies aimed at economy (women in the workforce, competitiveness, sovereign wealth funds, non-oil exports), society (culture, entertainment, health), and becoming an “ambitious nation” (streamlining public sector, household savings, philanthropy). At a high level, these efforts do appear to be bearing fruit, with non-oil related growth expected to reach 6% this year.
A notable aspect I observed during my project in Saudi Arabia, as well as meeting with many foreign consultants working there, from trillion dollar desert megacities to social media influence and surveillance operations, is that much of the expertise for Vision 2030 is flown in on multi-million contracts with big-name consulting firms. There seemed to be a prevailing perception among foreign consultants that Saudi government clients presented accessible opportunities due to the public sector's limited internal capacity. Consequently, this means that foreign consulting firms aren’t always sending their best and brightest out there.
Saudi government procurement officials are all too aware of this and often appear exasperated by consultants sweeping in from New York or London, ponying out their one-size-fits all solutions with lack of local understanding of what the Kingdom actually requires. At the same time, higher ups of the various ministries have a juggling act to show that their budgets are meaningfully advancing Vision 2030. This situation was sometimes humorously referred to as the "Kingdom of McKinsey," highlighting the notable presence of such firms in the consulting landscape.
Our Ministry project manager had a single-minded focus on KPIs, irrespective of their meaningfulness or the methods employed to achieve them. Their primary responsibility was to ensure the KPIs were met, as failure to do so could have severe consequences. For instance, our local partner received a warning of potential placement on a government blacklist, which would have limited their future involvement in government projects – an unfavorable outcome for any business. Meanwhile, obtaining approval for decisions necessitated navigating a complex bureaucratic chain, where higher-ranking officials and fat cat bureaucrats engaged in power struggles.
Consequently, the progress of substantial work was often impeded, and the project occasionally felt like a mere formality. The project manager’s admirable work ethic and tenacious pursuit of KPIs struck me as odd, as I had the impression that once a government job was secured in Saudi Arabia, you would be employed for life regardless of performance. However, my local contacts also explained that as part of Vision 2030, there had been a push for greater meritocracy and performance evaluation among junior government employees. Even those in influential positions were under pressure to demonstrate progress toward the all-important Vision 2030. This shift towards meritocracy among the younger generations offers hope for the future, as they gradually assume key roles, bringing fresh perspectives and efficiencies to the table.
As for the event I was working on itself – it was a classic attempt to buy soft power. It was a major international diplomatic gathering (not strictly Saudi-focused) which could have plenty of coverage about interesting international initiatives which the Kingdom was facilitating. But all our client was interested in (because they happened to be the Ministry tasked with hosting the event) was generating press about what a great job they did of hosting it and nothing about the other countries participating or why they were there. No holistic vision and not a word outside the Ministry’s narrow purview would be approved, and hence there was limited international coverage and the millions spent hosting the event were largely wasted (in my opinion anyway).
Pico Far East (0752.HK) a potential investment proxy and beneficiary of Vision 2030?
As I witnessed, the Saudi government’s push to host global events is part and parcel of their soft power push. This is endorsed at the highest levels of government and has resulted in Riyadh hosting everything from MMA fights to Expo 2030. According to one market study, the Saudi Meetings, Incentives, Conferences and Exhibitions (MICE) market was valued at USD 2.33 billion in 2023 and is expected to reach USD 4.84 billion by 2030, growing at an 11% CAGR from 2023 to 2030. This got us thinking about proxies to benefit from this trend, given the difficulties of investing directly in the Kingdom, as will be detailed in part 2 of this series.
Pico Far East (0752.HK) (market cap – USD 230 million) (“Pico”) is a Hong Kong-listed company principally engaged in providing exhibition and event marketing services with Middle East operations since the early 1990s. The Company is set to increase its investments in the Kingdom over the next few years, presenting potential opportunities for growth and expansion. However, we have yet to see some of these developments trickle through this year from the latest H123A results.
It would be interesting if we can gauge from management how this could look as it could be become the second largest geographic contributor for the business. Applying some simple back of the envelope estimates, the stock appears to be trading on FY23e P/E and EV/EBITDA of 8.9x and 3.8x respectively, which is cheap relative to its peers. On first screening, there appears to be few listed exhibition service providers, with Activation Group (9919.HK) more focused on marketing and brand activation. There are even fewer providers with exposure in the MENA region. Assuming Pico pays out 50% this year from better revenue and earnings performance, this would translate to 6% yield.
As of now, the stock does not have sell-side coverage. There have been past write-ups on the company by Reperio Capital in October 2020 and Michael Fritzell from
in September 2021, which may provide valuable insights for those interested in Pico. However, we’ll need to meet with management here to better understand the fundamentals of the business and opportunity set.Rise of Chinese automakers on Riyadh’s streets signal wider geopolitical shift
During my trip, I also witnessed the growing significance of China in Saudi Arabia's economy and future geopolitical orientation. Our client displayed a strong emphasis on gaining news coverage in China, recognizing that Saudi Arabia remains relatively unknown to the Chinese public.
Saudi Arabia's engagement with China benefits from a relatively clean slate, as it has not faced the same political baggage and negative perceptions that it encounters in the West. This favorable dynamic has facilitated the aggressive expansion of Chinese companies within the Kingdom, where Sinophobia is yet to rear its ugly head.
Through conversations with young locals, I gained insight into how China's rise is perceived in Saudi Arabia. They spoke about the Kingdom's future and their own career aspirations being intrinsically linked with China. The days of US political and economic hegemony in the region are seen as dwindling, with the US no longer serving as Saudi Arabia's primary oil importer and security guarantor. This shift has manifested in tensions arising from the Kingdom's increasingly interventionist stance in regional conflicts, as Riyadh ramps up its defense spending and charts its independent course.
We have written numerous times on this blog about Chinese investment in the Kingdom’s tech industry, money flowing both directions in the energy sector, and the increasing trend of Yuan-denominated trade.
At a street level, the proliferation of Chinese made cars was noticeable, as the Kingdom is a top 10 importer of Chinese vehicles (Chinese Automakers hold a 17% and growing market share there). Noteworthy players in this market include Chang’an Automobile (state-owned), Geely (0175.HK), and Haval (owned by Great Wall Motor (2333.HK; 601633.SS)) as Saudi consumers shake off negative perceptions around quality of Chinese vehicles.
For Great Wall Motor, Saudi Arabia represents yet another rapidly expanding export market. We recently profiled the stock in the context of its primary export market, Russia, and it is noteworthy that Saudi Arabia is emerging as another significant destination for their vehicles.
Stay tuned for our next instalment on the Riyadh trip, where we will take a look at the hypermarket, convenience store, and food delivery space, as well as explain more ways to access this exiting market as a foreign investor.
Currently, we do not hold shares in Pico Far East (0752.HK). We continue to hold shares in Great Wall Motor (2333.HK; 601633.SS), but have trimmed our exposure after hitting our target price of HKD 12.00.
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I will link to it in my Monday emerging markets link collections post. Facebook has been showing me sponsored posts about getting a free stopover or maybe its a 1 hotel night free deal or something in Saudi Arabia - I guess sponsored by either their tourism ministry or airline... Definitely interesting things to see there for intrepid tourists... As for investors, apparently local banks are paying something like 5% on CDs - discouraging new investment in the local stock market...