Industry Classification

Why are we introducing a new classification standard?

Saudi Exchange's earlier sector classification had been in place since 2008. However, with the continuous developments in the Saudi economy, new industries have emerged, both in private and public arena. These developments on the economic front also necessitate changes to be reflected in the classification of companies listed on the Saudi Exchange.

In the previous sector classification at Saudi Exchange, companies choosing to go public were assigned to sectors that were probably not accurately representing the business of these companies due to classification limitations. The new classification system adopted by Saudi Exchange provides solution to these limitations by closely aligning a company’s business activities and sources of revenues to its sector classification.

Saudi Exchange’s previous sector classification had limitations as it was not based on global classification standards. Furthermore, there were no periodic reviews of companies to reflect changes in the assigned classification due to any change in business profile of these companies.

Advantages of adopting the global classification standards

Global industry classification standard (GICS)

GICS is a common global classification standard used by thousands of market participants across all major groups involved in the investment process: asset managers, brokers (institutional and retail), consultants, researchers and stock exchanges.

GICS was developed jointly by Standard and Poor’s (S&P) and Morgan Stanley Capital International (MSCI), which are global and leading companies providing independent international financial data, indices and benchmark-related products and services.

The GICS structure is:

Universal: the standard applies to companies globally

Reliable: the structure correctly reflects the current state of industries in the equity investment universe

Flexible: the structure offers four levels of analysis, ranging from the most general sector to the most specialized sub-industry

Evolving: annual reviews are conducted by S&P Dow Jones Indices and MSCI to ensure that the structure remains fully representative of today’s global markets

GICS has been selected as a global industry classification standard to reclassify Saudi Exchange’s sectors. This move will enable Saudi Exchange to be comparable with other global equity markets. Moreover, this new globally recognized classification standard will encourage foreign and local investors to have better assessment of Saudi Exchange and would allow more meaningful comparisons with stocks and sectors across international equity markets.

GICS structure and methodology

GICS is a 4 tiered, hierarchical classification system, consisting of 11 Sectors (Level 1), 24 Industry Groups (Level 2), more than 60 Industries (Level 3) & more than 150 Sub-Industries (Level 4), as presented below.

The GICS methodology aims to enhance the investment research and asset management process for financial professionals worldwide.

Companies are allocated to Sub-Industries. Sub-Industries are grouped into Industries in such a way that general industrial and economic themes are common to all companies in the Industry. The Industries themselves will be aggregated into Industry Groups, which are in turn aggregated into Sectors.

GICS classification approach is both quantitative and qualitative. Each company is classified in the Sub-Industry whose definition describes the main business activities that generate the majority of the company’s revenues.

The primary source of information used to classify a company is its Annual Reports/ Financial Statements. New companies are classified according to the activities mentioned in the prospectus.

New Saudi Exchange market structure

Saudi Exchange‘s listed equities were previously classified into 16 sectors; however, current Saudi Exchange’s market structure has 20 sectors (Industry Groups), representing Level 2 under GICS hierarchical classification system.

These 20 sectors (Industry Groups under GICS at Level 2), representing the distribution of current listed companies, are presented as follows: