Global Research Sector – Petrochemicals Equities – Saudi Arabia June 20, 2012 Saudi Petrochemical Sector Augmentation in feedstock prices ruled out for the time being; not too last long Shift to alternate feedstock a double edged sword Plunging oil price dragging the share price of petrochemicals companies Strong Buy: SABIC, YANSAB & SIPCHEM Augmentation in feedstock price ruled out for the time being; not too last long Price of feedstock have been steady and unchanged over a decade. Ethane prices which currently stand at USD0.75/mmbtu were expected to rise last year and the news regarding it made huge rounds, however, in early 2012 the price increase was ruled out. We are of the view that this rise has not resulted because of drop in international gas price which are expected to make the prices of petrochemicals in North America very competitive. Although we do not rule out rise in feedstock prices in the coming years, however, we have not yet incorporated the increased prices in our models. Saudi Arabia shifting to alternate feedstock Scarcity of gas, coupled with inapplicability of ethane to yield higher-value products, is however driving petrochemicals producers of Saudi Arabia away from it. In view of the aforesaid restrictions, the petrochemicals producers are shifting toward alternative feedstock such as naphtha. The trend of shifting away from ethane for diversification of the product is encouraging, as it is in line with the government’s efforts to promote production of higher value chemicals and plastics essential for broader-based industrial and economic development in the region. Outlook; not too rosy in the long term for Saudi Arabia Petrochemical producers in the Saudi Arabia are currently at a quite defining moment that in the long term will affect their business. Following years of development and significant growth, the industry is now experiencing a shortage of natural gas. This is leading petrochemical players to use liquid feedstocks, which do not offer the same cost advantages as natural gas. At the same time, feedstock supplies are undergoing major changes worldwide. Production from Shale gas is increasing at a higher pace which will make US petrochemical more competitive, China has ambitious plans to convert coal to olefins, new exploration of oil and gas in Iraq can result in an increase in low cost feedstock from Iraq. Collectively all these developments can present a material threat to the Saudi petrochemical players. Plunging oil price dragging the price of petrochemicals Oil price has received severe battering in the last couple of months. Number of factors have contributed to the tumult, economic slowdown in Europe, particularly in Spain, Italy and Greece has dampened the demand, higher than expected increase in production from Iraq and Libya and increase in Non-OPEC supply to 0.52mnbpd in 2012 compared to 0.09mnbpd in 2011. Since the price of petrochemicals generally track the price of oil, the companies have witnessed double beating: falling share prices and drop in product prices and hence revenue. Same has been the case with Saudi Petrochemical companies as the Tadawul petrochemical index witnessed a fall of 14.6% in the last three months. Prices of SABIC, YANSAB & SIPCHEM also registered significant decline of 13.4%, 13.7% and 22.6% respectively in last 3months, which is the reason of Strong Buy recommendation despite expected drop in profitability and margins. Global Research - Saudi Petrochemical Universe SABIC 91.75 73,396.0 1.8 10.1 116.1 26.5% Strong Buy YANSAB 44.90 6,735.0 2.0 8.6 56.0 24.7% Strong Buy SIPCHEM 18.15 1,775.0 1.2 10.3 25.5 40.5% Strong Buy Source: Bloomberg & Global Research Mkt. Cap (USD mn) Company Recommen dation P/Bv 2012e P/E 2012e CMP (SAR) 19-06-12 Target Price (SAR) Upside / (Downside) Saudi Petrochemical Faisal Hasan, CFA Head of Research [email protected]Tel: (965) 2295-1270 Hettish Karmani Senior Financial Analyst [email protected]Tel: (965) 2295-1281 Global Investment House www.globalinv.net
Transcript
Global Research
Sector – Petrochemicals
Equities – Saudi Arabia
June 20, 2012
Saudi Petrochemical Sector
Augmentation in feedstock prices ruled out for the time being; not too last long Shift to alternate feedstock a double edged sword
Plunging oil price dragging the share price of petrochemicals companies
Strong Buy: SABIC, YANSAB & SIPCHEM
Augmentation in feedstock price ruled out for the time being; not too last long
Price of feedstock have been steady and unchanged over a decade. Ethane prices which currently
stand at USD0.75/mmbtu were expected to rise last year and the news regarding it made huge rounds,
however, in early 2012 the price increase was ruled out. We are of the view that this rise has not
resulted because of drop in international gas price which are expected to make the prices of
petrochemicals in North America very competitive. Although we do not rule out rise in feedstock prices
in the coming years, however, we have not yet incorporated the increased prices in our models.
Saudi Arabia shifting to alternate feedstock
Scarcity of gas, coupled with inapplicability of ethane to yield higher-value products, is however driving
petrochemicals producers of Saudi Arabia away from it. In view of the aforesaid restrictions, the
petrochemicals producers are shifting toward alternative feedstock such as naphtha. The trend of
shifting away from ethane for diversification of the product is encouraging, as it is in line with the
government’s efforts to promote production of higher value chemicals and plastics essential for
broader-based industrial and economic development in the region.
Outlook; not too rosy in the long term for Saudi Arabia
Petrochemical producers in the Saudi Arabia are currently at a quite defining moment that in the long
term will affect their business. Following years of development and significant growth, the industry is
now experiencing a shortage of natural gas. This is leading petrochemical players to use liquid
feedstocks, which do not offer the same cost advantages as natural gas. At the same time, feedstock
supplies are undergoing major changes worldwide. Production from Shale gas is increasing at a higher
pace which will make US petrochemical more competitive, China has ambitious plans to convert coal to
olefins, new exploration of oil and gas in Iraq can result in an increase in low cost feedstock from Iraq.
Collectively all these developments can present a material threat to the Saudi petrochemical players.
Plunging oil price dragging the price of petrochemicals
Oil price has received severe battering in the last couple of months. Number of factors have
contributed to the tumult, economic slowdown in Europe, particularly in Spain, Italy and Greece has
dampened the demand, higher than expected increase in production from Iraq and Libya and increase
in Non-OPEC supply to 0.52mnbpd in 2012 compared to 0.09mnbpd in 2011. Since the price of
petrochemicals generally track the price of oil, the companies have witnessed double beating: falling
share prices and drop in product prices and hence revenue. Same has been the case with Saudi
Petrochemical companies as the Tadawul petrochemical index witnessed a fall of 14.6% in the last
three months. Prices of SABIC, YANSAB & SIPCHEM also registered significant decline of 13.4%,
13.7% and 22.6% respectively in last 3months, which is the reason of Strong Buy recommendation
despite expected drop in profitability and margins.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 5
Petrochemicals Themes World output to drop in 2012 when compared to 2011… The Global economy has witnessed various ups and downs in the last couple of years. Rising sovereign debts, increasing inflation and rise in unemployment have continued to make the situation worse. These situations have given rise to subdued demand for the petrochemical products. Situation has also worsened because of the global credit crunch which has created difficulties in getting the required funding for the projects which in the case of petrochemicals are not very small.
World Economic Outlook Projections
(%) 2010 2011 2012e 2013e
World Output 5.3% 3.9% 3.5% 4.1%
Advanced Economies 3.2% 1.6% 1.4% 2.0%
US 3.0% 1.7% 2.1% 2.4%
Euro Area 1.9% 1.4% -0.3% 0.9%
Japan 4.4% -0.7% 2.0% 1.7%
UK 2.1% 0.7% 0.8% 2.0%
Canada 3.2% 2.5% 2.1% 2.2%
Developing Asia 9.7% 7.8% 7.3% 7.9%
China 10.4% 9.2% 8.2% 8.8%
India 10.6% 7.2% 6.9% 7.3%
MENA 4.9% 3.5% 4.2% 3.7%
GCC 5.2% 8.0% 5.3% 3.7%
Source: IMF Passive demand affected various petrochemicals projects globally which lead to project delays or outright cancellations. The majority of those project which were shelved were in Western Europe and North America. Europe continues to remain the biggest market for petrochemical products… Petrochemicals consumption is generally a function of GDP and the economies in the developed regions of the world have weakened in the recent past. Many industries, such as the construction industry and automotive industry, have suffered a significant downturn in such scenario. Overall consumer spending has also affected. As a result, the demand for petrochemicals in major end-use markets declined. The collapse in petrochemical demand and a loss of business confidence also triggered industry wide de-stocking, and drastic cutbacks in petrochemical production. The impact of economic downturn has been the greatest in the US and Western Europe.
Basic & Diversified Chemicals Sales by Region
(%) 2008 2009 2010 2011
Asia Pacific 43.5% 37.8% 34.1% 29.3%
Europe 43.0% 38.0% 31.7% 40.5%
North America 21.3% 19.9% 28.3% 27.0%
South America, Africa & Middle East 10.5% 10.4% 11.1% 8.1%
Adjustment -18.3% -6.1% -5.2% -4.9%
Source: Bloomberg Despite that Europe is still the biggest market for the basic and diversified chemicals. On an average sales exposure of petrochemical companies towards Europe as of 2011 is 40.5% followed by 29.3% in Asia Pacific. Within Asia Pacific majority of the chunk is being acquired by China as the country is 50% producer of various industrial commodities. Petrochemicals demand to be led by China going forward… China has emerged as the biggest petrochemical market in the world. Petrochemical demand growth is closely associated with the economic growth of a country, and China is the fastest growing economy in the world. The GDP of China is growing at a rate much higher than that of most other economies of the world. The country successfully posted 9.2% growth in 2011
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June 2012 6
despite the impact of the global financial slowdown, while most large economies in the world witnessed a downturn. Demand for petrochemicals in China is also rising, with growth in the infrastructure and construction industry, packaging industry, textile industry, automotive industry, the consumer goods and electronics markets, and many other industries which are major markets for petrochemicals.
CHINA PMI
Source: Bloomberg
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Packaging segment to evolve as main driver of Petrochemicals… With the growing emphasis on the look and appeal of the products, the packaging industry has grown rapidly in the last decade. Producers across different industries have grown keen on enhancing the packaging of their products. The packaging industry is scaling new heights, not only in terms of revenue growth, but also in devising new technologies, designs and aesthetically enhanced packaging solutions. The plastic packaging industry is the leading end-use market for many petrochemicals in the world.
Basic & Diversified Chemicals Sales by Region
(%) 2008 2009 2010 2011
Paper & Packaging 7.0% 17.5% 16.0% 14.0%
Chemicals 15.0% 15.0% 13.0% 15.0%
Consumer & Institutional 23.0% 28.0% 30.0% 25.0%
Construction 12.5% 11.8% 15.0% 15.0%
Automotive 10.7% 8.0% 10.0% 13.7%
Healthcare & Medical 16.5% 5.0% 9.0% 11.0%
Glass 6.0% 5.0% 6.0% 4.0%
Electronics 5.0% 4.5% 5.0% 3.0%
Utilities 4.0% 2.0% 5.0% 4.0%
Adjustments 0.3% 3.2% -9.0% 4.7%
Source: Bloomberg The global plastics packaging industry is large and growing strongly. The major force driving the consistent growth of the plastics packaging industry is the simultaneous growth in the industries which consumes plastic packaging products. As the need of different markets, the packaging needs of their products grow as well. Of these packaging needs, a few have been particularly popular, such as improved barrier properties. This growth trend, combined with current consumer life-styles and a growing demand for ready-to-eat packaged products, have resulted in a surge of demand in the packaging industry. Prices of various commodities track oil… Like any other commodity, the price of oil is primarily driven by two factors: supply and demand, and investor speculation. In times of economic expansion countries typically consume more oil, which increases the demand for it. During recession, oil usually declines in value as countries use less of it. The commodity is also affected by geopolitics as majority of the world’s supply comes from the Middle East and when there is unrest, the supply of oil is threatened, which causes its price to rise. When there is no fundamental reason for a steep change in oil’s price (i.e. supply and demand) it can usually be attributed to investor speculation. Oil price is pervasive in many aspects of daily life, from energy production to clothing, cars, computers and
Global Research – Saudi Arabia Petrochemical Sector
June 2012 7
household appliances. Petrol (for vehicles), polyester (for clothes) and plastic (more than 50% in household and industries) are each derived from petroleum, or crude oil. When oil prices rise, these products become more expensive to produce and vice versa.
Commodity Prices
Unit 2008 2009 2010 2011 2012
Energy
Coal, Australia (USD/ton) 93.4% -43.6% 37.6% 22.6% -7.4%
NEW World Bank Commodity Price Indices ( 2000 = 100)
Energy (x) 39.7% -66.5% 26.4% 29.9% 6.7%
Non Energy Commodities (x) 21.0% -47.8% 22.4% 20.7% -8.2%
Agriculture (x) 27.2% -35.0% 14.2% 22.7% -7.9%
Food (x) 33.9% -37.1% 8.9% 23.9% -3.2%
Grains (x) 49.1% -39.9% 1.5% 38.9% -4.9%
Raw Materials (x) 11.9% -34.1% 28.8% 24.4% -14.8%
Fertilizers (x) 136.0% -64.0% -8.2% 42.6% -2.6%
Metals and Minerals (x) 3.7% -63.1% 49.3% 14.4% -9.6%
Source: World Bank Pink Sheets & Bloomberg * 2012 till March Falling crude oil prices to drop the prices of petrochemicals… Typically, petrochemical prices are determined by adding the production costs of producers to the margin sustained by them. Production costs are heavily influenced by the raw material costs and the prices of the majority of petrochemical feedstock directly track the crude oil price trend. As a result, the price of crude oil is of critical importance to petrochemical producers. With the expectation of crude oil prices remaining in the range of USD90-100 per barrel or lower in 2012 and 2013 because of increase in supply from Libya, Iraq and Saudi Arabia and dampening demand in Europe and North America we believe the petrochemical prices would remain depressed in 2012 and 2013 and then gradually would pick up. With the GCC petrochemical producers particularly Saudi enjoy feedstock at fix price, the margins would tend to decline which will drop the profitability unless aided by volumetric growth. Cheaper feedstock highly important for the sustainability of the sector… A variety of feedstocks are used for petrochemicals production. Petrochemical feedstocks are generally produced from the refining of crude oil or the processing of natural gas. Recently, alternative process routes utilizing coal, biological hydrocarbons and unconventional natural gas, particularly shale gas, have gained more attention as potential feedstock sources. Other emerging sources include unconventional natural gas, coal and other bio-based commodity feedstocks.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 8
Petrochemical Product Prices
Source: Bloomberg & Global Research
-
200
400
600
800
1,000
2007 2008 2009 2010 2011 2012e
(US
D/to
n)
Propane
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200
400
600
800
1,000
2007 2008 2009 2010 2011 2012e
(US
D/to
n)
Butane
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200
400
600
800
1,000
2007 2008 2009 2010 2011 2012e
(US
D/to
n)
Naptha
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400
600
800
1,000
2007 2008 2009 2010 2011 2012e
(US
D/to
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Ethylene
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1,150
1,300
1,450
1,600
1,750
2007 2008 2009 2010 2011 2012e
(US
D/to
n)
LDPE
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100
200
300
400
500
2007 2008 2009 2010 2011 2012e
(US
D/to
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Ammonia
GCC low cost advantage not to last long… GCC petrochemical producers have long enjoyed the advantage of cheap feedstocks as they tap into the abundant supplies of ethane, propane and butane – feedstocks that also can yield more ethylene and propylene compared to the traditional naphtha. But this advantage may not last forever. With fewer new gas fields coming on stream in the Middle East, and those that do come up from exploration being used to replace older fields, it is expected that more of these gas feedstocks will be diverted to domestic use.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 9
And with scarcity of gas, coupled with inapplicability of ethane to yield higher-value products, is however driving petrochemicals producers away from it to Naptha. Plants based on naphtha and other Natural Gas Liquids as feedstock are costlier to build and maintain. In addition, the labor cost is comparatively higher in production using liquid feedstock. The prime cost disadvantage, though, is that product margins are highly linked to swings in global oil prices. Nevertheless, the Gulf still has many cost advantages over global players in liquid-based projects as well. This, in our view, will continue to garner investment inflow into the region as evident from the recent JVs between regional players and global energy firms. However on the other hand, majority of steam crackers in Northern America utilize gas feedstock, primarily ethane, which is a by-product of natural gas, typically extracted in the form of NGLs. In comparison, steam crackers in the other regions, with the exception of the Middle east, use more oil based feedstock, such as naptha and gas oil. With fall in natural gas prices (50% lesser than last year) and increase in gas liquid production – which comes along with increasing shale gas production, gas based feedstock cost of the US petrochemical industry is dropping significantly and has been the primary driver for renewed profitability and growth in Northern America.
Technically Recoverable Shale Gas Resources by Country (tn cubic feet)
Source: Geology.com
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While China on the other hand is using coal to produce the chemicals as it produces almost 50% of the world’s coal. That country is building a large number of plants that are producing various “petrochemicals” from coal. Using coal as a feedstock is an expensive way to go. First, there is a large infrastructure for coal handling. Then, the coal must be pulverized and fed into large gasifiers, using oxygen, where so-called synthesis gas, a mixture of carbon monoxide and hydrogen is eventually produced, with carbon dioxide and water as a co-product. The gas is then passed over different catalysts to produce various types of chemicals. Although at current point of time it is an expensive production method but with newer technologies and economies of scale China will either become a low cost petroleum producer or will be self sufficient enough to drop the imports of petrochemical products from Middle east. Outlook; not too rosy in the long term for GCC… Petrochemical producers in the GCC are currently at a quite defining moment that in the long term will affect their business. Following years of development and significant growth, the industry is now experiencing a shortage of natural gas. This is leading petrochemical players to use liquid feedstocks, which do not offer the same cost advantages as natural gas. At the same time, feedstock supplies are undergoing major changes worldwide. Production from Shale gas is increasing at a higher pace which will make US petrochemical more competitive, China has ambitious plans to convert coal to olefins, new exploration of oil and gas in Iraq can result in an increase in low cost feedstock from Iraq. On a standalone basis these development would not affect the financially strong petrochemical market of GCC but collectively they can present a material threat to the GCC petrochemical players.
Rising Shale gas
production is dropping
the price of gas and is
increasing the cash
margins of Northern
American
companies…
Global Research – Saudi Arabia Petrochemical Sector
June 2012 10
Saudi Arabia Hydrocarbon Sector
Saudi Arabia’s hydrocarbon sector operations are dominated by the state-owned oil company, Saudi Aramco. Saudi Aramco is the world’s largest oil company in terms of proven reserves and production of hydrocarbons. Saudi Arabia’s Ministry of Petroleum and Mineral Resources and the Supreme Council for Petroleum and Minerals have oversight of the sector and Saudi Aramco directly.
Basic Structure of Saudi Arabia Hydrocarbon Sector
Saudi Aramco is the world’s second largest producer and top exporter of crude oil, and is the only major producer that supplies to all three major market regions — North America, Europe and Asia — and the leading supplier of crude to Asia. As per 2010 report of Aramco, the company maintained its world-leading conventional crude-oil reserves at 260.1bn barrels, replacing 2010 production with oil from new field discoveries, expansions of existing fields and production optimization. Four new oil fields and one new gas field were discovered during the year, and six new oil reservoirs and three gas reservoirs were added to existing fields.
Saudi Arabia - GDP breakup
Source: Source: Ministry of Economy & Planning, SAMA
Global Research – Saudi Arabia Petrochemical Sector
June 2012 11
In 2010, Saudi Aramco produced 7.9mn barrels per day (bpd) of crude oil and 9.4bn standard cubic feet per day (scfd) of natural gas, and exported over 2bn barrels of oil and 316.4mn barrels of natural gas liquids (NGL). Aramco has a refining capacity of around 1.47mn b/d (70% of the total). Aramco owns four refineries outright (Ras Tanura, Jeddah, Riyadh and Yanbu) and owns equity shares in a further three (Rabigh, Sasref and Samref). Two new JV refineries are currently under construction at Jubail (SATORP) and Yanbu, which are predicted to come onstream in 2013 and 2014 respectively. In addition, Aramco hopes to increase its own capacity through three additional refinery projects underway. Aramco has five foreign partners in JVs, three of which are in existing refineries. The IOC with the greatest involvement in Saudi Arabian refining is ExxonMobil, which operates the 400,000b/d Samref refinery in Yanbu through a 50:50 partnership with Aramco. Lubricating base oils are produced at the Lubref facilities in Jeddah and Yanbu, which is a 30:70 JV between ExxonMobil and Aramco. The company increased the pace of its Kingdom-wide exploration program in 2010 to prepare for future hydrocarbon demand. These efforts yielded success, with the discovery of four new oil fields and one new gas field, increasing the total number of Saudi Aramco discovered fields to 112, plus the addition to existing fields of six new oil reservoirs and three new gas reservoirs.
Saudi Aramco, in 2010, put finishing touches on major parts of the biggest capital program in its history that began in 2009, raising maximum sustainable oil production by 1.7mn bpd to 12mn bpd. Significant progress was made on another giant oil increment i.e. 900,000 bpd Manifa, an Arabian Heavy crude oil field; added more than 200,000 bpd in maintain potential program; and launched an upgrade of Safaniya, the world’s largest offshore oil field.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 12
Saudi Arabia Petrochemical Sector Petrochemical capacity in the GCC… GCC has seen a significant increase in petrochemicals capacities, the main reason being the cheaper feedstock availability. Such that the Middle East’s share of petrochemicals production is expected to rise to 22% in 2016, up from 20% in 2011, largely as a result of investment in the Arabian Gulf region. Output of chemicals and petrochemicals in the GCC region is expected to rise by 6-7% per annum to reach around 135mn tons, according to the Gulf Petrochemicals and Chemicals Association. Ethane availability and feedstock pricing will remain key to the future growth of the region’s petrochemicals industry. The GCC has gas reserves totaling 42,860bncm. Production of an estimated 455bncm in 2010 should reach 642bcm in 2015, up 41%. However, surging domestic demand for gas has effectively led to a cap on further LNG projects, with no announced plans for new capacity after 2012.
Announced Ethylene Crackers In The Gulf Region
(tpa) Country Capacity
Abu Dhabi Polymers (Borouge) UAE 600,000
Al-Jubail Petrochemical (Kemya) KSA 810,000
Arabian Petrochemical (Petrokemya) KSA 800,000
Arabian Petrochemical (Petrokemya) KSA 800,000
Arabian Petrochemical (Petrokemya) KSA 830,000
Equate Petrochemical Kuwait 850,000
Jubail Chevron Phillips (JCP) KSA 300,000
Jubail United Petrochemical Company (JUPC) KSA 1,450,000
Qatar Chemical (Q-Chem) Qatar 500,000
Qatar Petrochemical Company (QAPCO) Qatar 720,000
Rabigh Refining and Petrochemical (Petro-Rabigh) KSA 1,300,000
Saudi Ethylene and Polyethylene Company (SEPC) KSA 1,000,000
Saudi Petrochemical (Sadaf) KSA 1,300,000
Saudi Yanbu Petrochemical (Yanpet) KSA 860,000
Saudi Yanbu Petrochemical (Yanpet) KSA 920,000
The Kuwait Olefins Company (TKOC) Kuwait 850,000
Total GCC 13,890,000
Source: Chemical Week & GPCA Drive towards alternate feedstock…
Scarcity of gas, coupled with inapplicability of ethane to yield higher-value products, is however driving petrochemicals producers away from it. In view of the aforesaid restrictions, the petrochemicals producers are shifting toward alternative feedstock such as naphtha, propane and butane. However, Use of non-ethane feedstock, in the Gulf petrochemicals sector will require proper due diligence. Plants based on naphtha and other NGL as feedstock are costlier to build and maintain. In addition, the labor cost is comparatively higher in production using liquid feedstock. The prime cost disadvantage, though, is that product margins are highly linked to swings in global oil prices.
Movement in Prices of Naptha with the change in Oil Prices
Source: World Bank Pink Sheets & Bloomberg
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
1Q
07
2Q
07
3Q
07
4Q
07
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Oil Naptha
Output of chemicals
and petrochemicals in
the GCC region is
expected to rise by 6-
7% per annum to
reach around 135mn
tons, according to the
Gulf Petrochemicals
and Chemicals
Association…
Global Research – Saudi Arabia Petrochemical Sector
June 2012 13
The trend of shifting away from ethane for diversification of the product slate is encouraging, as it is in line with the government’s endeavors to promote production of higher value chemicals and plastics essential for broader-based industrial and economic development in the region. It is gaining momentum in Saudi Arabia, where heavier feedstock such as propane and butane are used along with a small proportion of ethane, to produce new products. Saudi Arabia petrochemical sector… Saudi Arabian petrochemicals business environment is by far the most attractive in the Middle East region, owing to substantial reserves of cheaply extractable feedstock – including the largest oil reserves in the world. The petrochemicals sector accounts for about 7% of the global supply for basic and intermediary petrochemical products. From being a net importer, the country has emerged as a leading exporter in the petrochemicals sector, supplying to over 100 countries. Primary drivers for this turnaround have been strong infrastructure, significant cost advantage due to lower average variable and fixed costs, and competitive and fixed natural gas prices. These factors have also resulted in substantial investment inflows into the sector.
SWOT Analysis
Strengths Weakness
- Subsidy on natural gas - Foreign firms can enter only through JV's, none of
- Substantial rise in refining capacity in coming years their investment would be completely owned.
will ensure adequate, costeffective feedstock supplies
for new petrochemical projects
- Centrally located to export worldwide
Opportunities Threats
- Deregulation of the sector because of which foreign - Shift towards naptha as a feedstock can expose them
companies can partner with local ones and invest to oil price vulnerability.
through JV's. - Political and security situation can deter foreign
- Government offers grants & exemption to investment.
industrialists investing in plastics industry. - Slowing Asian growth will hurt exports
- Drop in price of natural gas in US can increase their
margins and make them more competitive.
Source: Global Research Ethane availability and feedstock pricing will remain key to the future growth of the Saudi petrochemical industry. Saudi Arabia's rapid and continuing expansion of its petrochemicals industry has been based on the accessibility of cheap feedstock. Sabic, which was established in 1976, is the leading player in the industry, and now ranks at second in terms of revenue worldwide. Over the past five years the company has nearly doubled its output of petrochemicals and its topline has grown from USD19.7mn in 2006 to USD58.3mn in 2011. The Company now accounts for over 15% of the sales of the world’s top ten firms. Lately the government has introduced deregulation by virtue of which a lot private firms have entered the sector or are in the process of it. One such example is Petro Rabigh, a joint venture between Saudi Aramco and Sumitomo Chemical, Japan. Other examples are: Sabic’s Ibn Zahr affiliate will host a previously announced 220,000tpa acrylonitrile JV for
the performance chemicals business. Sabic will have a 50% stake in the JV, with Japan’s Asahi Kasei and Mitsubishi Corporation each holding 25%. Completion is expected in 2015.
Sabic subsidiary Ibn Sina will operate a planned 250,000tpa methyl methacrylate (MMA) and 40,000tpa polymethyl methacrylate (PMMA) joint venture with Mitsubishi Rayon using Mitsubishi Rayon’s Lucite MMA technology and be on-stream in 2015.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 14
A 400,000tpa elastomers complex, a JV between Sabic and ExxonMobil, is planned for Kemya’s site at Jubail with units producing butyl rubber (BR), carbon black, polybutadiene rubber (PBR), and ethylenepropylene diene monomer (EPDM) rubber. The partners are committed to bringing it on-stream in 2015, with an EPC contract expected to be awarded in 2012.
Source: SABIC & BMI The main reason for the entrance of various private companies to the region is the availability of cheap and abundant feedstock. With the availability of such the petrochemical capacity of the country is expected to increase from 66.3mtpa in 2010 to 81.8mtpa by 2015, growth of 23.2%. Ammonia, LDPE, propylene and styrene will witness a rise of 56.3%, 52.4%, 39.4% and 38.4% respectively. Increasing number of petrochemical projects in Saudi Arabia… Petrochemical projects worth USD19bn are under execution in the GCC. Apart from this, projects with an estimated value of USD81bn are in different stages of planning. Saudi Arabia tops the list with USD12bn of projects under execution and another USD41bn of future projects. Gulf Petrochemicals & Chemicals Association has estimated GCC Petrochemical Capacity to increase from 77.3mtpa to 113mtpa at the end of 2015. Saudi Arabia is expected to see largest capacity addition by volume and UAE will see largest growth in percentage terms. Refineries and Petrochemicals in KSA moving towards integration… Integration of refineries and petrochemicals allows improved risk management, reprocessing of off-gas streams, greater feedstock flexibility and a platform which gives a further room for derivatives production. Its particularly true in various parts of the world where majority of the refineries are integrated with chemical facilities. However, things have begun to change and there is a growing consensus that the key to the feedstock issue is the integration of existing refineries with naphtha and NGL-fed petrochemical complexes. Some of the examples of such integration are: Saudi Aramco and its joint venture partner Dow Chemical of the US will use mainly
naphtha feedstock from an Aramco-operated refinery for their Ras Tanura complex (one of the largest single phase petrochemical projects in history), as well as gas from a nearby processing unit. The plant will produce a broad range of basic and derivative products, including ethylene, propylene, aromatics, chlorine derivatives, and polymers.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 15
Saudi Aramco and Sumitomo Chemical are carrying out a feasibility study on the second phase of Petro Rabigh in Saudi Arabia, and they aim to start production at the new complex in 2015. Rabigh Phase II is set to be built alongside the existing Petro Rabigh refinery and petrochemical complex at Rabigh. The cost is estimated in the region of USD6-8bn and involves adding 300,000tpa of ethylene capacity at the Petro Rabigh complex's 1.3mtpa ethane cracker and building 17 production units making aromatics and a range of intermediates and derivative products.
Saudi Aramco Total Refining and Petrochemical Company (SATORP), a JV (62.5% Saudi
Aramco, 37.5% Total Petrochemicals are building a USD9.6bn export refinery in Jubail. The project includes a 400,000b/d full conversion refinery, which is scheduled to begin operations in the second half of 2013. The refinery will also produce 700,000tpa PX, 140,000tpa benzene and 200,000tpa of polymer-grade propylene.
Outlook of KSA petrochemical sector… Petrochemical companies of Saudi Arabia have witnessed tremendous recovery in income since losses in 4Q08 & 1Q09. The profits continued to climb reaching the high in 3Q11. However, 4Q11 witnessed the most depressed volumes and pricing. Nevertheless, demand was reportedly much better in 1Q12, which witnessed a growth in income of over 18% in 1Q12 on a QoQ basis.
Saudi Listed Petrochemical Companies Profitability (USD mn)
Source: Bloomberg
(500.0)
300.0
1,100.0
1,900.0
2,700.0
3,500.0
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
2Q
11
3Q
11
4Q
11
1Q
12
Going forward we expect things a bit jittery for the overall outlook of petrochemical segment. First of all, we believe that some of demand in last couple of years resulted from the positive impact of government-led measures. As these measures have now expired or are on the verge of it, we suspect some sort of demand might fade with potential negative implications for petrochemical producers, mainly being the shift towards naptha – feedstock which is exposed to oil price volatility. Secondly, we believe Europe which on an average account for roughly 20% of the turnover of the companies of Saudi Arabia is not yet out of problems. Countries like Greece, Spain, Italy and Portugal are expected to drag the demand down for petrochemicals. Last but not the least, oil prices are expected to remain in the range of USD90-100 per barrel which will keep the upside potential in product prices low. While on the other hand we also believe, demand from Asia and production of high quality petrochemicals because of shift towards Naptha would open new industries and markets for the local producers.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 16
Petrochemical Companies Financial Performance GCC petrochemical companies 1Q12 earnings declined by 10.2% YoY to USD3.1bn as compared to USD3.5bn in the same period last year. While on a QoQ basis the earning improved by 23.9% added majorly by SABIC profit growth of 39% QoQ (Contributing 61.5% in 1Q12 compared to 58.4% in 1Q11 and 54.9% in 4Q11). First quarter performances of various petrochemical companies witnessed improvement on a QoQ basis mainly due to advancement in the product prices.
GCC Petrochemical Sector Companies Profitability
(USD mn)
1Q11 4Q11 1Q12
YoY Chg (%)
QoQ Chg (%)
SABIC
2,050.5 1,396.6 1,938.9
-5.4%
38.8%
IQ
575.5 463.2 524.0
-8.9%
13.1%
SAFCO
222.0 340.4 209.8
-5.5%
-38.4%
KAYAN
(2.2) (50.9) (19.0)
n/m
n/m
YANSAB
191.4 177.3 192.1
0.3%
8.3%
TASNEE
154.7 144.6 139.8
-9.6%
-3.3%
RABIGH
186.3 13.4 30.9
-83.4%
130.2%
PETROCHEM
(2.8) (7.6) (5.8)
n/m
n/m
SIPCHEM
32.2 56.3 40.4
25.4%
-28.2%
SAHARA
26.7 1.3 11.2
-58.1%
737.5%
APC
35.0 24.2 15.2
-56.5%
-37.0%
CHEMANOL
2.6 6.2 6.7
161.6%
8.3%
ALUJAIN
3.0 (6.6) 2.6
n/m
n/m
NAMA
(1.2) (61.3) (1.2)
n/m
n/m
DANA
25.1 40.1 56.1
123.9%
40.1%
SHELL OMAN
10.4 5.3 8.8
-16.2%
65.9%
GCC
3,509.2 2,542.5 3,150.7
-10.2%
23.9%
Profitability
1Q11 4Q11 1Q12
YoY Chg (%)
QoQ Chg (%)
Saudi Arabia
2,898.2 2,034.0 2,561.8
-11.6%
25.9%
Qatar
575.5 463.2 524.0
-8.9%
13.1%
Oman
10.4 5.3 8.8
-16.2%
65.9%
UAE
25.1 40.1 56.1
123.9%
40.1%
Sector
3,509.2 2,542.5 3,150.7
-10.2%
23.9%
Composition
1Q11 4Q11 1Q12
YoY Chg (%)
QoQ Chg (%)
Saudi Arabia
82.6% 80.0% 81.3%
-
-
Qatar
16.4% 18.2% 16.6%
-
-
Oman
0.3% 0.2% 0.3%
-
-
UAE
0.7% 1.6% 1.8%
-
-
Sector
100.0% 100.0% 100.0%
-
-
Source: Company Reports & Zawya
Overall, the performance of regional petrochemical companies was mixed on a QoQ basis with SABIC (Saudi Basic Industries Corp.), IQ (Industries Qatar), YANSAB (Yanbu National Petrochemical Company), Sahara Petrochemical, Shell Oman, Petro Rabigh and Dana Gas reporting better than expected earnings while other stocks such as Saudi Kayan Petrochemical Co., SAFCO (Saudi Arabia Fertilizers Co.), TASNEE (National Industrialization Co.), Sipchem (Saudi International Petrochemical Co.) and Nama Chemicals Co. reported drop in earnings or extended their losses.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 17
Global Research Petrochemical Universe Financial Performance… Within the GCC petrochemical companies, Global Research Petrochemical Universe witnessed a decline in profitability during 1Q12 on a YoY basis. Drop in profitability was majorly due to increase in cost of sales which dropped the gross margins of the sector. Cost of sales rose during the period by more than 16% which dropped the gross margins of the sector to an average of 33.1% in 1Q12 compared to 37.4% in the same period last year. Among Global’s universe, SIPCHEM margins dropped the most by 6.9pps followed by 5.7pps drop reported by Industries Qatar. Only company registering growth in gross margins was Dana gas by 9.7pps. Internationally, gas prices continued to drop. Price of natural gas (Henry Hub); feedstock used in the petrochemical industry fell by 26.2% QoQ and down 41.3% YoY. Drop in average prices of benchmark was mainly because of discovery of considerable amount of natural gas reserves in western countries coupled with high storage levels and fragile demand. On an average price of petrochemical products rose by 2.2% QoQ during 1Q12. Price of Ethylene witnessed an increase of 17.8% QoQ during 1Q12. While price of LDPE and LLDPE dropped on a QoQ basis by 6.9% and 0.1% respectively.
Global Research Universe - GCC Petrochemical Sector Consolidated Financials
(USD mn) 1Q11 1Q12 Chg (%)
Fin
an
cia
l P
erf
orm
an
ce
Sales Revenue 14,249 15,498 8.8%
Cost of Sales 8,921 10,375 16.3%
Gross Profit 5,328 5,123 -3.8%
Operating Expense 880 930 5.8%
Operating Profit 4,449 4,193 -5.7%
Financial Charges 288 249 -13.5%
Net Profit 3,097 2,961 -4.4%
Assets 113,180 118,198 4.4%
Equity 47,890 54,493 13.8%
Debt 33,936 35,447 4.5%
Cash & Bank Balance 14,606 19,668 34.7%
Liabilities 65,290 63,706 -2.4%
1Q11 1Q12 Chg
Rati
o A
na
lys
is
Gross Margins (%) 37.4% 33.1% -433.7bps
Operating Expense as % of Assets (%) 0.8% 0.8% 1.0bps
Operating Margins (%) 31.2% 27.1% -416.6bps
Net Margins (%) 21.7% 19.1% -262.5bps
Financial Charges as % of Debt (%) 0.8% 0.7% -14.6bps
Debt as % of Assets (%) 30.0% 30.0% 0.6bps
Liabilities as % of Assets (%) 57.7% 53.9% -379.0bps
Cash as % of Assets (%) 12.9% 16.6% 373.5bps
Equity as % of Assets (%) 42.3% 46.1% 379.0bps
Return on Equity (%) 6.5% 5.4% -103.2bps
Return on Assets (%) 2.7% 2.5% -23.1bps
Source: Company Report
* Consolidated Financials of 6 Listed Companies
The sector top-line witnessed a YoY increase of 8.8% in1Q12, which was due to the combined effect of increase in price of petrochemical products along with commencement of commercial production from the newly expanded facilities. Most topline growth was registered by SIPCHEM at 52.7% followed by 17.7% increase in the topline of YANSAB. Lowest growth was registered by SAFCO on the backdrop of fall in the prices of Ammonia and Urea by 32.3% and 11.4% QoQ during 1Q12.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 18
Overall net income registered by the companies under our coverage was USD2.96bn in 1Q12 as compared to USD3.09bn in the comparable period last year. SABIC continued to remain the lead contributor to the sector profitability at 65.5% followed by Industries Qatar and SAFCO at 17.7% and 7.1% respectively. During 1Q12, the companies were able to reduce the cost of funding which dropped the interest expense by 13.5% YoY. Overall interest expense during 1Q12 dropped to USD249mn as compared to USD288mn in 1Q11. Drop in the interest expense was on the back of cheaper refinancing rates available worldwide and easier fund raising for these companies because of backing of their oil rich governments. Cash and bank balances of the sector continued to rise, reaching USD19.6bn in 1Q12 compared to USD14.6bn in 1Q11, growth of 34.7%.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 19
COMPANY PROFILES
Global Research – Saudi Arabia Petrochemical Sector
Limited QoQ growth expected in 2Q12; volumes to drive income
Profits from its fertilizer affiliates to keep the bottom line growing
Saudi Kayan to report profit in 2012
Recommendation maintained at Strong Buy
1Q12 results higher than expectation Saudi Basic Industries Corporation (SABIC) reported 1Q12 net income of SAR7.27bn compared to SAR7.69bn for the same quarter last year, representing a decrease of 5.5%, and compared to the net income for the fourth quarter of 2011 of SAR5.24bn, representing an increase of 38.8%. The decline on YoY basis resulted because of lower product pricing which was to some extent softened by higher sales volumes. However the results were higher on a QoQ basis mainly driven by higher pricing for certain products and reduction in general and administrative costs. The results came higher despite low income reported by SAFCO and Saudi Kayan and increase in feedstock costs for certain products during the quarter.
Limited QoQ growth expected in 2Q12; volumes to drive the earnings With oil prices dropping significantly over the last few months in the backdrop of increase in supply from Iraq, Saudi Arabia and Libya, the petrochemical prices which are generally related with the price of oil are expected to drop in unison to it. We, therefore, believe average prices of petrochemicals will show a drop in the range of 3-5% in 2Q12. Hence, we expect the 2Q12 results to be driven by rolling out higher number of products specially in the Asian markets.
SABIC continues to focus on China; the key for Asian growth SABIC announced various growth commitment in China by moving forward on its plans to expand its manufacturing operations in the country. Recently, SINOPEC & SABIC Tianjin Petrochemical Company (SSTPC) laid the foundation for a polycarbonate production complex with 260 tons per annum capacity. Established in October 2009, SSTPC is a joint venture with SINOPEC and SABIC each holding 50% equity. The Phase One project, with annual capacity of one million tons of ethylene, began production in January 2010. With a total investment of RMB11 billion (USD1.7bn) and covering a ground area of 67 hectares, this polycarbonate production complex with an annual capacity of 260,000 tons is the Phase Two project and was approved by China's National Development and Reform Commission. Based on initial estimation, demand for polycarbonate in China will reach 1.78mn metric tons by 2015, an average annual increase of nearly 10%.
Strong Buy Target Price SAR116.1
80.0
87.0
94.0
101.0
108.0
115.0
-
3.0
6.0
9.0
12.0
15.0
18.0
Ju
n-1
1Ju
l-1
1A
ug
-11
Se
p-1
1O
ct-
11
No
v-1
1D
ec-1
1Ja
n-1
2F
eb
-12
Ma
r-1
2A
pr-
12
Ma
y-1
2Ju
n-1
2
Volume (mn) Price (SAR) - RHS
Global Research – Saudi Arabia Petrochemical Sector
June 2012 21
Sabic to build carbon fiber plant in Saudi Arabia Following a technology licensing agreement with acrylic Montefibre SpA in 2011, Sabic plans to build a polyacrylonitrile (PAN) precursor and carbon fiber manufacturing plant in the Kingdom. The company plans to produce at least 3,000 tons annually to start. Company said Montefibre's technology will be the basis for a new acrylic manufacturing facility. The acrylic will feed a new polyacrylonitrile (PAN) precursor facility, also to be built by Sabic in Saudi Arabia. The PAN, in turn, will feed a new Sabic carbon fiber manufacturing plant in Saudi Arabia. Company plans to sell most of the produce outside the country while some of it will be consumed in the country as well. Global Research has not incorporated the carbon fiber plant in its estimates.
Saudi Kayan; profits expected in the full year Saudi Kayan, an affiliate of Saudi Basic Industries Corporation started commercial production in October 2011. Once fully operational, the Kayan complex is expected to have an annual production capacity of more than 4mn tons of petrochemical and chemical products, making SABIC world’s largest producer of ethylene glycol. Company is also planning to open a Polyethylene Factory At Jubail. The factory, would use raw material from Sabic's ethylene olefins plant, in an effort to increase operational efficiency and maximize use of internal resources. During 1Q12, Company reported a loss of SAR71mn, mainly due to hike in cost and higher interest expense. However, losses were reportedly lower than the previous quarter on account of better cost control measures adopted by the Company. Company faced technical issues during the second quarter which halted production at all its factories for couple of days. Going forward, with expectation of lower petrochemical prices and being a startup company we expect Saudi Kayan to be in profit for the full year 2012.
Profits from its fertilizer affiliates to keep the bottom line growing SABIC is one of the leading global fertilizer producers with over 6.7mtpa of gross production capacity from Saudi Arabian Fertilizers Company (SAFCO), the Al-Jubail Fertilizer Company (AL-BAYRONI) and National Chemical Fertilizer Company (IBN AL-BAYTAR). In 2011, SABIC also entered into a joint venture - Maaden Phosphate Company. SABIC and Ma’aden holding has stakes of 30% & 70% respectively. The integrated plant is capable of producing 2.9mn tons of phosphate fertilizers and 1.1mn tons of ammonia. SAFCO one of SABIC’s affiliated will carry out feasibility studies for the construction of a new plant (SAFCO V), in its complex in Jubail, for the production of urea with annual capacity of 1.4mtpa along with ammonia at 1.2mtpa. The expansion will increase the total Ammonia and Urea capacity to 3.3mtpa and 3.7mtpa respectively. The expansion is to conclude by mid 2014 and is expected to start commercial production in the third quarter of 2014. Company is expected to report a net profit CAGR of 12% during 2011-15.
IBN AL-BAYTAR Net Income
Source: SAFCO & Global Research
-
300,000
600,000
900,000
1,200,000
1,500,000
1,800,000
2009 2010 2011 2012e 2013e 2014e 2015e
(SA
R 0
00
)
On the other hand income from IBN AL-BAYTAR is expected to report a CAGR of 2.8% during 2011-15. SABIC’s share of earnings are expected to increase to SAR1.0bn in 2012.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 22
Valuation Update We have reduced our fair value to SAR116.1/share as compared to SAR118.6/share earlier. Slight change in the fair value is because of expectations of lower product prices and a fall in demand in Europe which to some extent is expected to be compensated by growth in Asian markets. The stock at its current price of SAR91.75 is trading at a discount of 26.5% to our fair value. Hence we maintain our recommendation at Strong Buy on the stock.
Global Research – Saudi Arabia Petrochemical Sector
* Market price for 2012 and subsequent years as per closing prices on June 19, 2012
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Global Research – Saudi Arabia Petrochemical Sector
Yanbu National Petrochemicals Company
June 2012 24
Market Data
Bloomberg Code: YANSAB AB
Reuters Code: 2290.SE
CMP (19 June 2012): SAR44.9
O/S (mn) 562.5
Market Cap (SAR mn): 25,256
Market Cap (USD mn): 6,735
P/E 2012e (x): 8.6
P/Bv 2012e (x): 2.0
Price Performance 1-Yr
High (SAR): 56.25
Low (SAR): 41.6
Average Volume: (000) 1,243
1m 3m 12m
Absolute (%) -4.06 -13.65 -1.32
Relative (%) -1.73 -4.07 -8.21
Price Volume Performance
Better cost control measures raised the profitability during 1Q12
Sizable exposure to European markets
Growth limited in the topline because of capacity constraints
Recommendation maintained at Strong Buy
Better cost control measures raised the profitability during 1Q12 YANSAB recorded net profit of SAR720mn in 1Q12, which was higher by 0.3% YoY and 8.3% QoQ. Decline in cost was instrumental in the rise in the profitability. Cost of sales dropped by 6.1% which rose the gross margins to 37.1% compared to 32.4% in the previous quarter. Slight growth in the topline was due to the 10 day scheduled maintenance taken during the current period.
YANSAB Quarterly Performance
(SAR mn) 1Q11 2Q11 3Q11 4Q11 1Q12
Sales Revenue 2,077 2,660 2,498 2,424 2,446
Cost of Sales 1,186 1,520 1,522 1,638 1,539
Gross Profit 891 1,139 976 786 907
Operating Expense 53 47 23 52 62
Operating Profit 838 1,093 953 734 845
Financial Charges 102 107 105 99 97
Net Profit 718 964 828 665 720
Gross Margins 42.9% 42.8% 39.1% 32.4% 37.1%
Operating Margin 40.3% 41.1% 38.1% 30.3% 34.6%
Net Margin 34.6% 36.2% 33.1% 27.4% 29.4%
ROA 3.0% 4.1% 3.4% 2.9% 3.0%
ROE 8.9% 10.7% 8.4% 6.3% 6.4%
Debt as % of Assets 59.9% 55.7% 53.5% 48.6% 47.1%
Source: Tadawul & Zawya
With the decline in the prices of oil the price of petrochemical have remained under pressure and with limitation from the capacity side the profitability is expected to slightly drop during the second quarter.
Sizable exposure to European markets YANSAB exports its produce worldwide and Europe holds a sizable chunk of it. As of 2011, revenue to Europe remained at SAR2.1bn compared to SAR0.87bn in 2010, growth of 143.4%. Revenue composition also increased to 22% in 2011 compared to 15% in 2010. With the GDP growth in Europe slowing we expect, YANSAB to focus on Asian markets and the size of its revenue to Europe to decline in the coming years.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 25
Growth limited in the topline because of capacity constraints With no new capacity expansions announced by the Company in the coming years we expect a revenue CAGR of 2.8% during 2011-15. The decent growth in revenue is expected on the back of growth in prices post 2012, as we expect economic recovery worldwide post 2012 would give a boost to the commodity prices.
YANSAB Revenue Projection
Source: Company Reports & Global Research
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2009 2010 2011 2012e 2013e 2014e 2015e
(SA
R 0
00
)
Our view on prices for 2012 is quite pessimistic which is being seconded by the reduction in the prices lately announced by SABIC on MEG and other products. SABIC proposed to lower the prices of contracts for the sale of MEG to Asian customers by USD180 to USD1,020 per ton as the price of the mentioned material in the spot market hovered around the level of USD850 per ton.
Valuation Update We have reduced our fair value to SAR56.0/share as compared to SAR57.8/share earlier. Slight change in the fair value is because of expectations of lower product prices and a limited growth in the topline because of capacity constraints and bleak demand outlook for Europe, a sizable market for YANSAB. The stock at its current price of SAR44.9 is trading at a discount of 24.7% to our fair value. Hence we maintain our recommendation at Strong Buy on the stock.
Global Research – Saudi Arabia Petrochemical Sector
* Market price for 2012 and subsequent years as per closing prices on June 19, 2012
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Global Research – Saudi Arabia Petrochemical Sector
Saudi International Petrochemical Company
June 2012 27
Market Data
Bloomberg Code: SIPCHEM AB
Reuters Code: 2310.SE
CMP (19 June 2012): SAR18.15
O/S (mn) 366.6
Market Cap (SAR mn): 6,655
Market Cap (USD mn): 1,775
P/E 2012e (x): 10.3
P/Bv 2012e (x): 1.2
Price Performance 1-Yr
High (SAR): 24.45
Low (SAR): 17.75
Average Volume: (000) 1,556
1m 3m 12m
Absolute (%) -8.56 -22.60 -11.25
Relative (%) -6.25 -13.01 -18.14
Price Volume Performance
1Q12 results lower because of rising cost and falling product prices
SIPCHEM phase III projects to being production by mid of 2013
Exposure to Europe to reduce in the coming years
Recommendation maintained at Strong Buy
Lower 1Q12 results because of rising cost and falling product prices During 1Q12, SIPCHEM reported net income of SAR151.6mn compared to SAR211mn in the previous quarter. Drop in the income was a combination of both the fall in revenue (which was because of fall in product prices) and rise in cost (acquisition of Aectra SA). Increase in the results of first quarter compared to the same period last year was due to the increase in production and sales volume and improvements in sales prices. Nevertheless, the profit margins continue to remain depressed on both YoY and QoQ basis.
SIPCHEM Quarterly Performance
(SAR mn) 1Q11 2Q11 3Q11 4Q11 1Q12
Sales Revenue 693.0 831.6 865.0 934.7 1,058.0
Cost of Sales 425.8 515.2 447.9 513.3 723.3
Gross Profit 267.3 316.5 417.2 421.4 334.7
Operating Expense 27.0 28.5 24.5 44.7 30.8
Operating Profit 240.2 288.0 392.6 376.7 303.9
Financial Charges 41.2 41.1 49.0 49.9 45.4
Net Profit 120.9 165.4 208.4 211.0 151.6
Gross Margins 38.6% 38.1% 48.2% 45.1% 31.6%
Operating Margin 34.7% 34.6% 45.4% 40.3% 28.7%
Net Margin 17.4% 19.9% 24.1% 22.6% 14.3%
ROA 1.0% 1.3% 1.4% 1.4% 1.0%
ROE 2.4% 3.2% 3.9% 3.7% 2.8%
Debt as % of Assets 39.2% 37.9% 44.3% 44.6% 38.6%
Source: Tadawul & Zawya During 2Q11, the same trend is expected as the Company has significant exposure to European markets which are going through a period of slowdown. Coupled with that depressed oil prices are expected to result in a fall in petrochemical prices and maintenance shutdown taken during the period by IAC will eventually pull the profits down. SIPCHEM phase III projects to being production by mid of 2013
SIPCHEM has started construction operations (turnkey contract) to build plants of Phase III projects. The first of these two plants produces Ethylene Vinyl Acetate (EVA) and Low Density Poly Ethylene (LDPE). The second plant produces Ethyl Acetate and Butyl Acetate. Both plants will be located in Jubail Industrial City. The production capacity of the Vinyl Acetate project will be 200 thousand tons per annum and the plant will be operated by the International Polymers Company Limited, an affiliate of Sipchem, founded in 2009, owned by Sipchem (75%) and Hanwha Chemical. of South Korea (25%). The total cost of the project is estimated at approximately SAR3bn. The project’s main contractor, Korean company GS Engineering & Construction Co., started construction works on site in last quarter of 2011 and the project is scheduled to start operation during the second quarter of 2013 but being on the conservative side we have assumed it to enter in the commercial production phase by mid of 2013 and have incorporated proceeds from these affiliates into our estimates.
Global Research – Saudi Arabia Petrochemical Sector
June 2012 28
Significant exposure to European markets Alike YANSAB, SIPCHEM also exports its produce worldwide and Europe holds a significant chunk of it. As of 2011, revenue to Europe remained at SAR1bn compared to SAR0.4bn in 2010, growth of 149%. Revenue composition also increased to 30% in 2011 compared to 20% in 2010. In view of increasing exports to Europe, one of its affiliate acquired Aectra SA, a Swiss petrochemical trading and marketing company. Aectra SA was established in 1995 and is located in Lutry Switzerland. The Company has an established network of agents and customers throughout Europe.
Source: Company Reports & Global Research
Asia , 43.0%
Europe , 30.0%
Local & Middle East , 9.0%
Internal , 18.0% 2011
Asia , 48.0%
Europe , 27.0%
Local & Middle East , 9.0%
Internal , 16.0%
2015e
Although acquiring a company clearly signifies the importance of Europe to SIPCHEM but we are of the view that Asian market would be growing more strongly than Europe which is being seconded by the Company as well which is looking for similar acquisition in Asia. Hence we expect the revenue contribution from Europe to decline to 27% and to Asia to increase to 48% by 2015.
Valuation Update We have raised our fair value to SAR25.5/share as compared to SAR23.6/share earlier. Change in the fair value is because of incorporation of the SIPCHEM III. The stock at its current price of SAR18.15 is trading at a discount of 40.5% to our fair value. Hence we maintain our recommendation at Strong Buy on the stock.
Global Research – Saudi Arabia Petrochemical Sector
* Market price for 2012 and subsequent years as per closing prices on June 19, 2012
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June 2012 30
Disclosure The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.
Disclosure Checklist
Recommendation Bloomberg
Ticker Reuters
Ticker Price
Disclosure Company
Saudi Basic Industries Corporation Strong Buy SABIC AB 2010.SE SAR 91.75 1,10
Yanbu National Petrochemicals Co. Strong Buy YANSAB AB 2290.SE SAR 44.90 1,10
Saudi Int. Petrochemical Company Strong Buy SIPCHEM AB 2310.SE SAR 18.15 1,10
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Global Research: Equity Ratings Definitions
Global Rating Defination
STRONG BUY Fair value of the stock is >20% from the current market price
BUY Fair value of the stock is between +10% and +20% from the current market price
HOLD Fair value of the stock is between +10% and -10% from the current market price
SELL Fair value of the stock is < -10% from the current market price
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