OVERWEIGHT. Saudi International Petrochemical Co. (2310.SE)

Transcription

1 Saudi International Petrochemical Co. (2310.SE) OVERWEIGHT CMP SAR Target SAR Potential Upside 37.5% MSCI GCC Index Tadawul All Share Index 4, Key Stock Data Sector Oil & Gas Reuters Code 2310.SE Bloomberg Code SIPCHEM AB Equity No. of Shares (mn) Market Cap (SAR bn) 4.52 Market Cap (USD bn) 1.20 Avg. 12m Vol. ( 000) 2, Volatility (30 day) Volatility (180 day trend) Stock Performance (%) 52 week high / low (SAR) / M 3M 12M Absolute (%) -33.6% -61.0% -64.4% Relative (%) -21.2% -50.2% -53.5% Shareholding Pattern (%) Public Others Zamil Group Holding Company National Industries Group Holding 8.32 Sipchem and TASI Movement Executive Summary The Saudi International Petrochemical Co. (Sipchem) was established as a joint stock company in Saudi Arabia with an initial paid-up capital of SAR 500 million. It now has a paid-up capital of SAR 3.3 billion. An active player in the petrochemicals industry, the company is engaged in investment and development activities of both basic and intermediate chemicals that are used in a range of products. Its primary activity is to own, establish, operate and manage industrial projects in the petrochemical and chemical domain. It is amongst the region s biggest manufacturers of methanol and accounts for around 2% of the global methanol capacity. Sipchem has also developed strategic alliances with carefully selected international partners to optimize its technology and marketing positions. Sipchem produces over 1 million tonnes of methanol per year, as of 2008, through its subsidiary, International Methanol Co. Another subsidiary, the International Diol Co. produces 46,258 million tonnes per annum of butanediol. Rising prices and sales volume drive growth For the nine months ended September 2008, Sipchem witnessed a 47.7% upsurge in net profits to reach SAR 0.50 billion improving its margins to 34.1% from 33.1%. Its sales advanced 43.5% to SAR 1.47 billion. In line with FY07, the growth, during the period under review, was also on account of increase in the rate of production, increase in the international prices and sales volume. With surging revenues, the company improved cost of sales ratio to 38.4% from 42.0% in 9M07. As part of Sipchem s growth and expansion plans, the company has embarked on a number of projects. It has already started construction of a major Acetyls Complex which consists of acetic acid plant, vinyl acetate monomer plant and carbon monoxide plant. Commercial operation of these plants is scheduled to commence by 2Q09. Outlook and valuation As part of Sipchem s growth and expansion plans, it has embarked on a number of projects. As part of Phase-III, Sipchem is also developing an integrated olefins derivatives complex with a production capacity of 800,000 mtpa, scheduled for a 2013 start. Ramping up its production capacity, it has completed 87% of its acetyls complex project aiming at launching the complex at the start of 2Q09. This complex targets to open up a wide scope of opportunities for a variety of intermediary and processing industries in the country. Sipchem s rapid, elaborate and systematic expansionary plans involve heavy financing and have seen it enter into numerous contracts with lenders to fund its major projects. To determine the value of the company, we have used DCF valuation method. Currently, Sipchem is trading at a P/E multiple of 6.59x on 2008E earnings and 6.71x on 2009E earnings and at a P/B multiple of 0.70x and 0.67x on 2008E and 2009E BVPS, respectively. While the TASI Index reported a negative return of 58.7% from the beginning of this year, Sipchem logged in a YTD loss of 69.7%. Considering the above factors, we provide our Fair Value per share for the company at SAR The stock exhibits a 37.5% potential upside from its closing price of SAR (as on November 22, 2008). Therefore, we initiate our coverage on Sipchem with an OVERWEIGHT recommendation. SAR million 2006A 2007A 2008E 2009E 2010E Revenue 1,334 1,528 1,856 1,878 2,210 EBITDA 921 1,049 1,240 1,196 1,432 Net Profit EPS (SAR) EBITDA Margin 69.04% 68.64% 66.77% 63.69% 64.77% Net Profit Margin 37.01% 38.88% 35.48% 34.41% 36.26% Total Assets 5,262 7, ROAE NA 21.99% 15.94% 11.91% 13.78% Call us on or us at research@taib.com

2 Background Actively develops and invests in petrochemical and chemical industries Accounts for nearly 2% of the global Methanol production capacity All set to launch a worldclass Olefins Derivatives Complex Board of Directors Chaired by H. E. Engr. Abdulaziz A. Al-Zamil Member - President & CEO - Eng. Ahmad A. Al-Ohali Mr. Abdullah S. Bahamdan Mr. Abdurrahman A. Al- Turki Engr. Reyadh S. Ahmed Dr. Abdurrahman A. Al- Zamil Engr. Mohammad A. Al- Joaid Engr. Mohammad A. Al- Ghurair Mr. Fahad S. Al-Rajhi Dr. Abdulaziz A. Al-Gwaiz Dr. Saleh H. Al-Humaidan Source: Annual report 2007 The Saudi International Petrochemical Co. (Sipchem) was established as a joint stock company in Saudi Arabia in December 1999 with an initial paid-up capital of SAR 500 million. Sipchem went public following an initial public offer (IPO) and got listed on Saudi Stock Exchange (Tadawul) in November Presently, the company has a paid-up capital of SAR 3.3 billion. An active player in the petrochemicals industry, the company is engaged in investment and development activities of both basic and intermediate chemicals that are used in a range of products. Moreover, its primary activity is to own, establish, operate and manage industrial projects in the petrochemical and chemical domain. It is engaged in establishing separate companies with commercial registration for each project it undertakes. For this, it incurs costs of project construction and development. Sipchem commenced its commercial operations with manufacturing three products - Methanol, Maleic anhydride and Butanediol. The company accounts for around 2% of the global methanol capacity. Sipchem operates through six affiliates/subsidiaries out of which five are manufacturing units while one is used to carry out marketing & distribution activities of the company. Currently, only two manufacturing affiliates/subsidiaries of the company are operational along with the marketing subsidiary. International Methanol Co. (IMC) commenced commercial operations in 2004 and deals with the manufacture and sale of methanol while, International Diol Co. (IDC) formerly known as Gulf Advanced Chemical Industries Co. (GACIC) began operations in March 2006 and is primarily into manufacture and sale of maleic anhydride, butanediol and tetra hydro furan. Sipchem Marketing & Services Co. (SMSC) extends its marketing services for the products manufactured by other group companies. Sipchem aims at integrating present and future petrochemical and chemical products to form a series of final value-added products. Through its affiliates, IMC and IDC, Sipchem currently produces over 1 million mtpa of Methanol and 46,258 mtpa of BDO. Further, Sipchem is planning to construct a world-class olefins derivatives complex as a joint venture with leading world companies to economically utilize proven modern technologies. It has also made great progress in building projects for manufacturing added-value products including Acetic Acid and Vinyl Acetate. In 2006, the company started the construction of the Jubail Acetyl complex comprising three affiliates, International Acetyl Co. (IAC) with a capacity of 460,000 mtpa of acetic acid; International Vinyl Acetate Co. (IVAC) with a capacity of 330,000 mtpa of vinyl acetate monomer, and the International Gases Co. (IGC) with a capacity of 345,000 mtpa of carbon monoxide. Commercial operation at these plants is scheduled to start during the second quarter of In November 2006, Sipchem announced the launch of an Integrated Olefins Derivatives Complex producing nine value added, performance products with a total investment of approximately SAR 20 billion. This project is scheduled to commence operations in Business Model Sipchem adopted the following business mix: Sipchem is launching additional facilities demonstrating its aggressive expansion programme, which aims to make it one of the largest, fully integrated, petrochemical complexes in the Middle East. Transforming from a pure commodity player to a value-add manufacturer, the company has adopted the concept of integration of petrochemical value chain with focus to vertically amalgamate the business by further moving into downstream products. This integration will assist in realizing economies of scale and lower total structural costs. Strategic tie-ups with numerous international companies for the production and marketing of high quality products had helped the company maintain competitive rates for its products in the global markets. Sipchem is enjoying the benefit of getting Naphtha and natural gas, as a feed stock, at subsidized rates. This provides the company a competitive edge against regional competitors.

3 Affiliates of Sipchem Sipchem has a number of subsidiaries, affiliates and strategic investments. SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY % SHARE International Methanol Company (IMC) Saudi Arabia 65.00% International Diol Company (IDC) Saudi Arabia 53.91% International Acetyl Company (IAC) Saudi Arabia 87.00% International Vinyl Acetate Company (IVAC) Saudi Arabia 87.00% International Gases Company (IGC) Saudi Arabia 72.00% Sipchem Marketing & Services Company (SMSC) Saudi Arabia % Source: Financial Report 9M 2008 Industry Scenario Petrochemical demand increased at a CAGR of 4% over The Global Petrochemical industry has been on an expansion path in the recent times led by increased levels of demand emanating from emerging Asian economies mainly China and India. Rising population coupled with phenomenal growth witnessed by these economies has propelled the demand for petrochemicals from these regions. The demand for petrochemical products has increased at a CAGR of 4% over As demand remains a key driver for any increase in capacity and utilization rates, global petrochemical capacity increased at a CAGR of 3.3% to million tonnes over The capacity utilization rates have also reached 90.3% in 2007 compared to 87% in Consequently, petrochemical production has increased at a CAGR of 3.9% to million tonnes over Petrochemicals can be broadly classified into olefins, aromatics and oxygenates, which are used to produce a variety of end products. The main feed-stocks for petrochemical include crude oil in the form of naphtha and gasoline and natural gas. Consequently, a high oil and gas price scenario leads to increase in the feed-stock costs for the producers, thereby eating up their margins and curtailing any expansionary plans. Furthermore, petrochemical product price realizations bear a high correlation with the crude oil and natural gas prices. Therefore, producers gain on high product prices when the commodity prices increase, limited by a dip in demand on high prices at the same time. Decrease in commodity prices entail spur in demand although followed by lower petrochemical price realizations. In addition to this, price of petrochemical products are highly sensitive to the economic growth of a region as it impacts the demand pattern for these products. While favourable growth across economies has a positive impact on the petrochemical demand, downturns are accompanied by a slowdown in demand. The Organization of Petroleum Exporting Countries (OPEC) s crude oil prices had soared 183.5% to USD per barrel in 2007 compared to USD per barrel in 2002 mainly attributable to political uncertainty in the oil producing regions, high economic growth across the world and shortage of refined products. Moreover, given the strong demand and low surplus production capacity, OPEC s crude oil prices surged as high as USD per barrel in the first nine months of As a result, the margins of the companies in the petrochemical industry have been negatively impacted. However, as the rally witnessed in the crude oil price has started to ease down given the slump in demand for oil and weaker global growth, companies are expected to report an improvement in their margins. At the same time, Henry Hub natural gas prices have also increased 106.8% to USD 6.97 per million British Thermal Units (mmbtu) compared to USD 3.37 per mmbtu in The gas prices have also peaked at USD per mmbtu in Accordingly, methanol prices (derived from cracking of natural gas) rose 191.7% to USD per tonne compared over However, the availability of natural gas at a subsidized price (with prices as low as USD 0.75 per mmbtu in Saudi Arabia) provides a major cost advantage to Middle East petrochemical producers.

4 Capacity expansion hubs being MENA, China The Persian-Gulf region holds approx 65% of the world s oil and 49%of the gas reserves Saudi to invest USD 80 billion over the next 5 years in petrochem sector During recent times, there has been a major shift in the petrochemical production base from the US and Europe to Middle East & North Africa (MENA) and China, which has emerged as the hub for new capacities and expansions. The US region, which once used to be the hub of petrochemical facilities, has been on a downturn due to high feedstock costs that have decreased the margins across the industry. The marginal returns earned by the companies in the US petrochemical industry along with stiff competition from the Chinese and MENA regions on account of lower feedstock cost advantage have underpinned the capacity expansion plans. Along with this, the European petrochemicals industry has also suffered the aftermath of increased feedstock costs, which has led to a stalled growth for the industry. In addition, the European industry has witnessed a subdued growth on account of various regulations in place which include the Kyoto protocol, European Union s directive on chemicals and environmental campaigns. At the same time, the MENA region holds the ground advantage of lower feedstock cost from its rich oil fields and gas reserves. The region holds approximately 65% of the world oil reserves and 49% of the world gas reserves. According to a study by the Association of Petrochemicals Producers in Europe (APPE), the Middle Eastern producers share the highest profit margins when compared to Eastern European, American, and South East Asian producers. Additionally, the willingness of the Middle East region to diversify its economy beyond oil and gas is adding up to increased interest in the petrochemicals sector. According to Gulf Cooperation Council (GCC) s 11 th Industrialist Conference 2008, investments to the tune of USD 120 billion are expected in the sector. The combined petrochemical production capacity of MENA region is 84.7 million tonnes, which represents 66% of the total world capacity. Saudi Arabia is the largest petrochemical player in the MENA region and shares approximately 53% of the production capacity followed by Iran with approximately 20%. Amongst the companies in the Saudi petrochemical industry, Saudi Basic Industries Corp. (SABIC) accounts for approximately 54% and 28% of the total production capacity of Saudi Arabia and MENA, respectively, and is the biggest petrochemical company. SABIC is followed by Saudi Chemical Co. and Sahara Petrochemical Co. The production capacity in the MENA region is expected to increase to approximately million tonnes by 2009 and million tonnes by 2011 with major contributions from Saudi Arabia followed by Qatar and Kuwait. The Middle Eastern region is expected to account for approximately 20% of the world ethylene capacity by 2015 against its current share of 10%. Saudi Arabia with investments to the tune of USD 80 billion over the next 5 years in the sector has emerged as the biggest contributor to the growth. Significant growth projects include petrochemical complex to be built by Saudi Aramco in partnership with Dow Chemicals. The other capacity expansion plans include 3.8 million tonnes basic olefins plant by Saudi Kayan Petrochemical Co. expected to come on-stream in late 2010 along with 2.1 million tonnes olefins plant by Saudi International Petrochemical Co. expected to commence operations in Meanwhile, the Chinese petrochemical industry along with the MENA region also holds the advantage of a buoyant demand and technology to produce chemicals from coal, a cheaper alternate feedstock. These advantages have in turn shaped up the expansion story of the Chinese petrochemical industry. The Chinese petrochemical industry is expected to observe an expansion in ethylene capacities to the tune of 6.6 million tonnes between 2008 and Further, ethylene capacities are expected to increase by 11.4 million to 11.6 million tonnes between 2008 and Expected increase in demand for petrochemicals is likely to push up the demand for crude oil and natural gas Looking forward, the demand for petrochemical products is expected to remain high. According to Chemical Market Associates, Inc. (CMAI) the demand for ethylene is expected to increase from 100 million tonnes in 2004 to 177 million tonnes by Similarly, demand for propylene is expected to reach 116 million tonnes by 2020 compared to 64 million tonnes in The demand for benzene is also expected to grow at an annual average rate of 2.8% through 2020, generating demand of 57 million tonnes by The expected increase in the demand for petrochemicals is likely to push up the demand for crude oil and natural gas. According to OPEC the global demand for oil and gas is expected to keep the commodity prices high. This is expected to lead to higher price realization for petrochemical companies but at the same time is likely to keep the margins of petrochemical companies under pressure. Consequently, for the forthcoming period expansion plans in regions with feedstock cost advantage is expected to be on an upsurge.

5 Financial Performance FY 2007 Net profits increased 20.3% to SAR million in FY Improving Profitability The fiscal year ended 31 December, 2007 registered healthy financial results with net profit increasing 20.3% to SAR million compared to SAR million in This was mainly attributable to rise in the price of major products of the company coupled with improved gross profit margin to 62.4% from 61.6% in Gross profit showed a y-o-y growth of 15.9% to SAR million from SAR million in Rising production riding in better sales For the full year 2007, the company s sales revenue advanced 14.5% to SAR 1.53 billion as against SAR 1.33 billion in This rise in the volume of sales is on two accounts - rise in production and the volume of sales of the International Methanol Company and the International Diol Company. Cost efficiency, NP & GP margin The cost of sales ratio improved 76 bps to 37.6%, while general and administrative expenses ratio moved 3.7% from 3.6% for the year ended In line with this, the gross profit margin and net profit margin improved 76 bps to 62.4% and 187 bps to 38.9%, respectively. This is mainly on account of increase in sales revenue and availability of cheap feed stocks.

6 Chart Gallery Revenue (SAR Millions) Net Profit (SAR Millions) M M M M 2008 EBITDA Margin Net Profit Margin 70% 69% 69% 68% 68% 67% 67% 66% 66% 65% 65% M M % 39% 38% 36% 35% 33% 32% 30% M M 2008 Return on average assets (SAR Millions) Return on average equity (SAR Millions) 10.00% 25.00% 8.00% 20.00% 6.00% 15.00% 4.00% 10.00% 2.00% 5.00% 0.00% M M % M M 2008 Total Assets (SAR Millions) Shareholders' Equity (SAR Millions) M M M M 2008

7 Size of the Company The salient points about the balance sheet are as follows: The share of the non-current assets marginally decreased to 76.8% in 9M08 from 77.1% in the comparable period a year ago. However, the property plant and equipment registered healthy growth of 56.0% to SAR 7.08 billion, while taking its share in the total asset base to 74.0%. This increase is due to progress in construction of Acetyls project, which is almost 87% complete. Shareholders equity nearly doubled to SAR 5.13 billion The share of current assets has increased 23.2% from 22.9% in 9M07. Simultaneously, accounts receivable, prepayment and other receivable more than doubled to SAR 0.33 billion from SAR 0.14 billion, where as inventory level increased 17% to SAR 0.08 billion during 9M08. This was on back of the increased production and sales volumes. The cash and cash equivalent surged 46.3% to SAR 1.80 billion accounting for 18.8% of total asset base, which is somewhat less than 19.6% in 9M07. The company has been investing cash in Murabaha investments with maturities of three month or less, to better utilize its funds. The shareholders equity nearly doubled to SAR 5.13 billion from SAR 2.74 billion over the corresponding period last year, mainly on account of a whopping increase in share capital, statutory reserve and retained earnings. During 9M08, the company s total current liabilities decreased 22.8% over 9M07, due to reduced accounts payable and other liabilities and short-term loans. The non-current liabilities surged 62.4% during the same period on account of a nearly two-fold increase in long-term debt. Financial Performance Analysis 9M 2008 Net Profit surged 47.7% Revenue soared 43.5% For the nine months ended September 2008, Sipchem witnessed a 47.7% surge in net profits to reach SAR 0.50 billion as against SAR 0.34 billion in the year ago period. With this, the margins increased to 34.1% from 33.1%. The company s sales advanced 43.5% to SAR 1.47 billion from SAR 1.03 billion during 9M07. In line with FY07, the growth in this period was also on account of an increase in the rate of production, increase in the international prices and volume of sales of products. With surging revenues, the company improved cost of sales ratio to 38.4% from 42.0%, while general and administrative expense ratio improved to 3.1% from 3.6% in 9M07. Consecutively, annualized adjusted EPS increased to SAR 2.09 from SAR While on the one hand, annualized ROE dipped to 13.0% from 16.5%, on the other hand, annualized ROA dipped to 7.0% from 7.2%, even though the total assets and net profit increased during the period.

8 Working Capital Snapshot SAR' A 2007A 9M M 2008 Current Assets 1,824,071 1,994,751 1,440,917 2,215,316 Inventories 59, ,764 69,022 80,729 Inventory Conversion Period (Days) Accounts receivable, prepayments and other receivables 256, , , ,142 Average Collection Period (Days) Cash and cash equivalent 1,507,118 1,562,012 1,231,602 1,801,444 Current Liabilities 601,237 2,163,554 1,173, ,813 Accounts Payable and other liabilities 476,606 1,112, , ,010 Average Payment Period (Days) Share Capital 1,500,000 2,000,000 2,000,000 3,333,333 General reserve 0 275, , ,000 Statutory reserve 117, , , ,828 Net Core Working Capital -159, , , ,138 Average Core Working Capital Cycle (Days) Net Current Assets 1,222, , ,932 1,309,504 Average Working Capital Cycle (Days) Source: Sipchem Financial Statements Peer Comparison In order to do a peer comparison we have considered Methanol Chemicals Co (MCC), Advanced Polypropelene Co (APC), Saudi Arabian Fertiliser Co (SAFCO), and Basic Chemical Industries (BCI). Peer Analysis FY '07 MCC APC SAFCO BCI SIPCHEM 9M 9M FY 9M FY 9M FY '08 FY '07 '08 '07 '08 '07 '08 '07 Efficiency Ratios Inventory Turnover Ratio (x) NA Inventory Conversion Period (Days) NA Receivables Turnover Ratio (x) NA Average Collection Period (Days) NA Payables Turnover Ratio (x) NA Average Payment Period (Days) NA Total Assets Turnover Ratio (x) NA Fixed Assets Turnover Ratio (x) NA Working Capital Turnover Ratio (x) NA Profitability Ratios Gross Profit Margin (GPM) 27.3% 22.3% NA 31.9% NA NA 33.7% 27.7% 62.4% 61.6% EBITDA Margin 13.2% 13.4% NA 37.2% 70.3% 82.9% 21.6% 18.6% 71.3% 71.9% Net Profit Margin (NPM) 5.4% 6.6% NA 28.6% 62.8% 81.9% 11.4% 7.8% 38.9% 34.1% ROAE 3.7% 3.7% 15.0% 24.5% 41.1% 78.2% 17.8% 26.7% 22.0% 16.5% ROAA 2.2% 2.0% 10.0% 12.3% 29.8% 60.6% 9.7% 14.6% 9.1% 7.7% 9M '08 Market Indicators EPS (SAR) P/E (x) BVPS (SAR) P/BV (X) Revenue NA 1,002 3,516 4, ,528 1,472 Gross Profit NA 319 NA NA EBITDA NA 373 2,471 3, ,090 1,058 Net Profit ,209 3, Total Assets 1,301 2,631 2,545 3,685 8,153 9, ,750 9,565 Shareholders' Equity 678 1,387 1,416 1,695 6,014 7, ,997 5,130 Sources: Zawya.Com, SIPCHEM Financials

9 New Projects and Strategy Number of projects on board Aims to open bundle of opportunities for a variety of intermediary and processing industries As part of Sipchem s growth and expansion plans, the company embarked on a number of projects. The company already started construction of a major Acetyls Complex which consists of acetic acid plant, vinyl acetate monomer plant and carbon monoxide plant. Commercial operation of these plants is scheduled to start in the second quarter of As part of Phase-III, Sipchem is also developing an integrated olefins derivatives complex which will consist of nine plants producing value-added, performance chemicals with a production capacity of 800,000 mtpa. The project is scheduled to start in During March 2007, the Acetyls Complex signed a contract with Nasser Al Hajri Co. for the construction of the Acetic Acid Plant and the Vinyl Acetate Monomer Plant and another contract with ACB&I Co. involving the construction of storage facilities for a total value of over SAR 937 million. Ramping up its production capacity, Sipchem announced that it has completed 87% of its acetyls complex project which aims at launching the utility units of the complex by the end of the current year and launching the complex plants at the start of the second quarter of This complex targets to open up a wide scope of opportunities for a variety of intermediary and processing industries in the country that will have a great effect on the expansion and diversification of end products, which in turn will have a positive effect on the local economy. Under this project, the carbon monoxide plant will produce 345,000 mtpa, rendering this plant to be currently the largest of its type in the world. The complex will also produce 450,000 mtpa of acetic acid and acetic acid anhydride and 330,000 mtpa of vinyl acetate monomer. Further, the project will receive the necessary technical support from Eastman Co. (USA) for the production of acetic acid and from DuPont Co. (USA) for the production of vinyl acetate monomer. As a part of its strategy, the company s subsidiary IMC signed a five-year time charter agreement with the National Chemical Carriers (NCC), a subsidiary of National Maritime Transport Co. Under the agreement, carrier NCC-Rabigh will transport Sipchem s products to international markets. The total value of the agreement stood at SAR 150 million. Impacting the local economy in a positive way Meanwhile, the company s rapid, elaborate and systematic expansionary plans involved heavy financing; Sipchem entered into numerous contracts with banks and financial institutions to fund its major projects. In September 2008, the company raised a SAR 1.35 billion loan from Public Investment Fund (PIF) to finance part of the costs of construction of the acetyls complex project. During the same month, the company also closed a syndication facility worth USD 741 million (SAR 2.78 billion) with three banks for which Saudi British Bank acted as an underwriter after agreeing to take on the whole debt package in March. The deal was split between a USD 362 million commercial loan, a USD 360 million bridge facility, and a USD 19 million bridge facility. Earlier, in December 2007, the project already received financing loan from the Saudi Industrial Development Fund (SIDF) for an amount of SAR 1.13 billion. SWOT Analysis Strength: Aiming for organic growth, the company has the ability to enhance its expansion process fruitfully, which it has proven in the past. Sipchem like its local peers enjoys the benefit of getting feed stocks like naphtha and natural gas, at subsidized rates giving it a better price in international prices. Sipchem s forward thinking attitude, combined with an inspired approach continues to build its reputation as one of the region s leading petrochemical companies. Strategic tie-ups with numerous international companies, for the technology, help the company to maintain competitive rates for its products in the global markets. The company has the technological tie-ups with Eastman Chemicals Co. (USA) and DuPont (USA). Weakness: Dependence on one supplier for feed stock.

10 Opportunities: Effort of economic diversification like shifting its oil-dependent economy to industry-based economy will provide government support in the form of relaxation, grants and subsidies, to develop more and more industry in the region using the locally available raw material and feed stock. Product prices are increasing in the USA and the Europe, due to increasing feed stock prices there. The company may look at these markets with the competitive prices. Saudi Arabia s developmental plans augur well with Sipchem which continues to play a leading role in the development of the petrochemical sector and also in stimulating growth of the national economy. Threats: Extraction of petrochemical products from coal has encouraged China to consider massive expansion in its petrochemical capacities, which might increase competition in the global market. Rising competition from companies locally and also from the Asian markets would pose a threat to Sipchem whose integrated Olefins Derivatives complex would start commercial operations only in Risks and Concerns: As the company is totally dependent on Saudi Aramco for the supply of feedstock, which includes naphtha and natural gas, the risk of continuous supply is allied with the company. Stiff competition with local player, SABIC, for the methanol at the local regional and international players. Volatile oil and gas prices are the major concern for the company s future profitability. Valuation Methodology: Cost of Equity: 12.74% WACC: 10.20% We have used DCF valuation method for arriving at the fair value of Saudi International Petrochemical Company, as discussed below: Assumptions: (i) Risk free Rate (Rf) of 3.68% (ii) Historical equity premium of US equities over the risk-free rate. (iii) Country premium of 1.05% using Moody s long-term country rating (A1 for Saudi Arabia) and estimating the default spread for the rating, based upon the difference in yields for traded country bonds. (iv) Unlevered industry Beta for emerging markets petrochemical companies of (v) A terminal growth rate of 3.0% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 12.74%. Taking into consideration the long-term debt of SIPCHEM, we have arrived at the Weighted Average Cost of Capital (WACC) of 10.20%.

11 DCF Calculations DCF Valuation (FCFF Model) SAR ' Operating Profit (EBIT) 1,070,929 1,006,513 1,230,734 1,174,843 1,243,190 Tax on EBIT -50,092-47,079-57,567-54,953-58,150 Effective Tax Rate -4.68% -4.68% -4.68% -4.68% -4.68% NOPAT 1,020, ,433 1,173,167 1,119,890 1,185,040 Add: Depreciation and Amortization 153, , , , ,210 Less: Capex 1,877,189 1,057, , , ,875 Less: Change in Net Working Capital 170, , , , ,651 Operating Free Cash Flows to Firm (OFCFF) -873, , , , ,724 Non-Operating Income -20,123-29,753-19,396-23,614-20,502 Tax on Non-Operating Income 941 1, , Add: Non-Opearting Cash Flows (After Tax Non- Operating Income) -21,064-31,144-20,303-24,718-21,461 Free Cash Flow to Firm (FCFF) -894, , , , ,263 WACC 10.20% 10.20% 10.20% 10.20% 10.20% Present Value / Discount Long-Term Growth Rate (g) 3.00% Present Value of Free Cash Flows -880, , , , ,637 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 864,400 Terminal Value: Residual Cash Flow (FCFF of 2012E) 768,263 WACC Long-Term/Terminal Growth Rate (g) Divided by Capitalization Rate (WACC - g) 7.20% Equals Nominal Terminal Value 10,995,702 Implied Multiple of 2012E EBITDA 7.59 Times PV/ Discount Factor 0.67 Present Value of Terminal/Residual Value 7,337,076 Enterprise Value 8,201,476 Implied Multiple of 2012E EBITDA 5.66 Less: Long-term Debts 1,992,367 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 6,209,109 Net Outstanding Shares ('000) 333,333 Fair Value Per Share (SAR) Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes. Sensitivity Analysis of Nominal Terminal Value (SAR 000) Discount Long-Term Growth Rate Factor 2.00% 2.50% 3.00% 3.50% 4.00% 8.19% 12,659,582 13,839,533 15,246,835 16,954,202 19,069, % 10,898,861 11,770,844 12,783,696 13,974,553 15,394, % 9,560,467 10,231,465 10,995,702 11,874,062 12,894, % 8,526,965 9,061,789 9,661,914 10,340,079 11,112, % 7,690,168 8,126,620 8,126,620 9,150,196 9,755,719

12 Sensitivity Analysis of Discounted Terminal Value (SAR 000) Discount Long-Term Growth Rate Factor 2.00% 2.50% 3.00% 3.50% 4.00% 8.19% 9,119,542 9,969,540 10,983,313 12,213,243 13,736, % 7,555,894 8,160,416 8,862,600 9,688,190 10,672, % 6,379,391 6,827,126 7,337,076 7,923,178 8,603, % 5,480,926 5,824,698 6,210,444 6,646,352 7,142, % 4,762,046 5,032,313 5,331,989 5,666,151 6,041,114 Discount Factor Sensitivity Analysis of Enterprise Value (SAR 000) Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00% 8.19% 10,065,614 10,915,611 11,929,385 13,159,315 14,682, % 8,460,466 9,064,989 9,767,172 10,592,762 11,577, % 7,243,790 7,691,526 8,201,476 8,787,577 9,468, % 6,307,172 6,650,943 7,036,689 7,472,597 7,969, % 5,551,314 5,821,581 6,121,258 6,455,419 6,830,382 Investment Opinion Fair Value: SAR Investment Opinion: OVERWEIGHT Sipchem is expected to benefit from its expansionary efforts which entail investments into various projects. The company has already started construction of a major Acetyls Complex which consists of acetic acid plant, vinyl acetate monomer plant and carbon monoxide plant. Commercial operation of these plants is scheduled to start in the second quarter of The additional capacities would enable the company to expand its product base leading to higher production. Additionally, in order to further strengthen its presence down the value chain, the company is also developing an integrated olefins derivatives complex with a production capacity of 800,000 mtpa, scheduled for a 2013 start. We remain optimistic about the operation viability of these capacities given the attractive funding options available. Sipchem continues to enjoy low feedstock advantages due to availability of rich oil fields and gas reserves in the MENA region. Furthermore, Sipchem has strategic technological tie-ups with numerous international companies such as Eastman Chemicals Co. (USA) and DuPont (USA), which is expected to help the company to maintain competitive rates for its products in the global markets. The Global Petrochemical industry has been on an expansion path in the recent times led by increased levels of demand emanating from emerging Asian economies mainly China and India. Rising population coupled with phenomenal growth witnessed by these economies has propelled the demand for petrochemicals from these regions. Looking forward, the demand for petrochemical products is expected to remain high. According to Chemical Market Associates, Inc. (CMAI) the demand for ethylene is expected to increase from 100 million tonnes in 2004 to 177 million tonnes by The expected increase in the demand for petrochemicals is likely to push up the demand for crude oil and natural gas. According to OPEC the global demand for oil and gas is expected to keep the commodity prices high. This is expected to lead to higher price realization for petrochemical companies but at the same time is likely to keep the margins of petrochemical companies under pressure. Consequently, for the forthcoming period expansion plans in regions with feedstock cost advantage is expected to be on an upsurge. The demand scenario coupled with the Sipchem s expansionary plans and feedstock advantage partially offset by the global economic downturn bodes well for the company s growth initiatives. Currently, Sipchem is trading at a P/E multiple of 6.59x on 2008E earnings and 6.71x on 2009E earnings and at a P/B multiple of 0.70x and 0.67x on 2008E and 2009E BVPS, respectively. While the TASI Index reported a negative return of 58.7% from the beginning of this year, Sipchem logged in an YTD loss of 69.7%. Considering the above factors, we provide our Fair Value per share for the company at SAR The stock exhibits a 37.5% potential upside from its closing price of SAR (as on November 22, 2008). Therefore, we initiate our coverage on Sipchem with OVERWEIGHT recommendation.

13 Financial Statements Consolidated Balance Sheet (in SAR '000) 2006 A 2007A 9M M E 2009E 2010E ASSETS Current Assets Cash and cash equivalent 1,507,118 1,562,012 1,231,602 1,801,444 2,075,877 2,073,111 1,866,624 Accounts receivable, prepayments and other receivables 256, , , , , , ,596 Inventories 59, ,764 69,022 80, ,358 96, ,349 Total Current Assets 1,824,071 1,994,751 1,440,917 2,215,316 2,587,398 2,590,495 2,481,569 Non-Current Assets Property, plant and equipment 3,199,861 5,416,419 4,536,593 7,076,267 7,140,096 8,025,337 8,500,248 Project development cost 40, , , , , , ,695 Intangible assets 197, , , , ,541 95,425 76,817 Total Non-Current Assets 3,438,136 5,755,301 4,839,557 7,349,966 7,437,297 8,301,492 8,789,760 Total Assets 5,262,206 7,750,053 6,280,474 9,565,282 10,024,695 10,891,987 11,271,328 LIABILITIES AND EQUITY Current Liabilities Accounts Payable and other liabilities 476,606 1,112, , ,010 1,020,891 1,624,104 1,578,649 Short term loans 0 878, , Short term shareholder advances ,928 29,928 29,928 29,928 Current Portion of Long Term Debt 124, , , , , , ,064 Current Portion of capital lease 0 32,108 32,108 42,811 44,149 44,149 44,149 Total Current Liabilities 601,237 2,163,554 1,173, ,813 1,226,032 1,829,245 1,783,790 Non-Current Liabilities Long term Debt 1,688,005 1,085,496 1,098,496 1,992,367 1,992,367 1,974,248 1,956,129 Obligations under capital lease 0 486, , , , , ,527 Shareholder advances 0 102, , , , ,131 End of service indemnities 12,958 19,807 17,629 30,983 31,199 47,583 70,191 Total Non-Current Liabilities 1,700,962 1,694,329 1,603,098 2,602,643 2,601,521 2,555,637 2,515,978 Total Liabilities 2,302,199 3,857,882 2,777,083 3,508,456 3,827,553 4,384,882 4,299,768 Shareholder's equity and minority interest Share Capital 1,500,000 2,000,000 2,000,000 3,333,333 3,333,333 3,333,333 3,333,333 Statutory reserve 117, , , , , ,440 1,005,570 General reserve 0 275, , , , , ,000 Retained earnings 787, , , , ,564 1,046,914 1,431,240 Total shareholder's equity 2,405,505 2,996,878 2,742,799 5,130,410 5,270,725 5,580,688 6,045,144 Minority Interest 554, , , , , , ,417 Total shareholder's equity and minority interest 2,960,007 3,892,170 3,503,391 6,056,827 6,197,142 6,507,104 6,971,560 Total Liabilities, Shareholder's equity and minority interest 5,262,206 7,750,053 6,280,474 9,565,282 10,024,695 10,891,987 11,271,328

14 Consolidated Income Statement (in SAR '000) 2006 A 2007A 9M M E 2009E 2010E Sales 1,333,990 1,527,675 1,025,648 1,472,076 1,856,425 1,877,929 2,210,064 Cost of sales -512, , , , , , ,356 Gross Profit 821, , , ,473 1,143,147 1,081,271 1,316,709 General & administrative expenses -48,494-56,850-37,360-45,056-72,218-74,758-85,975 Operating income 773, , , ,417 1,070,929 1,006,513 1,230,734 Investment income 54,056 38,240 25,830 31,050 38,985 39,437 46,411 Finance charges -81, ,186-71,767-62,780-74,320-84,213-83,488 Provision for project development cost ,000-55, Net income/expenses of pre operating activities -1, Other income/(expenses) -4,938 30,761 5,336 11,388 14,851 15,023 17,681 Income before minority interest and Zakat 739, , , , , ,760 1,211,338 Minority interest -220, , , , , , ,722 Net income before Zakat 519, , , , , , ,616 Zakat -25,448-19,807-16,230-24,636-32,324-31,705-39,320 Net income 493, , , , , , ,297 Outstanding Shares ('000) 150, , , , , , ,333 EPS (SAR)

15 Consolidated Cash Flow Statement (SAR '000) 2006 A 2007A 9M M E 2009E 2010E Cash Flows from Operating Activities: Net income before Zakat 519, , , , , , ,616 Adjustments for Depreciation 147, , , , , , ,755 Amortization of intangible assets 33,832 41,333 29,177 36,342 49,602 23,115 18,608 End-of-service indemnities 4,780 6,736 5,119 11,770 12,289 17,797 24,764 Project Development costs ,000 55, Finance charges 81, ,186 71,767 62,780 74,320 84,213 83,488 Minority interest 220, , , , , , ,722 Net expenses of pre-operating activities 1, Changes in operating assets and liabilities: Accounts receivable, prepayments and other receivables -173,021-73, ,698-2,167-80,186-9,908-80,526 Inventories -5,061-41,802-9,060 21,035 1,406 4,044-17,034 Accounts payable and other liabilities -7, , ,867-98,500-91, ,213-45,455 Cash from operations 822,954 1,456,562 1,188, ,499 1,169,587 1,871,780 1,377,938 End of service indemnities paid ,414-2,156 Finance charges paid -83,732-68,954-57,012-84,316-74,320-84,213-83,488 Zakat and tax paid -27,238-81,034-72,223-61,842-32,324-31,705-39,320 Net cash from operating activities 711,506 1,306,174 1,058, ,746 1,062,046 1,754,448 1,252,974 Cash Flows from Investing Activities: Net expenses of pre-operating activities -1, Changes in investments, net 259, Increase in intangible assets - -12,036-4, Addition to property plant and equipment -550,814-2,151,880-1,486,874-2,067,497-1,877,189-1,057, ,667 Project development costs incurred -16, ,258-95,572-30, , , ,039 Other assets 14,134 Net cash used in investing activities -295,148-2,298,032-1,587,532-2,097,468-2,205,281-1,406,469-1,091,706 Cash Flows from Financing Activities: Short term loans - 878, , , , Long term debts -105,805-67,555-67, , ,324-62,267-62,267 Payment of Board of Directors - remuneration -2,600-2,600-2,200-2,883-2,828-3,508 Shareholder advances - 102, , Capital introduced by minority shareholders 32, , Changes in minority interest ,793 73, ,400 31, Proceeds from rights issue ,967,008 1,967, Long term shareholder advances , Short term shareholder advances ,928 29, Dividends paid , , , ,333 Net cash from (used in) financing activities -72,824 1,046, ,319 1,496,155 1,711, , ,108 Net change in cash and cash equivalents 343,534 54, , , ,760-50, ,840 Opening Cash and cash equivalents 1,163,583 1,507,118 1,507,118 1,562,012 1,507,118 2,075,877 2,073,111 Closing Cash & Cash Equivalents 1,507,118 1,562,012 1,231,602 1,801,444 2,075,877 2,073,111 1,866,624

16 Common Size Statements Common-Size Consolidated Balance Sheet 9M M E 2009E 2010E 2006 A 2007A ASSETS Current Assets Cash and cash equivalent 28.6% 20.2% 19.6% 18.8% 20.7% 19.0% 16.6% Accounts receivable, prepayments and other receivables 4.9% 4.3% 2.2% 3.5% 4.1% 3.9% 4.5% Inventories 1.1% 1.3% 1.1% 0.8% 1.0% 0.9% 1.0% Total Current Assets 34.7% 25.7% 22.9% 23.2% 25.8% 23.8% 22.0% Non-Current Assets Property, plant and equipment 60.8% 69.9% 72.2% 74.0% 71.2% 73.7% 75.4% Project development cost 0.8% 2.2% 2.1% 1.5% 1.8% 1.7% 1.9% Intangible assets 3.8% 2.2% 2.8% 1.4% 1.2% 0.9% 0.7% Total Non-Current Assets 65.3% 74.3% 77.1% 76.8% 74.2% 76.2% 78.0% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Current Liabilities Accounts Payable and other liabilities 9.1% 14.4% 12.2% 7.3% 10.2% 14.9% 14.0% Short term loans 0.0% 11.3% 4.0% 0.0% 0.0% 0.0% 0.0% Short term shareholder advances 0.0% 0.0% 0.0% 0.3% 0.3% 0.3% 0.3% Current Portion of Long Term Debt 2.4% 1.8% 2.0% 1.4% 1.3% 1.2% 1.2% Current Portion of capital lease 0.0% 0.4% 0.5% 0.4% 0.4% 0.4% 0.4% Total Current Liabilities 11.4% 27.9% 18.7% 9.5% 12.2% 16.8% 15.8% Non-Current Liabilities Long term Debt 32.1% 14.0% 17.5% 20.8% 19.9% 18.1% 17.4% Obligations under capital lease 0.0% 6.3% 7.8% 4.6% 4.4% 3.7% 3.1% Shareholder advances 0.0% 1.3% 0.0% 1.4% 1.3% 1.2% 1.2% End of service indemnities 0.2% 0.3% 0.3% 0.3% 0.3% 0.4% 0.6% Total Non-Current Liabilities 32.3% 21.9% 25.5% 27.2% 26.0% 23.5% 22.3% Total Liabilities 43.7% 49.8% 44.2% 36.7% 38.2% 40.3% 38.1% Shareholder's equity and minority interest Share Capital 28.5% 25.8% 31.8% 34.8% 33.3% 30.6% 29.6% Statutory reserve 2.2% 2.3% 2.4% 9.0% 8.6% 8.5% 8.9% General reserve 0.0% 3.5% 4.4% 2.9% 2.7% 2.5% 2.4% Retained earnings 15.0% 7.0% 5.0% 6.9% 8.0% 9.6% 12.7% Total shareholder's equity 45.7% 38.7% 43.7% 53.6% 52.6% 51.2% 53.6% Minority Interest 10.5% 11.6% 12.1% 9.7% 9.2% 8.5% 8.2% Total shareholder's equity and minority interest 56.3% 50.2% 55.8% 63.3% 61.8% 59.7% 61.9% Total Liabilities, Shareholder's equity and minority interest 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

17 Common-Size Consolidated Income Statement (in SAR '000) 2006 A 2007A 9M M E 2009E 2010E Sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales -38.4% -37.6% -42.0% -38.4% -38.4% -42.4% -40.4% Gross Profit 61.6% 62.4% 58.0% 61.6% 61.6% 57.6% 59.6% General & administrative expenses -3.6% -3.7% -3.6% -3.1% -3.9% -4.0% -3.9% Operating income 58.0% 58.6% 54.4% 58.5% 57.7% 53.6% 55.7% Investment income 4.1% 2.5% 2.5% 2.1% 2.1% 2.1% 2.1% Finance charges -6.1% -6.6% -7.0% -4.3% -4.0% -4.5% -3.8% Provision for project development cost 0.0% 0.0% 0.0% -3.7% -3.0% 0.0% 0.0% Net income/expenses of pre operating activities -0.1% -0.1% -0.1% 0.0% 0.0% 0.0% 0.0% Other income/(expenses) -0.4% 2.0% 0.5% 0.8% 0.8% 0.8% 0.8% Income before minority interest and Zakat 55.5% 56.5% 50.3% 53.4% 53.6% 52.0% 54.8% Minority interest -16.6% -16.4% -15.6% -17.6% -16.4% -15.9% -16.8% Net income before Zakat 38.9% 40.2% 34.7% 35.8% 37.2% 36.1% 38.0% Zakat -1.9% -1.3% -1.6% -1.7% -1.7% -1.7% -1.8% Net income 37.0% 38.9% 33.1% 34.1% 35.5% 34.4% 36.3%

18 Financial Ratios Saudi International Petrochemical Company 2006 A 2007A 9M M E 2009E 2010E Liquidity Ratios: Current Ratio (x) Quick Ratio (x) Inventory Conversion Period (Days) NA Average Collection Period (Days) NA Length of Operating Cycle (Days) NA Average Payment Period (Days) NA Length of Cash Cycle (Days) NA Activity Ratios: Inventory Turnover Ratio (x) NA Debtors Turnover Ratio (x) NA Creditors' Turnover Ratio (x) NA Total Assets Turnover Ratio (x) NA Net Fixed Assets Turnover Ratio (x) NA Working Capital Turnover Ratio (x) NA Capital/Equity Turnover Ratio (x) NA Profitability Ratios: Gross Profit Margin (GPM) 61.60% 62.36% 58.00% 61.58% 61.58% 57.58% 59.58% EBITDA Margin 69.04% 68.64% 66.14% 66.34% 66.77% 63.69% 64.77% Operating Profit Margin (NPM) 57.96% 58.64% 54.36% 58.52% 57.69% 53.60% 55.69% Net Profit Margin (NPM) 37.01% 38.88% 33.14% 34.11% 35.48% 34.41% 36.26% Return on Average Equity (ROAE) NA 21.99% 17.61%* 16.47%* 15.94% 11.91% 13.78% Return on Average Assets (ROAA) NA 9.13% 7.85%* 7.73%* 7.41% 6.18% 7.23% Leverage Ratios: Debt to Equity (D/E) Ratio (x) NA Shareholders' Equity to Total Assets Ratio (x) NA Total Liabilities to Total Assets Ratio (x) NA Current Liabilities to Equity Ratio (x) NA Growth Rates: % YoY Growth in Revenue NA 14.52% NA 43.53% 21.52% 1.16% 17.69% % YoY Growth in Net Operating Income NA 15.86% NA 54.51% 19.54% -6.01% 22.28% % YoY Growth in Net Income NA 20.31% NA 47.71% 10.90% -1.91% 24.02% % YoY Growth in Total Assets NA 47.28% NA 52.30% 29.35% 8.65% 3.48% % YoY Growth in Shareholders' Equity NA 24.58% NA 87.05% 75.87% 5.88% 8.32% Ratios used for Valuation: EPS (SAR) * 2.01* BVPS (SAR) P/E Ratio (x) P/BV Ratio (x) *Annualised