+ All Categories
Home > Documents > Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced...

Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced...

Date post: 12-Mar-2018
Category:
Upload: dinhkhuong
View: 224 times
Download: 5 times
Share this document with a friend
77
NCB Capital Research Department April 2010 Saudi Petrochemicals Entering the expansion phase Please refer to last page for important disclaimer Analyst Tariq Al-Alaiwat [email protected] +966 2 690 7627 An industry update with analysis of six of the leading companies in the sector
Transcript
Page 1: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

NCB Capital Research Department

April 2010

Saudi PetrochemicalsEntering the expansion phase

Please refer to last page for important disclaimer

Analyst

Tariq Al-Alaiwat

[email protected]

+966 2 690 7627

An industry update with analysis of six of the leading companies in the sector

Page 2: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

Co

nte

nts

EXECUTIVE SUMMARY ........................................................................................4 OVERVIEW OF COVERAGE ..................................................................................5 INDUSTRY OUTLOOK..........................................................................................6

Ethylene: Backbone of the petrochemial value chain ...................................................7 Polyethlene.......................................................................................................... 10 Propylene & Polypropylene..................................................................................... 14

OIL: CORRELATION & PRICING ........................................................................17 INDUSTRY FINANCIALS ...................................................................................21

Revenue outlook................................................................................................... 21 Margins & profitability forecasts.............................................................................. 22 1Q 2010 financial performance............................................................................... 23

KEY ASSUMPTIONS ..........................................................................................25 VALUATION......................................................................................................26

Dividend yield ...................................................................................................... 27

COMPANY PROFILES ........................................................................................28 Sahara Petrochemicals .......................................................................................... 29

Yansab................................................................................................................. 39

Saudi Kayan ......................................................................................................... 49

Petrochem ........................................................................................................... 58

National Industrialization Co. .................................................................................. 67

Sipchem............................................................................................................... 72

Page 3: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

KSA Petrochemical Sector

Page 4: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Executive summary Demand outlook positive, but aggressive capex worrisome Improving economic conditions mainly in Asian economies strengthens the demand

outlook for petrochemical products in the forthcoming years. However, the sector is

expected to witness a capacity surplus post 2012E, when the large build-out by

Middle Eastern and Asian players will start operations. This will likely exert pressure

on utilization rates, therefore, limiting petrochemical price growth in the medium to

long-term. We expect Saudi firms with existing facilities to continue operating at

100% utilization rates until 2013E, dropping to 95% in 2014E and 90% in 2015E

owing to increased petrochemical supply globally.

Feedstock and location benefits intact Access to low cost feedstock and proximity to growing Asian market are key

positives for the Saudi Petrochemical sector. These factors enabled a faster

recovery in earnings in the 2H 2009 for the Saudi companies and we expect these

benefits to continue driving earnings growth in the forthcoming years. We project

the average net profit margin for the 6 companies in this report to increase to

20.8% in 2011E from 12.5% in 2009.

Initiation of coverage on Saudi Kayan, Yansab, Sahara Petrochemicals and PetroChem We initiate coverage on Saudi Kayan (2350.SE) with a neutral rating and a price

target of SR20.3, Yansab (2290.SE) with a neutral rating and a price target of

SR50.7, Sahara Petrochemicals (2260.SE) with a neutral rating and a price target

of SR27.2 and PetroChem (2002.SE) with an underweight rating and a price target

of SR15.8 We have selected them due to their similar production mixes. All four

new companies being introduced to our coverage produce ethylene, propylene and

their derivatives (polyethylene, polypropylene, HDPE, LDPE and ethylene glycols).

Updating Sipchem and NIC (Tasnee) We update our forecasts for Sipchem and NIC (Tasnee). We maintain our

Outperform ratings on both with a price target of SR29.4 for Sipchem and SR40.0

for Tasnee. We believe 2010 will be a strong year for Tasnee as it realizes the full

benefits of its aggressive expansion in its petrochemical segment. The SEPC

expansion produces the same products as the four new companies under our

coverage but with production running at a high capacity, Tasnee is set to benefit

the most on the back of its strong track record and position.

Sipchem is expected to benefit from the commercial start of its Acetyl complex

scheduled in May 2010. An improved outlook on oil prices and higher operating

efficiency strengthen our outlook towards the stock. Sipchem undertook a

scheduled maintenance shutdown of 25 days in 3Q 2009. This continues to pay-off

in efficiency of production and better margins.

Collectively all six stocks represent 9.3% of the Saudi markets free float and 34%

of the petrochemical sector free float market share. In terms of production, this mix

collectively contributes approximately 50% of total ethylene and derivates produced

from the KSA capacities.

4

Page 5: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 5

Overview of coverage Exhibit 1: KSA petrochemical coverage - key positives & negatives

Company Recom. Target

priceUpside/

Downside Positive Negative

Sipchem Overweight SR29.4 ↑ 19.1%

• Commercial start of phase II expansion in 2Q 2010

• Improved operating efficiency to fuel 2010 earnings growth

• Revised oil forecasts boost petrochemical price assumptions

• Will be effected the most by the possible doubling in natural gas in 2012 as gross margins contract the most

• The only company paying anti-dumping charges (on Butanediol sales to China) amongst these companies

NIC (Tasnee) Overweight SR40.0 ↑ 14.2%

• Yanbu capacity expansion to positively impact titanium business earnings

• Improved oil forecast boosts petrochemical price assumptions

• Full year contribution from SEPC business to boost 2010 earnings

• Lowest net margins amongst the six companies in this report

• Highest debt to equity ratio • Engaged in non-core activities

which are not yet divested.

Sahara Neutral SR27.2 ↑ 11.4%

• Benefits of a diversified product mix is a long run positive

• Investor friendly management

• SEPC is the only income generator for now

• SAMC, ACVC and SAP plants to start in three years

Yansab Neutral SR50.7 ↑ 3.9%

• 1Q10 start to operations looks ideal

• Benefitting from SABIC’s strong marketing platform

• Investor friendly management

• Below 100% operating rates worrisome due to propane feed stock deficiency

• We believe that despite our confidence in the company, the stock is fully valued

Saudi Kayan Neutral SR20.3 ↓ 9.2%

• Strong partnership with SABIC to offer strong marketing platform

• Ramping operations just as the current cycle nears its peak

• Uncertainty on start of operations

• A lack of revenues in 2010e

Petrochem Underweight SR15.8 ↓ 15.1% • Strong partnership with Chevron Phillips to offer strong marketing platform

• Investor friendly management

• No sales to be reported until 2012

• Net losses in 2010e & 2011e • Planned product lines offers

limited growth opportunities

Source: NCBC Research

Page 6: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Industry outlook The Global Petrochemical Industry: Improving demand and higher prices Demand for petrochemicals and their derivatives generally track global economic

trends, given their extensive use in everyday applications (plastics, chemicals and

coating industry). Not surprisingly, the global economic crisis led to a significant

slowdown in petrochemical demand. There are signs of demand recovery in the key

consuming markets — automobiles, construction and consumer durables —

increased petrochemical trade, primarily in Asia (mainly China) in recent quarters.

This coupled with higher petrochemical prices is a positive for the sector. In our

view, demand fundamentals for petrochemical products remain largely intact in the

long-term, mainly due to rising consumption in developing Asian countries

(particularly China and India) and an anticipated rise in demand from developed

economies when economic conditions revive.

Exhibit 2: Economic growth to fuel petrochemical consumption GDP Growth (%)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2008A 2009A 2010E

US Euro area UK Japan China India

Source: IMF

Petrochemical prices, over the last year, have rallied in tandem with the rise in oil

prices on the assumption that demand has bottomed and will return as economic

activity rebounds. Detailed information on the price performance of petrochemical

products and oil grades is available in our monthly NCBC Petrochemical Tracker.

Post-2012, we believe the sector is set to face significant oversupply due to

aggressive expansion plans by Middle Eastern and Asian companies. This in turn

may lead to overcapacity, depressing utilization rates and putting a cap on pricing,

a trend which looks to remain for the medium to longer-term.

The Saudi Petrochemical Industry: Emerged from troubled waters faster than others Saudi petrochemical producers were not immune to the global slowdown and took a

hit on earnings in 4Q08 and 2009. However, their feedstock advantage and

proximity to Asian markets provided a floor to their earnings and Saudi firms

together reported net income of SR8bn in 2H 2009 compared to net income of

SR0.7bn in 1H 2009. The sector is one of the prime focus areas of the Saudi

Arabian government in its attempt to reduce the economy’s dependence on

petrodollars and to diversify the economy towards value added industries. The

KSA producers procure

natural gas at

USD0.75/mmbtu

6

Page 7: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

government offers natural gas to domestic petrochemical producers at a subsidized

rate of USD0.75/mmbtu through state-owned oil giant, Saudi Aramco. However,

globally producers procure this commodity at spot prices that currently stand at

USD5/mmbtu.

Based on our discussions with industry players, we believe that the natural gas

price of USD0.75/mmbtu will double to USD1.5/mmbtu in the Kingdom by 2012E.

However, even at these revised levels, the price is well below that what is paid by

the global peers. In our view, access to low cost feedstock, higher economies of

scale and logistical advantages arising from proximity to Asian markets give Saudi

Arabian companies a significant advantage over global peers. To further strengthen

their position in the global petrochemical market, Saudi Arabian petrochemical

players are undertaking aggressive capex to expand their capacities and diversify

their product portfolios.

Ethylene: Backbone of the petrochemical value chain Ethylene is the most popular olefin used largely in the production of industrial

chemicals and plastics products. It is an important feedstock for various

petrochemical derivatives — mainly polyethylene and ethylene oxide. Ethylene

derivatives find applications in a wide range of products such as films and sheets,

injection and blow molding, pipes and paints. Ethylene demand closely tracks

economic cycles, given the nature of its end markets.

Exhibit 3: Ethylene finds applications in different products

Ethylene consumption in 2008

HDPE 28%

LDPE 16%

LLDPE 16%

Others 6%

Ethylene Oxide 15%

Ethylene Dichloride 12%

Ethyl Benzene 7%

Source: NIC Prospectus - Jacobs Consultancy HDPE = High density polyethylene: LDPE = Low density polyethylene; LLDPE = Loner low density polyethylene

AGGRESSIVE CAPEX BY ASIAN AND MIDDLE EASTERN PLAYERS TO SHIFT TRADE FLOW

Ethylene production facilities are distributed across the globe. Key producing

regions are North America (accounting for about 27% of production), Asia-Pacific

(31%), Middle East and Africa (16%), and Western Europe (15%). However, Asia

and the Middle East are set to emerge as the global hub of ethylene and its

derivatives, given the capacity additions that are expected to become operational

... global spot price is at

USD4/mmbtu

Middle East and Africa will

represent 24% of global

ethylene capacity by 2012

7

Page 8: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 8

INDUSTRY OUTLOOK

during through 2012. According to BMI, Middle East and Africa will represent 24%

of the 182mn mt of global ethylene capacity by 2012, from close to 12% of the

132mn mt global capacity in 2007.

Exhibit 4: Key ethylene projects announced globally Ethylene capacity in ‘000 mtpa

Announced ethylene cracker projects ('000 tpa) Start date

Qatar

ExxonMobil Chemical/ Qatar Petroleum 1,300 2013-14

Qatar Petroleum/ Honam Petrochemical 1,000 1H-12

UAE

Borouge I & II 3,000 2010-13

Abu Dhabi National Chemicals 1,450 2014

China

Dushanzi Petrochemical 1,000 1Q-10

Kuwait Petroleum/Sinopec 1,000 2012

SABIC/Sinopec 1,000 2H-10

Sinopec Hainan Refining & Chemical 1,000 2011-12

Zhenhai Refining and Chemical Co. 1,000 2Q-10

Fushun Petrochemical 800 2011

Sinopec/SK Corp 800 2012-13

PetroChina Sichuan Petrochemical 800 2011-12

Daqing Petrochemical 600 End 2011

Dow Chemical/Shenhua 600 -

India

Reliance Industries 1,500 Delayed

Essar Gujarat Petrochemicals 1,300 Delayed

ONGC Petro-additions Ltd 1,100 End 2012

GAIL/Oil India/Total 1,000 Post 2012

Indian Oil Corp. 860 Jul-05

Total 21,110

Source: BMI, ICIS, Zawya

Owing to aggressive capex by Saudi firms in recent years, Business Monitor

International (BMI) expects total ethylene capacity in Saudi Arabia to grow around

2.3 times to 18.3mn mtpa by 2012 from about 8mn mtpa capacity in 2008.

Exhibit 5: Announced ethylene projects in Saudi Arabia

Ethylene capacity in ‘000 mtpa

Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

Eastern Petrochemical (Sharq) 1,300 Dec-09

National Chevron Phillips 1,200 2011

PetroRabigh 1,250 4Q-09

Ras Tanura Integrated Petrochemical Co 1,200 2014-15

SEPC 1,010 Jun-09

Saudi Kayan 1,350 2H-10

Yansab 1,300 Jul-09

Total 8,560

As a % of existing ethylene capacity in KSA 106 Source: BMI, ICIS, Zawya

Total ethylene capacity in

KSA expected to grow 2.3x

by 2012

Page 9: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 9

INDUSTRY OUTLOOK

ACCESS TO LOW COST FEEDSTOCK IS A KEY POSITIVE FOR SAUDI PRODUCERS

Raw materials and utilities form a major proportion of the ethylene cash cost

(please see exhibit 6). Naphtha and ethane, the feeds for ethylene crackers, are the

key components of raw material costs. The availability of ethane at the low price of

USD0.75/mmbtu in Saudi Arabia significantly lowers the proportion of raw material

cost in ethylene production, as is evident in the chart below. As a result, the

ethylene production cost of Saudi plants based on ethane feed is close to

USD160/mt, versus USD380/mt for producers using naphtha-feed crackers.

Exhibit 6: Ethane-feed Saudi plants have low feedstock cost versus the West Cost structure breakdown (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SouthKorea(N/E)

China(N/E)

NWEurope

inland (N)

NWEuropecoastal(Na)

US GulfCoast(E/P)

US GulfCoast (NG)

W.Canada(N)

KSA (E)

Raw materials Utilities Fixed costs

Source: MEED N=Naphtha; E=Ethane; P=Propane

MUTE DEMAND GROWTH AND CAPACITY ADDITIONS TO RESTRICT PRICE RECOVERY

North America and North-East Asia are two of the largest consumers of ethylene

globally, accounting for 26% and 25% of total global ethylene demand of 111mn

mtpa in 2008. On the consumption growth front, the Middle East emerged as the

leader with a CAGR of 7.7% in ethylene consumption during 2003-2008, followed

by North-East Asia at 4.5%. Following the modest demand rebound witnessed in 2H

2009, growth in global ethylene consumption is expected to remain muted in 2010e

owing to weak demand from developed countries mitigating the rapid demand

growth in many Middle Eastern and Asian economies.

Sluggish demand and new capacity additions are expected to restrict any significant

increase in global utilization rates in the near-term. However, Middle Eastern and

Asian players are expected to continue to operate at higher rates than their

Western counterparts, given their proximity to the growing end markets. Middle

Eastern firms also enjoy a feedstock cost advantage over their Asian peers.

On the pricing front, ethylene prices averaged USD832/mt in 2009, down 28.8%

YoY, following a 38% YoY dip in oil prices. We expect this to rise to USD1,284/mt in

2010e. Since the majority of total global ethylene capacity is based on naphtha or

ethane procured at market prices, movements in oil prices largely govern the price

movements of ethylene. Nevertheless, given the continued strength in oil prices, we

expect ethylene prices to continue rising in the near-term. However, from a longer-

Movement in oil prices

govern price movements of

ethylene

Page 10: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

term perspective, oversupply concerns weigh heavily on the magnitude of further

recovery. We expect ethylene prices to grow at a CAGR of 5.9% during 2009-

2015E. Our ethylene price forecast is based on anticipated movement in oil prices,

given the strong correlation between ethylene prices and oil prices historically.

Exhibit 7: Ethylene prices (historic and forecasts) USD/mt

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2008 2009 2011E 2012E 2014E 2015E 2017E 2018E

Source: Bloomberg, NCBC Research estimates

Polyethylene Polyethylene is the most commonly used ethylene derivative and finds multiple

applications as it is durable, flexible and chemically resistant. It has two forms –

high density polyethylene (HDPE) and low density polyethylene (LDPE).

Polyethylene mainly finds application in films and sheets followed by injection

molding and blow molding.

High Density Polyethylene (HDPE) This is a high density version of polyethylene and therefore harder, stronger but

less flexible than the low density polyethylene (LDPE). HDPE, given its

specifications, finds uses in products and packaging such as milk containers,

detergent bottles and water pipes to list a few.

Exhibit 8: Applications of HDPE

(%)

Film Grade27%

Pressure Pipe Grade13%

Blow Moulding Medium

14%

Blow Moulding Small26%

Blow Moulding Large20%

Source: Jacob Consultancy, NIC

10

Page 11: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

HDPE SUPPLY DYNAMICS

By geography, North America is the largest producer of HDPE with a market share

of about 25% of total global capacity of about 30mn mtpa in 2008, followed by

North East Asia (22%) and Western Europe (16%). The Middle Eastern region

accounted for 13% of global market share. Following the aggressive capex

undertaken by Middle Eastern players, the region’s total HDPE capacity is expected

to grow 2.6 times to 10mn mtpa by 2012e from 3.9mn mtpa in 2008.

During 2003-2008, global operating rates were higher than 85%, similar to the

strong levels witnessed during 1995-1997. Following the spread of economic

recessionary pressures across the globe, operating rates bottomed out in 2009.

Global operating rates are expected to improve gradually in the coming years

capitalizing on improving demand scenarios; though the pace of recovery is

expected to be slow. Given that operating costs are much lower in KSA and the

region, due to the lower cost of raw materials, we expect KSA producers to operate

at higher average rates than their global peers. Exhibit 9 details the global

production and operating rates historically and our estimates going forward.

Exhibit 9: Global HDPE production and operating rates

Metric tons per annum (millions), unless otherwise stated

0

10

20

30

40

50

60

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

60%

70%

80%

90%

100%

Capacity Production Operating Rate (%)

Source: NIC Presentation - Jacob Consultancy, NCBC Research estimates

HDPE DEMAND DYNAMICS

North-East Asia, North America and Western Europe are the largest consumers, by

geography of HDPE, together accounting for 64% of global consumption of 30mn

mtpa in 2008. During 2003-2008, global HDPE demand had increased at a CAGR of

3.5%, outpacing the growth in capacity of 3.1% during the same period. The

fastest growing geography was the Middle East, which reported a CAGR of 13.8% in

HDPE consumption, followed by North-East Asia at 3.5%. Going forward, we expect

consumption growth in Middle Eastern and Asian countries (mainly China and India)

to remain strong. However, overall HDPE demand is expected to grow at a slower

pace than witnessed historically, given the anticipated weakness in demand from

developed economies.

HDPE PRICING OUTLOOK

The prices of HDPE and LDPE have grown close to 47-77% since the beginning of

2009, driven by the increase in oil and ethylene prices. Going forward, we expect

HDPE and LDPE prices to continue tracking ethylene prices. We project HDPE prices

HDPE capacity in Middle

East expected to grow 2.6x

by 2012e

11

Page 12: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

to grow at a CAGR of 2.6% during 2009-2015E, while LDPE prices are expected to

witness a CAGR of 3.3% during the same period.

Exhibit 10: Polyethylene prices (historic and forecasts) USD/mt

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2005 2006 2008 2009 2011E 2012E 2014E 2015E 2017E 2018E

HDPE LDPE Ethylene

Source: Bloomberg, NCBC estimates

Low Density Polyethylene (LDPE) This is the low density version of polyethylene and therefore less hard, weaker but

more flexible then HDPE. LDPE, given its specifications, finds uses in products and

packaging such as foils, trays, plastic bags, and protective coating on paper and

even in textiles.

Exhibit 11: Applications of LDPE

%

High Clarity Film26%

Cable Insulation Grade6%

Heavy Duty Film13%

Hygienic Film28%

GP27%

Source: NIC Prospectus - Jacob Consultancy

LDPE SUPPLY DYNAMICS

Total global capacity of LDPE was over 22mn mtpa in 2008. By geography, Asia and

Europe were the largest producer of LDPE with a global market share of over 20%

each, followed by North America with a market share of over 10%. Since most of

the new capacities are being developed in the Middle East and Asia, this region’s

contribution to global capacity is expected to increase in the coming years.

Between 2003-2008 global

capacity of LDPE grew at a

CAGR of 2.4%

12

Page 13: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

During 2003-2008, global supply of LDPE grew at a CAGR of 2.4%, outpacing the

growth of close to 1% in global demand during the same period. Going forward, an

expanding capacity base along with slower demand growth is expected to limit the

medium term rise in the producers’ utilization rates.

Exhibit 12: Global LDPE production and utilization rates Metric tons per annum (millions), unless otherwise stated

0

5

10

15

20

25

30

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

60%

70%

80%

90%

100%

Capacity Production Operating Rate (%)

Source: NIC Presentation - Jacob Consultancy, NCBC Research estimates

LDPE DEMAND DYNAMICS

Western Europe, North America and China are the largest LDPE consumers by

geography, together accounting for close to 60% of global LDPE consumption of

19mn mtpa in 2008. In the coming years, LDPE demand is expected to grow at a

slower pace than witnessed historically, given the anticipated weakness in demand

from developed economies which is expected to offset the consumption growth in

Middle Eastern and Asian countries (mainly China and India).

13

Page 14: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

Propylene & Polypropylene

DIVERSIFIED NATURE OF APPLIATIONS

Propylene is the other commonly used olefin which finds application in films and

sheets, blow and injection molding, and fiber manufacturing. Much of the propylene

is converted into derivatives such as polypropylene and propylene oxide.

Exhibit 13: Propylene applications

Propylene consumption in 2008

Polypropylene , 67%

Propylene oxide , 8%

Acry nitrile , 7%

Acrylic Acid , 4%

Others, 14%

Source: Sahara prospectus

Polypropylene is consumed mainly for molding (injection and blow), films, sheets,

and fiber. These applications have a wide use in producing home appliances,

automotive parts, textile fibers and food packaging.

Exhibit 14: Polypropylene applications

Polypropylene consumption

Films & sheets , 22%

Injection Molding, 37%

Blow molding , 9%

Fiber , 24%

Other , 9%

Source: Sahara prospectus

MIDDLE EAST’S NEW FOCUS

About 34% of the total global capacity of 68mn mtpa of propylene was located in

North-East Asia in 2008, followed by Western Europe, home for about 21% of

global propylene capacity. North America accounted for around 20%, while the

Middle Eastern region contributed about 5%. The geographical distribution of

Middle East represents 5%

of global propylene

capacity

14

Page 15: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

polypropylene capacity is similar to that of propylene. Middle Eastern players

account for about 6% of the total global polypropylene capacity of 44mn mtpa.

In the coming years, the Middle Eastern region’s contribution is expected to rise,

given the growing number of propylene and polypropylene projects in the region,

with Saudi Arabia being the front-runner. Key projects include those being

developed by Advanced Petrochemical Company, Alujain, Sahara Petrochemical,

and Petrorabigh. Total capacity of about 3.6mn mtpa each of propylene and

polypropylene is being added in KSA during 2009-2011. Currently, Saudi Arabia has

capacity of 1.8mn mtpa of polypropylene.

Saudi Arabian players procure propane (the main feed for propylene) at a

discounted rate to naphtha prices (which is linked to oil prices). Though this

advantage is less attractive than that of ethylene, the offered discount on procuring

propane keeps production costs lower than global peers. This seems to be driving

the significant investments by Saudi players in increasing propylene and its

derivatives capacity in the Kingdom.

DEMAND DYNAMICS

North-East Asia, North America and Western Europe are the largest consumers by

geography, together accounting for 68% of global polypropylene consumption of

44mn mtpa in 2008. Consumption growth in the Middle East during 2003-2008

stood at 11.5% (CAGR), the fastest amongst all geographies, followed by North-

East Asia, which recorded a CAGR of 5.5%. Going forward, these markets are

expected to continue driving consumption growth. However, on the flip side, weak

demand in developed countries continues to remain a concern.

PRICING OUTLOOK

Propylene prices increased significantly in 2008 and touched a peak of

USD1,748/mt in June 2008. However, intensifying recessionary pressure forced the

prices down to levels of USD400/mt during November 2008. Currently, pricing has

recovered to the USD1,000-1,100/mt range. Polypropylene prices are hovering in

the range of USD1,200/mt.

KSA has a polypropylene

capacity of 1.8mn mtpa,

which should grow to 5.4

mtpa by 2011

Exhibit 15: Propylene supply surplus

Surplus/shortage (mn mt)

-1.0

-0.5

0.0

0.5

1.0

1.5

2003 2004 2005 2006 2007 2008

Source: National Petrochem prospectus

15

Page 16: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY OUTLOOK

Evident in exhibit 15, the propylene surplus has gradually increased in recent years

as supply grew at a CAGR of 3.0% during 2003-2008, outpacing the consumption

growth of 2.9% during the same period. The increased focus of Middle Eastern

petrochemical players on propylene is set to further disturb the equilibrium between

demand and supply amidst anticipated demand weaknesses in the near to medium-

term. We project propylene prices to increase at a CAGR of 4.9% during 2009-

2015E, slower than the price recovery in ethylene. Polypropylene prices are

expected to track the trend followed by propylene and expand at a CAGR of 4.1%

during the same period.

Exhibit 16: Propylene and polypropylene prices (historic and forecasts) USD/mt

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

Propylene Polypropylene

Source: Bloomberg, NCBC Research estimates

16

Page 17: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Oil: Correlation & pricing Petrochemicals are dependant on oil Crude oil and natural gas are primary feedstock for hydrocarbons like ethane and

propane, and hence, they have a strong bearing on the prices of petrochemicals.

Price hikes in crude oil and natural gas during the last decade resulted in high

petrochemical prices. This in turn boosted the prices of downstream products,

including polymers and plastics. The US Henry Hub natural gas prices rose to an

average of USD6.95/mmbtu in 2007 from USD4.23/mmbtu in 2000 and WTI crude

oil prices jumped to an average of USD72.30/brl from USD30.37/brl over the same

period. Consequently, during 2001-2007, ethylene prices increased approximately

156% and propylene prices grew by about 176% and boosted prices of

petrochemical derivatives during 2001-2007, reflecting in the prices of plastics and

polymer.

The uptrend in crude oil and natural gas prices was interrupted in 2H08, as

consumption declined amid the global economic crisis. Consequently, petrochemical

prices also dropped as feedstock prices declined. Prices for the key building blocks

of petrochemical products – ethylene and propylene – collapsed significantly during

the same period. Ethylene and propylene prices declined in the range of 65–75%

between July 2008 and December 2008. Petrochemical prices have since recovered,

attributable to the improving demand scenario but more strongly attributable to the

increase in the price of oil.

Exhibit 17: Petrochemicals prices and oil price correlation

Ethylene (USD/mt) and oil price (USD/barrel)

0

200

400

600

800

1000

1200

1400

1600

1800

0 20 40 60 80 100 120 140 160

Correlation : 0.87

Source: Bloomberg

NCBC oil forecast Oil plays a large part in the outlook of both petrochemical prices and petrochemical

stocks. The correlation between oil prices and the Petrochemicals sector has been

very strong over the past 1.5 years and at times ranging between 80-90%. Oil

demand and supply scenarios are the key factor instrumental in shaping oil price

trends. Unusually cold weather in Western regions supported oil demand in January

and in turn the crude oil price touched USD87 per barrel. Though this level shows a

strong rebound of 177% from its lows of December 2008, it is around 60% the

level of its highs of July 2008.

Correlation between oil

prices and the

petrochemical sector

ranges between 80-90%

17

Page 18: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 18

OIL: CORRELATION AND PRICING

In 2010, global oil demand is expected to average 86.6mn barrels per day, up

1.88% YoY, primarily driven by growth in Asian economies as oil demand from

OECD countries is expected to remain weak, according to IEA. On the supply front,

non-OPEC oil supply is expected to marginally grow by 0.3% YoY to 51.8mn barrels

per day in 2010, while OPEC kept its output quotas unchanged in its latest meeting.

However, output from OPEC members increased to 29.2mn barrels per day for the

first time, on YoY basis, in the month of February 2010 since October 2008.

We use our NCBC Economics team’s oil price assumptions for our estimates. With

stabilizing supply and anticipated demand recovery, oil prices are projected to

average USD81 per barrel in 2010e, up 20.5% YoY. However, further substantial

increases in oil prices seem difficult to achieve in the near-term, given the

uncertainty in the global economic recovery and the availability of capacity, which

indicate the presence of some downside risks. Nevertheless, in the long run, oil

prices are expected to range between USD85-90 per barrel during 2011-2012e and

gradually rise to USD80 per barrel by 2015e, as the economic scenario improves.

Exhibit 18: Oil price – historic and forecast USD/brl

0

25

50

75

100

125

150

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

2016E

2017E

2018E

Source: NCBC Economic Research estimates

Saudi petrochemical sector closely tracks oil price movement The performance of the TASI Petrochemical sector is very strongly correlated with

oil. We can observe from exhibit 19 that the correlation increased during the recent

economic crisis as it reached above 80% and despite a recent decline, is still in the

70% range. Recent increases in oil prices to above the $85 per barrel range has

driven a spike in the Petrochemical sector, which is now up over 30.6% YTD. While

economic fundamentals look to be improving, we caution that the current rally in oil

prices may not be sustainable as our outlook for 2010e calls for an average price of

$81 per barrel, implying a drop in oil prices in the coming quarters is possible.

Assuming correlations remain high, any drop in oil prices could negatively impact

the Petrochemical sector.

In addition, we note that further strength in oil prices could continue to drive the

Petrochemical sector higher. Stronger oil prices would imply stronger petrochemical

prices which would lead to stronger revenues and earnings for companies in the

Page 19: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

OIL: CORRELATION AND PRICING

sector. However, we also note that unless long-term fundamentals change, we

would not expect current volatility in oil prices to materially impact our long-term

oil price and petrochemical price assumptions. These assumptions drive our long-

term fundamental outlook for our companies and thus our underlying valuations.

Therefore, while any further current strength in oil prices may drive petrochemical

stocks higher, on a fundamental basis, valuations may begin to be stretched.

Exhibit 19: Petrochemicals sector and oil price correlation

Oil and Petrochemical sector weekly changes rebased to 100

0

50

100

150

200

250

Jul-07 Oct-07 Feb-08 May-08 Sep-08 Dec-08 Apr-09 Jul-09 Nov-09 Mar-10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Oil (LHS) Petrochem Sector (LHS) 1 Year Rolling Correlation

Source: Bloomberg, NCBC research

Scenario analysis based on change in oil prices Given that prices of petrochemicals are largely impacted by changes in the price of

oil, we study the relationship between the movement in oil prices and the historical

movement in petrochemical prices. Based on this understanding, we derive

petrochemical prices for the coming years and evaluate changes in the target stock

price (derived from our DCF valuation) in tandem with the movement in oil prices

(refer to Exhibit 20). In our analysis, we have assumed a per barrel oil price for the

terminal year as USD75. This highlighted column is our base case forecasts where

we assume that oil will remain at our estimated levels. We have then assumed

different scenario’s wherein oil decreases by 10-20% and increases by 10-20% for

the entire forecasting horizon.

19

Page 20: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

OIL: CORRELATION AND PRICING

Exhibit 20: Scenario analysis for oil movement in the range of $60-90/brl

SRmn, unless otherwise stated

Oil’s impact on our terminal year base case forecasts

↓20% ↓10% $75/brl ↑10% ↑20%

Tasnee

Revenue 14,643 15,683 16,462 17,242 18,281

Net Income 1,319 1,399 1,459 1,519 1,599

Valuation (SR) 35.7 38.2 40.0 41.8 44.1

Current price (SR) 35.0 35.0 35.0 35.0 35.0

Upside/(downside) from current (%)

2.1 9.0 14.2 19.3 26.1

Sipchem

Revenue 2,774 3,142 3,418 3,694 4,062

Net Income 430 627 774 921 1,117

Valuation (SR) 15.2 23.4 29.4 35.5 43.6

Current price (SR) 24.7 24.7 24.7 24.7 24.7

Upside/(downside) from current (%)

(38.3) (5.4) 19.1 43.6 76.3

Yansab

Revenue 7,219 8,468 9,404 10,341 11,589

Net Income 2,027 2,382 2,647 2,913 3,268

Valuation (SR) 36.3 44.5 50.7 56.9 65.1

Current price (SR) 48.8 48.8 48.8 48.8 48.8

Upside/(downside) from current (%)

(25.7) (8.8) 3.9 16.5 33.4

Sahara

Revenue 2,391 2,886 3,257 3,628 4,123

Net Income 706 832 927 1,021 1,147

Valuation (SR) 20.0 24.1 27.2 30.3 34.5

Current price (SR) 24.45 24.45 24.45 24.45 24.45

Upside/(downside) from current (%)

(18.4) (1.4) 11.4 24.1 41.1

PetroChem

Revenue 5,901 6,874 7,606 8,339 9,319

Net Income 709 881 1,011 1,141 1,316

Valuation (SR) 8.0 12.4 15.8 19.3 23.9

Current price (SR) 18.7 18.7 18.7 18.7 18.7

Upside/(downside) from current (%)

(57.2) (33.3) (15.1) 3.2 28.0

Saudi kayan

Revenue 10,987 12,995 14,501 16,007 18,015

Net Income 2,834 3,203 3,480 3,757 4,126

Valuation (SR) 16.9 18.9 20.3 21.8 23.8

Current price (SR) 22.4 22.4 22.4 22.4 22.4

Upside/(downside) from current (%)

(24.7) (15.8) (9.2) (2.5) 6.4

Source: NCBC Research estimates

20

Page 21: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Industry financials

Revenue outlook We expect revenue in 2010E to increase to SR29bn from SR11.7bn in 2009 for the

six stocks we look at in this note. The drivers for this revenue growth include the

start of production at two of the companies, an increase in volumes produced, as

well as improving prices of petrochemicals. Out of the six stocks detailed in this

report, Sipchem and Tasnee reported operating revenues in 2009. For 2010e

Yansab and Sahara are expected to see revenues however Saudi Kayan is not

expected to report revenues until 2011e and Petrochem until 2012e.

Exhibit 21: Sector and petrochemical players revenue

SRmn

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

Tasnee 10,863 17,123 17,506 18,288 18,107 18,949 18,354

Sipchem 830 2,817 3,741 3,911 3,565 3,665 3,405

Yansab 0 7,652 9,966 10,314 10,274 10,157 9,925

Sahara 0 1,467 2,922 3,063 4,772 4,473 4,109

Petrochem 0 0 0 5,932 8,721 8,191 7,579

Saudi Kayan 0 0 12,134 16,773 16,677 15,653 14,456

Total 11,693 29,059 46,269 58,281 62,116 61,088 57,828

Source: Companies, NCBC Research estimates

From the six companies we look at in this note, we expect Saudi Kayan to report

the highest absolute growth in revenue during 2010E-14E, increasing by SR15.6bn.

Sipchem is expected to witness the lowest absolute growth with SR0.96bn for the

same period.

Exhibit 22: Sector and petrochemical players revenue growth

%

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

Tasnee 8.2 57.6 2.2 4.5 (1.0) 4.6 (3.1)

Sipchem (51.0) 239.0 33.0 5.0 (9.0) (3.0) (7.0)

Yansab n/a n/a 30.2 3.5 (0.4) (1.1) (2.3)

Sahara n/a n/a 99.2 4.8 55.8 (6.3) (8.1)

Petrochem n/a n/a n/a n/a 47.0 (6.1) (7.5)

Saudi Kayan n/a n/a n/a 38.0 (1.0) (6.0) (7.6)

Average (%) (21.4) 148.3 41.2 11.2 15.2 (3.0) (5.9)

Source: Companies, NCBC Research estimates

21

Page 22: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 22

INDUSTRY FINANCIALS

Margins and profitability forecasts

Gross Margins benefit from low cost feedstock We expect Saudi petrochemical producers to continue to benefit from the access to

low cost feedstock from Saudi Aramco. Sourcing natural gas at a subsidized

USD0.75/mmBtu, Saudi Arabian ethane-feed crackers can produce ethylene at an

estimated USD160/mt compared with over USD380/mt from producers in the West

which use naphtha-feed crackers. This provides Saudi petrochemical players a

substantial cushion to absorb price declines and weakness in demand and generally

offers a floor on ethylene pricing beyond which global peers would quickly become

loss making.

Our gross margin forecasts for these companies ranges from 34% to 44% through

2015e, with the average peaking at 44% in 2010E. The difference in gross margins

for the companies depends mainly on the product area they are focusing on, as well

as the feedstock used (and subsequent cost advantages). The gross margins for

these companies compares to a range of 10% to 20% which is generally expected

for global competition in Asia and the West.

EBITDA and Net margins We expect EBITDA margins to range between 30%-33% during 2011E-14E for the

six companies under coverage. Amongst them, Sipchem has the highest EBITDA

margins for 2010E while Tasnee has the lowest. Despite the improving demand

outlook, the supply build-out is expected to outpace demand and limit the pace of

price recovery and therefore limiting the pace of margin expansion. We therefore

expect margins to witness limited growth post 2014E.

Exhibit 23: Covered petrochemical players margins

%

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

Tasnee EBITDA 22.9 29.0 27.2 25.3 24.7 23.3 23.3

Net 4.8 8.9 8.1 7.4 7.2 7.2 7.2

Sipchem EBITDA 39.5 61.1 60.6 54.6 52.9 51.2 49.0

Net 17.0 30.9 31.3 27.3 25.4 24.6 22.5

Yansab EBITDA n/a 52.6 44.4 44.2 44.6 44.7 45.0

Net n/a 39.1 30.3 31.5 31.5 31.6 31.8

Sahara EBITDA n/a 34.0 33.9 33.9 33.7 33.7 34.2

Net n/a 44.2 29.6 28.5 26.3 25.7 25.4

Petrochem EBITDA n/a n/a n/a 35.6 35.4 35.2 35.1

Net n/a n/a n/a 15.3 12.4 11.5 10.7

Saudi Kayan EBITDA n/a n/a 33.3 33.0 33.7 33.8 34.0

Net n/a n/a 18.8 19.4 19.7 18.8 17.8

Average of covered stocks EBITDA 31.2 35.8 33.2 31.5 31.2 30.7 30.3

Net 10.9 19.8 17.8 17.2 16.8 16.5 15.9

Source: Companies, NCBC Research estimates

Page 23: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY FINANCIALS

1Q 2010 financial performance The recently reported 1Q 2010 earnings came in very strong across the six

companies in this report when compared on a QoQ and a YoY basis. In 1Q 2009

total net income for the six companies in this report came out as a loss of

SR33.3mn and improved substantially to SR742.2mn in 1Q 2010. Total operating

income for 1Q 2009 stood at SR4mn while 1Q 2010 stood at SR1,293.8mn.

Overall improvement was driven by significant increases in petrochemical prices.

On a YoY basis, ethylene prices have increased 97%, while polyethylene prices

witnessed growth of 56.7%. Similarly, propylene and polypropylene prices

increased by 135.8% and 46.4% respectively.

TASNEE

Higher petrochemical prices positively impacted Tasnee’s 1Q 2010 results along

with the SEPC production. The net loss of SR26mn in 1Q 2009 was due to a

maintenance shutdown in the SPC plant and additional expense related to the SEPC

expansion.

SIPCHEM

Higher petrochemical prices positively impacted Sipchem’s 1Q 2010 results. Net

income improved 178% YoY and 43.7% QoQ. The average prices of Methanol

(accounting for 94% of Sipchems production) during 1Q10 stood at USD313/mt,

62% higher than that of USD193/mt in 1Q09

YANSAB

The start of commercial operations at the petrochemical complex positively

impacted its 1Q 2010 results as it was the first quarter for Yansab to have

revenues. Yansab reported net income of SR259mn for 1Q 2010 versus a net loss

of SR8.2mn for 1Q 2009.

SAHARA

The operating loss in 1Q 2010 is due to the pre-operational status of the Al Waha

plant as it is still in trial runs. The reason behind the rise in its net income was

primarily due to the income from the SPEC plant (which falls under ‘investment

from associates’ in the income statement).

PETROCHEM

The plants are in currently in pre-operational stage and under construction which

are the primary reasons behind reporting losses in 1Q 2010 of SR43mn.

SAUDI KAYAN

The plants are in currently in pre-operational stage which is the primary reason

behind reporting losses in 1Q 2010 of SR3.8mn. The company is still reporting zero

operating income.

23

Page 24: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

INDUSTRY FINANCIALS

Exhibit 24: Covered petrochemical players earnings summary

SRmn unless otherwise stated

Company 1Q 2009 4Q 2009 1Q 2010 QoQ (%) YoY (%)

Tasnee Operating income 12.5 606.7 856.1 41.1 6,748.4

Net income (26) 215.6 332.8 54.4 na

Sipchem Operating income 5.6 122.8 134.6 9.6 2,303.0

Net income 29.2 56.5 81.2 43.7 178.1

Yansab Operating income 0 0 310.0 n/a n/a

Net income (8.2) (7.3) 259 n/a n/a

Sahara Operating income (13.1) (8.8) (3.6) n/a n/a

Net income (14.1) 52.9 116 119.4 n/a

Petrochem Operating income (1.0) (4.8) (3.3) n/a n/a

Net income (7.9) (20.9) (43.0) n/a n/a

Saudi Kayan Operating income 0 0 0 n/a n/a

Net income (6.3) (0.4) (3.8) n/a n/a

Total Operating income 4.0 715.9 1,293.8 80.7 32,245

Net income (33.3) 296.4 742.2 150.4 n/a

Source: Companies, NCBC Research estimates

24

Page 25: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Key assumptions Utilization rate estimates We expect utilization rates of all the plants, which are already in operation, to run

at 100% during 2010. Utilization rates are then expected to decrease from 2014 in

line with over supply concerns and cyclical factors. Plants which are to commence

operations will gradually ramp up their utilization rates. Details of Yansab’s lower

utilization rate assumptions are discussed in detail in the company section on page

31 of this report.

Exhibit 25: Sector and petrochemical players average utilization rates

%

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

Tasnee 99 99 100 100 93 90 87

Sipchem 107 94 100 100 100 95 90

Yansab - 93 93 93 93 93 93

Sahara - 91 100 100 100 95 90

Petrochem - - - 90 100 95 90

Saudi Kayan - - - 100 100 95 90

Average 103 94 99 97 98 94 90

Source: Companies, NCBC Research estimates

Oil and petrochemical price estimates We expect average petrochemical prices to improve in 2010e on a YoY basis

benefiting from rising oil prices and improved demand. We expect the uptrend in

petrochemical prices to continue until 2013e, however declining gradually

thereafter as capacity build-outs begin reaching the market, outpacing demand

growth. We expect ethylene prices to fall by 1.2% in 2014e (on YoY basis) after

peaking at SR4,662/mt in 2012e.

The exhibit below provides the trend for average selling prices of key products for

the six companies we look at in this note. We expect prices to stay in a range as it

becomes increasingly difficult to achieve a strong recovery in prices given

increasing capacity and soft demand growth.

Exhibit 26: Oil and petrochemical price outlook

SR/mt, unless otherwise stated

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

WTI Prices ($/bbl) 61.7 80.6 85.0 90.0 85.0 85.0 80.0

Naptha 1,787 2,674 2,799 2,929 2,852 2,811 2,693

Ethylene 2,656 4,434 4,550 4,662 4,563 4,506 4,348

HDPE 4,066 4,912 5,165 5,294 5,258 5,196 5,071

LDPE 4,146 5,547 5,627 5,691 5,639 5,570 5,437

LLDPE 4,041 5,147 5,256 5,333 5,288 5,224 5,098

PE 3,591 4,571 4,923 5,034 5,014 4,959 4,856

Propylene 2,822 4,337 4,477 4,618 4,507 4,448 4,287

PP 3,866 4,882 5,241 5,422 5,357 5,288 5,139

Methanol 843 1,170 1,258 1,298 1,287 1,275 1,246

Acetic Acid 3,400 4,715 5,070 5,233 5,189 5,138 5,023

Vinyl Acetate 4,039 5,602 6,023 6,217 6,165 6,104 5,968

TiO2 8,719 9,591 10,182 10,810 11,477 12,185 12,185

Source: Companies, NCBC Research estimates

25

Page 26: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Valuation We used the following methodologies to arrive at our valuations for each of the

companies in this report.

Weighted Average Cost of Capital (WACC) Our valuation is based on the following assumptions:

Cost of Equity (CoE): We have taken the US 10-year Treasury yield of 3.81% (as

of April 2010) as the risk-free rate, as the Saudi Riyal is pegged to the US dollar.

The company’s adjusted beta (weekly returns since 1 January 2007 compared with

the Saudi’s TASI) is then used. We assume an equity risk premium of 8.04% for

Saudi Arabia which includes a 1.35% premium for the country risk associated with

Saudi Arabia.

Tax-adjusted cost of debt: We take the cost of debt for each stock and then

adjust for Zakat.

Using the above assumptions, we arrive at the appropriate WACC for each stock.

Discounted cash flow model We first prepare Free Cash Flow (FCF) estimates out to 2017. Given the cyclicality

of the sector, the eight-year explicit forecast period covers one business cycle. We

then use a terminal growth assumption of 2.5% and discount the cash flows using

the WACC. We then arrive at the estimated enterprise value of the company,

further adjust for debt, cash, and other payments to derive the equity value and

target price for each company.

Sum of the parts (SOTP) based DCF For evaluating Sahara’s business, we have constructed separate DCF valuations for

its projects – Al Waha, ACVC, SAMC (including SAP) and SEPC. We then follow the

same methodology used in the above DCF explanation.

A range of valuations offers opportunities The end result of our valuation exercises results in a range with significant upside

for Tasnee (upside of 14.2%) and Sipchem (upside of 19.1%), which we rate as

Outperform, and significant downside for Petrochem (downside of 15.1%), which

we rate as Underperform. The current levels for Yansab, Saudi Kayan and Sahara

look reasonable on this basis and we thus rate them as Neutral.

In general, we favor companies with a track record of production and

revenue/profitability generation. Constructing and starting operations at the

massive facilities which are going on stream in the country is an extremely complex

operation with inevitable delays. While we have been conservative in our

assumptions for start of operations at the companies which are not yet in

production, further delays are possible, which would impact the valuations. In

addition, we note that valuation levels for companies which have not yet started

operations seem to us to be high in general given uncertainties on timing and

ultimate production/profitability levels.

26

Page 27: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR 27

VALUATION

Exhibit 27: Valuation overview 2010

SRmn, unless otherwise stated

Company Market cap (SRmn)

% of Market free float

P/E 2010E

Dividend yield (%)

P/BV 2010E

Tasnee 16,124 0.37 9.5 3.0 1.7

Sipchem 8,233 0.28 10.1 4.2 1.5

Yansab 27,450 1.10 10.9 0.0 3.2

Sahara 7,152 0.53 29.0 0.0 2.0

Petrochem 8,952 1.72 n/a 0.0 1.2

Saudi Kayan 33,600 1.49 n/a 0.0 1.9

Source: Companies, NCBC Research estimates

Dividend yield Amongst the six stocks, we expect Saudi Kayan to report the highest dividend yield

of 4.5% from 2012e onwards. On the other hand, we do not expect Sahara and

Petrochem to pay a dividend during our forecast period. Amongst the four stocks

producing in the years prior to 2012, we expect Sipchem to offer the highest

dividend yield of 4.0%. With regards to Yansab we expect it to benefit from good

timing of commencement which builds comfortable cash reserves benefiting from

improving demand and sustained growth in petrochemical prices.

These dividend yields compare to the average for companies in the Saudi market of

around 3.4%. We note that the higher dividend yielding stocks in the Petrochemical

space, such as Sipchem, look interesting as they can be seen both as dividend

plays, as well as growth stocks given the production expansion they are seeing.

Exhibit 28: Petrochemical company dividend yields

Units %

Company 2009 2010E 2011E 2012E 2013E 2014E 2015E

Tasnee 2.1 2.9 2.9 2.9 2.9 2.9 2.9

Sipchem 4.0 4.0 4.0 4.0 4.0 4.0 4.0

Yansab 0.0 0.0 2.0 2.0 2.0 2.0 2.0

Sahara 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Petrochem 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Saudi Kayan 0.0 0.0 0.0 4.5 4.5 4.5 4.5

Source: Companies, NCBC Research estimates

Risks We believe one issue to keep in mind when investing in shares in the sector is the

sometimes complicated shareholding structures. We note that some of the

companies are essentially production facilities which serve larger entities such as

SABIC. Here, Yansab and Saudi Kayan fall into this category as most or all of their

output is marketed and sold through SABIC and many senior members of the

company managements are either currently or formerly affiliated with SABIC. While

we would like to believe that all management decisions are taken in the best

interests of each of the companies, there inevitably may be conflicts between

industrial shareholders and minority (public) shareholders which we believe could

impact the value for minority (public) shareholders. In our valuation analysis, we

have not incorporated the risks of such actions.

Page 28: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

Company Profiles Initiation and review of stocks

Page 29: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE

Sahara Petrochemicals

Neutral Looking forward to Al Waha production

Target Price (SR) 27.2

Current price (SR) 24.5

Potential upside (%) ↑ 11.4

Stock details

52-week range H/L (SR) 26/13

Market cap ($mn) 1,910

Shares outstanding (mn) 293

Listed on exchanges TADAWUL

Price perf (%) 1M 3M 12M

Absolute 9.9 23.2 91.8

Rel. to market 8.5 13.0 65.1

Avg daily T/o (mn) SR US$

3M 41.2 11.0

12M 32.0 8.5

Reuters code 2260.SE

Bloomberg code SPCO AB

Website www.saharapcc.com

Valuation multiples

09 10E 11E

P/E (x) 70.1 11.9 9.9

P/B (x) 1.8 2.0 1.7

EV/EBITDA (x) n/a 15.1 8.1

Div yield (%) 0.0 0.0 0.0

Source: NCBC Research estimates

Share price performance

0

5

10

15

20

25

30

Mar-09 Sep-09 Mar-10

4000

5000

6000

7000

8000

Sahara TASI (RHS)

Source: Bloomberg

Sahara Petrochemicals Co. (Sahara) has one operational plant, one

coming on-stream in 2Q 2010 and a further three set to commercialize

operations in 2013. Despite the diversified product mix, dependence on

limited production restricts its prospects in the near term. We initiate

coverage on Sahara with a Neutral rating and target price of SR27.2.

SEPC is the only income generator for now…: SEPC (Sahara’s 24.41%

owned associate) went commercially active in July 2009 and added

SR148.2mn to Sahara’s 2009 bottom line by way of income from associates.

We expect Sahara’s 2010 results to benefit from SEPC’s full year contribution

as well as an improving demand outlook and stronger petrochemical prices.

…Until the Al Waha plant begins commercial operations in 2Q 2010:

This plant will not only add 450,000 mt of polypropylene annually to Sahara’s

production, but will also bring in revenue to the company for the first time. Al

Waha will remain the only source of revenue for Sahara until the other plants

commercialize operations in 2013. Management has assured us of the start

date and we are confident in their ability to meet it.

• SAMC, ACVC and SAP plants to start in three years: These plants, which

are in the pipeline, will source feedstock from Sahara’s existing facilities – Al

Waha and SEPC. However, we do not expect these three plants to be

commercially operational before 1Q13, when they will add 755,000 mtpa in

capacity and SR269.4mn in estimated net income. Hence, on-time

commencement of Al Waha is crucial for Sahara’s valuation.

• Diverse product mix a long-term play: Once all of Sahara’s facilities are up

and running, the company will have amongst the most diverse product

portfolios in the sector with a range of ethylene derivatives, superabsorbent

polymers, and acrylates. However, Sahara will be benefiting from this diverse

mix only from 2013 onwards when the all the plants are operational.

• Valuation: Sahara trades at a 2009 P/BV multiple of 1.8x (sector average:

2.9x and TASI: 2.2x). Our DCF analysis results in a valuation of SR27.2/share.

However, with only two operational product lines, we believe Sahara may be

limited in its ability to benefit from the improving demand and pricing outlook

in the near term. We initiate coverage on Sahara with a Neutral rating and a

target price of SR27.2, representing 11.4% upside.

Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 0 1,242 2,358 2,440 3,757

EBITDA SR mn (39) 474 887 907 1,343

EBITDA margin % n/a 38.2 37.6 37.2 35.7

Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627

Net income SR mn 76 601 723 706 975

Net margin % n/a 48.4 30.7 28.9 26.0

EPS SR 0.35 2.05 2.47 2.41 3.33

Assets SR mn 5,956 7,396 8,451 9,297 10,707

Equity SR mn 2,938 3,539 4,263 4,969 5,944 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 30: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

Investment scenarios Valuation can increase significantly with higher prices, lower cost and better operating rates

Historical and expected price performance

2.383.46

3.272.38

3.453.72

27.2

36.8

18.1

0

7

14

21

28

35

SO

TP B

ear

case

WAC

C incr

ease

s by

1%

Pri

ces

decl

ine

by

3%

Cost

ris

es

by

3%

DCF

Base

case

Utiliz

ation g

row

by

5%

Cost

reduce

s by

3%

Pric

es

gro

w b

y 3%

SO

TP B

ull

case

(SR)

36.8

18.1

27.2

0

8

16

24

32

40

Apr-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11

Historical Price Performance Price Target

Scenario analysis

Source: NCBC Research estimates Source: NCBC Research estimates

Investment view DCF scenarios

• Price

target:

SR 27.2

• Weighting of DCF is 100%

• DCF bull

case:

SR 36.8

• Assuming higher prices and higher

utilization rates due to a faster demand

recovery. Also, assuming lower costs

resulting in better margins. This would

result in net income of SR683.3mn in 2010e

and SR1,065.6mn in 2014e.

• DCF base

case:

SR 27.2

• We expect operating rates and prices to

improve gradually in the coming years.

However, aggressive capacity additions are

expected to outpace the demand recovery

thus denting operating rates and prices

from 2014e onwards. We assume net

income of SR600.9mn in 2010e and

SR892.4mn in 2014e.

• Al Waha, the only revenue until 2013: In 2Q10, the Al

Waha plant, with capacity to produce 450,000 mt of

polypropylene, will start commercial operations. It will be

the only source of revenues until 2013, when the other

plant, ACVC, commence operations.

• SAMC, ACVC and SAP projects to remain under-

construction until 2013: The SAMC, ACVC and SAP plants

are not expected to start commercial operations before

2013. Once operational, these plants will add 755,000mtpa

capacity of varied petrochemical products, resulting in a

38.2% YoY jump in Sahara’s net income in 2013e.

• Benefits of a diversified product mix is a long run

positive: Sahara’s product mix will be diversified with the

inclusion of acrylates and superabsorbent polymers along

with ethylene and propylene derivatives. These products

offer different end uses thus enabling Sahara to benefit

from demand diversity in the long run, though limited

revenue streams cloud its near term outlook.

• Valuation: Despite integrated product flow and diversified

product mix strengthening Sahara’s long term outlook, we

believe limited capacity restricts its near term ability to

leverage the improving market scenario in terms of

petrochemical demand and prices. We, therefore, initiate

coverage on Sahara with a Neutral rating and a target price

of SR27.2, representing an upside of 11.4%.

• DCF bear

case:

SR 18.1

• Lower prices and higher costs due to higher

than expected revision in feedstock prices.

Also, a one percentage point increase in

WACC. Net income of SR557.2mn in 2010e

and SR787mn in 2014e.

Potential catalysts Investment risks

• Earlier then expected start in production: If Sahara

commences operations at its SAMC and ACVC plants earlier

then our estimated 2013, this would act as a positive trigger

to the stock as well as earlier reporting of profits and

revenues for these plants.

• A quick recovery in global economic growth would drive

demand and prices, and result in higher operating rates.

• Any delays in commencement of the Al Waha plant from its

expected May start of commercial operations.

• Any delays in commencement of the SAMC, ACVC and SAP

plants from the expected 1Q 2013 start.

• Higher then expected rise in feedstock prices could dent

profitability

• Once operational, anti dumping claims by Asian traders

could burden Sahara’s cost structure

30

Page 31: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

Investment view AL WAHA PLANT STARTING IN 2Q10, WITH SAMC, ACVC AND SAP PLANTS FOLLOWING IN 2013

The Al Waha plant started its trial runs in May 2009 however Sahara will not be

reporting revenue until 2Q10 when the plant commercializes its operations. The

only income that Sahara has been earning to date is from the SEPC plant (24.41%

owned by Sahara) which falls under the “Investment from associates” line in the

income statement. Management has assured us the operations at Al Waha will

commercialize by 2Q 2010 however we have incorporated it as June in our

forecasting. The Al Waha plant will be adding 450,000 mt of polypropylene annually

to Sahara’s production and will be the only source of revenue until the ACVC plant

commercialize their operations in 1Q 2013.

Sahara’s next milestones after the Al Waha plant, is the Saudi Acrylic Monomers

Company (SAMC), the Superabsorbent Polymers Project (SAP) and the Arabian

Chlor Vinyl Company (ACVC). All three projects will internally source feedstock from

Sahara’s existing facilities. We expect these plants to be commercially operational

by 2013 at which point they will be adding 755,000mtpa in annual capacity.

Management has indicated that these plants will begin commercial operations by

4Q 2012 however we have incorporated it as 1Q 2013 in our forecasting.

…OFFERING A DIVERSE PRODUCT MIX

The SAMC, ACVC and SAP plants will provide Sahara with a diverse product portfolio of

not only ethylene and its derivatives, but also commodity acrylates, superabsorbent

polymers and caustic soda. The uses of ethylene and its derivatives are discussed in

detail on page 7 in the ‘Industry outlook’ section of this report. Acrylates are primarily

used in printing inks, textiles, plastic additives and sealants. Superabsorbents are

primarily used in disposable hygiene products, which include baby diapers and feminine

hygiene, as well as liquid absorbent pads in packaged meat and in water-blocking

tapes. Caustic soda is more of an industrial product as it is used as a chemical base in

manufacturing paper, soap detergents and drain cleaners.

Risks to our view

AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES

Sahara Petrochemicals procures natural gas from Saudi Aramco at an attractive

price of USD0.75/mmbtu under long term contracts. However, we believe an

increase in the medium-term is possible and assume that for others in the sector,

gas prices will rise to USD1.5/mmBtu in 2012e. We have incorporated the rise in

price from 2012e for ethane and 2011e for propane in projecting Sahara’s future

cash flows. An earlier change in contractual prices and volumes of feedstock would

erode Petrochem’s cost advantage and impact earnings.

DELAYS IN COMMENCEMENT OF PLANTS

Prior to commencement of the Al Waha plant, Sahara will not be reporting

revenue’s and when the plant does commence commercial operations, it will be the

only source of revenue until ACVC joins in 1Q 2013. Any delay in the start of these

four plants beyond our expected dates would act as a negative trigger to the stock

both in terms of news and earnings impact.

31

Page 32: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

Valuation: SR27.2/share

Valuation methodology We have used Sum-of-the parts (SOTP) based DCF methodology to arrive at our

target price for Sahara.

Cost of Equity (COE) of 12.7%: We have taken the US 10-year Treasury yield of

3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to

the US dollar. The company’s adjusted beta (weekly returns since 1 January 2007

compared with Saudi’s TASI) is 1.10. We assume an equity risk premium of 8.04%

for Saudi Arabia which includes a 1.35% premium for the country risk associated

with Saudi Arabia.

Tax-adjusted cost of debt of 4.4%: The cost of debt for Sahara is assumed to

be 4.5%. After adjusting it for tax rate, cost of debt equals 4.4%.

Using the above assumptions, we arrive at a WACC of 10.2%.

SUM-OF-THE PARTS (SOTP) BASED DCF

For evaluating Sahara’s business, we have constructed separate DCF valuations for

its projects – Al Waha, ACVC, SAMC (including SAP) and SEPC. We first prepare a

detailed free cash flow (FCF) estimate for eight years from 2010 to 2017. Given the

cyclicality of the sector, the eight-year explicit forecast period covers one business

cycle. We then use a terminal growth rate of 2.5% and discount the cashflows

using the WACC of 10.20%. This is further adjusted for debt, cash and other

payments to derive Sahara’s equity value and target price.

Exhibit 36: Sahara - Details of SOTP Valuation

In SR mn, unless otherwise specified

Sahara’s stake(%)

Al Waha project 75.0 3,843

ACVC project 50.0 405

SAMC (incl. SAP) project 32.4 421

SEPC project 24.4 2,718

Total 7,003

Add: cash & cash equivalent 975

Less: end of services indemnities (14)

Equity value 7,965

No. of shares 293

Target price 27.2

Source: Company, NCBC Research estimates

The table below indicates the impact of changes in WACC as well as terminal

growth rate on the SOTP target price.

Exhibit 37: Sensitivity of valuation to WACC and terminal growth

Terminal growth rate (%)

1.5 2.0 2.5 3.0 3.5

8.2 34.1 36.5 39.2 42.4 46.4

9.2 28.8 30.4 32.3 34.5 37.1

10.2 24.6 25.8 27.2 28.8 30.6

11.2 21.3 22.2 23.3 24.4 25.8

WA

CC

(%

)

12.2 18.5 19.3 20.1 21.0 22.0

Source: NCBC Research estimates

32

Page 33: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

Company description

Overview Sahara Petrochemical Co (Sahara), established in 2004, is a holding company

engaged in producing chemical and petrochemical products through its following

subsidiaries:

• Tasnee and Sahara Olefins Company (TSOC): Sahara owns a 32.55%

stake in this subsidiary and the remaining is owned by Tasnee and its affiliates

(60.45%), and Saudi General Organization of Social Insurance (GOSI) (7.0%).

The firm has investments in SEPC (75.0% stake) and SAAC (65.0% stake).

• Saudi Acrylic Acid Company (SAAC): This is a JV between Sahara (22.0%),

TSOC (65.0%) and Tasnee (13.0%). SAAC currently holds a 75.0% stake each

in SAMC and SAP Project of which both of these projects are in the planning

stage.

• Al Waha Petrochemical Company (Al Waha): This subsidiary is 75.0%

owned by Sahara and is engaged in producing propylene and polypropylene.

• Arabian Chlor Vinyl Company (ACVC): This is a 50:50 JV between Sahara

and Maaden, and is currently in the planning stage.

Exhibit 38: Shareholding pattern %

Individuals and corporations, 70% Government

agencies, 10%

Public, 20%

Source: Tadawul

About 70% of Sahara’s capital is held by individuals and corporations (including Al-

Zamil Holding Group Company, which is the largest single shareholder having a

7.5% stake). Three public entities of Saudi Arabia together own a 10% stake in

Sahara; General Organization of Social Insurance (GOSI) with 4%, the General

Organization Retirement Organization with 4%, and Majlis Al-Awqaf Al-Aala with

2%. The remaining 20% is held by the public. In August 2009, Sahara increased its

share capital to SR2,925.3mn from SR1,875mn through rights a issue by offering

105.03mn shares.

33

Page 34: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

COMPANY DESCRIPTION

Al Waha

PROJECT DETAILS

A joint venture between Sahara (75.0%) and LyondellBasell (25.0%) with a project

cost of SR3.92bn. It has capacity to produce 467,000 mt of propylene which would

act as a feedstock to produce 450,000 mt of polypropylene annually. Trial runs

started in May 2009 and commercial operations are expected to start in 2Q10.

Sahara followed its Shariah-compliant project financing structure for funding the Al

Waha project. The equity contribution of the project was close to 41%. Debt worth

SR2.3bn was raised through Shariah-compliant external financing commitments,

SIDF and PIF.

FEEDSTOCK AGREEMENTS

Saudi Aramco has agreed to supply propane to the Al Waha plant effective from 1

July 2008 for a period of 20 years, while SEPC agreed to supply 29,750 mt of

ethylene annually for a period of 15 years. Propane is priced on the basis of

naphtha prices multiplied by a conversion factor, which currently stand at 0.685

and is expected to increase to 0.700 in 2011e.

MARKETING AGREEMENTS

About 86% of the output from the facility is directed to the markets of the Middle

East, South East Asia and India. As per an off-take agreement with Al Waha, Basell

Sales and Marketing Company BV (LyondellBasell’s subsidiary) is responsible for

sales outside KSA.

SEPC

PROJECT DETAILS

SEPC, with a project cost of SR9.4bn, is jointly owned by TSOC (75.0% stake) and

LyondellBasell (25.0% stake). Sahara owns around 24.41% in the venture. SEPC

has annual capacity to produce 1mn mt of ethylene, which is used as a feedstock to

produce 400,000 mt each of HDPE and LDPE. It also produces 285,000 mt of

propylene annually. The facility started commercial operations in June 2009.

FEEDSTOCK AGREEMENTS

Saudi Aramco agreed to supply around 1.058 mn mtpa of propane to SEPC for a

period of 20 years, at a discounted rate which is approximately 30% lower than

international prices. Saudi Aramco also supplies around 650,000 mt of ethane

annually to SEPC at a discounted rate of USD0.75/mmbtu.

MARKETING AGREEMENTS

SEPC plans to sell about 88% of its production to Middle East, South East Asia and

Europe. Tasnee Petrochemicals and Basell Sales and Marketing Company are

responsible for sales and marketing of the output, while some proportion of

ethylene which is not utilized in polyethylene production would be sold under long

term agreement to Saudi firms (including Sahara and its subsidiaries).

34

Page 35: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

COMPANY DESCRIPTION

Planned projects Sahara has 3 projects in the pipeline:

• Saudi Acrylic Monomers Company (SAMC)

• Superabsorbent Polymers Project (SAP Project)

• Arabian Chlor Vinyl Company (ACVC)

All three projects will internally source feedstock from Sahara’s existing facilities, Al

Waha and SEPC. Once operational, Sahara will have an integrated production flow

where most of the feedstock requirement is sourced internally. Total cost of these 3

projects equals about SR7bn, out of which around SR4.9bn would be sourced

through raising debt. Sahara’s total equity contribution to these projects equals

SR874mn.

Currently, pre-EPC activities of the three projects are underway which are expected

to be completed by December 2011. The 2nd phase, Procurement and Construction

Phase, is expected to finish by June 2012, while the projects are expected to start

trial operations in 4Q 2012. We have assumed the plants to start commercial

operations in 1Q 2013 in our forecasts

SAMC

SAMC is a joint venture between SAAC (75%) and Dow Chemicals (25%) and will

produce 150,000 mt of acrylic acid annually which in turn would be used to produce

two types of commodity acrylates – butyl acrylates and 2-ethylhexyl acrylates –

together having annual production capacity of 125,000 mtpa.

About 80% of acrylates production will be sold to Rohm and Hass Co. to the market

globally, while the remaining 20% would cater to the needs of the GCC region.

The estimated project cost is more than SR3bn, with an equity contribution of 30%

comprised of SR900mn from the two partners. Debt worth SRSR2.1bn is expected

to be raised from SIDF and commercial banks.

SAP PROJECT

This facility will produce 80,000 mt of superabsorbent polymers annually by using

acrylic acid produced at the SAMC plant. The project is 75% owned by SAAC and

25% by Evonik Industries AG. Sahara holds a 32.36% stake in the project. About

80% of its production will be sold in Asia.

The estimated project cost is SR1.5bn, with an equity contribution of 30%

comprised of SR450mn. Debt worth SR1.05bn is expected to be raised from SIDF

and commercial banks.

ACVC

This facility is a joint venture equally owned by Sahara and Saudi Arabian Mining

Company (Ma’aden) and will be engaged in producing 250,000 mt of caustic soda

and 300,000 mt of ethylene dichloride annually. The ethylene requirement of this

facility will be sourced from SEPC under an agreement to supply 85,000 mt

annually for a period of 20 years. Under a long term agreement, Ma’aden will

purchase caustic soda for usage in its aluminum complex which will be constructed

at Ras-Al-Zaur. Key markets – Saudi Arabia, Southeast Asia and North East Asia.

35

Page 36: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

COMPANY DESCRIPTION

The estimated project cost is SR2.5bn, with an equity contribution of 35%

comprised of SR875mn from the two partners. Debt worth SR1.6bn is expected to

be raised from SIDF and from commercial banks.

Exhibit 39: Product flow chart for planned projects

‘000 mt per annum

Caustic Chlorine Plant

Sodium Chloride370 KTA Chlorine

Caustic Soda to Ma’aden250,000 mtpa

Ethylene from SEPC 85,000 mtpa

EDC Plant

Caustic - NaOH

EDC to export markets 245,000 mtpa Ethylene Amine project 55,000 mtpa

Air

Acrylic Acid unit

Acrylic Acid 150,000

Esterification unit

Meoh,N- Butanol, MEG,DEG,PEG,2EH

Mixed Acrylate125,000 mtpa

Acrylic Acid 75,000 mtpa

Acrylic Acid 75,000 mtpa

PurificationSAP

80,000 mtpaPolymerizatio

n

Source: Company data, NCBC Research

36

Page 37: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

Financials

Exhibit 40: Income statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Sales - 1,242 2,358 2,440 3,757 3,523

% change n/a n/a 89.9 3.5 54.0 -6.2

COGS - (781) (1,543) (1,603) (2,547) (2,410)

Gross Profit - 462 815 837 1,209 1,112

Gross margin (%) n/a 37.2 34.6 34.3 32.2 31.6

G&A (39) (67) (128) (132) (205) (193)

D&A expenses - (80) (200) (202) (338) (341)

Operating Profit (39) 394 687 705 1,005 919

% change n/a n/a 74.2 2.6 42.6 -8.5

EBITDA (39) 474 887 907 1,343 1,261

% change n/a 87.2 2.2 48.1 -6.1

Margins (%) n/a 38.2 37.6 37.2 35.7 35.8

Interest expense - (32) (55) (55) (51) (47)

Profit before Zakat and MI 78 960 1,219 1,180 1,650 1,552

Minority interest - (316) (457) (442) (619) (582)

Net Income before Zakat 78 644 762 737 1,031 970

Zakat (1) (43) (38) (31) (56) (77)

Net income/(loss) 76 601 723 706 975 892

Net margin (%) n/a 48.4 30.7 28.9 26.0 25.3

as a % of NI before NI and Zakat n/a 37.5 37.5 37.5 37.5 37.5

EPS 0.35 2.05 2.47 2.41 3.33 3.05

Source: Company, NCBC Research estimates

Exhibit 41: Balance sheet In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 556 965 1,005 1,160 2,420 3,899

Other rec. & prepayments 154 154 154 154 154 154

Accounts receivables - 221 420 435 669 627

Inventories 104 160 317 329 523 495

Total current assets 815 1,501 1,896 2,078 3,767 5,176

Investment in associates 1,007 1,007 1,007 1,007 1,007 1,007

Projects under construction 4,083 997 1,830 2,663 - -

Property and equipment, net 16 3,891 3,718 3,549 5,933 5,661

Total non-current assets 5,141 5,894 6,555 7,219 6,940 6,668

Total assets 5,956 7,396 8,451 9,297 10,707 11,844

A/c payables & other liabilities 184 107 211 220 349 330

Other current liabilities 80 80 80 80 80 80

Total current liabilities 265 188 292 300 430 411

Long term debts 1,338 1,938 1,796 1,575 1,352 1,126

Advances against Islamic facilities

922 922 835 746 655 562

Other non-current liabilities 99 99 99 99 99 99

Total non-current liabilities 2,360 2,960 2,730 2,419 2,105 1,787

Share capital 2,925 2,925 2,925 2,925 2,925 2,925

Statutory reserves 8 68 140 211 308 398

Retained earnings 131 672 1,323 1,958 2,836 3,639

Total stockholders' equity 2,938 3,539 4,263 4,969 5,944 6,836

Minority interest 393 709 1,166 1,609 2,227 2,809

Total liabilities & stockholders' equity

5,956

7,396

8,451

9,297

10,707

11,844

Source: Company, NCBC Research estimates

37

Page 38: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAHARA – INITIATING COVERAGE

F INANCIALS

Exhibit 42: Cash flow statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from op. (a) 9 643 1,130 1,332 1,633 1,867

Cash flow from inv.(b) (732) (833) (861) (865) (59) (70)

CAPEX (732) (833) (861) (865) (59) (70)

Cash flow from fin.(c) 825 600 (230) (311) (314) (318)

Debt 380 600 (142) (221) (223) (225)

Net chg. in cash (a+b+c) 103 409 39 156 1,260 1,479

Cash at start of the year 453 556 965 1,005 1,160 2,420

Cash at end of the year 556 965 1,005 1,160 2,420 3,899

Source: Company, NCBC Research estimates

Exhibit 43: Key ratios

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR)

EPS 0.35 2.05 2.47 2.41 3.33 3.05

FCF per share (3.9) (1.1) 1.0 2.7 2.2 4.4

Div per share - - - - - -

Book value per share 15.1 15.1 14.5 15.9 17.9 19.8

Valuation ratios (x)

P/E 70.1 11.9 9.9 10.1 7.3 8.0

P/FCF (6.2) (22.8) 24.7 8.9 10.9 5.6

P/BV 1.8 2.0 1.7 1.4 1.2 1.0

EV/sales n/a 6.4 3.4 3.3 2.1 2.3

EV/EBITDA n/a 16.7 8.9 8.8 5.9 6.3

Div yield (%) - - - - - -

Profitability ratios (%)

Gross margins n/a 37.2 34.6 34.3 32.2 31.6

Operating margin n/a 31.8 29.1 28.9 26.7 26.1

EBITDA margins n/a 38.2 37.6 37.2 35.7 35.8

Net profit margins n/a 48.4 30.7 28.9 26.0 25.3

ROE 2.6 17.0 17.0 14.2 16.4 13.1

ROA 1.3 8.1 8.6 7.6 9.1 7.5

Liquidity ratios

Current ratio 1.0 2.9 3.1 3.1 3.1 3.1

Quick Ratio 0.6 2.0 2.0 2.0 1.9 1.9

Operating ratios (days)

Inventory n/a 75 75 75 75 75

Receivables outstanding n/a 65 65 65 65 65

Payables outstanding n/a 50 50 50 50 50

Operating cycle n/a 140 140 140 140 140

Cash cycle n/a 90 90 90 90 90

Production & sales

Production capacity (mn mt) 0.0 0.9 0.9 0.9 1.5 1.5

Production volumes (mn mt) 0.0 0.5 0.9 0.9 1.5 1.4

Utilization rate (%) 0.0 93 100 100 100 95

External sales volumes (mt) 0.0 0.2 0.5 0.5 1.0 1.0

Source: Company, NCBC Research estimates

38

Page 39: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE

Yansab

Netural Looking fully valued

Target Price (SR) 50.7

Current price (SR) 48.8

Potential upside (%) ↑ 3.9

Stock details

52-week range H/L (SR) 50/26

Market cap ($mn) 7,330

Shares outstanding (mn) 563

Listed on exchanges TADAWUL

Price perf (%) 1M 3M 12M

Absolute 22.9 43.1 131.3

Rel. to market 21.6 32.9 104.6

Avg daily T/o (mn) SR US$

3M 123.3 32.9

12M 75.3 20.1

Reuters code 2290.SE

Bloomberg code YANSAB AB

Website www.yansab.com.sa

Valuation multiples

09 10E 11E

P/E (x) n/a 9.6 9.5

P/B (x) 4.8 3.2 2.5

EV/EBITDA (x) n/a 10.6 9.7

Div yield (%) - - 2.0

Source: NCBC Research estimates

Share price performance

0

11

22

33

44

55

Mar-09 Jul-09 Dec-09 Apr-10

0

2000

4000

6000

8000

Yansab TASI (RHS)

Source: Bloomberg

Yanbu National Petrochemical Company (Yansab) has recently started

commercial operations (in March 2010). The timing looks ideal as both

demand and pricing are gaining traction. The company’s strong links

with SABIC and strategic location in the West are positives. However

with the strong performance of the stock over the past year, we

believe much of this is priced in. We initiate coverage with a Neutral

rating and target price of SR50.7.

1Q10 start to operations looks ideal: Yansab seems to have gotten its

timing right in commencing operations in March 2010, given the pick up in

both petrochemical prices and demand. However, with many other projects in

the country starting up over the next 3 years (Petrochem, Saudi Kayan and

Sahara Petrochemicals) excess supply which could impact operating rates and

pricing is a material risk.

Benefitting from SABIC’s strong marketing platform: We expects Yansab

to benefit from SABIC’s global marketing network and distribution channels.

Yansab’s location in the West of the country, which is significantly closer to

European markets relative to its East based peers, will be an added advantage.

A quick ramp up in revenues and earnings: 2010e will be the first year of

commercial operations and we expect revenues and earnings to quickly ramp

up over the next few years. By 2014e, we expect revenues of SR10.2bn from

zero in 2009. Net income should expand to SR3.2bn by 2014e from losses in

2009.

Below 100% operating rates worrisome: Yansab receives 35,000 barrels

per day of propane from Aramco, which is actually 10,000 barrels per day

below its full requirement. As a result, the ethylene cracker will likely run at a

sub-optimal utilization rate. Though SABIC is seeking approval for additional

propane from Aramco, we believe it may be difficult to secure this due to rising

domestic demand amid limited supply.

Looking fully valued: Yansab trades at a 2009 P/BV multiple of 4.8x (sector

average: 2.9x and TASI: 2.2x). In 2009 and YTD, Yansab’s stock price has

increased 126% and 46% respectively versus the TASI rising 67% and 13%.

Despite our confidence in the company, our valuation of SR50.7/share implies

the stock is fully valued. We initiate coverage on Yansab with a Neutral rating

and a target price of SR50.7, implying upside of 3.9%.

Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 0 7,485 9,771 10,123 10,087

EBITDA SR mn (29) 3,902 4,294 4,436 4,464

E Margin % n/a 52.1 43.9 43.8 44.3

Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627

Net income SR mn (29) 2,874 2,902 3,132 3,124

Net margin % - 38.4 29.7 30.9 31.0

EPS SR (0.05) 5.11 5.16 5.57 5.55

Assets SR mn 21,124 23,719 25,487 24,763 26,034

Equity SR mn 5,668 8,542 10,882 13,451 16,013 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 40: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

Investment scenarios Valuation can increase significantly with higher prices and better operating rates

Historical and expected price performance

32.0

7.06.5

5.1

50.7

6.56.0

5.6

68.7

0

10

20

30

40

50

60

70

DCF

Bear

case

WAC

C incr

ease

s by

2%

Pric

e dec

lines

by

5%

Cost

ris

es

by

10%

DC

F Base

case

Pri

ces

incr

ease

s by

5%

WAC

C r

educe

s by

100

bps

Opera

ting r

ate g

row

sas

allo

cation incr

ease

s

DC

F Bull

case

(SR)

67.5

32.1

50.7

0

10

20

30

40

50

60

70

Apr-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11

Historical Price Performance Price Target

Scenario analysis

Source: NCBC Research estimates Source: NCBC Research estimates

Investment view DCF scenarios

Price target:

SR 50.7

• Weighting of DCF is 100%

DCF bull case:

SR 68.7

• Assuming Yansab would be able to procure

additional feedstock from Saudi Aramco

would enable it to run its plant at a higher

operating rate. Also assuming higher prices

and a lower WACC. This would result in net

income increasing to SR3.8bn from

SR3.4bn between 2010e-14e.

DCF base

case:

SR 50.7

• We expect operating rates and prices to

improve gradually in the coming years.

However, aggressive capacity additions are

expected to outpace the demand recovery

thus denting operating rates and prices

from 2014e onwards. We assume net

income to increase to SR3.2bn from

SR3.0bn between 2010e-14e

• Commercial start up in March 2010: Yansab started

commercial operations at a time when prices have regained

strength and demand has picked up

• Strong tie-up with SABIC: Being a 55% stakeholder in

Yansab, SABIC is responsible for marketing and selling the

entire output from the Yansab complex.

• Presence in West offers proximity to Europe: Yansab

benefits from its plant location in the West of the country

which gives it the ability to easily cater to demand in Europe

• Insufficient feedstock limits operating rate: Yansab is

not able to secure the required propane feedstock from

Saudi Aramco for running its ethylene cracker at 100%

capacity. Though SABIC is in talks with Saudi Aramco to

procure an additional 10,000 barrels per day of propane, we

believe this may be difficult given rising demand in the

Kingdom and scarce supply

• Fully valued: Yansab’s stock price has increased by 131%

in the last 12 months, outpacing the recovery in the TASI

index by 105%. We believe that despite our confidence in

the company and its operations, the stock is fully valued DCF bear

case:

SR 32.1

• Lower prices and higher cost of production

owing to a higher than expected rise in

feedstock cost. Also a two percentage point

higher WACC. Net income is projected to

increase to SR2.7bn from SR2.6bn between

2010e-14e

Potential catalysts Risks to our view

• Allocation of an additional 10,000 barrels per day of

propane feedstock would enable Yansab to run its plant at a

100% operating rate

• A quick recovery in global economic growth would drive

demand and prices, and result in higher operating rates

• Higher then expected rise in feedstock prices could dent

profitability

• Earlier then expected 2015 revision of feedstock prices

would impact the cost structure

• Anti dumping claims by Asian traders could burden Yansab’s

cost structure with additional charges.

• Any extended slowdown in key industries could lead to a

protracted period of demand deceleration, depressing

operating rates and prices.

40

Page 41: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

Investment view LOOKING FULLY VALUED

At current levels, Yansab is trading at a 2010e P/E of 9.17x and a 2011e P/E of

9.1x. The stock had tumbled to a historic low of SR12.80 (down 75.3%) during

2008 after which it has climbed 281% to a current price of SR48.8. Yansab gained

125.7% during 2009 versus 27.5% for the Tadawul and 66.7% for the sector. Year

to date, the stock has risen 46.0%, versus 13.0% for the Tadawul. Despite our

confidence in the company, we believe the stock is looking fully valued at these

levels.

WELL TIMED COMMENCEMENT OF OPERATIONS

Given the cyclical nature of the petrochemical industry, we believe Yansab is

starting operations at an ideal time as prices have regained strength and demand is

picking up. This compares to some of its peers such as Petrochem, Sahara

Petrochemicals and Saudi Kayan which will all be beginning commercial operations

over 2011 to 2013. For the overall sector, the large capacity increases during this

time may impact utilization rates and pricing and we forecast utilization rates

dropping from 2014 onwards as the current cycle peaks.

GEOGRAPHIC ADVANTAGE RELATIVE TO KSA PEERS

Yansab is one of the two petrochemical producers located in the West of Saudi

Arabia. The other producers discussed in this report are all located in the East of

Saudi Arabia. Being located in the West gives Yansab the ability to cater to demand

in Europe. The distance between Yanbu and Jubail (the main production area in the

East) is in excess of 1,200km over land and around 4,700km (2,500 nautical miles)

by sea.

BENEFITTING FROM SABIC’S MARKETING PLATFORM AND FINANCING

SABIC (which owns 51% in Yansab) is responsible for marketing and selling the

entire output from Yansab’s complex to local and export markets. SABIC also acts

as a strong source of financing which is helpful during times when project financing

is difficult to secure. In 2009, SABIC offered SR2.2bn to Yansab in order to help the

company complete the project and to cover cost overruns.

FEEDSTOCK SHORTAGE CAPS UTLIZATION RATES

Yansab currently receives 35,000 barrels per day of propane, which is 10,000

barrels per day short in terms of running its plant at 100% utilization. According to

the prospectus, the company is seeking approval for these additional allocations;

however we believe it may be difficult to secure additional feedstock due to growing

domestic demand and limited supply.

Risks to our view

AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES

Yansab procures natural gas from Saudi Aramco at an attractive price of

USD0.75/mmbtu under long term contracts. However, we believe an increase in the

medium term is possible and have incorporated the possible upward reviews in gas

prices to USD1.5/mmBtu in 2012e for the Saudi petrochemical players. However,

41

Page 42: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

INVESTMENT VIEW

for Yansab, we believe prices will remain at the 0.75/mmbtu until 2015e when the

contract between Yansab and Aramco will be reviewed. An earlier increase in

feedstock cost than our forecast would erode Yansab’s cost advantage and

negatively affect our earnings estimates.

ANY UNEXPECTED CHANGE IN FEEDSTOCK PROCUREMENT QUANTITIES

If there is any progress in Yansab receiving more ethane and propane feedstock

allocations from Aramco, this would increase the utilization rates and positively

impact earnings.

42

Page 43: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

Valuation: SR50.7/share

Valuation methodology We have used DCF methodology to arrive at our target price for Yansab. Our

valuation is based on the following assumptions:

Cost of Equity (COE) of 13.1%: We have taken the US 10-year Treasury yield of

3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to

the US dollar. The company’s adjusted beta (weekly returns since 1 January 2007

compared with Saudi’s TASI) is 1.16. We assume an equity risk premium of 8.04%

for Saudi Arabia which includes a 1.35% premium for the country risk associated

with Saudi Arabia.

Tax-adjusted cost of debt of 4.4%: The cost of debt for Yansab is assumed to

be 4.5%. After adjusting it for tax/zakat, the cost of debt equals 4.4%.

Using the above assumptions, we arrive at a WACC of 10.2%.

For our DCF valuation, we explicitly model the detailed cash flows through 2017e,

which allows us to cover a complete business cycle. We use a terminal growth rate

of 2.5% and our WACC of 10.21%. Based on these assumptions, we arrive at the

estimated enterprise value of the company. This is further adjusted for debt, cash,

and other payments to derive Yansab’s equity value and target price of

SR50.7/share.

Exhibit 29: Yansab - Details of DCF Valuation

(SR mn unless specified)

Sum of present value 19,285.1

Terminal value 36,524.5

Present value of terminal 20,008.0

Enterprise value 39,293.2

Less: debt (13,459.0)

Add: cash 2,763.6

Less: end-of-services indemnities (81.1)

Equity value 28,516.6

Number of shares (mn) 562.5

Value per Share (SR) 50.70

Source: Company, NCBC Research estimates

The table below indicates the impact of changes in WACC as well as terminal

growth rate on the DCF target price.

Exhibit 30: Sensitivity table

Terminal growth rate (%)

1.5 2.0 2.5 3.0 3.5

8.2 55.6 59.1 63.2 68.0 73.9

9.2 50.3 53.0 56.0 59.5 63.6

10.2 46.3 48.4 50.7 53.3 56.4

11.2 43.1 44.8 46.6 48.7 51.0

WA

CC

(%

)

12.2 40.5 41.9 43.4 45.0 46.9 Source: NCBC Research estimates

43

Page 44: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

Company description

Overview Established in 2005, Yanbu National Petrochemical Company (Yansab) is 55%

owned by SABIC which holds 51%. GOSI holds 9.2%, while a 35% stake is with the

public. The company’s IPO in January 2006 was about 2.8 times over subscribed

and the proceeds totaled SR5.63bn (USD1.5bn).

Yansab has a total annual production capacity of more than 4mn mt of

petrochemical products. Basic chemicals (olefins, aromatics and oxygenate)

accounts for about 50% of the total product mix, while intermediates and polymers

contribute about 19% and 31%, respectively. On 12 July 2009, Yansab started

experimental runs at its petrochemical complex in Yanbu Industrial City. Production

at its ethylene and mono ethylene glycol plants started during the month of July

2009.

While the current capacity is around 4mn mt per annum (mtpa), capacity expansion

of 10-30% with minimal investments has been pre-designed into the complex. For

example, the olefins cracker’s current capacity is about 1.3mn mtpa of ethylene,

while the designed capacity is of 1.7mn mtpa. Similarly, the LLDPE and Mono

Ethylene Glycol plants have designed annual capacity of 500,000 mt and 800,000

mt, however the current annual capacity is of 400,000 mt and 700,000 mt,

respectively. The complex started commercial operations in March 2010 and

contributed to Yansab’s 1Q 2010 quarterly results.

Project cost overruns bring total to over SR21bn We believe the total project cost has increased to SR21.15bn (USD5.64bn) from the

SR18.75bn (USD5bn) announced in 2005. The project has been funded with debt

and equity split in a 70:30 ratio. Debt financing includes SR4.0bn from the Public

Investment Fund (PIF), a loan worth SR5.95bn from Commercial and Export Credit

Agencies and an Islamic finance tranche of SR3.18bn.

Moreover, during 2009, Yansab received a term loan worth SR2.2bn from its

partner, SABIC. We believe this was to cover the increase in project cost and debt

repayments due during the year.

44

Page 45: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE 45

COMPANY DESCRIPTION

Exhibit 31: Product flow chart

Metric tons per annum (mtpa), unless otherwise stated

770,000 mtpa

400,000 mtpa

Olefin production unit

Oxygen (525,000 mtpa)

Ethane (80 mn cu ft per day)

Propane (45,000 bbl per day)

Ethylene oxide / ethylene glycol

HDPE

LLDPE

Polypropylene

Butene separation unit (26,000 mtpa)

Benzene extraction unit, Toluene, Xylene

Exchange of refined propane (50,000 mtpa)

Thermal gasoline (120,000 mtpa)

Ethylene(1.3 mn mtpa)

50,000mtpa

100,000mtpa Butene 1

500,000 mtpa

400,000 mtpa

26,000 mtpa

100,000 mtpa

38,000 mtpa

Benthin –32,000 mtpa

Butene 2

Benzene

Toluene, Xylene

MTBE

Propylene(0.4 mn mtpa)

Source: Yansab, NCBC Research estimates

Feedstock agreement

ETHANE AND PROPANE

Yansab has secured low cost ethane and propane allocations from Saudi Aramco to

feed its mixed-feed facility.

Saudi Aramco has allocated 80mn cubic feet per day of ethane, 35,000 barrels of

propane per day and 35mn m2 per day of natural gas to Yansab. This allocation is

sufficient to produce 1.25mn mt of ethylene and 0.325mn mt of propylene annually

implying the plant would operate at an average utilization rate of 93%. We believe

it may be difficult for the company to secure this additional allocation due to

growing domestic demand and limited supply.

Saudi Aramco supplies ethane to Yansab at a fixed price of USD0.75/mmBtu. We

believe there will be a general increase in this pricing for the industry in 2012 to

USD1.5/mmbtu. However, for Yansab, given contractual agreements, we believe

the upward revision in ethane prices will likely take affect after 2015. Based on this,

we have incorporated this revision in our model from 2016. The propane price is

linked to Japanese naphtha prices and is likely to be revised upward in 2011,

though the hike is expected to be limited. Despite the prices for these key inputs

rising, we note that Yansab will still be receiving ethane and propane at attractive

levels compared to global peers.

Page 46: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

COMPANY DESCRIPTION

OTHER RAW MATERIALS

SABIC’s subsidiary, National Industrial Gases Co, is fulfilling the oxygen

requirement of Yansab’s complex. All the supply points are located close to the

project site to minimize the possibility of any delays (or disruptions) in supply.

Marketing agreement SABIC is responsible for marketing and selling the entire output from Yansab’s

complex to the local and export markets. Yansab, therefore, is set to benefit from

SABIC’s strong marketing network and distribution channels.

Dividend We have projected dividend payment of SR1 per share dividend starting from 2011,

given Yansab’s only begins commercial operations in 2010. This results in a

dividend yield of 2.0% for 2011e onwards.

46

Page 47: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

Financials Exhibit 32: Income statement In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Revenues 0 7,485 9,771 10,123 10,087 9,972

% change n/a n/a 30.5 3.6 -0.4 (1.1)

COGS 0 (4,163) (5,875) (6,072) (6,017) (5,962)

Gross Profit 0 3,322 3,896 4,050 4,070 4,010

Margins (%) n/a 44.4 39.9 40.0 40.3 40.2

G&A expenses (29) (198) (535) (553) (552) (546)

D&A expenses 0 (778) (933) (939) (945) (953)

Operating Profit (29) 3,124 3,361 3,497 3,518 3,464

% change n/a n/a 7.6 4.1 0.6 (1.5)

EBITDA (29) 3,902 4,294 4,436 4,464 4,417

% change n/a n/a 10.1 3.3 0.6 (1.0)

Margins (%) n/a 52.1 43.9 43.8 44.3 44.3

Interest expenses, net of income 0 (139) (276) (182) (157) (83)

Zakat 0 (112) (183) (184) (237) (289)

Net income (29) 2,874 2,902 3,132 3,124 3,093

Net margin (%) n/a 38.4 29.7 30.9 31.0 31.0

% change n/a n/a 1.0 7.9 (0.2) 31.0

EPS (SR) (0.05) 5.11 5.16 5.57 5.55 5.50

Source: Company, NCBC Research estimates

Exhibit 33: Balance sheet In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 606 2,339 4,037 4,006 6,097 8,119

Advances to suppliers and other receivables 865 865 865 865 865 865

Accounts receivables 0 1,230 1,606 1,664 1,658 1,639

Inventory 738 1,255 1,771 1,830 1,813 1,797

Total current assets 2,208 5,689 8,279 8,365 10,433 12,420

Capital work in progress 18,576 0 0 0 0 0

Fixed assets 0 17,891 17,068 16,259 15,462 14,694

Pre-operating expenses 200 0 0 0 0 0

Deferred charges 110 110 110 110 110 110

Other non-current assets 30 30 30 30 30 30

Total non-current assets 18,916 18,030 17,208 16,399 15,601 14,834

Total assets 21,124 23,719 25,487 24,763 26,034 27,254

Accounts payable 276 912 1,288 1,331 1,319 1,307

Accruals and provisions 488 488 488 488 488 488

Current portion of LT loan 916 947 3,336 1,279 1,298 1,367

Total current liabilities 1,679 2,347 5,112 3,098 3,105 3,162

LT loans, including term loan from a major shareholder 13,696 12,749 9,412 8,134 6,835 5,468

Employees's end of service benefits 81 81 81 81 81 81

Total non-current liabilities 13,777 12,830 9,494 8,215 6,916 5,549

Share capital 5,625 5,625 5,625 5,625 5,625 5,625

Statutory reserve 14 301 592 905 1,217 1,527

Retained earnings 29 2,616 4,665 6,921 9,171 11,392

Total stockholders' equity 5,668 8,542 10,882 13,451 16,013 18,543

Total liabilities & stockholders' equity 21,124 23,719 25,487 24,763 26,034 27,254

Source: Company, NCBC Research estimates

47

Page 48: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 YANSAB – INITIATING COVERAGE

F INANCIALS

Exhibit 34: Cash flow statement In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from op. (a) (1,787) 2,542 3,319 3,997 4,080 4,069

Cash flow from inv.(b) (1,455) 107 (111) (130) (148) (185)

CAPEX (1,471) (93) (111) (130) (148) (185)

Cash flow from fin.(c) 4,970 (3,071) (1,509) (3,899) (1,841) (1,861)

Debt 2,814 (916) (947) (3,336) (1,279) (1,298)

Net chg. in cash (a+b+c) 1,728 (422) 1,699 (32) 2,091 2,023

Cash at start of the year 1,033 2,761 2,339 4,037 4,006 6,097

Cash at end of the year 2,761 2,339 4,037 4,006 6,097 8,119

Source: Company, NCBC Research estimates

Exhibit 35: Key rations

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR)

EPS (0.05) 5.11 5.16 5.57 5.55 5.50

FCF per share (3.2) 4.6 6.2 7.2 7.2 7.0

Div per share - - 1.0 1.0 1.0 1.0

Book value per share 10.1 15.2 19.3 23.9 28.5 33.0

Valuation ratios (x)

P/E n/a 9.6 9.5 8.8 8.8 8.9

P/FCF n/a 10.6 7.9 6.8 6.7 6.9

P/BV 4.8 3.2 2.5 2.0 1.7 1.5

EV/sales - 5.5 4.2 4.1 4.1 4.2

EV/EBITDA n/a 10.6 9.7 9.3 9.3 9.4

Div yield (%) - - 2.0 2.0 2.0 2.0

Profitability ratios (%)

Gross margins - 44.4 39.9 40.0 40.3 40.2

Operating margin - 41.7 34.4 34.5 34.9 34.7

EBITDA margins - 52.1 43.9 43.8 44.3 44.3

Net profit margins - 38.4 29.7 30.9 31.0 31.0

ROE - 33.6 26.7 23.3 19.5 16.7

ROA - 12.1 11.4 12.6 12.0 11.3

Liquidity ratios

Current ratio 1.0 1.4 0.8 1.4 1.4 1.4

Quick Ratio 0.5 0.9 0.5 0.8 0.8 0.8

Operating ratios (days)

Inventory - 110 110 110 110 110

Receivables outstanding - 60 60 60 60 60

Payables outstanding - 80 80 80 80 80

Operating cycle - 170 170 170 170 170

Cash cycle - 90 90 90 90 90

Production & sales

Production capacity (mn mt) 3.9 3.9 3.9 3.9 3.9 3.9

Production volumes (mn mt) 0.8 3.1 3.7 3.7 3.7 3.7

Utilization rate (%) 59 96 96 96 96 96

External sales volumes (mt) 0.4 1.7 2.1 2.1 2.1 2.1

Source: Company, NCBC Research estimates

48

Page 49: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE

Saudi Kayan

Neutral Still Awaiting Start of Operations

Target Price (SR) 20.3

Current price (SR) 22.4

Potential downside (%) ↓ 9.2

Stock details

52-week range H/L (SR) 23/11

Market cap ($mn) 8,972

Shares outstanding (mn) 1,500

Listed on exchanges TADAWUL

Price perf (%) 1M 3M 12M

Absolute 17.9 20.4 100.9

Rel. to market 16.6 10.3 74.2

Avg daily T/o (mn) SR US$

3M 313.3 83.7

12M 214.4 57.2

Reuters code 2350.SE

Bloomberg code KAYAN AB

Website www.saudikayan.com

Valuation multiples

09 10E 11E

P/E (x) - - 14.7

P/B (x) 2.2 2.2 1.9

EV/EBITDA (x) - - 12.4

Div yield (%) - - -

Source: NCBC Research estimates

Share price performance

0

5

10

15

20

25

Apr-09 Sep-09 Mar-10

4000

5000

6000

7000

8000

Kayan TASI (RHS)

Saudi Kayan Petrochemical Company’s (Saudi Kayan) diversified

product mix and strong links with SABIC are key positives. However,

doubts over on-time start of operations and a lack of revenues until

2011e dim the near term outlook. We, therefore, initiate coverage on

Saudi Kayan with a Neutral rating and target price of SR20.3/share.

Uncertainty on start of operations: Saudi Kayan’s initial target was that all

plants would begin trial operations by the end of 2009. Despite this target

being reiterated in June 2009, shortly thereafter, in Dec. 2009, the company

announced a delay until 2H 2010 for all plants (except LDPE and Amines which

were expected to start in 2H 2012). In our forecasts we assume that

commercial operations of the majority of plants will be delayed until 2Q 2011

and the LDPE and Amines plants will delayed until 2013.

Strong earnings growth during 2011e-2013e: Given that we expect

operations in 16 of its 18 plants to start in 2Q 2011, we project net income to

turn positive in 2011e. While year 2012e will benefits from full year

contribution from these 16 plants (all plants except LDPE and Amines), 2013e

will be the first year of full production at Saudi Kayan’s petrochemical complex.

Net income is projected to peak in 2013e at SR3,288mn from SR2,279mn in

2011e.

Post 2013 earnings to contract as the current cycle nears its peak: Post

2013e, net income is likely to contract as the current cycle nears its peak;

regional and global capacity additions are likely to outpace demand growth,

pressuring prices and utilization rates to decline.

SABIC – a strong partner: Saudi Kayan is set to benefit from its close

association with SABIC’s (its single largest stakeholder with 35%) global sales

and marketing network and distribution channels. Saudi Kayan’s entire output

will be marketed and sold through SABIC.

Valuation: Saudi Kayan’s shares have jumped 100.9% in the last 12 months,

outpacing the TASI’s growth of 26.7%. Despite trading at a reasonable P/BV

multiple of 2.2x (sector average: 2.9x and TASI: 2.2), we believe the shares

may have risen too far too fast given the start-up nature of the business. With

our target price of SR20.3 indicating 9.2% downside to the current stock

levels, we initiate with a Neutral rating.

Source: Bloomberg Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 0 0 12,134 16,773 16,677

EBITDA SR mn 0 5 4,039 5,529 5,621

EBITDA margin % n/a n/a 33.3 33.0 33.7 Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627 Net income SR mn (17) (96) 2,279 3,247 3,288

Net margin % n/a n/a 18.8 19.4 19.7

EPS SR (0.01) (0.06) 1.52 2.16 2.19

Assets SR mn 35,808 36,099 38,648 39,928 40,374

Equity SR mn 15,477 15,381 17,660 19,407 21,195 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 50: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

Investment scenarios Valuation can increase significantly with higher prices and better operating rate

Historical and expected price performance

11.1

2.9

3.92.4

20.3

2.41.9

2.5

27.1

0

6

12

18

24

30

DCF

Bea

r ca

se

WACC

incr

ease

s b

y 2 %

Price

dec

lines

b

y 5 %

Pro

duct

ion c

ost

ris

es b

y 3 %

DC

F Bas

ecas

e

Pri

ces

incr

ease

s by

5 %

Opera

ting r

ate

gro

ws

by

5%

WACC

red

uce

s by

1%

DCF

Bull

case

(SR)

27.1

11.1

20.3

0

5

10

15

20

25

30

Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11

Historical Price Performance Price Target

Scenario analysis

Source: NCBC Research estimates Source: NCBC Research estimates

Investment view DCF scenarios

• Price

target:

SR 20.3

• Weighting of DCF is 100%

• DCF bull

case:

SR 27.1

• We assume Saudi Kayan to run its plant at

a higher operating rate. We also assume

higher prices and lower WACC. This would

result in net income rising to SR3.53n from

SR2.74n between 2011E-2014E

• DCF base

case:

SR 20.3

• We assume utilization rates peak in 2013

and prices peak in 2012. Aggressive

capacity additions globally are expected to

outpace the demand recovery, thus,

denting operating rates and prices in

subsequent years. We assume net income

to increase to SR2.94bn from SR2.28bn

between 2011E-2014E, while peaking in

2013e at SR3.3bn

• Commencement delay worrisome: Saudi Kayan has

already missed its initial commencement date for its plants

of Dec. 2009 and has retendered and re-awarded the EPC

contracts for 2 plants. Given its previous delays and

uncertainty of the start of its LDPE and Amines plants we

believe further delays are possible.

• Commercial operations to boost earnings: We estimate

that its first year of full commercial operations in all its

plants will only be in 2013. Following this, we expect net

income to peak in 2013e to SR3,288mn from SR2,279mn in

2011e.

• Restricted earnings growth post 2013e: As a result of

regional and global capacity additions outpacing demand

growth, we expect Saudi Kayan to experience pressuring

prices and utilization rates. This is projected to decline

Saudi Kayan’s 2014e net income by 9.2% to SR2,941mn.

• Strong tie-up with SABIC: SABIC will market Saudi

Kayan’s entire output, enabling Saudi Kayan to capitalize on

SABIC’s strong marketing network and distribution channel.

• Valuation: In the last 12 months, the stock price has

jumped by 100.9%, outpacing the TASI’s growth of 26.7%.

and sector growth of 51.6%. Despite Saudi Kayan’s

fundamental positives, we believe the risk reward is to the

downside. We initiate coverage on Saudi Kayan with a

target price of SR20.3, representing a downside of 9.2%.

• DCF bear

case:

SR 11.1

• We assume lower prices and higher cost of

production owing to higher than expected

rise in feedstock cost. We also assume

WACC to be two percentage point higher.

Net income is projected to increase to just

SR2.15bn from a net income of SR1.65bn

between 2011E-2014E

Potential catalysts Investment risks

• A quick rebound in global economic growth would drive

demand and prices and result in higher operating rates

• Earlier than expected commencement of the facilities would

act as a positive trigger for the stock price

• Higher than expected increase in feedstock prices could

dent profitability

• Revision of feedstock prices before expected in 2015 would

impact the cost structure

• Anti dumping claims by Asian traders could burden Saudi

Kayan’s cost structure with additional charges

• Any extended slowdown in key industries could lead to a

protracted period of demand weakness, depressing

operating rates and selling prices

50

Page 51: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

Investment view BOTTOM LINE TO REMAIN NEGATIVE IN 2010

Saudi Kayan aims to kick start trial runs at its units (except the LDPE and amines

plants) during 2H 2010 and early 2011. Given this, we assume commercial

operations at these units will start only in 2Q 2011. As a result, net income is

expected to turn positive only in 2011e, while we forecast Saudi Kayan will be

reporting net losses in 2010e. We believe 2012e will be the first year when Saudi

Kayan will witness a full year of production at these plants (apart from LDPE and

amines). We also expect net income to peak in 2013e, as subsequent years are

impacted by lower operating rates and prices.

ON TIME COMMENCEMENT OF OPERATIONS DOUBTFUL

Saudi Kayan re-tendered the engineering, procurement and construction (EPC)

contracts for its LDPE and amines facilities in 2009. The EPC contract for the amines

unit was awarded to CTCI Corp in January 2010, while Daelim Industries won the

EPC contract for the LDPE plant in late March 2010. The letter of intention for the

LDPE EPC contract was initially signed with Simon Carves Limited. Construction of

the LDPE plant is expected to be completed by 2H 2012, while an update on the

timeline for the amines facility is still not available. These uncertainties raise

concerns regarding Saudi Kayan’s ability to start operations as planned. Any delay

in Saudi Kayan reaching full capacity will also dent its ability to leverage the

benefits of scale and its integrated product mix.

STOCK PRICE RISE OFFERS LIMITED ROOM FOR UPSIDE

In the last 12 months, Saudi Kayan’s stock price has climbed 100.9% to the current

SR22.4 versus the 26.7% gain for the Tadawul index and 51.6% of the sector

index. We believe the stock looks expensive at current levels, given the company’s

start-up nature, and the continued uncertainties surrounding its start operations.

SAUDI KAYAN TO LEVERAGE ON SABIC’S MARKETING EXPERTISE

On the positive side, Saudi Kayan will benefit from SABIC’s extensive sales and

marketing network, distribution channel and its deep experience in the

petrochemical business. SABIC owns 35% in Saudi Kayan and is responsible for

marketing the entire output from the complex.

Risks to our view

AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES

Saudi Kayan procures natural gas from Saudi Aramco at an attractive price of

USD0.75/mmBtu under long term contracts. However, we believe a price increase

in the medium term is possible. Discussions with industry players indicate the

possibility of an upward revision in gas prices to USD1.5/mmBtu in 2012. However,

according to the company’s filings, prices will remain at the 0.75/mmBtu until

2014, when the contract between Saudi Kayan and Aramco will be reviewed. We

have incorporated a change in pricing for Saudi Kayan to USD1.5/mmBtu from

USD0.75/mmBtu, based on this information. Any change in contractual prices and

volumes of feedstock, contrary to our assumption, would erode Saudi Kayan’s cost

advantage and affect earnings.

51

Page 52: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

F INANCIAL PERFORMANCE

EARLIER THAN EXPECTED START OF OPERATIONS

Saudi Kayan commencing operations at most of its plants ahead of our 2Q 2011

estimate would act as a positive trigger for the stock. This, in turn, is likely to result

in the company reporting profits and revenues earlier than expected, thereby

boosting the stock’s valuation.

52

Page 53: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

Valuation: SR20.3/share

Valuation methodology We have used DCF methodology to arrive at our target price for Saudi Kayan.

Cost of Equity (COE) of 14.9%: We have taken the US 10-year Treasury yield of

3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to

the US dollar. Special attention is needed in estimating Saudi Kayan’s Beta because

of the expected change in the company’s capital structure. We calculated historical

(observed) beta using two years weekly data and then adjusted it for leverage, to

reflect our expectation of a medium-term debt-to-capital ratio of 50%. The levered

beta is 1.38. We assume an equity risk premium of 8.04% for Saudi Arabia which

includes a 1.35% premium for the country risk associated with Saudi Arabia.

Tax-adjusted cost of debt of 4.4%: The cost of debt for Saudi Kayan is assumed

to be 4.50%. After adjusting it for tax rate, cost of debt equals 4.40%.

Using the above assumptions, we arrive at a WACC of 9.65%.

DCF VALUE OF SR20.3/SHARE

For evaluating Saudi Kayan’s business, we use the DCF analysis with a detailed free

cash flow (FCF) estimate out to 2017E. Given the cyclicality of the sector, the eight-

year explicit forecast period covers one business cycle. We then use a terminal

growth assumption of 2.5% and discount the cash flows using the WACC. We then

arrive at the estimated enterprise value of the company, further adjust for debt,

cash, and other payments to derive Saudi Kayan’s equity value and target price.

Exhibit 52: Saudi Kayan - Details of DCF Valuation

In SR mn, unless otherwise specified

Sum of present value 18,302.5

Terminal value 50,653.5

Present value of terminal 28,634.0

Enterprise value 46,936.6

Less: debt (18,804.6)

Add: cash 2,453.9

Less: end-of-services indemnities (65.1)

Equity value 30,520.8

Number of shares (mn) 1,500.0

Value per share (SR) 20.3

Source: NCBC Research estimates

The table below indicates the impact of changes in WACC as well as terminal

growth rate on the DCF target price.

Exhibit 53: Sensitivity table

Terminal growth rate (%)

1.5 2.0 2.5 3.0 3.5

7.7 26.6 28.9 31.7 35.1 39.2

8.7 21.6 23.2 25.1 27.3 29.9

9.7 17.8 19.0 20.3 21.9 23.7

10.7 14.9 15.8 16.7 17.9 19.1

WA

CC

(%

)

11.7 12.5 13.2 13.9 14.8 15.7

Source: NCBC Research estimates

53

Page 54: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

Company description

Overview Saudi Kayan is a joint venture between SABIC and privately-held Al Kayan

Petrochemical Company (Al Kayan), and was registered on 12 June 2007. During

2007, 45% was offered to the public through an initial public offering. Currently,

SABIC and Al Kayan own a 35% and 20% stake in the firm, respectively, with the

remainder held by the public.

Exhibit 54: Shareholding pattern

Units

Public, 45%

Al Kayan Petrochemical Co,

20%

SABIC, 35%

Source: Tadawul

Saudi Kayan is currently in pre-operational stage and commissioning is expected to

start in phases, with important units starting operations in 2H 2010 and others in

early 2011. Two plants – LDPE and Amines – are expected to start trial operations

2H 2012 with commercial operations in 2013. Saudi Kayan’s petrochemical

complex, located in the Jubail Industrial City, will create a fully integrated

production model as the basic chemicals produced would be used internally to

manufacture polymers for external sales. The complex will have annual production

capacity of about 6mn mt.

Project cost at USD10bn The total project cost is targeted at approximately SR37.5bn (USD10bn) which was

financed through debt (~60%) and equity (~40%). SABIC, Al Kayan Petrochemical

Co and the proceeds from the IPO together accounted for SR15bn – the equity

proportion of the project cost.

In May 2008, a consortium of banks and financial institutions agreed to lend

SR22.5bn (USD6bn) to Saudi Kayan for a period of 15 years. The consortium

includes a group of regional and international banks and financial institutions along

with export credit agencies (such as ECGD, KEIC, K-EXIM and SACE). Al Rajhi

Banking & Investment Corporation is providing Islamic working capital, while the

Public Investment Fund (PIF) of the Kingdom of Saudi Arabia is financing the

project cost. Saudi Investment Development Fund (SIDF) provided USD533mn of

debt to Saudi Kayan.

54

Page 55: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE 55

F INANCIAL PERFORMANCE

Feedstock agreement

ETHANE AND BUTANE AT A DISCOUNT TO GLOBAL PRICES

Saudi Aramco has agreed to supply ethane to Saudi Kayan at a fixed price of

USD.75/mmBtu for seven years commencing from the first quarter of 2008. From

mid-December 2009, Saudi Kayan started receiving natural gas from Saudi Aramco

to facilitate commissioning of the complex. Industry wide expectations are that

ethane prices will be revised to SR1.5/mmBtu in 2012, however we believe Saudi

Kayan will face this revision in 2015, benefitting from its seven year agreement

with Saudi Aramco.

Saudi Aramco has also agreed to supply butane at a price linked to Japanese

Naphtha. The butane prices calculated using this mechanism are lower than butane

export prices. The price at which butane is supplied to Saudi Kayan is expected to

be revised upward in 2011 from a discount of 31.5% to a discount of 30%. The

company should continue to enjoy material cost benefits versus its global peers

who procure butane at market prices.

OTHER RAW MATERIALS SUPPLIED THROUGH THE SABIC GROUP

SABIC is scheduled to supply methanol to the complex, while the oxygen and

nitrogen requirement will be fulfilled by the National Company for Industrial Gases

(Gas) – SABIC’s subsidiary. Amine, benzene, butane-1 and soda will also be

supplied by SABIC’s subsidiaries.

Dividend policies We have projected dividend payment of SR1 per share dividend starting from

2012e. This results in a dividend yield of 4.5%.

Page 56: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

Financials

Exhibit 55: Income statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Sales 0 0 12,134 16,773 16,677 15,653

% change n/a n/a n/a 38.0 (1.0) (6.0)

Cost of Sales 0 0 (8,674) (11,998) (11,841) (11,231)

% of sales 0 0 71.5 71.5 71.0 71.8

Gross Profit 0 0 3,459 4,775 4,835 4,422

Gross margins (%) n/a n/a 28.5 28.5 29.0 28.2

SG&A expenses 0 0 (669) (922) (919) (870)

D&A expenses 0 (5) (1,248) (1,676) (1,705) (1,738)

Operating Profit 0 0 2,790 3,852 3,916 3,552

Operating Margin (%) 23.0 23.0 23.5 22.7

Interest Income 38 29 43 79

Interest Expense (464) (470) (470) (462)

Profit before taxes (17) (94) 2,364 3,411 3,490 3,170

Zakat (0) (2) (85) (164) (202) (229)

Net income (17) (96) 2,279 3,247 3,288 2,941

Net margin (%) n/a n/a 18.8 19.4 19.7 18.8%

EPS (SR) (0.01) (0.06) 1.52 2.16 2.19 1.96

Source: Company, NCBC Research estimates

Exhibit 56: Balance sheet

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 2,472 2,685 1,761 2,365 3,912 5,185

Accounts receivables 0 0 1,995 2,757 2,741 2,573

Inventories 0 0 2,614 3,616 3,569 3,385

Other receivables & prepayments 168 251 0 0 0 0

Total current assets 2,639 2,936 6,370 8,738 10,222 11,143

Cost of project under construction 33,147 33,147 32,268 31,180 30,142 29,186

Other non-current assets 21 16 10 10 10 10

Total non-current assets 33,168 33,163 32,279 31,190 30,152 29,196

Total assets 35,808 36,099 38,648 39,928 40,374 40,339

Accounts payable 272 408 1,901 2,630 2,595 2,462

Accrued and other current liabilities 883 1,133 1,142 1,222 1,262 1,276

Total current liabilities 1,155 1,540 3,043 3,852 3,857 3,738

Long term debts 19,113 19,113 17,878 16,600 15,250 13,893

Other non-current liabilities 62 64 67 69 71 72

Total non-current liabilities 19,175 19,178 17,945 16,669 15,321 13,965

Share capital 15,000 15,000 15,000 15,000 15,000 15,000

Statutory reserves 49 49 277 602 931 1,225

Retained earnings 428 332 2,383 3,805 5,264 6,411

Total stockholders' equity 15,477 15,381 17,660 19,407 21,195 22,636

Total equity & liabilities 35,808 36,099 38,648 39,928 40,374 40,339

Source: Company, NCBC Research estimates

56

Page 57: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI KAYAN – INITIATING COVERAGE

F INANCIALS

Exhibit 57: Cash flow statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from op. (a) (946) 213 675 3,970 5,064 4,913

Cash flow from inv.(b) (13,404) 0 (364) (587) (667) (783)

Cash flow from fin.(c) 13,299 0 (1,235) (2,778) (2,849) (2,857)

Debt 13,299 0 (1,235) (1,278) (1,349) (1,357)

Net change in cash (1,051) 213 (924) 604 (1,547) 1,273

Cash at start of the year 3,522 2,472 2,685 1,761 2,365 3,912

Cash at the end of period 2,472 2,685 1,761 2,365 3,912 5,185

Source: Company, NCBC Research estimates

Exhibit 58: Key ratios

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR)

EPS (0.01) (0.06) 1.52 2.16 2.19 1.96

Div per share 0.0 0.0 0.0 1.0 1.0 1.0

FCF per share (9.6) 0.2 0.5 2.5 3.2 3.0

Book value per share 10.3 10.3 11.8 12.9 14.1 15.1

Valuation ratios (x)

P/E n/a n/a 14.7 10.3 10.2 11.4

P/BV 2.2 2.2 1.9 1.7 1.6 1.5

P/FCF (2.3) 109.5 46.7 8.8 7.0 7.5

EV/sales n/a n/a 4.1 3.0 3.0 3.2

EV/EBITDA n/a 9,183.8 12.4 9.1 8.9 9.5

Div yield (%) - - - 4.5 4.5 4.5

Profitability ratios (%)

Gross margins n/a n/a 28.5 28.5 29.0 28.2

Operating margin n/a n/a 23.0 23.0 23.5 22.7

EBITDA margins n/a n/a 33.3 33.0 33.7 33.8

Net profit margins n/a n/a 18.8 19.4 19.7 18.8

ROE (0.1) (0.6) 12.9 16.7 15.5 13.0

ROA (0.1) (0.3) 5.9 8.1 8.1 7.3

Liquidity ratios

Current ratio 0.1 0.2 1.5 1.7 1.6 1.6

Quick Ratio 0.1 0.2 0.7 0.7 0.7 0.7

Operating ratios (days)

Inventory - - 110 110 110 110

Receivables outstanding - - 60 60 60 60

Payables outstanding - - 80 80 80 80

Operating cycle - - 170 170 170 170

Cash cycle - - 90 90 90 90

Production & sales (‘000 mt)

Production capacity 0.0 5.7 5.7 5.7 6.1 6.1

Production volumes 0.0 0.0 4.3 5.7 6.1 5.8

Utilization rate (%) n/a n/a 100 100 100 95

External sales volumes 0.0 0.0 2.2 2.9 2.8 2.7

Source: Company, NCBC Research estimates

57

Page 58: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 INITIATION OF COVERAGE

Petrochem

Underweight Waiting until 2012

Target Price (SR) 15.8

Current price (SR) 18.7

Potential downside (%) ↓ 15.1

Stock details

52-week range H/L (SR) 20/13

Market cap ($mn) 2,390

Shares outstanding (mn) 480

Listed on exchanges TADAWUL

Price perf (%) 1M 3M SL

Absolute 21.9 24.3 42.9

Rel. to market 16.5 13.9 23.6

Avg daily T/o (mn) SR US$

3M 46.2 12.3

Since listing 93.0 24.8

Reuters code 2002.SE

Bloomberg code PETROCH AB

Website www.petrochem.com.sa

Valuation multiples

09 10E 11E

P/E (x) n/a n/a n/a

P/B (x) 1.3 1.9 2.0

EV/EBITDA (x) n/a n/a n/a

Div yield (%) 0.0 0.0 0.0

Source: NCBC Research estimates SL: Since listing

Share price performance

10

15

20

25

Aug-09 Nov-09 Feb-10

4000

5000

6000

7000

8000

Petrochem TASI (RHS)

National Petrochemical Co. (Petrochem), expected to commence

operations in 2012, will be entering into the Ethylene and Propylene

derivatives arena through a JV with Chevron Phillips. However, given

that there will likely be no revenue until 2012e and that 2010e-2011e

will remain in net losses, we initiate coverage on Petrochem with an

Underweight rating and target price of SR15.8/share.

No sales to be reported until 2012: We expect Petrochem to only report

revenue figures starting in 2012e once its plants become operational. Given

our assumption that its plants will be commercially operational from 2Q12,

2012e will comprise 9 months of production. We expect 2013e will be the first

year for a full year of production to impact the revenue figures.

Net losses in 2010e & 2011e: We expect Petrochem will be incurring net

losses during 2010e and 2011e. The majority of the net losses during this time

are from interest expenses. Once revenues start in 2012e, we expect the net

income to turn positive, however quickly peaking in 2013e at SR1,080.3mn,

with contraction likely thereafter due to a lower utilization rate.

Planned product lines offers limited growth opportunities: Polyethylene

and polypropylene will account for close to 88% of Petrochem’s external sale

volumes. However, there is potential for oversupply here in the medium-term

given the aggressive capex by most of the Saudi players in extending their

ethylene and propylene derivatives capacities.

Strong partnership to offer motivated marketing: Chevron Phillips

Petrochemical Company, Petrochem’s JV partner, is an experienced marketer

with fully developed platforms and channels. Chevron Phillips has an off-take

agreement with Petrochem which limits its inventory risk.

Valuation: Petrochem trades at a 2009 P/BV multiple of 1.9x (sector average:

2.9x and TASI: 2.2x). Our DCF analysis results in a valuation of SR15.8/share.

Given the limited positive catalysts since operations will not start for another

two years, we initiate coverage on Petrochem with an Underweight rating and

a target price of SR15.8 representing 15.1% downside.

Source: Bloomberg Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 0 0 0 5,932 8,721

EBITDA SR mn (9) (15) (17) 2,115 3,087

EBITDA margin % n/a n/a n/a 35.6 35.4

Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627

Net income SR mn (61) (127) (236) 905 1,080

Net margin % n/a n/a n/a 15.3 12.4

EPS SR (0.19) (0.26) (0.49) 2.90 3.46

Assets SR mn 14,581 19,228 21,284 22,666 23,189

Equity SR mn 4,757 4,630 4,394 5,299 6,380 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 59: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

Investment scenarios Valuation can increase significantly with lower cost and higher prices

Historical and expected price performance

8.2

3.8

2.51.3

15.8

1.90.9

2.6

21.3

0

5

10

15

20

25

DC

F Bear

case

WACC

incr

ease

s by

2%

Realiz

ation d

ecl

ines

by

3%

Cost

ris

es

by

3%

DC

F Base

case

Utiliz

atio

n g

row

by

5%

Cos

t re

duce

s by

2%

Real

ization

gro

ws

by

3%

DCF

Bull

case

(SR)

21.3

8.2

15.8

0

5

10

15

20

25

30

Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11

Historical Price Performance Price Target

Scenario analysis

Source: NCBC Research estimates Source: NCBC Research estimates

Investment view DCF scenarios

• Price

target:

SR 15.8

• Weighting of DCF is 100%

• DCF bull

case:

SR 21.3

• Assuming higher prices and higher

utilization rates due to a faster demand

recovery. Also assuming lower costs and

expanding margins. Net income of

SR1.34bn expected in 2013e.

• DCF base

case:

SR 15.8

• We expect operating rates and prices to

improve gradually in coming years.

However, aggressive capacity additions are

expected to outpace the demand recovery

thus denting operating rates and prices

from 2014e onwards. We assume net

income of SR1.1bn in 2013e.

• No top line to be reported untill 2012: Plants will be

commercially operational in 2Q 2012e with 2012 featuring

only 9 months of production. Full year revenues will start in

2013e.

• Net losses till 2011e: Given no sales until 2012e,

Petrochem will be incurring net losses during 2010e and

2011e, mostly from interest expenses, we believe.

• Capacity oversupply in the region a risk: Polyethylene

and polypropylene will account for close to 88% of

Petrochem’s external sale volumes. Capacity oversupply in

these markets is a possibility given the aggressive capex

taken by KSA players in extending their ethylene and

propylene derivatives capacities.

• Low cost structure: The availability of low cost feedstock

to Petrochem helps in competing with global peers, but not

versus other KSA players which enjoy the same feedstock

advantage.

• Association with Chevron a positive: Petrochem’s JV

partner, Chevron Phillips Petrochemical Company, brings

strong marketing benefits as it has entered into an off-take

agreement with Petrochem to off take and sell all unsold

production

• DCF bear

case:

SR 8.2

• Lower prices and weaker utilization due to

intensified competition. Also two

percentage points higher WACC. Net

income of SR0.91bn expected in 2013e.

Potential catalysts Risks to our view

• Earlier then expected start in production: If Petrochem

commences operations earlier then our estimated 2Q 2012,

this would act as a positive trigger to the stock as well as

earlier reporting of profits and revenues.

• Higher then expected rise in feedstock prices could dent

profitability

• Once operational, anti dumping claims by Asian traders

could burden Petrochem’s cost structure with additional

charges.

59

Page 60: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

Investment view NET LOSSES UNTIL 2011E, WITH NO REVENUE UNTIL 2012E

We expect Petrochem’s plants to become commercially operational from 2Q12,

meaning the company will be in losses until then and 2012e figures will have

revenues for only 9 months of production. A full year of production, revenues and

subsequent earnings will only begin from 2013e, we expect.

We believe revenues will contract slightly after 2013e driven by a leveling out in

prices and contracting utilization rates. This outlook is in-line with our concerns on

global over capacity during this time frame as large capacity additions continue in

the overall market. We anticipate that utilization rates will contract to 95% in

2014e and 90% in 2015e.

With production commencing in 2012, we expect Petrochem will be incurring net

losses during 2010e and 2011e due to its interest expenses. After strong net

income growth in 2012e and 2013e, we expect net income to contract in 2014e and

2015e as a result of the decreasing utilization rate.

FORAY IN ETHYLENE AND PROPYLENE PRODUCT LINE OFFERS

LIMITED GROWTH OPPORTUNITIES

Polyethylene and polypropylene will account for close to 88% of Petrochem’s

external sale volumes, we believe. Given the aggressive capacity additions planned

by most of the Saudi players in extending their ethylene and propylene derivatives

capacities, we believe Petrochem will be entering into a market facing overcapacity.

This could restrict any price recovery in the polyethylene and polypropylene

markets in forthcoming years. In addition, Petrochem’s dependency on these

product lines is concerning when most of its peers are diversifying into different

value-added derivatives with a larger capacity base. We therefore remain slightly

apprehensive over Petrochem’s ability to outperform its Saudi peers in terms of

earnings generation capabilities in the coming years.

LIMITED HEAD ROOM WITH VALUE ALREADY PRICED IN

In the near term, we do not see any strong price catalysts given that the company

is currently in pre-operational stage. Moreover, as the stock price is already up

42.9%, outpacing the 19.3% rise in TASI index, from its listing on 08 August 2009,

and the pre-operational status, we believe the stock is looking expensive. Our

valuation and price target of SR15.8/share indicates 15.1% downside and drives

our Underweight rating.

60

Page 61: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM – INITIATING COVERAGE

INVESTMENT VIEW

Risks to our view

EARLIER THEN EXPECTED START IN PRODUCTION

If Petrochem commences operations earlier then our estimated 2Q 2012, the news

announcement would act as a positive trigger to the stock price and more

importantly would positively impact the financials with earlier reporting of profits

and revenues.

AMENDMENTS IN FEEDSTOCK PROCUREMENT PRICES

Petrochem procures natural gas from Saudi Aramco at an attractive price of

USD0.75/mmbtu under long term contracts. However, we believe an increase in the

medium-term is possible and assume that for others in the sector, gas prices will

rise to USD1.5/mmBtu in 2012e. For Petrochem, we believe that prices will remain

at 0.75/mmbtu until 2015e when the contract between Petrochem and Aramco will

be reviewed. We have incorporated the rise in price from 2016e in projecting

Petrochem’s future cash flows. An earlier change in contractual prices and volumes

of feedstock would erode Petrochem’s cost advantage and impact earnings.

61

Page 62: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

Valuation: SR15.8/share

Valuation methodology We have used DCF methodology to arrive at our target price for Petrochem.

Our valuation is based on the following assumptions:

Cost of Equity (COE) of 14.4%: We have taken the US 10-year Treasury yield of

3.81% (as of 25 April 2010) as the risk-free rate, as the Saudi Riyal is pegged to

the US dollar. Special attention is needed in estimating Petrochem’s Beta because

of the expected change in the company’s capital structure. We calculated historical

(observed) beta using two years weekly data and then adjusted it for leverage, to

reflect our expectation of a medium-term debt-to-capital ratio of 45%. The levered

beta is 1.32. We assume an equity risk premium of 8.04% for Saudi Arabia which

includes a 1.35% premium for the country risk associated with Saudi Arabia.

Tax-adjusted cost of debt of 4.4%: The cost of debt for Saudi Kayan is assumed

to be 4.50%. After adjusting it for tax rate, cost of debt equals 4.40%.

Using the above assumptions, we arrive at a WACC of 9.97%.

DCF VALUE OF SR15.8/SHARE

For evaluating Petrochem’s business, we use DCF analysis with a detailed free cash

flow (FCF) estimate out to 2017e. Given the cyclicality of the sector, the eight-year

explicit forecast period covers one business cycle. We then use a terminal growth

rate assumption of 2.5% and discount the cash flows using the WACC of 9.97%.

Based on these assumptions, we arrive at the estimated enterprise value of the

company. This is further adjusted for debt, cash, and other payments to derive

Petrochem’s equity value and target price.

Exhibit 44: Petrochem - Details of DCF Valuation

In SRmn, unless otherwise specified

(SR mn unless specified)

Sum of present value 6,180.7

Terminal value 29,694.4

Present value of terminal 16,488.5

Enterprise value 22,669.2

Less: debt (11,576.7)

Add: cash 601.3

Less: end-of-services indemnities (1.8)

Equity value pre-minorities 11,692.0

Less: minorities interest (4,092.2)

Equity value post minorities 7,599.8

Number of shares (mn) 480.0

Value per Share (SR) 15.8

Source: Company, NCBC Research estimates

The table below indicates the impact of changes in WACC as well as terminal

growth rate on the DCF target price.

Exhibit 45: Sensitivity table

Terminal growth (%)

1.5 2.0 2.5 3.0 3.5

8.0 19.0 21.3 24.0 27.2 31.1

9.0 15.6 17.3 19.2 21.5 24.2

10.0 13.0 14.3 15.8 17.5 19.5

11.0 10.9 12.0 13.2 14.5 16.0

WA

CC

(%

)

12.0 9.2 10.1 11.1 12.2 13.4 Source: NCBC Research estimates

62

Page 63: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

Company description

Overview Established in March 2008, National Petrochemical Company (PetroChem), 47.7%

owned by Saudi Industrial Investment Group (SIIG – 2250.SE), is engaged in the

petrochemical market through its subsidiary - Saudi Polymers Company. Petrochem

owns a 65% stake in Saudi Polymers Company located in Al-Jubail Industrial City.

The remaining 35% stake is owned by Arabian Chevron Philips Petrochemical Ltd.

Saudi Polymers Company’s petrochemical complex is under-construction and will

have a total annual production capacity of 3.4 mn mtpa. Its petrochemical product

portfolio includes 1.2mn mtpa of ethylene, 0.4mn mtpa of propylene, 1.1mn mtpa

of HDPE and LDPE (0.55mn mtpa each), 0.4mn mtpa of polypropylene, 0.2mn mtpa

of polystyrene and 0.1mn mtpa of hexene. Saudi Polymers Company is in pre-

operational stage and is expected to commence operations in 2011. We have taken

a conservative assumption that the complex would start commercial operations in

2Q 2012.

In July 2009, Petrochem raised SR2.6bn in its IPO by offering 240mn shares to the

public and 20 mn shares to SIIG. Out of the 240mn shares, 80mn shares each were

allocated to General Organization for Social Insurance (GOSI) and Public Pension

Agency (PPA). Following this, SIIG’s stake reduced to 47.7% from 95% held earlier,

GOSI and PPA each owns 16.2%, while the remaining 17.6% is held by the public.

Exhibit 46: Shareholding pattern

%

SIIG, 48%

GOSI, 16%

PPA, 16%

Public, 20%

Source: Tadawul

63

Page 64: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

COMPANY DESCRIPTION

Exhibit 47: Product flow chart

mt per annum, unless otherwise stated

Ethane60 mn cu ft

Propane(40,000 bpd)

Olefins unit

EthyleneHDPE and LDPE units

HDPE and LDPE550,000 mtpa (each)

Polystyrene unit Polystyrene200,000 mtpa

Styrene

Polypropylene400,000 mtpaPP unit

Propylene

Hexene unit

Source: Petrochem Prospectus, NCBC Research estimates

Project cost The estimated cost of the project is over SR20.8bn financed through equity and

debt funding. Total debt of SR13.5bn was raised from commercial banks (SR9.3bn),

PIF (SR3.0bn) and SIDF (SR1.2bn). The equity contribution worth SR7.4bn was

arranged through the IPO and partner’s contribution.

Feedstock agreement The complex includes a mix feed cracker which utilize 40% ethane and 60%

propane as feedstocks.

ETHANE AND PROPANE

Saudi Aramco has agreed to supply around 40,000 bpd of propane to Saudi

Polymer Company for a period of 20 years, at a discounted rate to international

prices. Saudi Aramco will also supply around 60mn cubic feet of ethane annually to

Petrochem at fixed rate of USD0.75/mmbtu until 2015.

STYRENE

The styrene requirement for the Saudi Polymer Co will be fulfilled by Al-Jubail

Chevron Phillips Co which will provide 200,000 mtpa to the facility. We believe

styrene will be supplied at discount to market prices given that Arabian Chevron

Phillips Petrochemical Company is Petrochem’s JV partner.

Marketing agreement Petrochem’s JV partner, Chevron Phillips Petrochemical Company has an off-take

agreement in which it is obligated to off take and sell all unsold production leaving

no risk to Petrochem in terms of unsold production.

End markets Saudi Polymer Co will cater to the Middle Eastern, South Eastern Asia and European

petrochemical markets through Chevron Phillips Chemical International Sales

(CPCIS). Moreover, Saudi Polymer Company will be responsible for any inter-

segmental sales, products sold to Saudi Chevron Phillips and Jubail Chevron Phillips

and products sold to Saudi clients.

64

Page 65: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

Financials Exhibit 48: Income statement In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Revenues 0 0 0 5,932 8,721 8,191

% change n/a n/a n/a n/a 47.0 (6.1)

COGS 0 0 0 (3,892) (6,189) (5,893)

Gross Profit 0 0 0 2,040 2,532 2,298

Margins (%) n/a n/a n/a 34.4 29.0 28.1

G&A expenses (9) (15) (18) (316) (488) (462)

D&A expenses 0 (0) (0) (390) (1,044) (1,051)

Operating Profit (9) (15) (18) 1,724 2,043 1,836

EBITDA (9) (15) (17) 2,115 3,087 2,887

% change n/a n/a n/a n/a 46.0 (6.5)

Other expenses (15) 0 0 0 0 0

Interest expenses, net of income 15 14 (211) (280) (299) (286)

Minority interest payment 2 4 0 (487) (582) (508)

Zakat (53) (129) (7) (52) (83) (100)

Net income (61) (127) (236) 905 1,080 943

% change n/a n/a n/a n/a 19.3 12.5

Net margin (%) n/a n/a n/a 15.3 12.4 11.5

EPS (SR) (0.19) (0.26) (0.49) 2.90 3.46 3.02

Source: Company, NCBC Research estimates

Exhibit 49: Balance sheet In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 3,272 689 337 252 714 1,566

Accounts receivables 0 0 0 1,056 1,553 1,459

Inventories 0 0 0 800 1,272 1,211

Total current assets 3,276 694 341 2,112 3,543 4,240

Cost of project under construction 11,170 18,399 20,808 0 0 0

Property and equipment, net 1 1 1 20,419 19,512 18,623

Deferred expenses 134 134 134 134 134 134

Total non-current assets 11,305 18,534 20,944 20,553 19,646 18,756

Total assets 14,581 19,228 21,284 22,666 23,189 22,996

Accured expenses & other liabilities 1 1 1 1 1 1

Zakat provision 53 53 53 53 53 53

Accounts payables 0 0 0 533 848 807

Total current liabilities 54 54 54 587 902 861

Long term debts 7,675 9,967 12,259 12,002 11,130 10,036

Support loans 1,037 1,037 1,037 1,237 1,237 1,237

Other non-current liabilities 966 967 968 968 968 968

Total non-current liabilities 9,678 11,971 14,264 14,207 13,335 12,240

Share capital 4,800 4,800 4,800 4,800 4,800 4,800

Statutory reserves 2 2 2 92 200 295

Retained earnings (45) (172) (408) 407 1,379 2,228

Total stockholders' equity 4,757 4,630 4,394 5,299 6,380 7,322

Minority Equity 92 2,573 2,573 2,573 2,573 2,573

Total liabilities & equity 14,581 19,228 21,284 22,666 23,189 22,996

Source: Company, NCBC Research estimates

65

Page 66: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 PETROCHEM - INITIATING COVERAGE

F INANCIALS

Exhibit 50: Cash flow statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from op. (a) 667 (126) (235) (27) 1,470 2,109

Cash flow from inv.(b) (9,092) (7,229) (2,410) 0 (136) (162)

Addition(and transfers) to PP&E (9,012) (7,229) (2,410) 0 (136) (162)

Cash flow from fin.(c) 10,184 4,773 2,292 (57) (872) (1,094)

Debt 7,492 2,292 2,292 (257) (872) (1,094)

Net change in cash 1,759 (2,583) (353) (85) 462 852

Cash at start of the year 1,513 3,272 689 337 252 714

Cash at end of the year 3,272 689 337 252 714 1,566

Source: Company, NCBC Research estimates

Exhibit 51: Key ratios In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR)

EPS (0.19) (0.26) (0.49) 2.90 3.46 3.02

FCF per share (28.02) (15.09) (5.06) 1.52 4.58 5.67

Div per share - - - - - -

Book value per share 14.92 9.65 9.15 11.04 13.29 15.25

Valuation ratios (x)

P/E n/m n/m n/m 6.43 5.39 6.17

P/FCF n/m n/m n/m 12.26 4.07 3.29

P/BV 1.25 1.93 2.04 1.69 1.40 1.22

EV/sales n/m n/m 2.43 1.65 1.76 1.90

EV/EBITDA n/m n/m n/m 6.81 4.66 4.98

Div yield (%) - - - - - -

Profitability ratios (%)

Gross margins n/m n/m n/m 34.40 29.03 28.06

Operating margin n/m n/m n/m 29.07 23.43 22.41

EBITDA margins n/m n/m n/m 35.65 35.40 35.25

Net profit margins n/m n/m n/m 15.26 12.39 11.51

ROE (1.27) (2.75) (5.37) 17.08 16.93 12.87

ROA (0.42) (0.66) (1.11) 3.99 4.66 4.10

Liquidity ratios

Current ratio 0.07 0.07 0.07 3.17 3.14 3.10

Quick Ratio 0.07 0.07 0.07 1.81 1.73 1.70

Operating ratios (days)

Inventory (excl. spare parts) - - - 75 75 75

Receivables outstanding - - - 65 65 65

Payables outstanding - - - 50 50 50

Operating cycle - - - 140 140 140

Cash cycle - - - 90 90 90

Production & sales

Production capacity (mn mt) 0.0 0.0 3.4 3.4 3.4 3.4

Production volumes (mn mt) 0.0 0.0 0.0 2.3 3.4 3.2

Utilization Rate (%) n/a n/a n/a 90.0 100.0 95.0

External Sales Volumes (mt) 0.0 0.0 0.0 1.1 1.7 1.6

Source: Company, NCBC Research estimates

66

Page 67: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 COMPANY UPDATE

National Industrialization Co

Overweight Riding on expansion

Target Price (SR) 40.0

Current price (SR) 35.0

Stock details

52-week range H/L (SR) 33/14

Market cap ($mn) 4,305

Shares outstanding (mn) 461

Listed on exchanges TADAWUL

Price perf (%) 1M 3M 12M

Absolute 17.1 28.7 133.3

Rel. to market 15.7 18.5 106.6

Avg daily T/o (mn) SR US$

3M 42.3 11.3

12M 32.1 8.6

Reuters code 2060.SE

Bloomberg code NIC AB

Website www.tasnee.com

Valuation multiples

09 10E 11E

P/E (x) 31.0 10.5 11.4

P/B (x) 2.1 1.8 1.6

EV/EBITDA (x) 11.5 5.8 6.0

Div yield (%) 2.1 2.9 2.9

Source: NCBC Research estimates

Share price performance

0

8

16

24

32

40

Apr-09 Sep-09 Mar-10

4000

5000

6000

7000

8000

Tasnee TASI (RHS)

National Industrialization Co (Tasnee) has added 60,000mt capacity of

TiO2 and started construction of its Acrylic acid plant. Moreover, an

improved outlook on oil prices and a full year contribution from SEPC

are set to boost earnings going forward. Our price target increases to

SR40.0 and we reiterate our Overweight rating on the stock

Yanbu capacity expansion to positively impact titanium business

earnings: Cristal Global added 60,000 mt capacity of titanium dioxide at its

Yanbu plant at the end of 2009, increasing Tasnee’s total titanium dioxide

capacity by about 8%. This increase will offset the loss in production for the

months of March and April 2010 at Stallingborough (UK) due to a temporary

shutdown, and should positively impact earnings through the remainder of the

year.

Improved oil forecast boosts petrochemical price forecast: Recent

strength in oil prices is a positive for Tasnee’s valuation as movements in oil

prices have a strong bearing on petrochemical prices. This, along with an

expanded capacity base and rising demand supports our outlook on the stock.

Full year contribution from SEPC business to boost 2010 earnings:

Tasnee’s 2010 results will benefit from a full year contribution from the SEPC

plant which started operations in June 2009. The timing on this expansion

looks ideal as it allows Tasnee to capitalize on rising petrochemical demand

and prices.

Valuation increased to SR40.0/share: The increased capacity and higher

pricing assumptions has positively impacted Tasnee’s future cash flows. Our

price target also increases by 20% to SR40.0. We continue to remain

Overweight on Tasnee and see it as one of our top picks in the Petrochemical

sector.

Source: Bloomberg Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 10,863 17,123 17,506 18,288 18,107

EBITDA SR mn 2,493 4,963 4,764 4,624 4,480

EBITDA margin % 22.9 29.0 27.2 25.3 24.7 Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627 Net income SR mn 519 1,530 1,418 1,352 1,307

Net margin % 4.8 8.9 8.1 7.4 7.2

EPS SR 1.13 3.32 3.08 2.93 2.84

Assets SR mn 33,168 36,739 38,089 38,493 35,919

Equity SR mn 7,790 8,859 9,816 10,707 11,554 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 68: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 TASNEE – COMPANY UPDATE 68

Forecast changes NET POSITIVE CHANGE IN TITANIUM CAPACITY POSITIVELY IMPACTS VALUATION

Cristal Global has completed a capacity expansion of its Yanbu based TiO2 facility to

180,000 mt from 120,000 mt, an expansion which we had not previously

incorporated into our model. However, offsetting this, in March 2010, Cristal Global

(Tasnee’s titanium arm) closed its 150,000mt/year TiO2 producing plant located in

Stallingborough (UK) when a pressurized container of titanium tetrachloride

ruptured. Cristal Global has indicated that the plant resumed normal operations last

weekrelease. The increased TiO2 production from the Yanbu plant in the first

quarter will help in mitigating the impact of near two month’s capacity closure at its

UK facility. We calculate the net impact of the additional capacity and the closure of

its UK facility as a 2,500mt increase in Cristal Global’s TiO2 capacity per quarter for

1Q 2010 and 2Q 2010 versus 4Q 2009.

UPWARD REVISION IN OIL PRICE FORECAST

Our oil price forecasts (NCBC Economics team) call for oil to average USD80.60 per

barrel in 2010e, up 30.6% YoY. Oil prices are expected to increase to USD85 per

barrel in 2011e and gradually rise to USD90 per barrel by 2013e. In the long run,

oil prices are expected to average around USD75 per barrel. These assumptions are

higher than our previous estimates. This upward revision in oil prices in turn has

pushed our petrochemical price estimates up thus positively impacting Tasnee’s

financial outlook and valuation.

Exhibit 59: NCBC oil price forecast

In USD per barrel

2010E 2011E 2012E 2013E 2014E 2015E

New forecast 81 85 90 85 85 80

Previous forecast 74 70 75 80 80 85

Change (%) 9 21 20 6 6 (6)

Source: NCBC Economics team estimates

WORK AT ACRYLIC ACID PLANT STARTED

The Acrylic Acid project includes a plant producing 125,000 mtpa of commodity

acrylates and a facility producing 80,000 mtpa of superabsorbent polymers. The

estimated project cost is SR3.1bn with an equity to debt contribution of 30%:70%.

The project is expected to start commercial operations in 3Q12. Once operational,

this should offer an additional revenue stream to Tasnee, although we have not yet

incorporated this into our forecasts, thus providing some additional upside. Tasnee,

through its various holdings, will receive 52.3% of the economics of this plant.

However it is not clear yet as to whether Tasnee will fully consolidate the earnings

from the Acrylic acid plant or reflect it under the investment in associates.

Page 69: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 TASNEE – COMPANY UPDATE

F INANCIAL PERFORMANCE

HIGHER MINORITY INTEREST AND ZAKAT RELATED EXPENSES

Tasnee reported an increase in zakat expense for its subsidiaries and minority

interest related expenses in 2009. In 2009, zakat related expenses stood at

SR91.9mn (compared to an income of SR55.6mn in 2008) and minority related

expenses were SR452.7mn (compared to SR157.8mn in 2008). These higher than

expected expenses were the primary reason behind the net income weakness for

the full year 2009. For the full year 2009, net income stood at SR526mn (SR601mn

in 2008) lower than our original expectation of SR653mn. We have incorporated

these increases while projecting Tasnee’s earnings in coming years.

The table below displays revised estimates for Tasnee’s 2010 and 2011

performance.

Exhibit 60: Earnings revisions

In SR mn, unless otherwise stated

Old

2010ENew

2010E % chg Old

2011ENew

2011E % chg

Revenue 14,251 17,123 20 15,224 17,506 15

EBITDA 3,291 4,963 51 3,705 4,764 29

Net profit 1,215 1,530 26 1,377 1,418 3

Target price (SR) N/A N/A N/A 33.2 40.0 20

Source: NCBC Research estimates

69

Page 70: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 TASNEE – COMPANY UPDATE

Financials Exhibit 61: Income statement In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Revenues 10,863 17,123 17,506 18,288 18,107 18,949

% change 8.2 57.6 2.2 4.5 (1.0) 4.6

COGS (8,404) (11,938) (12,451) (13,345) (13,313) (14,169)

Gross Profit 2,459 5,185 5,054 4,943 4,794 4,779

Margins (%) 22.6 30.3 28.9 27.0 26.5 25.2

Other Expenses (965) (1,404) (1,496) (1,575) (1,614) (1,701)

Share in associates 23 20 20 20 20 20

Operating Profit 1,517 3,801 3,578 3,388 3,200 3,098

Margins (%) 14.0 22.2 20.4 18.5 17.7 16.3

Minority interest expenses (453) (1,225) (1,136) (1,083) (1,047) (1,092)

Zakat (92) (264) (245) (233) (226) (235)

Net income 519 1,530 1,418 1,352 1,307 1,364

Net margin (%) 4.8 8.9 8.1 7.4 7.2 7.2

EPS 1.13 3.32 3.08 2.93 2.84 2.96

Source: Company, NCBC Research estimates

Exhibit 62: Balance sheet

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 3,585 4,484 6,233 6,703 4,419 5,129

Accounts receivables 3,033 4,546 4,408 4,505 4,460 4,667

Inventories 2,716 4,046 3,897 3,820 3,782 3,958

Other receivables & prepayments 533 757 790 846 844 844

Total current assets 9,867 13,833 15,328 15,875 13,506 14,599

Fixed assets 18,057 17,871 17,717 17,560 17,345 17,176

Intangible assets 3,697 3,689 3,680 3,673 3,662 3,652

Construction work-in-progress 448 227 227 227 227 227

Other non-current assets 1,098 1,118 1,138 1,158 1,179 1,199

Total non-current assets 23,301 22,906 22,762 22,618 22,413 22,253

Total assets 33,168 36,739 38,089 38,493 35,919 36,852

Short-term facilities 2,235 1,962 2,006 2,095 2,075 2,171

Current portion of long-term debt 892 1,238 1,774 4,263 1,337 1,973

Accounts payable 1,011 1,469 1,498 1,569 1,565 1,666

Other current liabilities 1,643 2,303 2,358 2,475 2,470 2,521

Total current liabilities 5,781 6,971 7,636 10,403 7,447 8,331

Long term debts 12,888 12,472 11,182 6,918 5,581 3,608

Obligation under capital lease 1,219 1,031 844 656 469 375

Other non-current liabilities 3,641 5,021 5,163 5,389 5,416 5,656

Total non-current liabilities 15,927 16,014 14,607 10,269 8,758 6,812

Share capital 4,607 4,607 4,607 4,607 4,607 4,607

Statutory reserves 349 502 644 779 910 1,046

Retained earnings 1,220 2,136 2,952 3,708 4,424 5,190

Others 1,613 1,613 1,613 1,613 1,613 1,613

Total stockholders' equity 7,790 8,859 9,816 10,707 11,554 12,457

Minority interest 3,670 4,895 6,031 7,114 8,161 9,253

Total equity & liab 33,168 36,739 38,089 38,493 35,919 36,852

Source: Company, NCBC Research estimates

70

Page 71: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 TASNEE – COMPANY UPDATE

F INANCIALS

Exhibit 63: Cash flow statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from op. (a) 38 1,392 2,994 2,791 2,656 2,646

Cash flow from inv.(b) (1,790) (747) (1,022) (1,071) (1,055) (1,139)

Addition(and transfers) to PP&E (2,195) (629) (896) (936) (912) (986)

Free cash flow (a+b) (1,752) 645 1,972 1,720 1,601 1,507

Cash flow from fin.(c) 1,724 253 (223) (1,250) (3,885) (797)

Debt 1,271 (343) (711) (1,684) (4,284) (1,241)

Net chg. in cash (a+b+c) (28) 899 1,749 470 (2,284) 710

Cash at start of the year 3,613 3,585 4,484 6,233 6,703 4,419

Cash at end of the year 3,585 4,484 6,233 6,703 4,419 5,129

Source: Company, NCBC Research estimates

Exhibit 64: Key ratios

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR) EPS 1.13 3.32 3.08 2.93 2.84 2.96 FCF per share (5.6) 1.4 4.3 3.7 3.5 3.3 Div per share 0.8 1.0 1.0 1.0 1.0 1.0 Book value per share 16.9 19.2 21.3 23.2 25.1 27.0 Valuation ratios (x) P/E 31.0 10.5 11.4 11.9 12.3 11.8 P/BV (6.3) 25.0 8.2 9.4 10.1 10.7 P/FCF 2.1 1.8 1.6 1.5 1.4 1.3 EV/sales 2.6 1.7 1.6 1.6 1.6 1.5 EV/EBITDA 11.5 5.8 6.0 6.2 6.4 6.5 Div yield (%) 2.1 2.9 2.9 2.9 2.9 2.9 Profitability ratios (%) Gross margins 22.6 30.3 28.9 27.0 26.5 25.2 Operating margin 14.0 22.2 20.4 18.5 17.7 16.3 EBITDA margins 22.9 29.0 27.2 25.3 24.7 23.3 Net profit margins 4.8 8.9 8.1 7.4 7.2 7.2 ROE 1.6 4.2 3.7 3.5 3.6 3.7 ROA 6.7 17.3 14.4 12.6 11.3 10.9 Liquidity ratios Current ratio 1.7 2.0 2.0 1.5 1.8 1.8 Quick Ratio 1.2 1.4 1.5 1.2 1.3 1.3 Operating ratios (days) Inventory 91 86 81 76 76 76 Receivables outstanding 102 97 92 90 90 90 Payables outstanding 44 45 44 43 43 43 Operating cycle 193 183 173 166 166 166 Cash cycle 149 138 129 123 123 123 Production & sales (mn mt) Production (mn mt) Titanium business 0.7 0.8 0.8 0.8 0.8 0.8 Petrochemical business 2.2 3.3 3.0 3.1 3.0 3.0 Utilization rate (%) Titanium business 83 96 100 100 100 100 Petrochemical business 87 100 100 100 84 88 External sales volumes (mt) Titanium business 0.7 0.8 0.8 0.8 0.8 0.8 Petrochemical business 1.1 1.7 1.7 1.7 1.6 1.7

Source: Company, NCBC Research estimates

71

Page 72: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

PETROCHEMICAL | 27 Apr i l 2010 COMPANY UPDATE

Sipchem

Overweight 2Q 2010 to benefit from Phase II

Target Price (SR) 29.4

Current price (SR) 24.7

Stock details

52-week range H/L (SR) 26/17

Market cap ($mn) 2,198

Shares outstanding (mn) 333

Listed on exchanges TADAWUL

Price perf (%) 1M 3M 12M

Absolute 1.6 8.6 39.5

Rel. to market 0.3 (1.6) 12.8

Avg daily T/o (mn) SR US$

3M 26.4 7.1

12M 28.2 7.5

Reuters code 2310.SE

Bloomberg code SIPCHEM AB

Website www.sipchem.com

Valuation multiples

09 10E 11E

P/E (x) 58.4 9.5 7.0

P/B (x) 1.7 1.5 1.3

EV/EBITDA (x) 34.0 6.5 4.9

Div yield (%) 4.0 4.0 4.0

Source: NCBC Research estimates

Share price performance

0

5

10

15

20

25

30

Apr-09 Oct-09 Apr-10

4000

5000

6000

7000

8000

Sipchem TASI (RHS)

Source: Bloomberg

Saudi International Petrochemical Co (Sipchem) 2010 results are to

benefit from the commercial start of its Acetyl complex scheduled for

April 2010. An improved outlook on oil prices and higher operating

efficiency further strengthens our outlook towards the stock. Our

price target increases 6% to SR29.4 and we reiterate our Overweight

rating on the stock.

Commercial start of phase II expansion in 2Q 2010: Management has

indicated an April start to commercial operations at its Phase II complex,

however we are conservatively assuming a May 2010 start. Earnings from this

Acetyl complex will likely boost Sipchem’s 2010e net income by over 6x YoY to

SR870mn.

Revised oil forecasts boost petrochemical price forecasts: We have

revised our petrochemical price forecasts upward in line with our revisions in

oil prices given rising demand and stabilizing supplies. The higher pricing along

with an expanded capacity base positively impacts Sipchem’s valuation.

Improved operating efficiency to fuel 2010 earnings growth: In 4Q

2009, Sipchem benefited from improved operating performance post its

maintenance shutdown during 3Q 2009, a strong recovery in petrochemical

prices and reduced anti-dumping charges. As a result, Sipchem’s net income

grew to SR56.5mn in 4Q 2009 from SR34.7mn in 4Q 2008. We expect these

factors to fuel earnings growth in 2010 as well.

Improved visibility on Phase III expansion plan: Sipchem aims to award

the engineering, procurement and construction (EPC) contract for Phase III by

end 2010. This expansion would add 125,000 mtpa of polyvinyl acetate and

200,000 mtpa of ethylene vinyl acetate to Sipchem’s existing petrochemical

product mix. This joint venture, 75% owned by Sipchem and 25% by Korea’s

Hanwha Chemical Co, is expected by management to be completed by end

2013. We do not yet incorporate Phase III into our valuation, offering further

upside.

Estimates and Valuation: Stronger pricing and improved efficiencies drive

our changes to estimates. Better 2009 full year results and the contribution

from the Acetyl complex increase our confidence in the stock. Hence, our price

target increases by 5.6% to SR29.4 representing an upside of 19.1%. We

continue to remain Overweight on Sipchem.

Financials

2009 2010E 2011E 2012E 2013E

Revenues SR mn 830 2,817 3,741 3,911 3,565

EBITDA SR mn 328 1,722 2,269 2,136 1,887

EBITDA margin % 39.5 61.1 60.6 54.6 52.9

Tariq Al-Alaiwat [email protected] Tel. +966 2690 7627

Net income SR mn 141 870 1,171 1,069 905

Net margin % 17.0 30.9 31.3 27.3 25.4

EPS SR 0.42 2.61 3.51 3.21 2.72

Assets SR mn 11,818 12,377 12,852 13,241 13,318

Equity SR mn 4,922 5,457 6,292 7,026 7,595 Please refer to the last page for important disclaimer

Source: Company, NCBC Research estimates

Page 73: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SIPCHEM – COMPANY UPDATE

Forecast changes PHASE II TO START COMMERCIALLY IN APRIL 2010

We believe Sipchem management is targeting an April 2010 start for its Phase II

complex, however we have factored in our forecasts that the complex will be

commercially starting from the beginning of May, out of conservatism. The complex

started trial runs at its different units during 3Q 2009 and 4Q 2009. The Acetyl

complex is set to double Sipchem’s annual capacity to 2.2mn mt. The contribution

of the Phase II complex will positively impact 2010e revenues by an estimated

SR1.5bn. Overall 2010e net income expected to grow by approximately 6.2 times

to SR870mn when compared with 2009 net income of SR141mn.

UPWARD REVISION IN OIL PRICE FORECAST

We have increased our oil forecasts to an average of USD80.60 per barrel in 2010e,

up 30.6% YoY. Oil prices are expected to increase to USD85 per barrel in 2011e

and gradually rise to USD90 per barrel by 2012e, as the global economy recovers.

In the long run, oil prices are expected to average around USD75 per barrel. These

assumptions are higher than our previous estimates, which has pushed our

petrochemical price estimates up thus positively impacting Sipchem’s valuation.

Exhibit 65: NCBC oil price forecast

In USD per barrel

2010E 2011E 2012E 2013E 2014E 2015E

New forecast 81 85 90 85 85 80

Previous forecast 74 70 75 80 80 85

Change (%) 9 21 20 6 6 (6)

Source: NCBC Economics team estimates

STRONG 1Q 2010 RESULTS BOOST OUTLOOK

Sipchem’s 1Q 2010 results benefited from higher than expected petrochemical

prices, improved operating performance post its maintenance shutdown during 3Q

2009 and lower anti-dumping charges. The Chinese government reduced the anti-

dumping charges on Sipchem’s Butanediol output to 4.5% from the 20.9% levied

earlier. Net income in 1Q 2010 jumped to SR81.2mn from SR29.2mn in 1Q 2009

and SR56.5mn in 4Q 2009. We expect these factors to fuel earnings growth in 2010

as well.

UPDATE ON PHASE III DEVELOPMENT

The engineering, procurement and construction (EPC) contract for Phase III is

expected to be awarded by the end of 2010. Phase III will produce 125,000 mtpa of

polyvinyl acetate and 200,000 mtpa of ethylene vinyl acetate. Sipchem will be

delivering 80,000mtpa of carbon monoxide production from the IGC plant to SABIC

under a 20-year agreement. The project is expected to complete by end 2013.

Sipchem is in talks with SABIC to take the ethane feedstock. Currently, we have

not included the impact of this expansion while valuing Sipchem due to uncertainty

on timing. Nevertheless, any positive news flow on this front will act as a strong

catalyst for the stock price, we believe.

73

Page 74: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SIPCHEM – COMPANY UPDATE

F INANCIAL PERFORMANCE

Exhibit 66: Earnings revisions

In SR Mn, unless otherwise stated

Old

2010ENew

2010E % chg Old

2011ENew

2011E % chg

Revenue 2,934 2,817 (4.0) 3,302 3,741 13.3

EBITDA 1,654 1,722 4.1 1,905 2,269 19.1

Net profit 670 870 29.8 818 1,171 43.2

Target price (SR) N/A N/A N/A 27.9 29.4 5.6

Source: NCBC Research estimates

.

74

Page 75: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SIPCHEM – COMPANY UPDATE

Financials

Exhibit 67: Income statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Sales 830 2,817 3,741 3,911 3,565 3,665

Change (%) (51.4) 239.2 32.8 4.6 (8.9) 2.8

Cost of Sales (435) (979) (1,286) (1,581) (1,500) (1,604)

Gross Profit 395 1,838 2,455 2,330 2,065 2,061

Gross margin (%) 47.6 65.2 65.6 59.6 57.9 56.2

SG&A (67) (116) (186) (195) (177) (182)

Depreciation (167) (308) (364) (385) (407) (429)

Operating Profit 168 1,413 1,905 1,751 1,480 1,450

Operating Margin (%) 20.3 50.2 50.9 44.8 41.5 39.6

Minority interest (29) (454) (611) (558) (472) (470)

Profit before taxes 141 917 1,233 1,126 953 949

Zakat (40) (46) (62) (57) (48) (48)

Net Income 141 870 1,171 1,069 905 901

Net Income Margin (%) 17.0 30.9 31.3 27.3 25.4 24.6

EPS 0.42 2.61 3.51 3.21 2.72 2.70

Source: Company, NCBC Research estimates

Exhibit 68: Balance sheet In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash & Cash equivalents 1,831 1,724 1,743 1,885 1,976 1,905

Accounts receivables 308 772 1,025 1,072 977 1,004

Inventories 79 201 264 325 308 330

Total current assets 2,218 2,697 3,032 3,282 3,261 3,239

Fixed assets 9,517 9,596 9,737 9,877 9,974 10,088

Other non-current assets 83 83 83 83 83 83

Total non-current assets 9,601 9,679 9,820 9,960 10,057 10,171

Total assets 11,818 12,377 12,852 13,241 13,318 13,410

Accounts payable 620 754 826 895 876 900

Accrued and other current liabilities 283 773 773 773 773 486

Total current liabilities 903 1,528 1,599 1,668 1,649 1,386

Long term debts 4,241 3,541 2,840 2,140 1,440 1,020

Other non-current liabilities 842 799 756 713 669 633

Total non-current liabilities 5,083 4,340 3,596 2,853 2,109 1,652

Share capital 3,333 3,333 3,333 3,333 3,333 3,333

Reserves 1,208 1,295 1,412 1,519 1,609 1,700

Retained earnings 484 932 1,650 2,276 2,755 3,231

Others (103) (103) (103) (103) (103) (103)

Total stockholders' equity 4,922 5,457 6,292 7,026 7,595 8,161

Minority interest 910 1,052 1,365 1,695 1,964 2,210

Total equity & liabilities 11,818 12,377 12,852 13,241 13,318 13,410

Source: Company, NCBC Research estimates

75

Page 76: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SIPCHEM – COMPANY UPDATE

F INANCIALS

Exhibit 69: Cash flow statement

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Cash flow from operating activities (175) 1,114 1,806 1,888 1,807 1,705

Cash flow from investing activities (1,327) (389) (504) (525) (505) (543)

Addition(and transfers) to PP&E (1,532) (387) (504) (525) (505) (543)

Cash flow from financing activities 752 (833) (1,283) (1,221) (1,211) (1,233)

Debt 1,179 (263) (754) (754) (754) (754)

Net change in cash (750) (107) 18 142 91 (70)

Cash at start of the year 2,581 1,831 1,724 1,743 1,885 1,976

Cash at the end of period 1,831 1,724 1,743 1,885 1,976 1,905

Source: Company, NCBC Research estimates

Exhibit 70: Key ratios

In SR mn, unless otherwise stated

2009 2010E 2011E 2012E 2013E 2014E

Per share ratios (SR)

EPS 0.42 2.61 3.51 3.21 2.72 2.70

FCF per share (5.22) 2.18 3.90 4.09 3.91 3.49

Div per share 1.00 1.00 1.00 1.00 1.00 1.00

Book value per share 14.77 16.37 18.88 21.08 22.79 24.48

Valuation ratios (x)

P/E 58.44 9.46 7.03 7.70 9.10 9.13

P/BV 1.67 1.51 1.31 1.17 1.08 1.01

P/FCF (4.73) 11.32 6.33 6.04 6.32 7.08

EV/sales 13.37 3.74 2.55 2.39 2.61 2.52

EV/EBITDA 33.96 6.47 4.91 5.22 5.90 5.93

Div yield (%) 4.0 4.0 4.0 4.0 4.0 4.0

Profitability ratios (%)

Gross margins 47.6 65.2 65.6 59.6 57.9 56.2

Operating margin 20.3 50.2 50.9 44.8 41.5 39.6

EBITDA margins 39.5 61.1 60.6 54.6 52.9 51.3

Net profit margins 17.0 30.9 31.3 27.3 25.4 24.6

ROE 2.9 15.9 18.6 15.2 11.9 11.0

ROA 1.2 7.0 9.1 8.1 6.8 6.7

Liquidity ratios

Current ratio 3.6 3.6 3.7 3.7 3.7 3.6

Quick Ratio 3.4 3.3 3.4 3.3 3.4 3.2

Operating ratios (days)

Inventory 66 75 75 75 75 75

Receivables outstanding 135 100 100 100 100 100

Payables outstanding 149 85 85 85 85 85

Operating cycle 201 175 175 175 175 175

Cash cycle 52 90 90 90 90 90

Production & sales (mn mt)

Production capacity 1.0 2.2 2.2 2.2 2.2 2.2

Production volumes 1.1 1.7 2.2 2.2 2.0 2.1

Utilization rate (%) 107* 95 100 100 100 95

External sales volumes 1.1 1.3 1.4 1.4 1.3 1.3

Company, NCBC Research estimates *Company reported figure

76

Page 77: Saudi Petrochemicals - GulfBase Petrochemicals ... Updating Sipchem and NIC (Tasnee) ... Announced ethylene cracker projects in Saudi Arabia '000 tpa Start date

27 April 2010 SAUDI PETROCHEMICAL SECTOR

Kindly send all mailing list requests to [email protected]

Head of Research Eiji Aono [email protected] +966 2 690 7786 Brokerage website www.alahlitadawul.com / www.alahlibrokerage.com Corporate website www.ncbc.com NCBC INVESTMENT RATINGS Overweight: Target price represents expected returns in excess of 15% in the next 12 months Neutral: Target price represents expected returns between -10% and +15% in the next 12 months Underweight: Target price represents a fall in share price exceeding 10% in the next 12 months Price Target: Analysts set share price targets for individual companies based on a 12 month horizon. These share price

targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon

OTHER DEFINITIONS NR: Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with

applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations

CS: Coverage Suspended. NCBC has suspended coverage of this company NC: Not Covered. NCBC does not cover this company

IMPORTANT INFORMATION

The authors of this document hereby certify that the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this document. The authors also certify that neither they nor their respective spouses or dependants (if relevant) hold a beneficial interest in the securities that are the subject of this document. Funds managed by NCB Capital and its subsidiaries for third parties may own the securities that are the subject of this document. NCB Capital or its subsidiaries may own securities in one or more of the aforementioned companies, or funds or in funds managed by third parties The authors of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. The Investment Banking division of NCB Capital may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this document or are mentioned in this document.

This document is issued to the person to whom NCB Capital has issued it. This document is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. This document is not intended to take into account any investment suitability needs of the recipient. In particular, this document is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this document. NCB Capital strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this document take into account both risk and expected return. Information and opinions contained in this document have been compiled or arrived at by NCB Capital from sources believed to be reliable, but NCB Capital has not independently verified the contents of this document and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. To the maximum extent permitted by applicable law and regulation, NCB Capital shall not be liable for any loss that may arise from the use of this document or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. All opinions and estimates included in this document constitute NCB Capital’s judgment as of the date of production of this document, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than he or she originally invested. Additionally, fees may apply on investments in securities. Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this document may be reproduced without the written permission of NCB Capital. Neither this document nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi Arabia where its distribution may be restricted by law. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations.

NCB Capital is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia to carry out dealing, as principal and agent, and underwriting, managing, arranging, advising and custody, with respect to securities under licence number 37-06046. NCB Capital’s registered office is at 3rd & 4th Floor Tower B, NCB Regional Building, Al Mather street, P.O. Box 22216, Riyadh 11495, Kingdom of Saudi Arabia.


Recommended