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Call us on +973 17549499 or email us at [email protected] Saudi Kayan Petrochemical Co. (2350.SE) CMP SAR 14.85 Target SAR 11.26 Downside 24.2% MSCI GCC Index 428.64 Tadawul All Share Index 5,947.77 Key Stock Data Sector Petrochemicals Reuters Code 2350.SE Bloomberg Code KAYAB AB Equity Net Out. Shares (bn) 1.500 Market Cap (SAR bn) 22.275 Market Cap (USD bn) 5.941 Avg. 12m Vol. (mn) 7.520 Volatility (30 day) 19.554 Volatility (180 day) 40.387 Stock Performance (%) 52 week high / low (SAR) 17.30 / 8.90 1M 3M 12M Absolute (%) -0.3 6.2 -14.2 Relative (%) -4.3 7.0 6.6 Shareholding Pattern (%) Saudi Basic Industries Corporation 35.00 Al Kayan Petrochemical Company 20.00 Public 45.00 Saudi Kayan and Tadawul All Share Index Executive Summary Saudi Kayan Petrochemical Co. (Saudi Kayan) is a Saudi joint stock company established following a partnership agreement between Saudi Basic industries Corp. (SABIC), which holds 35.0% and AlKayan Petrochemical Co. (Kayan) with a 20.0% stake. The primary activity of the company involves investments in industrial projects related to petrochemicals and chemicals. The company’s industrial complex with an annual production capacity of over 6 million tonnes of petrochemical products is expected to begin full commercial operations by 4Q10. Saudi Kayan reported a net loss of SAR 12.75 million for 1H09 Saudi Kayan is still in the pre-operating stage and, as a result, reports only non- operational income. The company did not report any investment income for 1H09, while the same included an Islamic murabaha income of SAR 150.34 million in 1H08. The company reported SAR 12.75 million as pre-operative expenses and floating costs during 1H09. Accordingly, net loss stood at SAR 12.75 million as against a net income of SAR 155.32 million in 1H08. This translated into an adjusted annualised loss per share (LPS) of 0.02 in 1H09 compared to an adjusted annualised EPS of SAR 0.21. Outlook and valuation The petrochemicals sector was negatively impacted by the global economic crisis, which led to weak demand for petrochemicals and a sharp decline in prices. Accordingly, the companies operating in this sector witnessed heavy erosion in profitability. However, on a positive note, there has been an improvement in the demand and pricing of petrochemical products in anticipation of an economic recovery. Saudi Kayan’s production facilities are currently under production and, as a result, the current earnings only reflect its non-core operations. The company’s industrial complex is expected to start commercial operations by 4Q10. The positives for the company include the advantage of feedstock costs and access to the marketing channels of SABIC. However, the huge debt on its balance sheet and the current stock price, which has already appreciated 52.3% since the beginning of the year, discount the expected future earnings. In addition, uncertainties related to the timely completion of the project present a weak outlook for the stock implying an unattractive opportunity at the current levels. To determine the fair value of Saudi Kayan, we have used the DCF valuation method. Saudi Kayan is expected start generating revenues in 2010 based on which it is trading at a P/E multiple of 74.03x on 2010E earnings, and at a P/B multiple of 1.44x and 1.41x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by jumping 49.2% since January as against a gain of 23.8% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 11.26, which exhibits a potential downside of 24.2% from its closing price of SAR 14.85 (as on Sep 24, 2009). Accordingly, we initiate our coverage on Saudi Kayan Petrochemical Co. with an UNDERWEIGHT recommendation. SAR Million 2007A 2008A 2009E 2010E 2011E Revenues NA NA NA 1,940 8,878 EBITDA NA NA NA 523 2,349 Margin (%) NA NA NA 27.0 26.5 Net Profit 323 494 -26 301 1,093 Margin (%) NA NA NA 15.5 12.3 Adjusted EPS (SAR) 0.22 0.33 -0.02 0.20 0.73 Total Assets 15,713 22,402 33,706 35,645 37,114 RoAE NA 3.2 -0.2 1.9 6.7 UNDERWEIGHT
Transcript
Page 1: Saudi Kayan Petrochemical Co. (2350.SE) UNDERWEIGHTmec.biz/term/uploads/KAYAN_01102009.pdf · Ethoxylates 40,000 Detergent, paint, leather Choline ... chemicals in Saudi Arabia for

Call us on +973 17549499 or email us at [email protected]

Saudi Kayan Petrochemical Co. (2350.SE)

CMP SAR 14.85 Target SAR 11.26 Downside 24.2%

MSCI GCC Index 428.64 Tadawul All Share Index 5,947.77

Key Stock Data Sector Petrochemicals Reuters Code 2350.SE Bloomberg Code KAYAB AB Equity Net Out. Shares (bn) 1.500 Market Cap (SAR bn) 22.275 Market Cap (USD bn) 5.941 Avg. 12m Vol. (mn) 7.520 Volatility (30 day) 19.554 Volatility (180 day) 40.387

Stock Performance (%) 52 week high / low (SAR) 17.30 / 8.90

1M 3M 12M Absolute (%) -0.3 6.2 -14.2 Relative (%) -4.3 7.0 6.6

Shareholding Pattern (%)

Saudi Basic Industries Corporation 35.00 Al Kayan Petrochemical Company 20.00 Public 45.00

Saudi Kayan and Tadawul All Share Index

Executive Summary Saudi Kayan Petrochemical Co. (Saudi Kayan) is a Saudi joint stock company established following a partnership agreement between Saudi Basic industries Corp. (SABIC), which holds 35.0% and AlKayan Petrochemical Co. (Kayan) with a 20.0% stake. The primary activity of the company involves investments in industrial projects related to petrochemicals and chemicals. The company’s industrial complex with an annual production capacity of over 6 million tonnes of petrochemical products is expected to begin full commercial operations by 4Q10. Saudi Kayan reported a net loss of SAR 12.75 million for 1H09 Saudi Kayan is still in the pre-operating stage and, as a result, reports only non-operational income. The company did not report any investment income for 1H09, while the same included an Islamic murabaha income of SAR 150.34 million in 1H08. The company reported SAR 12.75 million as pre-operative expenses and floating costs during 1H09. Accordingly, net loss stood at SAR 12.75 million as against a net income of SAR 155.32 million in 1H08. This translated into an adjusted annualised loss per share (LPS) of 0.02 in 1H09 compared to an adjusted annualised EPS of SAR 0.21. Outlook and valuation The petrochemicals sector was negatively impacted by the global economic crisis, which led to weak demand for petrochemicals and a sharp decline in prices. Accordingly, the companies operating in this sector witnessed heavy erosion in profitability. However, on a positive note, there has been an improvement in the demand and pricing of petrochemical products in anticipation of an economic recovery. Saudi Kayan’s production facilities are currently under production and, as a result, the current earnings only reflect its non-core operations. The company’s industrial complex is expected to start commercial operations by 4Q10. The positives for the company include the advantage of feedstock costs and access to the marketing channels of SABIC. However, the huge debt on its balance sheet and the current stock price, which has already appreciated 52.3% since the beginning of the year, discount the expected future earnings. In addition, uncertainties related to the timely completion of the project present a weak outlook for the stock implying an unattractive opportunity at the current levels. To determine the fair value of Saudi Kayan, we have used the DCF valuation method. Saudi Kayan is expected start generating revenues in 2010 based on which it is trading at a P/E multiple of 74.03x on 2010E earnings, and at a P/B multiple of 1.44x and 1.41x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by jumping 49.2% since January as against a gain of 23.8% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 11.26, which exhibits a potential downside of 24.2% from its closing price of SAR 14.85 (as on Sep 24, 2009). Accordingly, we initiate our coverage on Saudi Kayan Petrochemical Co. with an UNDERWEIGHT recommendation.

SAR Million 2007A 2008A 2009E 2010E 2011E Revenues NA NA NA 1,940 8,878 EBITDA NA NA NA 523 2,349 Margin (%) NA NA NA 27.0 26.5 Net Profit 323 494 -26 301 1,093 Margin (%) NA NA NA 15.5 12.3 Adjusted EPS (SAR) 0.22 0.33 -0.02 0.20 0.73 Total Assets 15,713 22,402 33,706 35,645 37,114 RoAE NA 3.2 -0.2 1.9 6.7

UNDERWEIGHT

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Background Saudi Kayan Petrochemical Co. (Saudi Kayan) is a Saudi joint stock company operating in the chemicals and petrochemicals industry. The company is the outcome of a partnership agreement between Saudi Basic Industries Corp. (SABIC), which holds 35.0%, and AlKayan Petrochemical Co. (Kayan), which holds 20.0%. Following an IPO in April 2007, the company offered 45% of its capital to the public and got listed on the Saudi Stock Exchange (Tadawul). Headquartered at the Jubail Industrial City in the Eastern Region of Saudi Arabia, Saudi Kayan is constructing a huge manufacturing complex. The principal activity of the company is to invest in industrial projects in the petrochemical and chemical fields. In addition, the company is actively involved in securing and developing industrial projects to support its raw materials need. Additionally, it operates and manages all the company’s projects by providing support and maintenance for the utilities related to these plants.

Various Units at Saudi Kayan Petrochemical Complex

Industrial projects in pipeline to support company’s growth Series of specialized products to be produced locally for the first time

Source: Zawya The Saudi Kayan industrial complex is expected to begin commercial operations by the fourth quarter of 2010, with an annual production capacity of over 6 million tonnes of petrochemical and chemical products. It will manufacture certain specialized chemicals for the first time in the country. These products include aminoethanols, aminomethyls, dimethylformamide, choline chloride, dimethylethanol, dimethylethanolamine, ethoxylates, phenol, cumene and polycarbonate that will help widen the possibilities for downstream industries. The company will also produce conventional products such as ethylene, propylene, polypropylene, ethylene glycol, butene-1, among others. Saudi Kayan also plans to establish an applications center focusing on development of industrial products and applications, especially research in polycarbonate and other new value-added downstream industries in Saudi Arabia.

Production Capacity of Saudi Kayan (Product-wise) (in metric tonnes)

Product Name Annual Production Uses / Applications

Ethylene 1,478,000 Feedstock for the polyethylene units Propylene 630,000 Feedstock for the polypropylene units Benzene 109,000 Feedstock for cumene plant Polyethylene 700,000 Automotive gasoline tanks, pipes bottles & containers

Polypropylene 350,000 Automotive industry, electric appliances, hot water pipe systems fibers (such as diapers), film wrap

Ethylene Glycols 537,000 Polyester fiber for textile industry and PET for soft drinks

package

Polycarbonate 260,000 Optical Media (CD & DVD), construction & housing, automotive, electronic, medical

Ethanolamines 100,000 Gas sweetening, surfactants, ethylene amine Acetone 133,000 Solvents, BPA manufacturing, methyl methacrylate Dimethyl Formamide 50,000 Used in man-made fibers, leather, pharmaceuticals, solvent,

PU coatings Ethoxylates 40,000 Detergent, paint, leather Choline Chloride 20,000 Poultry Feed, plant growth regulators & pharmaceuticals

Bisphenol A 240,000 Poly Carbonate (CD disks, glazing & automotive Industry), epoxy resins (adhesives, flexible packaging, laminates etc.)

Source: Saudi Kayan

Saudi Kayan Petrochemical

Ethane/Butane Catalytic Cracking

Unit

Polyethylene Plant

Polycarbonates Plant

Amines Unit

Integrated Phenolics Plant

Ethylene Glycol Unit

Polypropylene Plant

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Board of Directors • Chaired by Mr. Mutlaq H. Al-Morished

• Mr. Khalid S. Al-Obied - Board Secretary

• Mr. Awadh M. Al-Maker • Mr. Mazyad S. Al-Khaldi • Mr. Mohammed A. Al-Ghamdi

• Mr. Abdullah S. Nojaidi • Mr. Hikmat S. Al-Zaim • Mr. Taha A. Al-Kuwaiz Source: Zawya Global economy expected to witness negative growth of 1.4% in 2009

Business Model

Subsidiaries/Associates of Saudi Kayan Saudi Kayan has no subsidiary/associates. INDUSTRY SCENARIO According to estimates by the International Monetary Fund (IMF), the world economy will recede 1.4% during 2009 as a result of the continued economic slowdown. This is contrary to the growth rates of 5.1% and 3.1% registered for 2007 and 2008, respectively. However, the trend is likely to reverse with growth rebounding to 2.5% in 2010. The Middle East region’s GDP, which registered a healthy real growth of 5.7% and 6.3% during 2006 and 2007, respectively, is anticipated to come down from 5.2% in 2008 to 2.0% for 2009 before expanding back to 3.7% in 2010. Within the region, the GCC countries witnessed GDP growth of 6.4% in 2008, but are likely to grow at a mere 1.3% during 2009 owing to multiple factors that include weak oil prices, contraction of global demand and trade-related activity, squeezed liquidity, lower tourism and reduced remittances. However, the GCC’s growth is expected to normalize to 4.2% in 2010 on improving market dynamics. Saudi Arabia’s real GDP grew at an average 4.4% over the period 2004-08, on the back of high oil prices and subsequent economic development. However, unlike the overall GCC region, Saudi Arabia’s real GDP is expected to contract 0.9% during 2009 before bouncing back to a positive 2.9% in 2010. As per preliminary estimates, Saudi Arabia’s nominal GDP increased 22.0% YoY to reach SAR 1,753.50 billion in 2008 from SAR 1,437.68 billion in 2007, driven by record oil prices during the first half of the year. Average oil prices jumped to USD 95.0 per barrel (bbl) in 2008 from USD 67.6 per bbl in 2007. The mining & quarrying sector (up 37.2% to SAR 1,005.20 billion) was the largest contributor to the GDP at 57.3%. Meanwhile, recording a YoY growth of 9.2%, the construction sector logged in revenues worth SAR 71.03 billion during 2008 accounting for 4.1%. The finance, insurance, real estate and business services sectors together contributed 6.6%. In light of the financial turmoil and economic slowdown along with falling oil prices, the IMF forecasts a 22.3% decline in nominal GDP for 2009. However, a reversal is expected, as economic growth is likely to rebound to 13.3% in 2010. The country is estimated to run a budget deficit of SAR 65 billion (USD 16 billion) in 2009 – the first in six years. However, massive fiscal surpluses registered during 2003-2008 have allowed Saudi Arabia to boost its foreign assets, which supported higher spending and offset the pressure due to the global crisis.

Saudi Kayan to introduce certain specialized chemicals in Saudi Arabia for the first time, providing wide opportunities for downstream industries

SAUDI KAYAN

Saudi Kayan invests in industrial projects in the petrochemical and chemical industry

Contracts with international players to build various plants at the upcoming integrated complex

Focus on transferring technical know-how and expertise in the petrochemical and chemical industry

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Increased demand from Asian economies drives growth in the petrochemical industry Access to cheap feedstock instrumental to the emergence of Middle East as a petrochemical hub

Saudi Arabia's Nominal GDP

0

400

800

1,200

1,600

2,000

2004 2005 2006 2007 2008E0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Nominal GDP (SAR Billions) Nominal GDP Grow th (%)

Contribution to GDP (%)

0.0%

14.0%

28.0%

42.0%

56.0%

70.0%

2004 2005 2006 2007 2008E

Oil to GDP Non-oil to GDP

Source: SAMA, Central Department of Statistics & Information The global petrochemical industry witnessed a healthy growth scenario in the years prior to the global economic crisis on rising demand from emerging Asian economies. Rising population coupled with unparalleled growth witnessed by these economies over the last few years resulted in a rise in demand for petrochemicals from these regions. The demand for petrochemical products increased at a CAGR of 4% during the 2002-07 period. With demand being the key driver for any increase in capacity and utilisation rates, global petrochemical capacity increased at a CAGR of 3.3% to 128.4 million tonnes over this period and capacity utilisation rates reached 91.7% in 2007 compared to 87% in 2002. Consequently, petrochemical production has increased at a CAGR of 3.9% to 117.7 million tonnes over 2002-07. The year 2008 continued to benefit from soaring oil and gas prices, which contributed significantly to the top-line and bottom-line growth of the companies operating within the industry. Further, on the cost front, the Middle East & North Africa (MENA) region holds the advantage of lower feedstock costs owing to its rich oil fields and gas reserves. According to a study by the Association of Petrochemicals Producers in Europe (APPE), Middle Eastern producers enjoy the highest profit margins when compared to producers in Eastern European, American, and South East Asian. The trend is likely to continue as the region holds approximately 65% of the world oil reserves and 49% of the world gas reserves. Additionally, the willingness of the region to diversify its economy beyond oil and gas is adding up to an increased interest in the petrochemicals sector. The MENA region accounts for approximately 66% of the global petrochemical capacity of which the Gulf region (comprising the six GCC countries and Iran) contributes about 86%, while the rest is contributed by North African countries like Egypt, Libya, and Algeria. Saudi Arabia has the maximum share in the petrochemical capacity amongst the Gulf countries, accounting for approximately 43% of the total capacity. Saudi Basic Industries Corp. accounts for approximately 54% and 28% of the total production capacity of Saudi Arabia and MENA respectively, and is the biggest petrochemical company in the region. During the last few years, there has been a major shift in the petrochemical production base from the US and Europe to MENA and China, which have emerged as the hub for new capacities and expansions. The North American region, which once used to be the hub of petrochemical facilities, has been on a downturn due to high feedstock costs that have hurt margins across the industry. The marginal returns earned by companies in the US petrochemical industry coupled with stiff competition from the Chinese and MENA regions on account of feedstock cost advantage have directly impacted capacity expansion plans. Even the European petrochemicals industry has suffered on account of higher feedstock costs, which has stalled growth for the industry. Further, the European industry has witnessed subdued growth due to various regulations including the Kyoto protocol - the European Union’s directive on chemicals and environmental campaigns. Ethylene is the most important feedstock in the production of a number of derivatives apart from being used as a raw material for a variety of inputs for plastics, fibres and elastomers. According to Chemical Market Associates Inc. (CMAI), the global ethylene industry operating rates are projected to fall from 92% in early 2008 to below 90% throughout 2012 in the wake of current economic situation. The massive build-up of ethylene capacity in the Middle East and Asia might be detrimental to the demand-supply dynamics of the sector. Historically, from 1995 to 2008, ethylene capacity increased by more than 22 million metric tonnes (mmt) in the Asia-Pacific region and approximately 13 mmt in the Middle East. CMAI projects that these regions are projected to add another 41 mmt of capacity by 2015. With investments to the tune of USD 80 billion planned over the next 5 years, Saudi Arabia is expected to double its ethylene capacity from the levels achieved in 2008 to18.2 million tonnes per annum (mtpa) by the end of 2013.

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Benzene prices improve on increased demand from Asian producers India, China contribute to the rise in demand for polypropylene

Major Petrochemical Projects in Middle East

Country/Company Product Targeted completion Status

Saudi Arabia Arabian Industrial Fibers (Ibn Rushd) Propylene and derivatives 2012 Planned

Saudi Kayan Olefins, aromatics and derivatives 1Q11 Under construction

National Chevron Phillips Ethylene and derivatives 4Q11 Under construction

Petro Rabigh II Olefins, aromatics and derivatives Under study

Saudi Aramco/Dow Chemical Ethylene, aromatics and derivatives 2014 FEED stage

Saudi Aramco/Total Propylene and aromatics Post 2012 NA Abu Dhabi Borouge II Olefins and derivatives 2H10 Under construction

Borouge III Polyolefins 2014 Feasibility study stage

ChemaWEyaat Olefins, aromatics and derivatives 2014 Under preliminary

engineering Qatar

ExxonMobil/Qatar Petroleum Ethylene Post 2012 FEED award delayed

Honam Petrochemical/Qatar Petroleum Olefins and derivatives Post 2012 Decision on project

deferred to 2H12 Oman Duqm Refining & Petrochemical

Refinery, olefins and derivatives Post 2012 Delayed

* FEED – Front-End Engineering Design Source: Chemical Industry News & Intelligence

Benzene is the basic raw material for a number of petrochemical intermediaries including styrene, phenol, acetone, cyclohexane and nitrobenzene. Demand for benzene as a raw material for the production of styrene constitutes 52%, while cumene used in the manufacturing of phenol and cyclohexane accounts for 19% and 13%, respectively. Nitrobenzene and other chemical intermediaries account for the rest of the demand for benzene. Off late, the demand for benzene has been increasing buoyed by higher gasoline consumption in Asia. According to the CMAI, the demand for benzene is expected to witness an absolute growth of 1.3 million tonnes per year through 2011. On the other hand, the supply side dynamics remain tight mainly due to a shortage of investments in the sector. However, rising demand has necessitated additional capacities to be installed. According to the CMAI, approximately 9 million tonnes per year of benzene capacity is likely to be added over 2007-10. Further, according to the CMAI, around 3.1 million tonnes per year of new benzene capacity is likely to be added across Northeast and Southeast Asia during the next five years. In the Middle East, 1.5 million tonnes of new annual benzene capacity will be added over 2007-11. However, on the flip side, increased capacity is likely to strain utilisation rates, which are expected to fall to 80%. Benzene prices, which follow crude oil and natural gas prices, have increased significantly since the start of 2Q09 mainly due to higher demand for styrene from Asia. The price of benzene shot up sequentially 66.9% during the first two months of the second quarter. Moreover, the Asian demand for benzene is increasing fast and the trend may necessitate exports from the US and the Europe. However, in the long run, with an increase in capacity, the price for benzene is expected to exhibit a better correlation to the cost of production. Polypropylene (PP) is the basic raw material for the production of a variety of products including fibers, yarns, and textiles. It is also used in food packaging, electronic films, photo and graphic arts applications and automobiles, where its low weight serves as an inherent advantage. Historically, the demand for PP has grown at around 7-8% mainly due to its versatility and relatively low cost compared to other polymers. According to the CMAI, the demand for PP is expected to increase at approximately 6% per annum over the 2007-12 period buoyed by rising demand from India and China. However, the overcapacity build-up in Middle East and Asia is expected to become a key challenge for the industry as 9 million tonnes of annual capacity gets added over 2008-10. The scenario is also expected to intensify the competition for the export markets with North America likely to lose its leadership position and Europe turning into a net importer. Meanwhile, China continues to remain the largest consumer of PP. According to the China Petroleum & Chemical Industry Association (CPCIA), the PP production is likely to increase to 12 million tonnes by 2010 from an estimated 7.13 million tonnes in 2007. Further, according to International Construction Information Society (ICIS), a cost and specification information provider for the construction industry, expects at least 11 new PP plants with a total capacity of 3.9 mtpa under construction to come on-stream between 2008 and 2011.

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Asian economies, mainly China, remain the biggest export market for the Middle East Economic downturn leads to negative demand for petrochemicals in China

The ongoing global economic recession and credit crunch has dampened demand leading to price correction across basic petrochemical products. The prices of ethylene, butadiene, polypropylene and benzene have declined to at least three-year lows. However, on a positive note, the improving demand scenario has led to an improved trend in 2Q09. The prices for polypropylene, polyethylene and benzene witnessed a sequential improvement during 2Q09. While polypropylene prices reported a 24.4% sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter. The price of benzene however, gained the maximum rising 80.6% in 2Q09 on a sequential basis.

Price Change in Crude Oil and Natural Gas

-36%

-18%

0%

18%

36%

54%

72%

2004 2005 2006 2007 2008

Crude OPEC basket Natural Gas

Price Change of Key Petrochemicals

-56%

-28%

0%

28%

56%

2006 2007 2008 2009

Polyethylene Ethylene Benzene Polypropylene

Source: Bloomberg *2009 includes prices till August Source: Bloomberg On the demand side, Asian economies have emerged as the key markets for petrochemical products because of their favourable demand growth. China remains the biggest export market with petrochemical demand expected to rise around 9% each year till 2012 compared to a mere 1.8% projected for the US and Europe. At the same time, as a result of the feedstock cost advantage, the Middle East region has emerged as a significant petrochemical producer, targeting its low cost products towards the Asian markets. However, given the economic slump, the demand for petrochemical products is likely to remain low with over-capacity further deteriorating the situation. Ethylene derivatives exports from North America are expected to decline as a result of weakening global demand, appreciating dollar and overcapacity building up in the Middle East. The reduction in operating rates in Asia particularly the Middle East is expected to exert pressure on US exports and cash margins. According to ICIS, exports from the Middle East are expected to increase from 4.3 million tonnes in 2008 to 11.7 million tonnes in 2013 benefiting from capacity expansions. Consequently, net trade balance for US polyethylene is expected to fall from 3.4 million tonnes in 2008 to 0.80 million tonnes by 2013. With access to low cost feedstock (coal), China has been developing the local industry to fulfil the soaring domestic demand. However, the scenario is changing fast as a result of the sluggish demand for petrochemicals. According to CPCIA, Chinese petrochemical industry is moving downwards for the first time after ten years of high growth. Further, according to the Centre for Business Intelligence, an independent commodities information provider in China, demand for key petrochemical products including ethylene, polyethylene, benzene and purified terephthalic acid (PTA) witnessed negative growth in demand for the first time in 2008. Amongst this, PTA’s demand was the most affected declining 8% in 2008 compared to a rise of 26% in 2007. The slowdown in global demand for Chinese textiles, toys, electronics, home appliances, machinery and other finished manufactured goods has caused the dip in demand for petrochemical products. Further, industry experts believe that the sector would be challenged by overproduction, lack of innovation and competitiveness and price undercutting from other parts of the world.

Demand and Production in China in 2008 ('000 tonnes)

0

3,200

6,400

9,600

12,800

16,000

Ethy

lene

Prop

ylen

e

Poly

ethy

lene

(PE)

Poly

prop

ylen

e

Petro

benz

ene

Purif

ied

tere

phth

alic

acid

(PTA

)

Mon

oeth

ylen

egl

ycol

(MEG

)

Met

hano

l

Demand Production Sources: CBI Research & Consulting, China National Bureau of Statistics

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Global turmoil leads to weak demand, over capacity aggravates situation

The Chinese government has undertaken certain initiatives to revive the industry. During January 2009, China’s state council approved a stimulus package of approximately RMB 500 billion (USD 73 billion) to ensure scheduled commission of planned capacity additions, in order to revive the local industry. This initiative will likely reduce chemical imports to 17 mmt in 2011 from 20 mmt in 2007.

China Cracker Expansion Plans, ’000 tonnes

Company Project location 2009 expansion

2010 expansion

2011 expansion

Start-up time

Sinopec (including joint ventures) Fujian United Petrochemical

Fujian, South China 800 - - 1H 2009

Shanghai Secco Petrochemical

Shanghai, East China 300 - - Aug-09

Tianjin Petrochemical Tianjin, North China 1,000 - - Sep-09

Zhenhai Refinery and Petrochemical

Zhejiang, East China 1,000 - - Oct-09

Guangzhou Petrochemical

Guangdong, East China - - 1,000 Planning

board Wuhan Petrochemical

Hubei, Central China - - 800 Planning

board Petro China Dushanzi Petrochemical

Xinjiang, Northwest China 1,000 - - 1Q 2009

Panjin Petrochemical Liaoning, Northeast China 450 - - Oct-09

Fushun Petrochemical

Liaoning, Northeast China - 800 - Planning

board Sichuan Petrochemical

Sichuan, Southwest China - - 800 Planning

board Daqing Petrochemical

Heilongjiang, Northeast China - 600 - Planning

board Total New Capacity 4,550 1,400 2,600 Source: CBI Research & Consulting

The demand for petrochemicals has remained weak given the ongoing financial turmoil. This in turn has led to the closure of production facilities, delays in capacity addition plans and industry-wide merger and acquisition activity. Capacity additions have been facing delays or postponement mainly in the financing and engineering stages with tightened credit availability. The liquidity crunch has already forced Qatar Petroleum and Korea-based Honam Petrochemical to defer a joint cracker and derivatives project. Saudi Aramco and Dow Chemical-operated Ras Tanura project, estimated at USD 26 billion and touted as the biggest petrochemical project in the sector is faced with apprehensions regarding the scheduled completion in 2014. While decline in feedstock costs has improved profitability for producers, the weak demand scenario has kept a check on the volumes of business generated. However, on a positive note, the demand situation is expected to improve in the medium term. Petrochemical prices, which have already seen multi-year lows, have been slowly, but definitely, recovering. On the other hand, with a decline in construction costs, petrochemical players are renegotiating contracts with their engineering partners. Saudi Aramco decided to renegotiate contracts for its giant Manifa oilfield development project towards the end of 2008. Apart from this, the present situation is believed to be throwing up an array of consolidation and merger opportunities with the Middle East being considered a potential buyer for distressed assets across Asian and European petrochemical companies. In February 2009, Abu Dhabi’s sovereign wealth fund IPIC agreed to acquire Canada-based NOVA Chemicals for USD 2.3 billion, including the debt assumption. In another development, Sabic and Sipchem have signed an MoU to work together on new projects worth USD 4 billion using Sipchem’s government allocation of feedstock ethane. Further, the companies are also taking preparatory steps towards streamlining operational efficiencies, enhancing vertical integration, reducing capacity and realigning portfolios to focus on core businesses and see through this global turmoil.

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Saudi Kayan reported a pre-operating net income of SAR 494 million in 2008

Financial Performance - FY2008 Saudi Kayan is still in the pre-operating stage and consequently reports only non-operational income. The company’s Islamic murabaha income increased 36.9% to SAR 676.85 million compared to SAR 494.50 million. In addition, the company generated SAR 2.37 million as interest income during the year. The company’s expenses mainly in the form of pre-operative and floating costs amounted to SAR 171.97 million for the year compared to SAR 164.03 million in 2007. Zakat amounted to SAR 13.16 million as against SAR 7.96 million in 2007. Accordingly, net income for the year increased 53.2% to SAR 494.08 million compared to SAR 322.51 million in 2007. Adjusted EPS increased from SAR 0.22 to SAR 0.33 for the year.

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0

160

320

480

640

800

2007 2008 1H08

Islamic Murabaha Income (SAR Millions)

-140

0

140

280

420

560

700

2007 2008 1H08 1H09

Net Profit (SAR Millions)

-

7,000

14,000

21,000

28,000

35,000

2007 2008 1H08 1H09

Total Assets (SAR Millions)

-1.0%

0.0%

1.0%

2.0%

3.0%

2008 1H08 1H09

Return on Average Assets (RoAA)

-

4,000

8,000

12,000

16,000

20,000

2007 2008 1H08 1H09

Shareholders' Equity (SAR Millions)

-1%

0%

1%

2%

3%

4%

2008 1H08 1H09

Return on Average Equity (RoAE)

Chart Gallery

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Size of the Company The salient features of the balance sheet are:

Total assets nearly doubled to SAR 32.37 billion in 1H09 compared to SAR 16.20 billion in 1H08 led by additions to projects under construction and partially offset by a decline in cash & cash equivalents.

The company’s projects under construction representing 84.3% of the total assets base increased

more than two-fold to SAR 27.29 million as against SAR 10.27 million in 1H08. Construction activity at its industrial complex is progressing as planned and is estimated to be 78.3% complete by the end of June 2009. The company expects operations to commence in 2010. Furthermore, the increase in the assets base as a result of this was somewhat limited following a 14.6% decline in cash & cash equivalents to SAR 4.99 billion compared to SAR 5.84 billion in 1H08 as funds were directed towards development activities. Accordingly, the share of cash & cash equivalents in the total assets base decreased from 36.0% to 15.4%.

Long-term debt stood at SAR 15.58 billion at the end of 1H09, up from SAR 5.81 billion at the end

of 2008 due to the debt raised during the first half of 2009 to fund its development program. This represented 48.1% of the total balance sheet size in 1H09. The company did not have any long-term debt on its balance sheet at the end of 1H08. Shareholders’ equity remained flat at SAR 15.48 billion.

Financial Performance Analysis – 1H09 Saudi Kayan did not report any investment income for 1H09, unlike 1H08 when it reported an Islamic murabaha income of SAR 150.34 million. The company reported SAR 12.75 million in pre-operative expenses and floating costs during the first half of 2009. Accordingly, net loss stood at SAR 12.75 million as against a net income of SAR 155.32 million in 1H08. This translated into an adjusted annualised loss per share (LPS) of 0.02 in 1H09 compared to an adjusted annualised EPS of SAR 0.21. Net loss for 1H09 resulted in an annualised negative return of 0.2% on equity while, a net profit in 1H08 generated positive return of 2.0%. Similarly, a negative return of 0.1% was generated on average assets in 1H09 compared to a positive return of 1.9% during 1H08.

Saudi Kayan did not generate any income in 1H09

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Peer Comparison In order to do a peer comparison, we have taken comparable companies involved in petrochemicals business across Saudi Arabia that includes Saudi Industrial Investment Group (SIIG), National Industrialization Company (NIC), Saudi International Petrochemical Company (SIPCHEM) and Saudi Kayan.

Financial Performance of Comparable Companies SIIG NIC SIPCHEM Saudi Kayan 2008 1H09 2008 1H09 2008 1H09 2008 1H09 Ratios: Total Assets Turnover Ratio (x) 0.31 0.27 0.36 0.25 0.18 0.06 NA NA Operating Profit Margin (%) -0.5 5.4 9.7 5.2 55.3 4.2 NA NA EBITDA Margin (%) 2.2 5.4 16.7 5.2 55.9 4.2 NA NA Net Profit Margin (%) 2.3 1.8 6.0 1.7 31.4 8.8 NA NA Debt Equity Ratio 0.53 0.82 2.20 2.32 0.75 1.04 0.38 1.01 RoAA (%) 0.7 0.5* 2.2 0.4* 5.8 0.5* 2.6 -0.1* RoAE (%) 1.2 0.9* 9.1 1.8* 13.5 1.2* 3.2 -0.2* Market Indicators: Adj. EPS (SAR) 0.11 0.10* 1.30 0.29* 1.61 0.18* 0.33 -0.02* P/E (x) 210.91 219.39 15.91 72.21 13.04 117.90 45.08 NM Adj. BVPS (SAR) 11.55 11.60 15.88 15.74 14.89 14.40 10.33 10.32 P/BV (x) 1.98 1.97 1.31 1.32 1.41 1.46 1.44 1.44 Current Market Capitalisation (SAR Millions) 10,283 10,283 9,559 9,559

7,000 7,000

22,275

22,275

(SAR Million) Revenues 2,138.96 1,317.56 10,037.14 3,796.42 1,708.58 335.50 NA NA % YoY change 46.6 14.3 38.9 -26.5 11.8 -66.4 NA NA Operating Profit/ (Loss) -10.32 71.60 974.43 198.57 945.34 13.96 NA NA % YoY change NA -73.2 -12.9 -66.5 5.4 -97.7 NA NA EBITDA 46.26 71.60 1,671.81 198.57 954.44 13.96 NA NA % YoY change -90.2 -73.2 12.4 -66.5 5.3 -97.7 NA NA Net Profit/ (Loss) 48.75 23.43 600.85 66.19 536.78 29.69 494.08 -12.75 % YoY change -88.9 -92.1 -9.1 -82.1 -9.6 -91.9 53.2 NA Total Assets 8,649.03 10,534.40 30,422.66 31,050.35 10,833.39 11,633.97 22,401.72 32,370.17 % YoY change 74.2 34.5 23.4 8.7 39.8 26.3 42.6 99.8 Shareholders’ Equity 5,197.23 5,219.95 7,317.76 7,249.45 4,964.60 4,801.14 15,494.08 15,481.33 % YoY change 66.3 -4.1 23.2 -9.5 65.7 -9.9 1.1 0.0 NA: Not applicable, NM: Not meaningful Source: Zawya, Saudi Kayan’s financial statements

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Work on industrial complex progressing as per plan Tie-ups with international players

New Projects and Strategies Saudi Kayan maintains that work at its industrial complex is progressing according to plan. As of July 2009, about 94.2% of construction work was already completed. In order to fulfil the funding needs for a part of this complex, Saudi Kayan secured a USD 533 million (SAR 2 billion) loan facility from the Saudi Industrial Development Fund (SIDF) in January 2009. This funding completed its USD 6 billion requirement needed to finance a portion of its petrochemical complex. The company had earlier arranged the rest of the financing from a number of local and international banks. In June 2008, the company awarded an initial contract estimated at USD 38 million to Singapore-based Van Leeuwen Pipe & Tube for the supply of carbon steel, alloy steel, stainless steel and incoloy pipes, fittings and flanges for the Saudi Kayan Olefins Plant project. With a total capacity of 1.35 mtpa, the olefins plant is managed by Kellogg Brown & Root Singapore. The company signed a contract with Daelim Industrial Limited Co. (Korea) to establish a SAR 4.9 billion (USD 1.3 billion) polycarbonate plant with a production capacity of 260,000 mtpa.

SWOT Analysis

THREATS

Competition from a number of private firms operating in the sector

OPPORTUNITIES

The country’s continued focus on expanding its petrochemical sector to become a primary centre for the production of basic chemicals Impetus on increasing competitiveness of the industrial sector Government funding to mega strategic projects amidst global crisis

WEAKNESS

Still incurring losses as its petrochemical project continues to be in the pre-operational stage

STRENGTHS

Considered as one of the largest single-phase petrochemicals complex ever built Strong backing by Sabic, the Gulf’s largest petrochemical producer, as the major shareholder To introduce several specialized products that will be produced for the first time in Saudi Arabia

Risks and Concerns:

The current economic downturn has tightened liquidity across most economies in the GCC. Lower oil prices have proved detrimental to the budget surpluses enjoyed by the regional governments till the last year. Consequently, mobilisation of funds towards infrastructure projects has been adversely impacted, leading to a further slowdown in overall economic activity. In addition, weak economic growth has negatively impacted the demand across sectors thereby restricting consumer spending. Consequently, the region’s economies will likely witness slower/negative growth in 2009 despite some improvement during the second half of the year. Furthermore, as demand for petrochemicals is heavily dependent on the economic growth, companies might witness a restrained revenue growth. The prices of petrochemical products are mainly determined by the demand/supply scenario and tend to follow the global price trends for crude oil and natural gas, which form the basic raw materials. Therefore, any significant dip in crude oil and natural gas prices might lead to lower price realisations for petrochemical products, whereas at the same time, lower input costs might help improve operating margins as well. In addition, uncertainty related with regard to the timing and cost of completion of the new projects that will depend, in part, upon approvals from relevant governmental authorities. Delays in projection completion are also expected to lead to cost overruns, which in turn is likely to reduce the anticipated returns.

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Cost of Equity: 11.40% WACC: 6.71%

Valuation Methodology: We have used DCF valuation method to arrive at the fair value of Saudi Kayan, as discussed below: Assumptions:

(i) Risk free Rate (Rf) of 3.20%, equivalent to one year average yield on 10 year US T-bill. (ii) Levered Beta of 1.16 (iii) A terminal growth rate of 2%

Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 11.40% and a WACC of 6.71%.

DCF Calculations DCF Valuation (FCFF Model)

(in SAR Million) 2009E* 2010E 2011E 2012E 2013E 2014E Operating Profit (EBIT) NA 308.90 1,487.81 1,726.06 1,841.02 2,036.37 Zakat on EBIT NA 8.01 38.60 44.78 47.76 52.83 Effective Tax Rate 2.6% 2.6% 2.6% 2.6% 2.6% 2.6% NOPAT NA 300.88 1,449.21 1,681.28 1,793.26 1,983.53 Add: Depreciation and Amortisation NA 214.16 860.92 867.37 880.38 889.19 Less: Capex 375.87 356.22 1,003.69 1,082.60 1,314.07 1,182.65 Less: Change in Net Working Capital -159.32 153.89 640.20 320.09 112.16 -220.11 Operating Free Cash Flows to Firm (OFCFF) -216.54 4.93 666.24 1,145.96 1,247.41 1,910.18 Free Cash Flow to Firm (FCFF) -216.54 4.93 666.24 1,145.96 1,247.41 1,910.18 WACC (Ko) (%) 6.71% 6.71% 6.71% 6.71% 6.71% 6.71% Present Value / Discount Factor 0.9680 0.9072 0.8501 0.7966 0.7465 0.6996 Long-Term Growth Rate (g) (%) 2.00% Terminal Multiple [(1 + g) / (WACC - g)] 21.65 Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 41,354.64 Present Value of Free Cash Flows -209.62 4.47 566.37 912.92 931.24 1,336.34

*2009E excludes 1H09A

Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 3,541.71 Terminal Value: Residual Cash Flow (FCFF of 2014E) 1,910.18 WACC 6.71% Long-Term Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 0.05 Equals Nominal Terminal Value 41,354.64 Implied Multiple of 2014E EBITDA 14.14 Times PV/ Discount Factor 0.70 Present Value of Terminal/Residual Value 28,931.07 Enterprise Value 32,472.78 Implied Multiple of 2014E EBITDA 11.10 Less: Long-term Debts 15,577.56 Less: Market Value of Preferred Shares 0.00 Add: Surplus Cash and Investments 0.00 Equity Value 16,895.22 No. of Outstanding Shares (Million) 1,500.00 Fair Value Per Share (SAR) 11.26

* figures in SAR Million unless specified

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Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes.

Sensitivity Analysis of Nominal Terminal Value (SAR Million) Discount

Factor Long-Term Growth Rate

1.00% 1.50% 2.00% 2.50% 3.00% 7.00% 32,146 35,241 38,955 43,493 49,166 8.00% 27,555 29,820 32,464 35,588 39,336 9.00% 24,111 25,845 41,355 30,114 32,782

10.00% 21,432 22,805 24,350 26,100 28,100 11.00% 19,290 21,645 21,645 23,030 24,588

Sensitivity Analysis of Discounted Terminal Value (SAR Million)

Discount Factor

Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00%

7.00% 22,155 24,288 26,848 29,976 33,886 8.00% 18,044 19,528 21,259 23,304 25,759 9.00% 15,008 16,088 28,931 18,745 20,406

10.00% 12,687 13,500 14,414 15,451 16,635 11.00% 10,865 12,191 12,191 12,971 13,849

Sensitivity Analysis of Enterprise Value (SAR Million)

Discount Factor

Long-Term Growth Rate 1.00% 1.50% 2.00% 2.50% 3.00%

7.00% 25,863 27,996 30,556 33,684 37,594 8.00% 21,606 23,090 24,821 26,867 29,321 9.00% 18,433 19,512 32,473 22,170 23,830

10.00% 15,981 16,793 17,708 18,744 19,928 11.00% 14,033 15,359 15,359 16,140 17,017

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Investment Opinion The expansion of petrochemical sector remains highly dependent on the demand pattern for products, which in turn is reliant on macroeconomic health. The petrochemicals sector witnessed healthy growth during 2008, as sound economic growth registered by economies worldwide kept the demand for petrochemical products at a high level. At the same time, price realisations followed an upward trajectory leading to record top and bottom-line growth for the companies operating in the sector. However, towards the later part of 2008, the sector witnessed slower growth as demand for petrochemicals plunged as a result of the economic slump. The slowdown across the world economies driven by multiple factors including the subprime mortgage crisis and declining oil prices, amongst others, have been instrumental in pulling down the demand for petrochemical products. The prices of basic petrochemicals such as ethylene, butadiene, propylene, styrene, and benzene all slumped to at least three-year lows. Even China, which continues to be one of the largest consumers of petrochemicals, was no exception and witnessed negative demand growth for the first time in 10 years. As the impact of the economic crisis widened, the petrochemicals sector became more prone to shut-downs of production facilities and delays in capacity addition plans. In addition to this, the sector has also been abuzz with merger and acquisition talk. However, there has been a reversal in the prices of crude oil and natural gas. The OPEC’s crude oil price increased from USD 35.58 per bbl at the start of the year to USD 71.14 per bbl as of August 14, 2009. The prices for polypropylene, polyethylene and benzene have all witnessed sequential improvements in 2Q09. While polypropylene prices reported a 24.4% sequential gain, polyethylene price improved 17.4% in 2Q09 compared to the previous quarter. The price of benzene gained the maximum rising 80.6% in 2Q09 on a sequential basis. This is expected to lead to a gradual improvement in earnings of the companies operating in this sector. Saudi Kayan’s industrial complex is expected to commence operations by 4Q10 with an annual production capacity of over 6 million tonnes of petrochemical and chemical products. The company will also hold the advantage of being the first player to introduce specialized chemicals in Saudi Arabia that include aminoethanols, aminomethyls and dimethylformamide amongst others. The company is currently in the pre-operating phase and its current earnings only reflect income from investments. However, we expect the company to generate sustained revenues starting 4Q10, with the capacities anticipated to gradually attain optimum utilization levels, going forward. Furthermore, tie-ups and agreements with Saudi Aramco and SABIC give the company feedstock cost advantage and access to marketing channels, respectively. However, the huge debt on its balance sheet is expected to hurt the company’s profitability. Furthermore, the stock price has already jumped 52.3% since the beginning of the year and discounts the expected future earnings flow of the company. Given the price rally already witnessed and uncertainties associated with the commissioning of the project, we believe that the stock does not present an attractive investment opportunity at current levels. Saudi Kayan is expected start generating revenues in 2010 based on which it is trading at a P/E multiple of 74.03x on 2010E earnings, and at a P/B multiple of 1.44x and 1.41x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has outperformed the index by increasing 49.2% since January as against a gain of 23.8% by the Tadawul All Share Index. Considering the above factors, we arrive at a price target of SAR 11.26, which exhibits a potential downside of 24.2% from its closing price of SAR 14.85 (as on Sep 24, 2009). Accordingly, we initiate our coverage on Saudi Kayan Petrochemical Co. with an UNDERWEIGHT recommendation.

Fair Value: SAR 11.26 Investment Opinion: UNDERWEIGHT

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Financial Statements Consolidated Balance Sheet

(in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Non-current assets Cost of projects under construction 4,837.34 18,764.46 10,273.13 27,286.48 28,412.35 0 0 Plant, property & equipment 0 0 0 0 0 28,554.41 28,697.19 Other non-current assets 6.12 27.15 29.57 25.21 26.25 45.58 47.46 Total non-current assets 4,843.46 18,791.61 10,302.70 27,311.69 28,438.60 28,599.99 28,744.64 Current assets Cash and cash equivalents 10,765.34 3,522.30 5,839.08 4,986.59 5,192.34 6,705.16 7,282.80 Accounts receivables 0 0 0 0 0 106.72 532.69 Inventory 0 0 0 0 0 135.83 443.91 Other receivables and prepayments 104.66 87.81 62.63 71.89 74.86 96.99 110.26 Total current assets 10,869.99 3,610.11 5,901.71 5,058.48 5,267.20 7,044.71 8,369.65 Total Assets 15,713.45 22,401.72 16,204.40 32,370.17 33,705.80 35,644.70 37,114.30 LIABILITIES AND EQUITY Liabilities Non-current liabilities Long term debt 0 5,814.82 0 15,577.56 16,843.86 18,240.53 18,098.11 Other non-current liabilities 26.37 52.18 43.93 58.19 88.55 112.27 177.87 Total non-current liabilities 26.37 5,867.00 43.93 15,635.74 16,932.42 18,352.80 18,275.99 Current liabilities Accounts payable 364.56 540.38 167.70 659.54 686.75 797.55 904.66 Current portion of long term debt 0 0 0 0 0 0 242.29 Accrued and other current liabilities 0 500.26 514.94 593.56 618.05 724.89 829.00 Total current liabilities 364.56 1,040.64 682.64 1,253.10 1,304.80 1,522.44 1,975.95 Total liabilities 390.94 6,907.64 726.57 16,888.84 18,237.22 19,875.24 20,251.94 Equity Share capital 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 15,000.00 Statutory reserve 32.25 49.41 47.78 49.41 49.41 79.50 188.79 Retained earnings 290.26 444.67 430.05 431.92 419.17 689.97 1,673.57 Equity attributable to equity holders of the Company 15,322.51 15,494.08 15,477.83 15,481.33 15,468.58 15,769.46 16,862.36 Total liabilities & equity 15,713.45 22,401.72 16,204.40 32,370.17 33,705.80 35,644.70 37,114.30

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Consolidated Income Statement (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Revenues NA NA NA NA NA 1,940.45 8,878.11 Cost of sales NA NA NA NA NA -1,313.67 -6,032.59 Gross Profit NA NA NA NA NA 626.79 2,845.53 Selling, general & administrative expenses NA NA NA NA NA -103.73 -496.80 Depreciation NA NA NA NA NA -214.16 -860.92 Operating profit NA NA NA NA NA 308.90 1,487.81 EBITDA NA NA NA NA NA 523.05 2,348.73 Islamic murabaha income 494.50 676.85 150.34 NA NA NA NAInterest income NA 2.37 NA NA NA NA NAPre-operative, floating costs and other expenses -164.03 -171.97 11.18 -12.75 -25.50 NA NAFinance costs NA NA NA NA NA NA -365.81 Net income from pre-operating activities before zakat 330.47 507.24 161.52 -12.75 -25.50 308.90 1,122.01 Zakat -7.96 -13.16 -6.20 NA NA -8.01 -29.11 Net income 322.51 494.08 155.32 -12.75 -25.50 300.88 1,092.90 Adjusted EPS 0.22 0.33 0.21* -0.02* -0.02 0.20 0.73

* Annualized

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Consolidated Cash Flow Statement (in SAR Million) 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Cash Flow From Pre-Operating/ Operating Activities Net income from pre-operating activities before zakat 330.47 507.24 161.52 -12.75 -25.50 308.90 1,122.01 Adjustments in: Depreciation and amortization 0 0 0 0 0 214.16 860.92 Finance costs 0 0 0 0 0 0.00 365.81 Change in assets & liabilities: Accounts receivables 0 0 0 0 0 -106.72 -425.96 Inventory 0 0 0 0 0 -135.83 -308.07 Other receivables and prepayments -104.66 -87.81 42.03 15.92 12.95 -22.13 -13.28 Other non-current assets -6.12 0 0 0 0.90 -19.33 -1.88 Accounts payable, accrued and other current liabilities 143.73 105.51 311.88 212.46 146.37 110.79 107.11 Other non-current liabilities 26.37 52.18 17.56 6.01 36.38 23.72 65.60 Net cash generated from pre-operating/ operating activities 389.80 577.12 532.99 221.63 171.11 373.55 1,772.25 Zakat paid 0 0 0 0 0 -8.01 -29.11 Net cash from pre-operating/ operating activities 389.80 577.12 532.99 221.63 171.11 365.53 1,743.14 Cash Flow From Investing Activities Additions to cost of projects under construction -4,624.47 -17,842.49 -5,435.79 -8,522.03 -9,531.01 0 0 Additions to plant, property & equipment 0 0 0 0 0 -230.05 -897.69 Other non-current assets 0 -27.15 -23.45 1.95 0.90 -19.33 -1.88 Net Cash flows from (used in) Investing Activities -4,624.47 -17,869.64 -5,459.24 -8,520.08 -9,530.11 -249.38 -899.57 Cash Flow From Financing Activities Proceeds from issuance of share capital 15,000.00 15,000.00 0 0 0 0 0 Finance costs paid 0 0 0 0 0 0.00 -365.81 Proceeds from long term debts 0 5,814.82 0 9,762.73 11,029.04 1,396.67 99.87 Dividends paid 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Net Cash flows from Financing Activities 15,000.00 20,814.82 0.00 9,762.73 11,029.04 1,396.67 -265.94 Net change in cash & cash equivalents 10,765.34 3,522.30 -4,926.25 1,464.29 1,670 1,513 578 Cash & cash equivalents balance, Beginning of period 0 0 10,765.34 3,522.30 3,522 5,192 6,705 Cash & cash equivalents balance, End of period 10,765.34 3,522.30 5,839.08 4,986.59 5,192 6,705 7,283 Cash Flow From Pre-Operating Activities 330.47 507.24 161.52 -12.75 -25.50 308.90 1,122.01

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Common – Size Statements

Common-Size Consolidated Balance Sheet 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E ASSETS Non-current assets Cost of projects under construction 30.8% 83.8% 63.4% 84.3% 84.3% 0.0% 0.0% Plant, property & equipment 0.0% 0.0% 0.0% 0.0% 0.0% 80.1% 77.3% Other non-current assets 0.0% 0.1% 0.2% 0.1% 0.1% 0.1% 0.1% Total non-current assets 30.8% 83.9% 63.6% 84.4% 84.4% 80.2% 77.4% Current assets Cash and cash equivalents 68.5% 15.7% 36.0% 15.4% 15.4% 18.8% 19.6% Accounts receivables 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% 1.4% Inventory 0.0% 0.0% 0.0% 0.0% 0.0% 0.4% 1.2% Other receivables and prepayments 0.7% 0.4% 0.4% 0.2% 0.2% 0.3% 0.3% Total current assets 69.2% 16.1% 36.4% 15.6% 15.6% 19.8% 22.6% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Non-current liabilities Long term debt 0.0% 26.0% 0.0% 48.1% 50.0% 51.2% 48.8% Other non-current liabilities 0.2% 0.2% 0.3% 0.2% 0.3% 0.3% 0.5% Total non-current liabilities 0.2% 26.2% 0.3% 48.3% 50.2% 51.5% 49.2% Current liabilities Accounts payable 2.3% 2.4% 1.0% 2.0% 2.0% 2.2% 2.4% Current portion of long term debt 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.7% Accrued and other current liabilities 0.0% 2.2% 3.2% 1.8% 1.8% 2.0% 2.2% Total current liabilities 2.3% 4.6% 4.2% 3.9% 3.9% 4.3% 5.3% Total liabilities 2.5% 30.8% 4.5% 52.2% 54.1% 55.8% 54.6% Equity Share capital 95.5% 67.0% 92.6% 46.3% 44.5% 42.1% 40.4% Statutory reserve 0.2% 0.2% 0.3% 0.2% 0.1% 0.2% 0.5% Retained earnings 1.8% 2.0% 2.7% 1.3% 1.2% 1.9% 4.5% Equity attributable to equity holders of the Company 97.5% 69.2% 95.5% 47.8% 45.9% 44.2% 45.4% Total liabilities & equity 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

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Common-Size Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Revenues NA NA NA NA NA 100.0% 100.0% Cost of sales NA NA NA NA NA -67.7% -67.9% Gross Profit NA NA NA NA NA 32.3% 32.1% Selling, general & administrative expenses NA NA NA NA NA -5.3% -5.6% Depreciation NA NA NA NA NA -11.0% -9.7% Operating profit NA NA NA NA NA 15.9% 16.8% EBITDA NA NA NA NA NA 27.0% 26.5% Islamic murabaha income NA NA NA NA NA 0.0% 0.0% Interest income NA NA NA NA NA 0.0% 0.0% Pre-operative, floating costs and other expenses NA NA NA NA NA 0.0% 0.0% Finance costs NA NA NA NA NA 0.0% -4.1% Net income from pre-operating activities before zakat NA NA NA NA NA 15.9% 12.6% Zakat NA NA NA NA NA -0.4% -0.3% Net income NA NA NA NA NA 15.5% 12.3%

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Financial Ratios 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Liquidity Ratios: Current Ratio (x) 29.82 3.47 8.65 4.04 4.04 4.63 4.24 Quick Ratio (x) 29.82 3.47 8.65 4.04 4.04 4.54 4.01 Profitability Ratios: Return on Average Equity (RoAE) (%) NA 3.2 2.0* -0.2* -0.2 1.9 6.7 Return on Average Assets (RoAA) (%) NA 2.6 1.9* -0.1* -0.1 0.9 3.0 Leverage Ratios: Debt to Equity (D/E) Ratio (x) 0.00 0.38 0.00 1.01 1.09 1.16 1.09 Shareholders' Equity to Total Assets Ratio (x) 0.98 0.69 0.96 0.48 0.46 0.44 0.45 Total Liabilities to Total Assets Ratio (x) 0.02 0.31 0.04 0.52 0.54 0.56 0.55 Current Liabilities to Equity Ratio (x) 0.02 0.07 0.04 0.08 0.08 0.10 0.12 Growth Rates: % YoY Growth in Total Revenues NA NA NA NA NA NA 357.5% % YoY Growth in Operating Profit NA NA NA NA NA NA 381.7% % YoY Growth in EBITDA NA NA NA NA NA NA 349.0% % YoY Growth in Net Profit NA 53.2 NA NA NA NA 263.2% % YoY Growth in Total Assets NA 42.6 NA 99.8 50.5 5.8 4.1 % YoY Growth in Shareholders' Equity NA 1.1 NA 0.0 -0.2 1.9 6.9 Ratios used for Valuation: Adj. EPS (SAR) 0.22 0.33 0.21* -0.02* -0.02 0.20 0.73 Adj. BVPS (SAR) 10.22 10.33 10.32 10.32 10.31 10.51 11.24 P/E Ratio (x) 69.07 45.08 71.71 NM NM 74.03 20.38 P/BV Ratio (x) 1.45 1.44 1.44 1.44 1.44 1.41 1.32 Current Market Price (SAR)** 14.85 14.85 14.85 14.85 14.85 14.85 14.85

* Annualized ** Current Market Price as on September 24, 2009

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DISCLAIMER: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication, but we make no representation as to its accuracy or completeness. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of TAIB Securities WLL, any associated company or the employees thereof. Nothing contained herein should be construed as an offer to buy or sell or a solicitation of an offer to buy or sell. The value of any investment may fall as well as rise. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of the investment to increase or diminish. Consequently, investors may not get back the full value of their original investment

Call us on +973 17549499 or email us at [email protected]


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