Author Archives: Sabah al-Binali

Is the Dubai Hospitality Sector Building for the Right Tourists?

June 21, 2015 By in Hospitality Tags: ,

ArabianBusiness reported last month that STR Global data showed Dubai hospitality supply increased 5.6% and demand also increased a whopping 8%, with occupancy up 2.3%. The average daily rate, however, fell 8.5% with a corresponding revenue decrease of 6.4% per available room.

When demand goes up but revenue goes down, the issue is rarely increased competition. It is a decrease in demand from the earlier, higher price point in favour of a new lower service price point.

In other words, either Dubai’s visitors all suddenly got poorer, or the economic demographic of Dubai’s tourists is sliding down the price curve. Given the number of fine dining restaurants that have elected to participate in all you can eat and drink brunches, my bet is on the latter.

What does this mean for Dubai hospitality? Build more three and four star hotels, or risk having five star hotels selling rooms at three star prices.

Shale Oil Producers: Swing Producers or Price Takers?

June 21, 2015 By in Oil Tags: ,

The new narrative in the oil markets is that shale oil producers have usurped the Saudis as the swing producers. What a dangerously naïve idea.

A swing producer is one that intentionally changes its production levels to achieve its objectives. If oil prices drop and Saudi Arabia decides to reduce production so as to stabilise oil prices then that is the action of a swing producer. In other words, a swing producer can intentionally move prices.

A price taker is a producer that sells oil at whatever price it is given. It has no market pricing power. If oil prices drop and shale oil producers are forced to stop production because they are registering massive losses then they are price takers.

Just because shale oil producers become profitable at USD 100 and come online at that price does not mean that they are swing producers. As in any other market massively high costs means that you are at the bottom of the food chain. Costs that are 30 to 50 times that of the largest oil exporter in the world indicate that shale oil producers are not only at the bottom of the oil production food chain, they might very well be buried deep underground.

Saudi Arabia remains, by a large margin, the most important producer of oil globally.

How Steve Jobs and Apple Dominated the World

June 16, 2015 By in Entrepreneurship Tags: ,

Steve Jobs is a modern day, corporate equivalent of Ghengis Khan, and Apple was his horde. This is the story of how he did it.

If I asked you what business Avis or Budget were in you would probably say car rental. Although this is true it is not the most effective way to think of these companies. A far more profitable way to think about them is as mass producers of second-hand cars.

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State-owned enterprises can learn from family businesses

June 9, 2015 By in Corporate Governance Tags: , ,

State-owned enterprises (SOEs) are controlled subsidiaries of a government which undertake commercial activities. SOEs are globally common and are involved in a wide variety of activities such as mail services, telecommunications, airlines, airports, railroads, natural resources, broadcasting and healthcare.

Sometimes it is easy to forget that SOEs form an important component of the economy. Just think of the UK’s BBC, Manchester airport, London Underground and London Rail. SOEs are usually connected to natural monopolies and infrastructure thus giving them an even greater influence over the economy.

Since SOEs are expected to act with their commercial interests as their main goal they can learn a lot from the private sector. There is one area though that does not crossover well from the private sector to the SOEs and that is corporate governance. Being a fully owned subsidiary of a government creates unique challenges not least because a government does not hold commercial interest as its overriding goal.

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UAE Labour Policy and the Health of the Economy: Ying & Yang

June 2, 2015 By in Economy Tags:

The phrase “UAE dependence on foreign labour” is a mainstay of any discussion about the UAE’s economy. It sounds self-evident, doesn’t it? I, however, refuse to believe an opinion that is stated as fact, regardless of how authoritative the statement might sound.

The implication in the statement is that if foreign labour were to leave the UAE then the economy of the UAE would be negatively impacted. This misses the point that the factors affecting an economy are many, and are dynamic. For example, the statement does not address how easy to it is to replace labour. But that is for another article.

In this article I’ll look at what the relationship between foreign labour and the economy are, which of these leads and which of them follows and what this means to the UAE.

So how should we investigate this? I have heard it said that a picture is worth a thousand word. Let me present three.

Source: The World Bank

Source: The World Bank

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Mover’s Advantage: Of Sony, Google and Emirates Airlines.

May 26, 2015 By in Strategy Tags:

Sony was a first mover in personal stereos. Emirates is a last mover in airlines. Which strategy has the advantage: First Mover or Last Mover?

When I was a child, I was frequently admonished with the old adage that “The early bird catches the worm.” I analysed this and one day responded to my teacher “But doesn’t the early worm get eaten by the early bird?”

In the 1970s teachers were not enamoured of 8 year olds talking back to them. Worse was if said 8 year old eloquently blew apart a foundational aphorism that the adult world depended upon to mould young minds with.

To my chagrin, when I turned thirty and even more now that I’m in my forties, people continue to resent logic intruding into their personal reality.

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What your mother-in-law can teach you about performance reviews

May 19, 2015 By in HR Tags: ,

Here is a secret – managers do not dislike employee performance reviews because the reviews are difficult, but because the managers are usually decent people.

Formal performance reviews are presented as a positive feedback mechanism that helps employees develop. The reality is that performance reviews usually happen once a year, and that is far too infrequent to be of any use. Even the most aggressive review programme maxes out at four times a year, still too infrequent to be of any use.

In a normally functioning company, useful feedback to any employee is in the form of continual informal feedback over the whole year. A formal review adds no real value to employee development over and above an informal feedback process.

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Taxes give government more command over an economy

May 12, 2015 By in Government Tags: 1 Comment

Direct corporate and personal income tax in the GCC is extremely low or even non-existent. Even when indirect taxes, usually in the form of fees and dues, are added in, the total tax burden in the GCC remains light relative to the rest of the world.

It is not hard to see how this is possible, and the usual debate surrounding this topic centres on the sustainability of such policies. The general position is that the absence of corporate and personal income tax is a unilaterally beneficial state of affairs and that any introduction of a tax would have no benefits to the residents of the GCC.

Perhaps such a view is too one-sided. Could there be benefits to an income tax?

One idea used by taxing governments is that the structure of taxes can be used to influence behaviour. At the top of this list is the saving and investment behaviour of corporations and consumers.

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Avoiding the Hannibal Lecters of the Investment World

May 5, 2015 By in Due Diligence Tags: , ,

Portfolio managers and investment analysts like to say that due diligence, a deep review or audit of a potential investment, is an integral part of their business. They are most probably lying, or if we want to be charitable, they are deluded.

Due diligence is not considered sexy. It involves legal, financial and operational reviews. Where are the six screens with hundreds of flashing numbers? Where are the bank of telephones with people shouting orders into them? Where are the oak-panelled boardrooms? The late nights at Cipriani’s and Harry’s? Where, when all is said and done, are the … well, let us not get too carried away.

Portfolio managers and investment analysts rarely perform due diligence personally. They rarely even lead the process. Just look at all the professionals taken in by the Madoff scandal. This is a shame, as due diligence is the only way to consistently make money.

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Investment Valuation Lessons III: Discounted Cash Flows versus Peer Group Comparison

April 29, 2015 By in Investments Tags: , , ,

The debate of whether discounted cash flows or peer group comparisons are the better business model has raged ever since M&A became vogue. Let me put an end to the suspense right now: both are useless as effective valuation tools. Let’s find out why and what might work.

Discounted Cash Flow

The problem with discounted cash flows (DCF) is the sensitivity to a large number of parameters especially since DCF is usually used to predict high-growth. It is hard enough to predict the future performance of stable businesses. Trying to predict the performance of companies in a growth phase is indistinguishable from guessing.

So how should you go about valuing the company that is about to go into a high-growth phase? The short answer is you use a value based on the scenario that the company continues as is. In other words the high-growth is as much a result of your cash as it is of the company’s business. Therefore the growth phase piece should be treated as if it is a complete start-up where everything is valued at book value and therefore there is no premium on the current business.
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